Jason P. Tank, CFA

Cybersecurity: An Ounce of Prevention

August 26, 2022 by Jason P. Tank, CFA, CFP

Benjamin Franklin was a wise guy. He’s the one behind “Don’t throw stones at your neighbors, if your own windows are glass.” He also came up with “No pain, no gain.“ Amazingly, he shared this nugget about 250 years before the internet was even invented, “An ounce of prevention is worth a pound of cure.”

Online security is a growing problem that needs attention. This is especially true for seniors. I was recently reminded of this working with a client who experienced financial fraud. Thankfully, my client was made whole. But, it certainly didn’t come without worry and stress. In the spirit of prevention, here are some easy things you can do.

Two-Factor Authentication: This is the Holy Grail for your online financial accounts. Whenever you log in, a text message should be sent to you with a unique code to gain access to your accounts. Almost every reputable financial institution has this safety measure available. If you can log in, without going through a two-factor authentication process, please stop reading this article immediately and contact your bank, credit card and financial advisor.

Use a Password Manager: Every single person I know struggles to remember all of their usernames and passwords. Naturally, the easiest thing is to use the same login information for every website. Unfortunately, that happens to be the best way to let fraudsters gain access to every one of your accounts! So, what can you do? Use a password manager, such as LastPass or 1Password. These applications will allow you to establish unique passwords and, most importantly, securely store them all in one place.

Set Up Activity Alerts: If some crook does gain access to your accounts, there are things you can do to limit the damage. For example, many financial institutions allow you to establish text, email or phone alerts for large purchases or possible fraudulent transactions. If you cannot figure out how to set up these account alerts, once again just call your bank, credit cards or financial advisor for help.

Hobble Your Accounts: I have to admit, this suggestion might sound a bit weird. For my clients, I’ve purposely limited what they can do online in their investment accounts. Unless I’m told otherwise, they cannot just log in and proceed to buy or sell securities or move money out of their investment accounts. Of course, the same applies to every bad guy who might happen to gain access, too!

While going completely offline is always an option, it’s increasingly cumbersome. Remember, fraudsters don’t like to work that hard. They seek easy targets. When they hit a brick wall, they tend to move on. With a few easy steps, you can make it a lot harder on them while still enjoying the conveniences of our connected world.

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

The Bond Market’s Wayne Gretzky Moment

August 5, 2022 by Jason P. Tank, CFA, CFP

Q: What’s going on with interest rates lately? I know the Federal Reserve is still raising interest rates. But, now I read that mortgage rates are falling and my bond portfolio is also recovering. Can you explain?

A: As we all know, the Fed is deep in the midst of a serious rate hiking campaign. Since March, short-term interest rates have been raised from zero to about 2.25% to 2.5%. The Fed started out slowly this spring and then really picked up speed by this summer. It’s been one of the fastest “monetary tightening” phases in modern history.

Given the Fed’s inaction last year in the face of a sudden surge in inflation, they went into catch-up mode. In unprecedented fashion, they raised rates 0.75% at both their June and July meetings. The Fed basically carried out a policy of shock-and-awe. By mid-June, the major bond market index was down well over 10% as compared to the start of the year.

Thankfully, I believe the Fed has now shifted into a more gentle phase. They have three more scheduled meetings in 2022 and have signaled an additional 1% in cumulative rate hikes by Christmas. Current expectations are for a 0.5% hike at their late-September meeting followed by two smaller 0.25% bumps at the November and December meeting. After that, they’ll likely enter a wait-and-see phase to see how the dust has settled on inflation and the economy.

Investors have more-or-less factored all of this into their calculations. They are already looking “over the valley”, so to speak. And, what do they see on the other side? A break in the inflation fever, for starters. But, to accomplish that feat, they also see the Fed having pushed the economy to the very edge of a recession. And, what happens in a recession? The Fed shifts into reverse and starts to cut interest rates!

So, when you read headlines about mortgage rates falling and when you notice your bonds are starting to recover, try to focus on the direction of longer-term rates rather than short-term rates. The fact is, the Fed can really only control short-term interest rates while longer-term rates are largely set by the market.

To fully exorcise the demon of inflation, the Fed is hell-bent on ignoring hockey legend Wayne Gretzky’s famous advice, “Skate to where the puck is going to be, not to where it has been.” Based on current market signals, investors are busy placing bets that the Fed will take things too far. We’ll see where the puck goes next.

Bear Market Tax Moves

July 22, 2022 by Jason P. Tank, CFA, CFP

To paraphrase a popular bumper sticker, bear markets happen! Rather than bury your head, it’s moments like these that create some planning opportunities. Here are two bear market tax moves to consider.

Consider doing a Roth conversion when markets are down. Remember, the money invested in your IRA has not yet been taxed. But it will be someday. Fortunately, you are in control of when that moment arrives. What better time to pay those taxes than when the value of your IRA is temporarily depressed? Better yet, the IRS simply must accept a discount!

For the uninitiated, Roth conversions involve shifting – that is, converting – money out of your not-yet-taxed, traditional IRA and into a never-to-be-taxed Roth IRA. The amount you convert counts as taxable income.

Of course, while Roth conversions are smart when the value of your IRA is down, they become really smart when your conversion is taxed at a lower rate than it likely will be in the future. Figuring that part out requires some tax analysis skills along with a little bit of guessing about the future.

Now, Roth conversions are not an all-or-none proposition. They often are best done in smaller chunks and spread out over multiple years. You definitely want to be careful to not push yourself into a higher-than-normal tax bracket or trigger other oddities in our tax code.

