Jason P. Tank, CFA, CFP, EA

A Peculiar Game of Tug-of-War

February 1, 2022 by Jason P. Tank, CFA, CFP, EA

As January goes, so goes the year. If that old market saying holds any weight, investors’ worry may be justified. The start of 2022 has certainly been rough.

Along with stock indexes falling between 5% to 10% in January, bonds have also added to the pain with a decline of around 2%. It’s safe to say that few investors have been spared from losses to start the year.

It’s commonplace to blame the Fed for all of this negativity. In their defense, the pandemic has presented a significant challenge. With their now-$9 trillion balance sheet, almost double its pre-Covid size, they have grown visibly uncomfortable in their unorthodox policies. They seem to be looking for the escape hatch from their homemade trap of zero interest rates. Increasingly, it’s not at all clear they actually built one.

Since their grand monetary experiment began in response to the Great Financial Crisis in 2008, the Fed did finally start to baby-step its way toward higher rates by early 2017. Covid suddenly arrived and the Fed pinned interest rates right back down to the floor. And, with that not seemingly enough to cushion the economy, they further juiced financial market sentiment by purchasing yet another $4 trillion of bonds. It worked.

Similar to a game of hot potato, their bond purchases sent investors seeking other, riskier assets; namely increasing demand for both stocks and real estate. This hot-potato effect may be the true magic behind their zero-rate monetary policy. It not-so-subtly shifts the mentality of the herd and sends them thundering off in riskier directions; pushing up the prices of riskier assets in hopes of feeding a sense of consumer and investor confidence.

What’s been happening since the start of 2022 is an example of the jittery herd deciding on its direction. With Covid’s final wave clearly cresting (we all hope) and with both unemployment way down and inflation way up, the Fed has telegraphed that a policy change is just ahead. They’ve penciled at least three 0.25% rate hikes throughout 2022, about a year earlier than expected. In addition, they’ve also sent the message that their business of buying bonds is soon coming to an end.

However, it’s important to note that the Fed’s shift is just one element of the current backdrop. Regardless of how it might seem, there are other factors to consider. We seem to be in the midst of a peculiar game of tug-of-war.

Holding on to the opposite side of the rope stands our post-Covid economy. The economy is quite strong and, in my opinion, it’s likely to both broaden and deepen its strength in the year ahead. As if churning just below the surface, there is a pending sense of a post-pandemic release of optimism and pent up activity. Even with elevated stock market valuations, the economy’s strength may not result in a match that ends with the financial markets facedown in the mud.

Keep in mind the irony of the current situation. If the Fed senses the economy’s footing is slipping, it’s likely to lighten up on its own effort. As it should be, the Fed’s true desired outcome is a healthy stalemate. Unlike most games of tug-of-war, a boring stalemate in this peculiar match is a win-win outcome. So far, the start of 2022 has been anything but boring! It’s likely to be an interesting year.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Lessons in Pandemic Investing

January 18, 2022 by Jason P. Tank, CFA, CFP, EA

As we enter the third year of the pandemic, it might be just long enough to do a little reflection. In the spirit of seeking wisdom and reinforcing investing lessons, let’s do a quick retrospective of a few of the pandemic’s most-famous stocks.

One thing that became clear during the initial months of the 2020 lockdown was the appearance of truly novice investors. Some were very young and very green. But, plenty of them were middle-aged people in their pajamas with far too much time on their hands who should have known better. These so-called investors acted like moths to a flickering flame, seeking out one “meme” or “theme” stock after another.

The common thread in the infatuation with these types of stocks was the disregard for any semblance of value and investment analysis. While this type of investor behavior happens from time to time, the obvious reality of the stay-at-home trend exacerbated the sillines to a headline-grabbing level. It’s been so egregious it’ll no doubt present a library of lessons for future investors to reference for decades to come.

Among dozens of other stocks, important lessons can be learned from the stock price crashes felt by investors in companies such as Zoom, Peloton, Roku, Teladoc and the mutual fund most associated with the pandemic-fueled trade, ARK Innovation.

Zoom is arguably the poster child stock of the pandemic. Many millions downloaded it within a week or so of the lockdown. Almost two years later, I still use it incessantly in my business. It’s literally become an essential tool.

However, what was lost on novice investors was that holding video meetings was not something that only Zoom could do. The list of well-established competitors is a mile long. This business landscape was as obvious in the first days of the pandemic as it is now almost two years later. Still, Zoom’s stock price skyrocketed from about $60 per share before Covid to almost $600 per share just before the vaccine’s were made available. The stock became the proverbial ten-bagger in less than one year! Since then, plenty of wild-eyed investors have been left holding the bag. The stock has now plummeted about 75% from its peak a little over a year ago.

