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Q&A: Stimulus Payments and RMDs

February 12, 2021 by Jason P. Tank, CFA

Q: Both last spring, and now again in December, I didn’t receive any “economic impact payments.” It doesn’t make any sense to me. My income in 2020 was way down compared to 2019. Do you have any idea how that could be?

A: Your confusion is completely understandable. You’re absolutely not alone! Let me explain how the stimulus payments actually work.

Congress structured those payments – the one last April/May and the most recent one in December/January – as an “advance” on a tax credit that’s officially applied to your 2020 tax return. But, they wanted to speed up payments to people during the lockdown last spring. And, since they didn’t know what your 2020 income was going to be, Congress simply used 2019 as their “guide.”

It looks like your 2019 tax return disqualified you from receiving the “advanced payments.” The government clearly got the wrong impression about the financial hit you took in 2020. As a result, they didn’t send you those payments in “advance” of your actual 2020 tax filing.

But, don’t worry, the 2020 tax season has now arrived. If your 2020 income was lower than it was in 2019, as you’ve said, you’ll now qualify for the two tax credits of $1,200 (spring) and $600 (winter). When it’s completed, take a close look at your 2020 taxes and see if your tax credits are in there. Better late than never, right?

Q: Is age 70 ½ still an important age when it comes to my annual required minimum distribution (RMD) from my IRA? I turned age 70 ½ last spring, but I didn’t have to take any distributions because of the pandemic. Do I have to take my first RMD in 2021?

A: You are correct that required minimum distributions, known as RMDs, were suspended in 2020. But, you’ve missed a recent change related to the RMD rules.

Back in December of 2019, Congress quietly passed the SECURE Act that changed a number of things to enhance overall retirement readiness. For some reason, this bipartisan bill officially pushed back the age that you are required to start taking distributions (and, therefore, finally paying some tax) from your IRA and other tax-deferred accounts.

Since you were born after June 30, 1949, you don’t actually have to take your first distribution from your IRA until you reach age 72. For those born prior to June 30, 1949, the important milestone remained age 70 ½.

You might wonder, why did they choose such an odd cut-off date of June 30, 1949? Well, that’s officially the last day you could have been born to reach age 70 ½ during the calendar year of 2019.

Side note: There appears to be a movement afoot in Congress to further push out the RMD starting age to 75. If that comes to fruition, it’ll no doubt create some tax and financial planning strategies to consider. Frequent tax law changes and arbitrary complexity certainly breeds job security for paper-pushers, like me!

Idle Hands With Free Money

February 2, 2021 by Jason P. Tank, CFA

Idle hands certainly are the Devil’s workshop. If the mob of Reddit day traders who drove GameStop to stupid heights last week are any indication, so too are idle thumbs!

For the uninitiated, here’s the lowdown. Over the span of three short weeks, GameStop inexplicably vaulted from about $20 per share to nearly $500 per share. The stock’s move had nothing to do with GameStop’s actual business, of course. It was driven by individuals who gathered online and supposedly shared the common goal of inflicting pain on evil Wall Street types.

GameStop is a struggling retailer operating in the video game industry that’s increasingly going digital; a trend that’s only been accelerated by Covid. It comes as no surprise that many hedge funds decided to bet against them. In fact, GameStop ultimately became the most heavily shorted stock on Wall Street.

Now, when an investor wants to bet against a stock, they find some shares to temporarily borrow and then immediately sell them into the market. Their plan is to return the borrowed shares by repurchasing them after the stock drops. Short sellers aim to sell high and buy low. Over the past couple years, short sellers literally borrowed every possible share of GameStop.

This massive, one-way bet caught the attention of some contrarian investors. Some wagered that GameStop might be able to pull off a turnaround. A few entertaining ones even went on YouTube to explain their rationale.

If things improved for GameStop, they dreamed of a colossal “short squeeze.” That is, they imagined a rising stock price that would literally crush the short sellers. Further, if only Gamestop investors could hold on tightly enough to their shares, the short sellers would be forced to bid higher and higher for shares to exit their terrible trade.

As the story goes, inspired by the prospects of destroying Wall Streeters, millions of idle, stuck-at-home and new investors – armed with easy-come, easy-go stimulus checks and Robinhood’s trading app – gathered on a social media platform, Reddit, to coordinate the ultimate short squeeze.

To help keep the game going, these new investors have even devised mantras to inspire others to hold tight. They speak of having “diamond hands” with the ability to ride through the volatility of the trade. They even post brokerage account screenshots showing their sometimes massive losses and add pithy reminders to their fellow gamers that you-only-live-once. I imagine it looked so fun!

Lately, though, it appears the Devil has been lurking in the shadows as these gamblers tapped away on their phones. Ironically, their end-game depended on their ability to suppress the deadly sin they most despise in others; personal greed.

Over the past few days, the mob has decided to sell out and is searching in vain for a willing sucker to buy their bloated shares. Naturally, no matter how game-like it all appeared, all that free money started to add up to some real dough. The mob does still view it as real money, right? Are you listening, Fed and Congress?

Biden’s Two Trillion Dollar Stimulus Plan

January 19, 2021 by Jason P. Tank, CFA

Here comes yet another $2 trillion in economic relief directly on the heels of last month’s nearly $1 trillion package. For those keeping score, that’ll bring the official tally to roughly $5 trillion spent to combat Covid.

President-elect Biden unveiled an outline of his economic recovery plan last week. With majority control of both the House and the Senate, we should expect semi-swift passage. Here’s a rundown of the major things we can expect to see.

To begin, with $600 payments now just landing in the bank accounts of about 250 million adults and children, it looks like this will be topped off to $2,000 per person. Given the very broad reach of these payments – which will be received by approximately 75% of adults and children – it is probably safe to say the main goal is to encourage consumer spending, rather than helping those most in need.

To address those most in need, Biden’s plan also aims to further enhance unemployment benefits for the current 19 million people who continue to struggle to find ample safe or steady work. Just before Christmas and after many months of intense negotiation, Congress recently agreed to add $1,200 per month to regular state-based unemployment benefits. If Biden’s plan becomes law, we should expect this to increase again to $1,600 per month and push the benefit period out another six months to September.

Biden’s plan also seeks to help those with children. Currently, almost all families receive a $2,000 tax credit for each child under the age of 17. The proposed plan is to increase this to $3,000 per child. Biden has also proposed making these child tax credits fully, rather than partially, “refundable.” That’s just a fancy word that means eligible families would get a check for the full $3,000 per child, even if they actually owed zero federal tax.

Biden also wants to expand the tax credit designed to help defray the high cost of childcare. Families currently receive a tax credit between 20% and 35% of childcare expenses. The current credit can reach as high as $3,000 per child with a family maximum of $6,000. The proposal is to expand the credit to $4,000 per child, subject to a maximum of $8,000 per family. And, unlike the current tax law, he also wants to make these childcare tax credits “refundable”, as well.

Among other proposals, Biden’s goal is to establish a multi-year transition to a national minimum wage of $15 per hour. This proposal would affect workers and businesses in some states more than in others. Additionally, Biden hopes to provide bigger health care premium subsidies for those who use the Affordable Care Act to gain coverage.

Oh, I almost forgot to mention the growing talk of student loan debt relief up to $10,000 per borrower. So, the next time your kids or grandchildren question the impact of their vote, just remind them of the two Georgia run-off elections!

Is History Rhyming Once Again?

January 5, 2021 by Jason P. Tank, CFA

Mark Twain once said, “History doesn’t repeat itself, but it does often rhyme.”