Yet another bear market move involves your after-tax investments. Unlike your IRA that is taxed when you withdraw the money, the only items that result in taxes inside your after-tax accounts are your dividends, interest and the capital gains that you choose to realize when you sell an investment. Inside your after-tax accounts, the government doesn’t tax the chicken, just the eggs it produces.

Consider harvesting capital losses to use later on in the good years. If you look, you may notice quite a lot of yet-to-be-realized capital losses sitting inside your brokerage statements. You can harvest those losses for later use. The IRS will let you stockpile capital losses and carry them forward to offset your future gains.

To be clear, I’m not recommending that you simply dump a depressed investment just to realize a loss for future tax purposes. Instead, you could harvest losses and still leave your portfolio largely unaffected by (a) doubling your position in a depressed holding and then selling the high-cost shares after 31 days, (b) selling your depressed holding and waiting 31 days to buy it right back or (c) selling the depressed investment and reinvesting in something similar, but not identical.

Bear markets are hard to control and are often best ignored. But, when it comes to managing your taxes, Roth conversions and tax loss harvesting might satisfy your natural itch to take back a little control.

Start Preparing for the Recovery

July 1, 2022 by Jason P. Tank, CFA, CFP

Since the start of 2022, stocks have dropped about 20% to 30% and bonds have declined about 11%. For investors with balanced portfolios, you’d have to travel back in time for many decades to find a comparably dismal start.

Inflation is the primary cause, of course. In response, the Fed is aggressively trying to put the genie back in the bottle. Since March, they have raised short-term interest rates three times to 1.5%. And, there’s more to come. Expectations are they’ll hit 3.5% by the end of the year.

Focusing first on bonds, all of this begs a reasonable question, “With the Fed less than halfway done, shouldn’t we just get out of bonds completely?”

As I wrote last week, with the Fed’s future rate hikes already factored into today’s prices, I feel we’ve seen the worst of the bond market decline. In baseball terms, for bonds, I’d say we’re in at least the middle of the 8th inning.

Given this view, I’ve recently shifted more heavily into corporate bonds and have also modestly extended the average maturity of my clients’ bond portfolios. With interest rates now higher, I feel bonds offer both ballast and income. This combination of benefits has not existed in bonds for many years. In short, it feels like the wrong time to bail on the bond market.

Turning now to stocks, it’s been an equally tough period. Everyone is on recession watch. Officially, we don’t find out about recessions until one is either well underway, or already over. However, the stock market typically ferrets out a recession many months before one hits and sometimes it’s wrong. With stocks down this much, I think we’re getting a pretty good signal that a recession is probably on the near-term horizon.

This, too, begs another reasonable question, “With things looking so ugly out there, how much worse do you expect the stock market to get?”

With my view that inflation will soon peak and, in turn, the Fed will be done raising rates by year’s end, my base case is that we should expect a more typical bear market decline of 30% to 35% in stocks. Again, in baseball terms, for stocks, I think we’re sitting in the bottom of the 6th inning. This is not close enough to the end to exhale. But, it’s certainly not far enough away to bail out of stocks or even cling to cash.

Bear markets are tough to stomach, for sure. And, with bonds also in decline, this one feels like a one-two punch. But, it’s imperative to find resolve and prepare for the recovery phase of a bear market. It’s likely not as far away as it seems.

Return of the Ballast of Bonds

June 24, 2022 by Jason P. Tank, CFA, CFP

Before this decline, most investors knew the level of income offered by bonds was far too paltry. To be fair, that was the case for about a decade. Like a frog adjusting to increasing levels of discomfort, the era of super-low rates and declining inflation led to a secondary focus on yield. The primary focus was not on bonds’ return on investment, but rather on their return of investment.

You have to travel back to the early ‘80s to see anything quite like the last six months, inflation-adjusted. Since the start of 2022, the general bond market has plunged about 11%. With stocks in a bear market, there have been no traditional places for investors to hide. Year-to-date, overall portfolio declines in the mid-teens are the norm, even for conservative investors. Once again, truly ugly.

How we got here is now a well-known story; a witch’s brew of a pandemic plus massive government stimulus plus supply-chain breakdowns plus war-induced shocks to both energy prices and food inputs. In a flash, it’s added up to a worldwide surge in inflation and, importantly, rising inflation expectations.

Late last year, the Federal Reserve abruptly pivoted from its overly-sanguine view on inflation. I mistakenly shared that sanguine view, to be honest. Ultimately, I do still believe our recent spike in inflation will subside. But, as far as clawing back the recent carnage, a bond market recovery will undoubtedly require more patience.

However, there is some good news. The worst of the pain in bonds is likely over and yields are significantly more attractive today.

It’s important to recognize that now, more than ever, financial markets act like betting venues. Investors don’t just wait around for outcomes to be revealed. Instead, markets lurch from one set of expected outcomes to another set, based on shifting sentiment and probabilities about an uncertain future.

The Fed is the bond market’s focus and their power largely resides in their “forward guidance” about the path of their interest rate hikes. With the power of their words alone – how far and how fast they’ll raise interest rates – they largely control the direction of the bond market.

Once the Fed’s policy path is fully believed – and the Fed’s credibility is restored – their entire rate hiking campaign will be fully absorbed by the bond market. At that point, the lurching will stop and the ballast of bonds will return. I feel that time is very near and – I think I speak for many out there – it won’t be a moment too soon!

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