Seasons Greeting Lessons from Scrooge…. past, present, and future.

As of Friday’s market close, the S&P 500 1-year return is 0.0% – 2018 Year-to-Date down 0.9%.  So a lot of ups and downs (Downs we notice and feel more) to get to 0.0% return for the index. The S&P is made up of the largest 500 companies in the United States. International Stocks and US Mid & Small Cap companies have fared a lot worse. International Stocks – 1-year return down 15% – US Small Caps down 13%

The news has been grim for short term investors; however one of the main reasons equity investors are rewarded with higher long term returns is for the uncertainty “risk” & market movement “volatility”. Given the current level of uncertainty, expected returns going forward should be higher to compensate long term investors for taking the risk. This is known as the risk premium.

1. There is news of a potential government shut down. I didn’t realize the government has been shut down 2 times already in 2018.
2. Watch one White House daily briefing – if you can
3. Tariffs – which in plain English are a tax on goods and services passed on to consumers
4. Price of crude is down 40% since October
5. Flat yield curve – savings accounts paying 2% – seems high after years of 1%
6. Home sales have slowed in really hot real estate markets
7. Plus its market prediction season on top of everything else. To get on TV you need to predict disaster.

Ghost of Christmas Past – It’s always good to reflect on how we prepared & managed through other periods of market turmoil. 20 years ago, the Dow Jones index was at 9,200 and the largest company was GE. A lot has happened over the past years. It’s funny & sad that most of the charts we look at seem to highlight the bad times. I guess that’s human nature – try and think of some good financial times & be grateful for all you have accomplished.

Ghost of Christmas Present – Where are we now? What has changed since the summer (other than being colder)? Today, the Dow Jones Index stands at 23,850 and 3 largest companies are Microsoft, Apple & Amazon – a lot of people can’t imagine life without their products, 20 years ago very few used their products.

Ghost of Christmas yet to come – One of the main reasons we constantly review cash flow (Have money in the pantry) and taxes, is to be prepared for the future. No one really knows what will happen in markets over the next year, but I am rationally optimistic that the world will move forward and 5, 10, 20 years from now will be talking about new companies we can’t imagine life without.

Over the last 20 years Lighthouse Financial Advisors, Inc. has stayed focused on what we can control and we will continue that focus as we move forward into the next 20 years. I know the news and markets are discouraging, but please don’t hesitate to call if you have questions or concerns. That’s why you work with us, we are here to help and listen.

Wishing you a wonderful holiday and a Happy New Year,

For the second year in a row I am a daily listener to Lance Armstrong’s podcast covering the 2018 Tour de France. As a race, the Tour’s terrain is always full of variety: flat stages, mountainous stages, and even stages with miles of cobblestones. As someone who has experienced the trials and tribulations of le Tour firsthand, Lance is rarely one to try and predict a winner. As an evidence-based investor, you also know how futile market predictions can be.

As a rider, like an investor, we can only control our actions. Riders have no control over the terrain, the weather, or the dense crowds (eh-hmm, hooligan fans) lining the roads. As an investor, we have no control over the amalgam of forces that create positive/negative market returns (i.e.  geopolitics, interest rates, currency risk etc.). Even when being pragmatic with all of the things that are in our control, we are never free from setbacks. This brings us back to the point of this article: recessions.

Looking at the chart below, we see that recessions occur roughly every four years. Given that our last recession was in 2009, it would seem that we’re due. When? Good luck guessing that one. All riders in the Tour know that there will be crashes; it’s simply a matter of when. As an investor, we need not forget that like crashes on the Tour, recessions are also a matter of when.

Market growth is not something that can continue indefinitely, economies need recessions to filter out the poor performers and allow opportunity for new entrants. In the Tour de France, how riders navigate the setbacks and challenging times can often be indicative to their overall performance. As an investor, those with the guts and capital to make purchases during a recession are the winners (i.e. buying depressed assets at a discount). Warren Buffett once shared the sage advice to “be fearful when others are greedy, and be greedy when others are fearful.” I’d have to ask Lance, but I feel like this holds true in both our financial markets and the Tour.

For those planning to retire or begin drawing down their assets in the near future (within the next 1-5 years), portfolio management can become a bit more nuanced. In short, it’s imperative to set aside at least a few years of living expenses in safe investments (i.e. short-term bonds with high credit quality). Why? Having these funds on the sidelines during a recession will allow you to ride out the market tumult, to not sell your equity positions out of necessity, and to be patient in waiting for the market recovery.

Aside from your portfolio allocation, the other area within your control as an investor (and arguably even more important) is your spending. If a Tour de France rider exerts all of his energy on the first mountain incline, how will he fare later in the Tour? Depleting too much energy too early in the Tour would be short-sighted and result in lackluster performance. Now, think of that same rider who exerted too much energy too early that now faces an immense challenge that is beyond his control. Good luck Chuck.