Investor speculation is once again running rampant. Trading activity and the number of new brokerage accounts has spiked in 2020. Options trading among individual investors has jumped and eye-popping IPOs have arrived. Tesla and Bitcoin are signs of something concerning, not to mention the surging market valuations of all things tech-related. This type of investor frenzy doesn’t usually end well.

Under most measures, both the stock and bond markets appear to be significantly overvalued. Fundamental metrics, such as sales, earnings and cash flow almost uniformly point to frothy financial markets. Coldly weighing fundamentals and finances, as opposed to simply chasing market momentum, is what separates investment from speculation. The line is blurry, for sure.

A common explanation of the market’s stunning rebound since March centers on the Federal Reserve and the US Treasury. Since the virus struck, the financial support by these two government bodies totals about $7 trillion and growing. The Fed is buying bonds at an annual pace of about $1.5 trillion and President-Elect Biden describes the latest $1 trillion aid package as just a “down payment.”

About half of the $7 trillion is meant to prop up consumer spending through direct payments to people and businesses. The goal is to fill the income holes left behind by Covid. The other half of that $7 trillion has been used to prop up stocks and bonds by mercilessly driving down interest rates and prodding investors to take on risk. Think of this part as filling asset holes created by Covid. Arguably, it’s not hard to view this part as market manipulation.

The documentary, The Flaw, convincingly argued the underlying cause of the financial and housing crisis of 2008 was a combination of anemic income growth and growing wealth inequality in America. Not surprisingly, the central villain in that story was the Federal Reserve.

As the story was told, for the poor and middle-class who don’t tend to own a lot of investments, the equity in their homes represented their primary path to wealth creation. For the rich who have lots of financial assets, the Fed’s super-low interest rate policy in response to the tech-stock bust drove them to provide toxic mortgages to everyone with a pulse.

The story described a symbiotic relationship where the rich chased after some yield and the poor gained easy access to rising home equity to keep spending beyond their income. It worked beautifully, until the merry-go-round stopped. As if trapped with no other way out, what came next was a doubling down on zero interest rates by the Fed along with deficit spending by Congress.

As I eagerly turn the page of my calendar to 2021, today’s pumping of trillions into the economy has me contemplating the impact on the tomorrows yet to come. I’m hearing history’s rhyme. I sincerely hope this time the Federal Reserve has finally devised a way out of the trap they’ve created for conservative, income-starved investors. In the meantime, I’d suggest you prudently rebalance.

Jason P. Tank, CFA 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

To Be Rip Van Winkle in 2020

December 4, 2020 by Jason P. Tank, CFA

Ah, to be Rip Van Winkle! Just imagine if we could have fallen asleep last New Year’s Eve and are only just now stirring awake wondering what we’ve missed. No doubt we’d be vigorously scratching our proverbial long and scraggly beards as we peruse this year’s dark headlines.

Unbeknownst to us as we blissfully snored away to start 2020, an insidious and novel virus had begun to spread inside and outside China. At first, it seemed like a far away risk. Images of hazmat-suited workers spraying disinfectant in the streets seemed benign and, yes, very foreign. A few weeks later, a storm hit our shores like none other.

Relying on all of our American exceptionalism and optimism, it took the stock market until late February to finally stop rising. In a blink of an eye – just one short month later – not only were the stock market’s big gains from 2019 gone, but essentially all of Trump’s sacred stock market boom since late 2016 had vanished.

Luckily for us, slumbering away like Rip Van Winkle, things were about to get very, very troubling.

Recognizing the speed of the financial meltdown in early March, the Federal Reserve took action only it could take. Within two weeks, the Fed cut interest rates back to zero and, for all intents and purposes, pledged to try to backstop financial markets. Putting this into perspective, it took the Fed six years to buy $4 trillion in financial assets after the Great Financial Crisis. In just eight weeks during this current crisis, the Fed added yet another $3 trillion to the mix. Perhaps more importantly, they promised investors unlimited support for as long as it would take.

Within days, Congress joined the fight and authorized its own $3 trillion of financial aid to both individuals and businesses. Unemployment benefits were boosted dramatically for the tens of millions of workers who were instantly out of work. Direct payments were also sent to nearly every household. About one in ten mortgages and nearly every student loan was given a repayment holiday. Last but not least, about six million businesses were given free government money to keep paying the workers they chose to keep around.

Despite the shutdown’s initial success in bending the curve, the virus once again spread over the summer months and experts were sounding the alarm about the colder seasons to come. In the face of these threats, Congress let its financial aid programs end in August. One logically could have assumed that this level of inaction – both in mitigating the virus and buffering the economy – would have stirred the financial markets awake to the ongoing risks that were apparent late in the summer.

Well, today, with our eyes now finally opening, we find ourselves in a truly peculiar world. It’s been quite a year to be wide awake the whole time. If only we had peacefully slept our way through it all. Ah, to be Rip Van Winkle!

Jason P. Tank, CFA 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

Congress and Lansing, Are You Listening?

November 20, 2020 by Jason P. Tank, CFA

The news over the last few weeks has been remarkable in its positivity. No, I’m not referring to the alarming surge in positivity rates in our nation, our state and our community. Nor am I referring to the need to positively stay home and stay safe when it’s at all possible. And, I’m certainly not talking about the positively dark period just ahead of us as this unrelenting virus spreads and we are stretched to new limits.

Instead, I’m talking about the positive vaccine developments.

The vaccine news from Pfizer and Moderna is a game changer. After giving their vaccine to tens of thousands of volunteers, about 95% of the first batch of positive COVID-19 infections happened in people who were only given the placebo. These two vaccines appear to provide protection far better than hoped. It’s important to remember this was never a slam dunk. It could have taken years.

I’m optimistic that we’re actually starting to turn the long, long corner of this crisis. What exactly does this mean for the economy and the financial markets? It all depends on the timing of the vaccine and the actions of our politicians in Washington and Lansing.

Until we achieve mass vaccination, parts of the economy will continue to be heavily weighed down. As we’re experiencing right now, public health restrictions will continue to affect the obvious set of businesses that rely on people gathering together.

Since mass vaccination likely won’t happen until well into 2021, more financial help is needed immediately, especially for these employees and these small business owners. Congress needs to deliver a financial bridge that should have been built many months ago. And, our politicians in Lansing need to start speaking with one voice to ensure public health compliance to get through this difficult period. I am hopeful that their childish, political squabbling will be silenced as we experience our biggest wave of infections, hospitalizations and death.

Naturally, what’s next for the direction of financial markets is far less clear. The main culprit for this lack of clarity is in how markets actually work.

Financial markets are real-time “anticipation machines.” In this sense, both good news and bad news is immediately pulled forward and instantly reflected in today’s prices. Since the crisis hit, the virus has produced violent waves of bad news and good news. Uncertainty and market volatility are identical twins.

Financial markets are also real-time “comparison machines.” The central question that’s answered on a daily basis is whether one investment is more attractive than another. On this front, the Federal Reserve has totally gummed up the machine. With yields on bonds and cash downright paltry, it makes many stocks look relatively attractive, even at today’s all-time highs.

This all presents a serious conundrum, both for investors and for our economy. A vaccine is coming and our hospitals are almost full. The political season is over and real leadership is now required. Congress and Lansing, are you listening? The message the virus is sending is loud and clear.

Jason P. Tank, CFA 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

Dewey Defeats Truman! Not This Time!

November 3, 2020 by Jason P. Tank, CFA

As I write this, it’s early morning just before the polls open. The allure of prognostication is simply too enticing for me to pass up. With that, forgive me for stepping just one day into the future!