Teladoc Health is another example of allowing an industry-bending trend to lead you off the cliff as an investor. Telemedicine was on its way prior to the pandemic. During the pandemic, it became an unstoppable trend and life-changer for millions.

Investors noticed the obvious and drove the stock from about $80 per share at the start of the pandemic to around $300 per share within a year’s time. Nothing short of a lucky run in Las Vegas is quite as intoxicating as quadrupling your money in such quick fashion. Equally, having it round-trip back down to $80 only one year later is nauseating.

Having been in the business of investing for over two decades certainly gives me perspective along with increasingly large doses of humility. On both social and business grounds, what we’ve all witnessed over the past two years is as unprecedented as it is enlightening. But, perhaps most importantly, as living through the tech bubble in the late ‘90s did before it, this pandemic has once again reinforced in me the importance of fighting the allure of easy money and wild-eyed speculation. I suspect many new investors will reflect similarly. One can only hope.

Three Simple Things for 2022

January 4, 2022 by Jason P. Tank, CFA, CFP, EA

Every new year brings a goal to do things just a little bit better. To me, better often means simpler. And, the simplest things are the most automatic. Here are three simple and automatic things to consider for 2022.

Change your RMD Mechanics: I have to admit, it was very nice not having to deal with required minimum distributions (RMDs) for my clients in 2020. Nonetheless, RMDs returned in full-force last year. With that, it has spurred me to further systematize our internal process in an effort to maximize my clients’ charitable giving options.

For those of you who have reached the age of RMDs and don’t need to dip into your IRA to pay your everyday bills, consider the following setup.

Establish the level of cash you need to live your life and just have that money come directly from your after-tax investment or savings accounts. Next, get a checkbook issued for your IRA. Set this dedicated IRA checkbook aside and only use it for your charitable giving throughout the year. Your IRA donations will reduce your RMD dollar-for-dollar and will help to lower your tax bill. Then, when the end of the year approaches, simply distribute the rest of your RMD into your after-tax investment or bank account.

With this simple process in place, you won’t even have to think about your RMD during the year and, perhaps best of all, you’ll enjoy the nice tax break that comes from making charitable donations directly from your IRA.

File an Extension: I don’t know about you, but I’m extremely busy at the start of the year. This makes the traditional tax filing deadline of mid-April a time-management burden for me. Now, perhaps you’re not busy at all, but instead just want to enjoy some warm weather away from your tax files! In either case, you might consider filing for an extension and pushing off your tax deadline to a more convenient time.

Of course, filing for an extension is not the same as taking a tax holiday! By April 18th, you still need to pay what you owe. To get that part done, you can just do a rough calculation and send in the money with your request for your tax filing extensions. Then, by mid-October, you can do the nitty-gritty math and officially file your taxes.

Don’t Forget to Rebalance: Last year was yet another good one for the stock market. That’s worthy of celebration. However, once your personal celebration ends, try to return to reality and stay disciplined about your investments and the risks you’re taking.

As most of you know, the single most important thing you can do is to periodically rebalance your portfolio’s asset allocation. After the past few years of stock market gains, there is a pretty good chance things have gotten out of whack.

While benign neglect often feels pretty good, it only lasts for a little while. Rather than overthink the market and the economy, simply eliminate the guesswork by making portfolio rebalancing your automatic routine.

Q&A: Social Security and Crypto

December 10, 2021 by Jason P. Tank, CFA, CFP, EA

Q: I’d love to settle my mind. Most of my friends have already filed for Social Security benefits. They were worried it’ll eventually go away. But, my financial advisor continues to recommend that I keep waiting to file for mine. What are your thoughts?

I’d really like to give you a short-and-sweet answer. Unfortunately, without knowing your personal circumstances, that’s simply impossible. But, here are a few things to help guide your thinking.

Social Security isn’t going away anytime soon, in my view. For those over 55, the promised benefit shown on your latest Social Security statement is very, very, very likely to arrive in your bank account soon enough. Yes, that’s three “verys.”

How can I sound so certain? First, no politician wants to pull the rug out from under your planning that’s already in its later stages. Second, no politician wants to lose the votes of those who actually vote.

As your advisor likely explained, for every year you delay, you get an 8% lifetime benefit hike. Importantly, if your benefit is larger than your spouse’s, your surviving spouse will also enjoy your boosted benefit amount upon your death. As long as one of you lives for about 14 more years, each one-year delay is likely worth it. Naturally, this is a mortality question that only you can answer.