As an investor, depleting too much of your portfolio too early could have even more dire consequences than a cyclist overexerting themselves. In the event of a recession, those who rely on their portfolio assets for monthly/annual cash needs may be fine if maintaining a lifestyle within their means. However, for those living above their means, this perfect storm of a recessionary market combined with overspending will deteriorate a portfolio quickly. Trying to tighten your spending during a recession is fine, but for those in later stages of life who are already drawing down their assets for living expenses, decreased spending during a recession could be a case of too little too late.

Regardless of life stage, having a properly allocated portfolio and being conscious of your cash inflows and outflows is crucial to know in advance of a recession. Like a competitive cyclist, focus on what you can control. Whether cycling or investing, always work to be in a position of strength. If questions, contact us for a review so that when the sky is falling and market analysts cry catastrophe, you can kick back and enjoy the lighter things in life – like the Tour de France.

The Tax Cuts and Jobs Act of 2017 imposed significant changes to the 2018 tax code especially for self-employed people but one area it did not change is the benefit of Solo 401(k) or individual 401(k) plans. These retirement plans are designed for companies with one employee (or an employee and spouse) that want to maximize retirement savings.  Unlike SEP IRAs, traditional IRAs and traditional 401(k) plans, the Solo 401(k) provides both tremendous tax advantages and low operating costs to set-up and maintain.

A Solo 401(k) offers the same maximum annual pre-tax contribution amount as a traditional 401(k). For 2018, the amount is $18,500 (a $500 increase from 2017) for those younger than age 50. People that turn 50 or older in 2018 can contribute an additional “catch-up” contribution of $6,000. These contributions are deemed employee contributions.  A major benefit of the Solo 401(k) for less profitable companies is the ability to contribute up to 100% of your self-employed earnings towards this employee contribution. For example, if your company has a profit of $20,000 then $18,500 can be contributed as an employee contribution if you are under 50 and $20,000 can be contributed if 50 or older. Not only are these contributions tax deductible against your Federal income but also against your New Jersey income. Employee contributions must be completed by December 31^st.

In addition, a Solo 401(k) offers the opportunity for pre-tax employer contributions with a maximum of $36,500. This amount is based on up to 20% of your net self-employment income (business income minus half your self-employment tax). Employer contributions must be completed by deadline to file taxes.

These are huge tax savings and allow self-employed people to save aggressively for retirement.

Another advantage is the low cost to set-up and operate the Solo 401(k) plan. Fidelity is renowned for offering Solo 401(k) plans without set-up costs or annual fees.

Children’s Impact Under Tax Reform

With the recent overhaul of the US tax system, it comes as no surprise that many are still trying to decipher how they are impacted by the changes. While media pundits have been quick to highlight the most dramatic changes (i.e. mortgage interest limitations, state tax deduction limits, lowered corporate taxes), few have touched on how this reform will impact individuals/families with children under 18 years old. To summarize these changes:

Enhanced Child Credit:

• Expanded from $1,000 per qualifying child to $2,000
• New $500 credit is available for qualifying dependents not eligible for the full $2,000 credit (this is intended to make up for taxpayers no longer being able to claim their dependent parents as personal exemptions).
• Most notable point for LFA clients: Credits begin to phase out once income exceeds $400k for married couples, $200k for all other taxpayers. This is an increase from the former phase-outs of $110k for married couples, $55k for all others. Many more LFA clients will qualify for this credit.

529 plans:

• 529 savings plans have been a tax-efficient way to save for future education expenses on behalf of a designated beneficiary, such as a child or grandchild. Before tax reform, these accounts were strictly reserved for college and post-secondary training. Now, up to $10,000/year may be withdrawn from these accounts to cover the costs of K-12 expenses (includes expenses for public, private, and religious schools).
• Qualified 529 expenses remain pretty much the same as they were previous to tax reform: Tuition, room and board, technology (computers/printers/laptops/software), books and supplies, certain homeschooling expenses (new).

Kiddie tax

• Prior to tax reform, the tax code allowed for parents to transfer appreciated securities to their children and for their children to sell the securities and recognize the gain (at lower rates than if the parent had exercised). Transfers of income like this are still allowed and slightly more favorable…as long as the strategy keeps capital gains, interest, and dividends below the $2,600 – 0% tax rate.
• Earned income, however is subject to higher rates at lower income levels.
• Previous kiddie tax rules stated that, at worst, the child’s income would be taxed at the parents’ tax rate. Now, children’s ordinary income and/or capital gains are taxed at the same rates as trusts, listed below:

As with all financial planning topics, feel free to contact us to discuss how new tax law changes affect you!