—–

[Post-Election Update: I was wrong, especially in the national tone of the election’s outcome. Florida went to Trump, not Biden, early in the night and the swing-state vote count dragged on for days. It was much closer than I expected. However, the electoral college result will likely turn out to be 306-232, not 335-203, as predicted below. Florida was the key difference and, instead of North Carolina for Biden, he won Georgia. And, of course, the Senate race is still to-be-determined after two January run-off races in Georgia. Republicans will likely end up still holding a slim majority in the Senate by losing either one or two seats; narrowing their current three seat majority.]

——

I’m sure losing so badly last night is tough for Trump to accept. It wasn’t a Reagan-Mondale or Nixon-McGovern type of landslide. In our modern era of deep division, that’s no longer possible. However, Biden’s 335-203 electoral victory along with Republicans narrowly losing control of the Senate leaves little room for doubt. It was a rough night for Trump and the Republicans, especially when it was so easily avoidable.

The night began with 20 states and their 125 electoral votes preordained to be in Trump’s column. In Biden’s bag of certain victories were 17 states and their 215 electoral votes. That left the minority of voters living in just 13 states to decide things.

Like 2020 itself, this election cycle felt like an eternity. Courtesy of Florida, however, the dense air of drama dissipated swiftly. For that, we are all thankful, I’m sure. Frankly, after the 2000 election and their hanging chads, they owed the nation some clarity!

As the evening unfolded, most of the remaining swing states followed Florida’s lead. Other than Trump’s narrow victories in Texas and Georgia in the South and his small margins in Ohio and Iowa in the Midwest, the remaining swing states lined up for Biden. Yes, some votes are still being counted. But, when all is said and done, North Carolina and Pennsylvania will also officially end up in Biden’s tally.

In the final analysis, this election was always a referendum on Trump’s leadership; both in its style and in its substance. Among too many dramas to overcome and overlook, his presidency was ultimately decided by his response to the pandemic. To avoid last night’s defeat, Trump needed some foresight. Instead, he’s left with 20/20 hindsight about what could have been. Alas, true do-overs in life are few and far between.

When the virus hit, we needed national leadership. Nobody expected perfect leadership. In fact, our political divisiveness and our economy’s underlying inequalities rendered a perfect response impossible to achieve. Instead, what was needed was a clear plan that never arrived. This plan includes access to free and rapid testing capabilities, the delivery of predictable financial support for as long as it takes and a consistent focus on the common good.

As I sign off this column and gently step back to the tension-filled morning of election day, let’s all hope for a much better 2021. We, along with the next President of the United States, certainly have a lot of work to do to get things back on track. As we enter the months ahead, let’s start by recommitting to wearing our masks, keeping our distance and staying as safe as possible. That’s a plan I know we can all follow!

The Dials on the Dashboard

October 20, 2020 by Jason P. Tank, CFA

In a bygone era, risk and reward were inexorably linked. Managing an investment portfolio was like turning a series of dials on a dashboard. Today, not so much.

Investors have choices ranging from risk-free to downright speculative investments. These old trade offs, when guided by prudence, were governed by clear-eyed calculus. Cash offered the lowest return and the greatest peace of mind. Stocks offered a chance for higher returns, given enough research, time and guts. And, in between these poles, sat other investment options like bonds of varying maturities and quality. With each step investors took along the path of risk, the deal was clear; higher risk, higher returns. It was all so quaint.

The Federal Reserve now has its heavy fingers gripped to the master dial used to calibrate the sensitivity of every other dial on the financial market’s dashboard. Their master dial is both simple and powerful. It sets short-term interest rates and it changes investor behavior.

Today, cash pays nothing. US Treasury bills pay next to nothing. High-quality bonds offer paltry returns. Even junk bonds issued by financially-weaker companies offer historically slim yields. And, with so many of the dials on the dashboard unresponsive, investors have driven up stock prices to levels that befuddle the green eyeshade types. These are the number crunchers who still care about fundamentals and still believe in the relationship between price and value!

In all fairness, the Fed has been fiddling with the master dial for some time now. Remember when they set interest rates so low, and for so long, that bankers had no choice but to fuel a real estate bubble? The Fed finally woke up to that reality and pulled away the punch bowl. Then, they wildly spun the master dial in reverse to deal with the aftermath. Incredibly, interest rates were pinned to zero for a decade. When even zero rates didn’t work as hoped, they just printed trillions of dollars to tweak the sensitivities of the other dials on the dashboard.

Well, what the Fed has done since March has made their past efforts look restrained. What took them years back then, only took a matter of weeks this time. With one mighty blow, interest rates have hit the floor and are unblinking. Trillions of dollars have been printed to push up asset prices, and drive down yields, everywhere. And, the Fed has credibly promised to starve risk-conscious investors for many years to come. For added impact, politicians have joined the effort. It’s basically free money, after all.

Let me be clear. The Fed, and the bankers they ultimately work for, understand the present situation. Our finance-fueled economy depends mightily on high asset prices. When prices decline, the Fed’s fingers twitch. They seem to have concluded our free-market system cannot be left up to investors alone. Their fingers are twisting every dial now, whether we like it or not. To make matters even worse, I’m starting to feel like my once-stylish green eyeshade is dating me.

Say Hello to President Pelosi

October 2, 2020 by Jason P. Tank, CFA

As is my habit, I wake in the very early hours on Friday morning to write this column. I routinely start with a blank screen, but rarely a blank mind. The “kernel” of the column is almost always decided and I begin to write. On this crisp morning, however, my screen started out blank and my original topic was promptly discarded. A new one arrived courtesy of Twitter, “Tonight, @FLOTUS and I tested positive for COVID-19.”

Every four years in October, focus inevitably turns to the race for the White House. Having managed money now through five other presidential elections over my career, clients often ask me to opine on the election’s outcome and its possible effects on the financial markets.

While I do my best to answer, admittedly my heart is never really into it. My relative disinterest reminds me of Warren Buffett’s quip that his brain has three boxes, “In”, “Out” and “Too Hard!” For me, elections land in the too hard pile. However, while this election is way too hard – on too many levels – it has my attention.

I’m a numbers guy and I’ve looked at the polling and have played with the electoral map. As things stand today, it is my belief that Trump will lose this election and perhaps in a landslide. This election is, in my view, a clear referendum on Trump. Things have not been looking good for him.

The number of pathways to a Trump victory is small. First, he must win Florida and Ohio. Neither is certain and both are critical. He also needs to avoid an upset in Texas, Georgia, North Carolina or Iowa. While he could theoretically withstand an Iowa defeat, it would likely point to bad outcomes elsewhere on the map. People in Iowa aren’t all that different from other people in the Midwest.

Now, if he gets through that gauntlet of six states, I think he has three possible roads to victory. One goes through Arizona, one through Pennsylvania and one through Michigan.

With Arizona, Trump can win it with either Michigan or Pennsylvania. If he loses Arizona, but happens to eke out a victory in Pennsylvania, he can win by adding either Michigan or Wisconsin. And, if he doesn’t win in either Arizona or Pennsylvania, but is able to pull off another slim victory in Michigan, he needs to also win Wisconsin. To be clear, across all three pathways, his margin of victory is small and his margin for error is tiny.

This is 2020, after all, so I must add that there are a couple of possible scenarios that end in a tie. The verdict is then left up to the newly-elected House; not by majority vote of the representatives, but by simply tallying one vote for each state’s delegation.

Do you know which party currently has a one-state majority in the House, but a clear minority of the House seats? And, what if this election cycle creates a deadlocked House vote? Say hello to President Pelosi. Things can always get crazier!