In addition, delaying your filing might open up tax planning opportunities while you wait. Uncovering them takes some detailed financial modeling. To name a couple, strategic Roth conversions and harvesting long-term capital gains come to mind.

Finally, to settle your mind, don’t forget that your friends may have very different financial circumstances from you. It’s never really safe to assume we’re all alike.

Q: Everywhere I look, I see more and more about investing in Bitcoin and other cryptocurrencies. It seems a lot of younger people now view them as legit investments. Yet, I don’t own any cryptocurrencies in my portfolio. Should I?

Over the past year, interest in cryptocurrency has certainly grown. If you ever tune into CNBC or read a financial publication, I’d bet real money that you’d hear about the latest wild moves of Bitcoin or Ethereum or whatever other crypto that sprouted up. It’s like crack cocaine for the financial media!

You can definitely put me in the camp of skeptics. It’s just far too volatile to be categorized as a reputable investment.

Bitcoin’s price fell about 40% in a span of months earlier in 2021. That drop was followed up with a price spike of 70% just a few months ago. Back in 2018, Bitcoin fell about 70% only to be followed by a quadrupling in early 2019.

As math geeks already know, while price surges of 70% and 400% seem exciting and lucrative, these moves only just recovered the 40% and 70% declines that came before them. It takes bigger gains to make up for losses. My advice is to turn down the volume on CNBC and think about something else.

A Bit of Math Goes a Long Way

November 23, 2021 by Jason P. Tank, CFA, CFP, EA

I’m in the mood for a little math. Perhaps memories of college are flooding into my mind as I watch two of my kids gear up for this semester’s finals. Once a math major, always a math major, I suppose!

Let’s start with the electric-vehicle maker, Rivian Automotive. Regarding Rivian, here are three numbers to ponder. One hundred eighty. One billion. One hundred billion.

One hundred eighty is the number of vehicles Rivian Automotive produced through October of this year. In comparison, General Motors sold 4.7 million vehicles in the first nine months of 2021. Ford Motor sold 2.8 million vehicles over that same period.

One billion is the loss posted by Rivian in the first half of this year. Through September, General Motors logged a profit of $8.1 billion and Ford earned $5.6 billion.

One hundred billion is the current market value of Rivian, just following its initial public offering this past month. In comparison, General Motors’ market value is only around $90 billion and Ford’s is near $80 billion.

To be fair, Rivian Automotive is just a start-up. And, clearly, investors are hoping it turns into the next Tesla with its wildly overvalued stock worth over $1 trillion. But, remember, we’re talking about a company that’s made one hundred eighty vehicles and already has a one hundred billion dollar market value? It’s good to do some math.

Shifting gears, here is another number to contemplate. Eight and a half percent.

We are now in the open enrollment period for gaining health insurance coverage through the Affordable Care Act (ACA) marketplace. Just like this year, the formula for calculating health insurance premium subsidies is more generous than in years past.

Prior to 2021, you didn’t get any premium support or subsidy under the ACA if you made more than four times the official poverty line. For example, as a family of four, you’d lose all premium subsidies if your household income exceeded about $106,000, even if only by one single dollar.

At that level of income, it implied that a family of four could really afford a health insurance plan that currently costs about $20,000 per year and sports a $5,000 deductible to boot. Good luck with that, of course. In a demonstration of bad policy, if this family’s income came in just one dollar under the qualifying income threshold, they were provided a hefty premium subsidy of about $10,000. The program was designed with a truly steep “income cliff.”

For 2022, as it was in 2021, this income cliff will once again be waived. As a result, there are no income thresholds to consider with regard to receiving health insurance premium subsidies through the ACA marketplace. And, just like last year, the official “affordable” amount for health insurance is now set at a maximum of 8.5% of your family income. For lower income families, the maximum affordable premium is even less.

For a family of four, this 8.5% figure caps their health insurance premium at about $750 per month, instead of having them pay the full $1,500 monthly cost for the ACA Marketplace’s “benchmark” silver health plan. And, with their subsidy in hand, if they chose to buy a bronze plan, they could likely cut their monthly premium nearly in half again. With this premium savings, they could then contribute to a health savings account (HSA) for later use and additional tax benefits.

All around, it seems like a good idea to do some math as you head into 2022. I’m just glad I don’t have finals to stress over in the next few weeks. I promise I’ll try really hard not to gloat to my kids!

« Previous Page