Jason P. Tank, CFA 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

Everything is Connected

September 11, 2020 by Jason P. Tank, CFA

The concept of all things being connected is on my mind. Every glance I take at the news of the day makes it obvious why. And, every day that brings us closer to the colder months makes it more consequential.

In the narrow world of financial markets, the concept of connectedness is clear.

When the Federal Reserve makes cash trash, the flow of investment dollars moves elsewhere. As if moving outward in concentric circles, money moves out the risk spectrum in search of better returns.

After this drives up the price of one investment type after another – inevitably squeezing future returns down – the search moves into even riskier areas. The difficulty lies not in determining the final destination of this journey, but in the timing of the end game. It always ends, of course.

As Chuck Prince, ex-CEO of Citigroup, said just before the mortgage mess exploded, “As long as the music is playing, you’ve got to get up and dance.” Similarly, Warren Buffett wisely wrote just before the tech-bubble popped, “[People] hate to miss a single minute of what is one helluva party. They are dancing in a room in which the clocks have no hands.”

In the broader, real world, the concept of connectedness is equally clear.

As we move into the fall months and move indoors, the virus begins to gain a major advantage. Our next moves will matter.

After six months of sacrifice, the next test of our collective commitment to stop the spread is approaching. I’m afraid we’re in the process of failing.

In Grand Traverse County, our average positive test rate for Covid-19 moved from a summer low of around 1% in early August to over 5% in early September. Epidemiologists want positivity rates below 3%. We have seen about 225 positive cases in Grand Traverse County over the past month. That was with only half of the recommended number of tests given. So, you should probably double it.

With almost all of our area’s schools resuming face-to-face instruction, my focus on our area’s connectedness is heightened. The safety of our 20,000+ kids and our 2,000+ school employees is intimately linked to the safety of our entire community, including our area’s businesses and the livelihoods of thousands of their employees.

The virus thrives on our connectedness. The resumption of typical face-to-face schooling fails the safety test for our community on nearly every level. The daily process of crowding thousands of kids and adults indoors, combined with inadequate testing and a palpable sense of virus fatigue, is a perfect recipe for accelerated spread.

The sad irony is that our desperation to hear the music and ignore the clock on the wall is the very thing that will hold back our return toward normalcy. Remember, we’re all in this together, right?

“We survive here in dependence on others. Whether we like it or not, there is hardly a moment of our lives when we do not benefit from others’ activities.” – Dalai Lama

Things are Getting Seriously Funny

August 28, 2020 by Jason P. Tank, CFA

Since the start of the year, Apple’s share price has vaulted over 70%. Amazon’s has jumped more than 80%. Both Facebook and Microsoft are up over 40%. And, Google’s stock price is up over 20%. Remarkably, this super-charged performance is happening in the midst of a pandemic.

As things stand now, the top 10 largest companies in the much-watched S&P 500 make up just under 30% of the total market value of the index. This level of concentration in the stock market now sits at a modern day record. It deserves investors’ attention and some level of caution.

For the uninitiated, the S&P 500 is simply a published list of the 500 largest publicly traded companies in the US. It was created to represent a fair sampling of the overall stock market. The S&P 500 is the most popular index around and it captures about 80% of the total market value of all US stocks. Literally tens of trillions of dollars are passively invested to just match the returns of the S&P 500 index.

When you buy the entire S&P 500 in your portfolio, it’s important to note that you don’t actually get 500 equally-weighted stocks. In fact, the 500th stock on the list is far, far less important than the 1st stock listed. Rather, it’s a market value-weighted index with the top stock, Apple, representing over 6% and the last stock on the long list makes up just a tiny sliver of your holdings.

Over recent decades, the top 10 largest companies in the S&P 500 represented around 20% of the total market value. Today, the top stocks are pulling ahead like never before. As a result of this imbalance, today’s level of stock market concentration exceeds the tech-bubble era of the late ‘90s.

The froth we’re all seeing in today’s stock market is baffling to many professionals. Politicians have distributed trillions of borrowed dollars into household and corporate bank accounts in recent months. At the same time, the Federal Reserve has shoveled trillions in printed money into our financial markets and set interest rates at zero. They’ve even promised markets that they aren’t even thinking about thinking about raising rates anytime soon!

Interest rates have hit rock-bottom and savers are starved for safe income like never before. Money market funds now yield next-to-nothing, CD rates are downright tiny and high-quality, short-term bonds yield less than inflation. The search for a reasonable, low risk return feels futile.

Investors and speculators have responded by purchasing the safest, largest stocks they can find. Among them are massive, cash-rich and debt-free technology companies and a smattering of companies that are currently benefiting from the shifting demands created by this pandemic. At the same time, investors eschew most companies involved in traditional retail, banking, travel and energy, among other sectors. The gap between the haves and have-nots is widening. This troubling trend is happening on both Wall Street and on Main Street.

Things are getting more than a little bit funny. Seriously.

The Hand We’ve Been Dealt

August 4, 2020 by Jason P. Tank, CFA

Congress and the White House are in heated negotiations on the nature of the next round of financial support needed for our economy. A deal will soon be struck, of that I am quite certain. What I am growing uncertain about is our lost sense of empathy as a nation. It’s high time we find it.

In a few days, we will reach the end of the second week of zero supplemental unemployment benefits coming from the federal government. As of last week, about 30 million people without work depended on this financial lifeline. For the average unemployed person in Michigan, what’s been left behind is a meager $300 per week. For just a moment, let that figure sink in as you reflect on your own personal budget.

Between my own flurries of frustration and hostile criticisms of our nation’s abject failures to effectively respond to this ongoing crisis, I’ve also tried to acknowledge a sense of gratitude. It’s an internal battle; some won, some lost. I’m sure many of us who still have our jobs and still feel a sense of economic stability have felt similarly. For too many of us, including me, criticism comes much more easily than does empathy.

As we watch the negotiations in Washington unfold, let me summarize the main sticking point of unemployment benefits through the lens of empathy.

Republicans have proposed cutting the special federal unemployment benefits from $600 per week and replacing it with a lower benefit of just $200 per week. Democrats want to keep the higher benefit in place for the next five months. The difference roughly equates to a mortgage or rent payment for tens of millions of households. Note that already one in 12 households with a mortgage are in forbearance programs.

Republicans’ primary criticism of the now-expired benefit is the majority of jobless workers were collecting more from unemployment than they earned in their former jobs. Many Republicans have adopted the view that this encourages people not to work. Their underlying assumption is that the millions who have experienced the misfortune of losing their job during a global pandemic are inherently lazy.

My personal reminder of the importance of empathy – the act of understanding the experiences of another person – recently came to me through an essay written back in 2017 by former CBS anchorman Dan Rather. His recollections of his Depression-era upbringing offers a stark contrast to the situation we find ourselves in today. The following passage highlights a viewpoint that I think we could all benefit from, especially those of us who, today, can be counted among the fortunate.

“There was no judgment or disdain on the part of those offering assistance. No one wondered why those neighbors weren’t working, and no one passed moral judgments on their inability to fend for themselves. We understood that in life, some are dealt aces, some tens, and some deuces…We understood that those who were suffering weren’t lazy or lacking the desire to do better. Fate had the potential to slap any of us.”

Jason P. Tank, CFA 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

Trillions More Is on the Way

July 21, 2020 by Jason P. Tank, CFA

Here we go again! Congress is back in session and crafting yet another pandemic financial aid bill. The negotiations, by all indications, will be brutal as the fate of the finances of millions of households, businesses, schools, cities and states hang on every twist and turn.

Based on the early reports, I would characterize the pending legislation as likely to be undersized for the economic challenges we still face. That may surprise some readers. It really shouldn’t.

While the trillions already allocated is truly staggering, it’s arguable that our dismal failure to contain the virus was largely wasted. The earlier shutdown was designed to buy us time to squash the first wave and to build our contact tracing capacity to manage later outbreaks. Our failure is the cost of poor leadership and our poisoned politics.

Taking center stage in the current negotiations is how to deal with the extra $600 weekly benefit provided through the Federal Pandemic Unemployment Compensation (FPUC) program. This economic lifeline for about 30 million people is set to expire in just a few days. The deadline has been known for many months, of course.

This generous benefit has been highly controversial. Some believe it has created a perverse incentive for people to remain unemployed, rather than work. As infections rise to fresh records, it’s an open question if employers are ready to fill the void. Republicans and Democrats would answer the question quite differently.

Another contentious proposal that’s being openly debated is to provide a temporary payroll tax holiday for every employee and employer. It may quickly find itself on the cutting room floor, but the White House is lobbying hard for it. However, even Republicans are wary of this idea as it is a very untargeted approach. It’ll be interesting to watch, especially with an election that’s only 104 days away. Getting a government-provided raise just before mail-in ballots arrive has a nice ring to it.

Speaking of government payments, a real consensus is forming quickly around providing another round of economic impact payments directly to households. From the looks of it, the eligibility for this round of checks and direct deposits may be narrower as millions of households received money they didn’t need.

Finally, in the face of severe budget shortfalls with far-reaching implications, one can hope the normal political lines will be wiped away as Congress considers providing more financial aid to schools, cities and states. If too little financial aid is granted, it will be a real reminder of how our national politics can have tangible downstream impacts on our own local public institutions.

Back in late May, at the height of the economy’s re-opening euphoria, majority leader Mitch McConnell over-confidently declared that the next coronavirus bill will be the “last.” If Congress opts to undersize this next bill – as I suspect they might – I’m afraid I’ll be forced to begin a future column with the same exasperated words, Here We Go Again!

Use Your Get Out of Jail Free Card

July 3, 2020 by Jason P. Tank, CFA

My grandma – yia-yia – used to pay me cold hard cash to learn a tiny bit of Greek. Beyond remembering just one swear word, the lasting impact of her lessons is my self-identification as being “half-Greek.” As a result, I rarely pass up the chance to quote Greek philosophers.

According to Heraclitus of Ephesus, change is the only constant. Case in point, this year’s waiver of your IRA’s required minimum distributions or RMD.

First, a little bit of background. Once you reach age 72, the government forces you to take money out of your IRA every year. The reason is simple; after you’ve enjoyed decades of untaxed gains, the government wants you to pay up, finally.

On March 27, tucked inside the massive piece of legislation known as the CARES Act, Congress suspended RMDs for just this year. This distribution hiatus applies to regular IRAs, 401(k)s, and inherited IRAs, too.

While it is unusual for Congress to waive RMDs, one was also granted in 2009 during the Great Financial Crisis. Notably, during that saga, the waiver was granted very late in 2008. This allowed for plenty of time to plan for the year ahead. We weren’t as lucky this time!

This year’s rule change created some interesting technical challenges for retirees. What could be done if you had already taken your RMDs before March 27th? What if you didn’t really need the money you took out? How do you actually undo it?

There’s a little known rule, referred to as the 60-day rollover rule, that allows people who took money out of their IRA to simply redeposit it. You are only allowed to use this tool once every 12 months. Using that rule seemed like a simple solution to undo an RMD done before March 27. Unfortunately, it really wasn’t.

Apparently unbeknownst to Congress, this 60-day rollover tool isn’t actually allowed for RMD distributions. It only applies to regular, non-RMD distributions. To further complicate matters, since the CARES Act became law on March 27, even incorrectly using the 60-day rollover rule still didn’t help those Johnny-on-the-spot retirees who took their RMD before January 27.

This confusing state of limbo is how things stood for about three months since the CARES Act had passed; until about a week ago.

Finally, on June 23, the IRS published a notice that says any RMDs can be returned to your IRA by August 31. And, the new guidance covers any distributions taken all the way back to the start of 2020.

Actually, it turns out that Heraclitus’ wisdom was not completely true. Change really isn’t the only constant. He forgot about the certainty of both death and taxes.

With this new get-out-of-jail-free card – which expires by August 31 – you may want to consider returning any unwanted RMDs. Deferring taxes for another year is a deal that’s likely too good to pass up. I’ll keep you posted on my work finding a way to defy death. Hint: Don’t hold your breath for too long!

Jason P. Tank, CFA 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

Are We Different and Special?

June 19, 2020 by Jason P. Tank, CFA

The questions greatly outnumber the answers. What do others know about containing the virus that we don’t? Do we know enough about the virus? Have we settled on a pragmatic policy of morbid acceptance? Are we being too cavalier?

Let’s briefly review the news from other parts of the world and compare them to stories here at home. Pay special attention to the number of new infections referenced below and the starkly contrasting policy responses. Since my professional focus is on money matters, how this all unfolds will have profound implications on financial markets.

May 19, The Guardian – Chinese authorities have sealed off the north-eastern city of Shulan, home to about 700,000 people, after an outbreak of coronavirus, imposing measures similar to those used in Wuhan. At least 34 people have been diagnosed with Covid-19 in Jilin province in the past fortnight.

June 13, Haaretz – “Statistics released Saturday evening by the Education Ministry show that 493 Israelis within the education system have tested positive…Thus far, 177 educational institutions have re-closed.”

June 18, The Guardian – “Beijing ordered all hotels be shut down, as well as restaurants in high-risk areas. On Thursday, Beijing reported 21 new cases of Covid-19…Schools have been closed, flights cancelled, and travel in and out of the city restricted.”

June 18, South Florida Sun Sentinel – “Florida saw a record-breaking 3,207 new coronavirus cases, shattering the previous high mark of infections this week…a trend where there have been at least 2,000 cases logged in five out of the past six days.”

June 18, CNBC – “Arizona health officials reported 2,519 confirmed cases on Thursday, surpassing the previous single-day high. South Carolina officials reported 987 new cases Thursday afternoon…marking another all-time high single-day increase. Texas reported 3,516 new cases Thursday evening, topping the previous record.”

As we now enter the summer months, investors are entirely focused on the economic reopening process. With each passing week, a collective complacency about the virus and its future impact has firmly taken hold in the US. This feels like a mistake.

Some major themes currently dominate financial markets today. Few expect to see any backward steps in the re-opening process. The shutdown is viewed as an overreaction and far too costly. A vaccine will arrive early next year. Game-changing treatments are coming soon. Stocks are viewed as the only game in town. And, finally, the Fed’s got our back. With all humility, each of these themes are worthy of healthy skepticism.

With at least 120,000 virus-related US deaths to date, it’s arguable that we’re only a few innings into this sad healthcare and financial saga. I personally hope that we can not only overcome our juvenile national attention span, but also regain our sense of common purpose.

As I survey the landscape and watch financial markets surprisingly recover, one burning question is quickly rising to the top of my own list of unknowns. Are we different and special?

Jason P. Tank, CFA 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

A Disconnect Like Never Before

June 5, 2020 by Jason P. Tank, CFA

The stock market is roaring back in the face of incredibly negative news of job losses, a deep recession and the specter of an uncertain economic recovery. Over the course of my career I have certainly seen moments of disconnect between the markets and the real economy. But, it’s safe to say that I’ve never seen as wide of a disconnect as I see today.

During a very short five-week period from mid-February to late March, the stock market cratered about 40% and bonds nosedived. Not only was there no place for investors to hide, there was almost no time to hide. Now, a little more than two months later, both stocks and bonds have profoundly rebounded. While the pace of the recovery cannot be overstated, the feeling of whiplash for investors cannot be understated.

Thanks to the unlimited backing of the Federal Reserve and Congress, Wall Street looks like it’s back, for now. But, let’s briefly review what’s happening on Main Street.

We have about 30 million people collecting “official” unemployment. While this figure changes from week to week, it’s important to note that a growing number of employees are also being added back to payrolls, even if they aren’t really back to work. Many of their paychecks are being covered through loans that will be forgiven if the business promises to act as a “shadow” unemployment system. Between the official and the shadow unemployment system, it’s probably safe to say that around 35 million to 40 million people who worked just a few short months ago are no longer working today. The combination of official and shadow unemployment represents a Great Depression-like 20% to 25% of the approximate 160 million people counted in the nation’s workforce.

As the economy’s reopening process unfolds, we should certainly expect many people to go back to work in some capacity. How many will head back is entirely dependent on the pace and path of the economic recovery. And, of course, much of that will be dictated by our collective approach to mitigating the spread of a novel virus that has no vaccine, limited therapies and no end date.

Adding to these uncertainties, as people do get called back to work, many face a cut in income as their official unemployment benefit currently exceeds their former paychecks. The funding source that provides for the extra $600 per week in unemployment benefits is slated to end on July 31. To complete the picture, our new shadow unemployment system’s funding source, provided through those forgivable small business loans, is also finite and temporary. The dual expiration and depletion of the official and shadow unemployment systems are an economic cliff eerily reminiscent of Thelma & Louise.

As Wall Street miraculously booms once again, Main Street’s position looks much more precarious. This disconnect was aptly illustrated by Senate Majority Leader Mitch McConnell’s recent declaration that their next piece of financial aid legislation will be their “fourth and final” bill. To put it bluntly, I very highly doubt it.

Jason P. Tank, CFA 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 Men and Women in the Arena

May 1, 2020 by Jason P. Tank, CFA

In just over a month’s time the federal government has quilted together a complex patchwork of protection for millions of workers and business owners. Here’s just a portion of the growing highlight reel.

Economic Impact Checks: About 150 million checks from the government will be delivered or deposited soon. For those who qualify based on income, you’ll receive $1,200 plus another $500 for each child under 17.

There is a myth that these payments are only an advance or a loan against your tax refund next year. That is false. If you get a payment, it won’t affect your 2020 tax refund at all. However, if you made too much money in 2018 or 2019 to qualify for an immediate payment, but ultimately qualify based on this year’s income, you will receive your payment as a large tax credit next year.

Enhanced Unemployment Benefits: About 30 million people have already filed for unemployment benefits across the country. The filing process has been frustrating for many. However, it’ll be worth the wait as benefits are paid retroactively and they will be bigger than ever before.

To begin, the maximum regular unemployment benefit in Michigan is about $1,500 per month. This part lasts about 10 months. The federal government added on another flat amount of $2,400 per month. This additional part lasts until the end of July. In my view, there is a high likelihood it will be renewed. Importantly, for the first time, self-employed people who didn’t pay into the unemployment system are also entitled to receive benefits.

Paycheck Protection Program: Many millions of smaller businesses have filed to receive loans to help pay their employees over the next two months. Similar to the frustration felt by those filing for unemployment, this program has been equally cumbersome. The first wave of applications quickly depleted the program’s initial funding. Congress recently replenished it. The verdict is still out if it was enough to meet the demand.

If the loan is used for payroll costs and other qualified expenses, it will be fully or partially forgiven. Otherwise, it’ll just turn into a two-year loan at a very low interest rate. Of course, the loan forgiveness rules are confusing. It’s also important to note, to qualify for this loan you must certify that the money was “necessary” to support your business. The word “necessary” is already subject to a heated debate.

As time passes, we’ll no doubt witness the ramifications of this hastily constructed patchwork of financial support. The post-mortem analysis will be both politically and financially brutal. Until then, however, we should be reminded of Roosevelt’s famous quote, “It’s not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better…the credit belongs to the man who is actually in the arena.”

I certainly do not envy the women and men standing in the arena today.

Jason P. Tank, CFA 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

Beware of the Swinging Door

April 20, 2020 by Jason P. Tank, CFA

Like prisoners etching their time served on their cell wall, my family has chosen our kitchen door jam to mark our social distancing efforts. Six weeks is approaching in just a couple of days. I must say, my long-held belief that April has only 30 days is faltering. 

While I’m not an expert on the medical hurdles we’ll need to clear to safely “reopen” the economy, indications are that we’re still many weeks out. It may happen sooner, as a matter of choice, but it won’t necessarily mean we’ve satisfied the safety criteria. Regardless, it’s becoming clear to me our reopening will only feel moderately different than today. In fact, I’m expecting it to resemble a swinging door. 

Unless you’ve successfully adopted the behavior of an ostrich by quickly stuffing your unopened March investment statements in a drawer, the stock market’s huge rebound might be a perfect moment to take a fresh look at your portfolio. Bear markets often provide investors a few short windows of opportunity to make long-neglected adjustments. Let your concern about your financial condition during the heart of last month’s decline be your guide to making possible changes now.  

Financial markets have absorbed this Black Swan event with lightning speed. The market’s reaction has matched the trillions of dollars thrown out as a lifeline to businesses, households and investors. Right or wrong, policymakers’ vast power to save our financial system is seemingly unquestioned. However, the durability and sufficiency of these actions still remains an open question.

The unprecedented government support is likely not enough. Their solution has been a messy patchwork of enhanced unemployment benefits, forgivable loans to small businesses, cheap loans to larger businesses and small “stimulus” checks to millions of households. The money is just now arriving. Clearly, distributing vast sums of money is tough work. In a crisis, it never feels fast enough. The next phases of financial support that I expect to see in the months ahead will go much more smoothly. The templates of the various programs are being battle tested today. 

With their programs, Congress and the Fed have helped to fill the immediate income and funding gaps at all levels. Nonetheless, they’ve realistically only bought the economy about two-to-four months of time. As we continue to grapple with the ongoing public health policy responses, we should expect negative follow-on impacts to the financial picture of hospitals, schools, municipalities and states. I anticipate a trifecta of program extensions, expansions and tweaks in the months ahead.

For a glimpse of our likely future, we should look to Singapore, Japan and South Korea. These countries have been held up as success stories for their ability to squelch their outbreaks. Now, after sustained periods of containment driven by advanced testing, tracking and tracing tools, each has reinitiated or extended their orders for their citizenry to isolate. Given this, even after we choose to reopen, we need to be aware of the swinging door. Otherwise, it just might hit us in the face.

Jason P. Tank, CFA 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

For the Record, I Hope I’m Wrong

April 3, 2020 by Jason P. Tank, CFA

Today’s column is written on trading Day 31 of my internal market timeline that started with the all-time high set in mid-February. A lot has happened in the past two weeks since my last column. It feels longer ago to me. Time is not moving at its normal pace.

It appears the economic impact created by the virus, and the lockdown, will last longer than just a couple months. I expect the recovery will be slow and bumpy. It will likely move from a red light, to a yellow light and then, eventually, to green. And, along the way, we should all expect confusing signal changes. The timing and shape of the economic recovery will be driven entirely by the virus. Given this, the pace and progress will no doubt be frustrating.

We all know how this movie will end. Ironically, that doesn’t make it any less suspenseful. Before a vaccine arrives – which experts continue to project won’t happen for at least a year – our collective efforts to slow the spread of the virus is our only moral choice. Naturally, left in the wake is the economy. The opening salvo to mitigate the economic fallout came in the form of the $2.2 trillion CARES Act signed into law one week ago.

The CARES Act’s main goal is to replace lost income for households and businesses during the lengthy lockdown. It is my view that even more financial support will be needed as we will experience only a slow ramp back to “normal.” This legislation was designed to only help cover lost income until around July. The recovery from a deeper and longer economic hole will require more. If I’m right about the slow pace of things to come, this will become more obvious on or before the end of May.

According to current models, the loss of life in the US will ramp up over the next month before we slowly roll down the curve. I fully expect this to happen in waves as new hot spots pop up across the country. With this, investor sentiment could grow more negative despite the massive financial aid provided. This sentiment shift has already started after last week’s very sudden sense of investor relief.

For now, I will stick with my view that the broader stock market could ultimately decline about 40% to 50% from the all-time high. From today’s levels, now down about 25% as of trading Day 31 on my internal market timeline, it’s very important to either prepare your mind or prepare your portfolio for a sizable additional decline in stocks.

It bears repeating, the discipline of risk management is my total focus. Sanitizing my words through the false prism of being right versus being wrong in hindsight is unimportant. As we all know, there are much bigger things to worry about. For the record, and for the sake of the economy, I do hope I’m wrong.

Jason P. Tank, CFA 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

Stock Market Timeline of Coronavirus

March 20, 2020 by Jason P. Tank, CFA

Let me begin by saying that I’ve never managed investment portfolios through the false prism of being right versus being wrong. Hindsight will always be perfect. To me, it is always about the discipline of risk management. This is especially true during a market crisis. This extraordinary moment in history has my full attention.

Over the last few weeks, I have been assessing and re-assessing the level of risk in my clients’ portfolios. Understandably, my process has tied closely to the news of the spread of the coronavirus and, most importantly, on its impact on our economy.

Remarkably, there have been only 21 trading days since the market high was reached on February 19th.

From Day 1 through Day 7, the stock market had suddenly dropped about 13% off its high. The business news headlines at the time were largely focused on the serious Chinese “supply chain” disruptions experienced by large international companies.

From Day 8 through Day 11, the market went sideways in very violent fashion. The focus over these days had begun to shift from business-related disruptions to the potential seriousness of our own looming public health crisis. It was at this moment that I wrote my first column addressing coronavirus and how investors might handle it. My advice on Day 11 could fairly be described as both conventional and prudent.

From Day 12 through Day 16, the fear of the profound economic impact of the public health measures we might face had begun to firmly set in. The mass cancellations of larger public gatherings began in earnest and the announcements of school closures hit the news. The stock market fell about 18% during this short period, bringing the total market decline to about 27%, as measured by the S&P 500 index of large companies. Smaller public companies who are more domestically focused began to fall even faster.

From Day 17 through Day 21, the forced closure of restaurants and bars, along with the voluntary actions taken by many others has now followed. So, too, has the start of massive employee layoffs. During this current phase, the market’s volatile up-and-down churn has added yet another 3% to the total decline. And, again, smaller company shares have fallen even faster still.

As I write this, the S&P 500 index is down about 29% and smaller company indexes are down about 39% from their all-time highs. The speed of the decline is unprecedented.

On the morning of Day 22, what I feel we know is this. The roiling closure of economic activity that we’ve experienced so far will undoubtedly increase. The fallout for small business owners and employees is profound. The federal government is searching for measures to lessen the blow. At this moment, their proposed solutions are insufficient. Their current inability to more closely match the speed, scope and scale of the economic crisis concerns me.

I am currently assuming the complete market trading timeline for this health crisis will run through Day 100 or early July. Every day now will add both valuable and worthless news to absorb. We are now standing on the edge of just Day 22. Over the next month, we’ll know a lot more. By that time, I feel the vast majority of the market’s losses will be in the books. I’m looking through the chaos to around trading Day 50 or so.

It is my current view the stock market has more room to fall. With the many uncertainties I see, along with the likelihood of worse to come for the economy, my current base case is for a cumulative stock market decline of around 45% to 50%. The decline in particular stocks will not be uniform. Given this, my focus is on how to best position and prepare for the recovery to come. As I wrote on the morning of Day 12, and now again on the morning of Day 22, I am still confident that this too shall pass.

Jason P. Tank, CFA 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.

The Investment Age of Coronavirus

March 6, 2020 by Jason P. Tank, CFA

Up 1,000, down 1,000, up 1,000, and then down yet another 1,000. The past week shows the confused state of the stock market. And, that doesn’t even count the 4,500 point decline the week before last. This is the age of coronavirus. And, this too shall eventually pass.

As most people with an opinion should state on this subject, I am not a doctor. I don’t intend to share any profound insights on the virus itself. My focus and expertise is on its effect on money and markets.

Having managed portfolios through the financial crisis of 2008, much of the last two weeks has felt reminiscent. To be clear, the proximate cause of the market volatility during those two periods couldn’t be more different. However, the commonality begins and ends with the effect that fear has on investors’ collective decisions. Like all forms of panic, fear of the unknown has created a self-reinforcing negative feedback loop. I’m optimistic that once this particular fever breaks, the current negative feedback loop will too.

Until then, the pace, breadth and severity of the spread of coronavirus remains largely uncertain. The opinions espoused by medical experts, and the many untrained among us, are built on layers of assumptions. These assumptions relate to both the pathology of the virus and the public policy decisions we’ll choose to make to slow its spread.

The sensationalized headlines that feed off the din of opinions in today’s noisy world naturally adds to investor uncertainty. Filtering out the hard science from the pure conjecture is admittedly difficult. Regardless, it’s highly important to apply a clear filter to your flow of information. This is especially the case if you are trying to make important decisions about your money.

The global economy is slowing. We are more interconnected than ever before and our economy’s complex web of supply chains has been severely stressed. Beyond the negative effects of these bottlenecks, we’re just now starting to see some impacts closer to home. Many companies and some schools and organizers of large gatherings of people are choosing to push pause on their plans.

It’s rational to expect that most business leaders are likely to delay executing on their short- and intermediate-term plans. This entire negative feedback loop has clearly caught the attention of our financial markets and public policymakers.

Here’s a simple message for readers of this column. As it was during the recession scare of late 2018, your investment portfolio and your approach to risk management is being stress tested, yet again. My general advice to you is to only move with methodical moderation.

For those who have been excessively conservative, consider taking some baby-steps back into stocks. Use these 1,000 point declines as your friend. And, for those who failed to prudently rebalance during the longest bull market in modern history, consider reducing your risk as this coronavirus fever breaks. Every 1,000 point rebound should be an easy opportunity to do what you’ve not done before.

Jason P. Tank, CFA 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.

Minding the Gap Years in Retirement

January 31, 2020 by Jason P. Tank, CFA

Q: My husband and I are in our mid-60s. We are planning to retire very soon. We are having a bit of a disagreement about when we should file for our Social Security benefits. I want to wait and he wants to collect right away! Who is right?

A: Congratulations! Of course, I can’t tell you who is right without all the facts. But, I can tell you that your decision may open up interesting opportunities during the “gap years” marked by the end of your work life and the start of your Social Security. Given that you’re the one who asked the question, I have to give you the preliminary nod!

To start, most people know the advantages of delaying Social Security. The boost in benefits can be big, if you can afford to wait. That decision, of course, depends on good genes, good health and good luck, too!

Delaying Social Security not only boosts your future benefits, but it also widens the length of your “gap years” and, with it, it also opens a nice tax planning window.

First, there’s a little-known wrinkle in the tax law that’s been around for about 15 years. For people who pay tax in the 12% federal bracket, realized capital gains are afforded a special 0% federal tax rate. If you are able to live off of your already-taxed savings during your gap years, you might be able to strategically sell some of your highly-appreciated stock without taking any federal tax hit at all.

To be clear, selling that stock doesn’t mean you aren’t allowed to immediately re-buy it for your portfolio. You are just getting a tax-free shot to effectively “step-up” the cost basis to today’s price. That’s a shot that usually only happens when you die. This way is much more satisfying!

Next, you might consider doing some strategic Roth conversions during your gap years. A Roth conversion is just a fancy term for taking some of your pre-tax, regular IRA money and moving it over into a tax-free, Roth IRA. Of course, the income tax you’ll owe with any Roth conversion should always be paid with money that’s outside your regular IRA.

The main motivator for doing a Roth conversion is when your current tax rate is the same, or preferably less, than your expected future tax rate. During your gap years, when you might choose to draw down your already-taxed savings to cover your needs, you can purposely look much poorer to Uncle Sam and sneakily squeeze Roth conversions into your tax return at a temporarily low tax rate.

While recently traveling around London during a very special visit to my older brother, I got very used to the constant warning to not fall through the absurdly wide crack between the subway and the platform. So, as the English like to say, as you make your Social Security timing decision, be sure to “Mind the Gap!”

Social Security and Whac-a-Mole

January 21, 2020 by Jason P. Tank, CFA

Whac-a-Mole was a truly frustrating game. Right when you smack your hammer on that mole’s head, another one pops up. It was so frustrating its name has now taken on the linguistic heights of Kleenex. Everyone knows exactly what you mean when you say it and they know how you’re feeling!

Navigating the world of Social Security is kind of like playing Whac-a-Mole. Just when you think you’ve got all the facts down, there’s yet another thing to clobber. Understanding how Social Security is taxed is particularly hairy.

Before jumping into an example, let me first state that about 45% of all retirees start to collect Social Security at the very earliest possible age of 62. Despite the massive financial incentive to file later, almost half of all retirees choose to take the money and run. What people might not fully appreciate is that for every $1.00 you’d receive at age 62, you could get about $1.75 if you waited to collect at age 70. For many reasons, good and bad, less than 5% of all retirees wait until age 70. If possible, more should delay.

To help shore up Social Security’s finances, benefits became subject to tax back in 1984. For lower income people, Social Security benefits are not included in their taxable income. For many others, a maximum of 85% of their benefit is taxed. About half of all retirees are paying some tax on their benefits. The true tax rate they pay can be surprisingly high.

For example, let’s imagine a married couple with $25,000 in pension income, $15,000 in interest income and $30,000 in Social Security benefits. Under a somewhat complex formula, this couple would see that about 50% of their Social Security is included in their taxable income. If they were to take $12,000 out of their IRA to help pay for a new car, the maximum 85% of their Social Security benefit would then be counted as taxable income.

Just like that frustrating game of Whac-a-Mole, the $12,000 IRA distribution for their new car resulted in about $10,000 more of their Social Security popping up on their tax return. It is very understandable for this couple to believe they’d pay tax in the 12% federal tax bracket on their IRA distribution. For them and the majority of other Social Security beneficiaries, however, the 12% tax bracket is a mirage. Without some tax planning, this couple really pays tax at a much higher marginal rate of 22.2%. I’ll say it again, Whac-a-Mole is really no fun!

To learn a bit more about the world of Social Security, attend the next Money Series on Wednesday, February 12 at 6:30pm in the McGuire Room at Traverse Area District Library. The Money Series is a Traverse City-based nonprofit committed to providing open access to financial education, for all. Register at MoneySeries.org or call (231) 668-6894.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series.

A New Year and a New Law for Your Money

January 3, 2020 by Jason P. Tank, CFA

Q: I turned 70.5 last year and my wife is going to turn 70.5 this year. I heard that the SECURE Act was signed into law right before the start of 2020. Do we both still have to take our required minimum distributions (RMDs) from our IRAs in 2020?

Just when you thought you understood the magical age of 70.5, you can now add the magical age of 72 to your repertoire! For people born before July 1, 1949, you will still live under the old RMD rule of age 70.5. For everyone else, your first RMD isn’t required until you reach age 72.

So, in your case, while you will still need to take out your RMD in 2020, your wife won’t have to take her first RMD until she turns age 72. Depending on her actual birthday and your tax situation, she might take her first RMD in 2021, 2022, or possibly even 2023.

As a little background, last summer, the House passed the SECURE Act with a nearly unanimous vote of 417-3 and sent it over to the Senate. For over six months, the Senate just sat on the bill. Some began to wonder if it might never become law. At the last minute, the SECURE act was sneakily tacked onto a routine year-end spending bill and signed into law on December 20.

The SECURE Act features a few other things to keep straight. It used to be that people had to stop contributing to their IRA once they reached age 70.5. That silly rule is now gone. And, you can still make charitable donations from your IRA once you reach age 70.5, even if you don’t actually have an RMD to take until age 72.

Q: I recently discovered a major problem with my taxes. My brokerage firm sent me a tax form that completely ignored the charitable donations I made from my IRA. I actually paid taxes on those donations. What are brokerage firms required to report to the IRS when it comes to the donations I make directly from my IRA?

Your question is literally a public service announcement. You are correct, brokerage firms report to the IRS all of the money you’ve taken out of your IRA. And, when I say all, I mean all! Nothing on your Form 1099-R (usually sent in early February) will indicate that you gave some of that money to charity.

As you found out, be sure to tell your tax preparer that you donated some of your IRA distributions directly to qualified charities. The donation you made then should be subtracted from the figures shown on your Form 1099-R.

For interested readers, you might want to review your old tax returns to make sure you got this right. If you find that you’ve made a mistake, remember you still have until April 2020 to amend your 2016, 2017 and 2018 tax returns!

Jason P. Tank, CFA 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

Reflections on 2019, Onward into 2020

December 20, 2019 by Jason P. Tank, CFA

What a difference a year makes! At Christmastime a year ago, financial markets were in steep decline and fear was all around. The Fed had stubbornly been raising interest rates and the foreboding inversion of the yield curve was the topic of the day. Yet, after just one quick trip around the sun, financial markets in 2019 turned out to be simply marvelous.

If things stay steady for the final week, the stock market will be up about 25% to 30% for the year. This more than makes up for last year’s moderately negative year. The results rival the fantastic returns of 2017 and 2013; the best years of this current bull market. And, this year even stands toe-to-toe with the recession-recovery years of 2009 and 2003. It was a surprisingly good year.

As we all know, it’s not like things have been all peaches and cream lately. In the face of a slowing economy, the Federal Reserve suddenly reversed course and cut interest rates. The trade war with China was being waged basically all year long. Our largest companies delivered almost zero earnings growth. And, finally, we ended the year with an impeachment vote. With all of this, I don’t think many investors would have predicted such a strong market.

What made 2019 more marvelous was the big return in bonds. For the year, bonds delivered about 6% to 12%. Ironically, the driver that led to the great year in stocks was the same factor that drove up bonds; the Fed’s interest rate cuts in response to the fear of a possible recession. It’s not very often that worry of a recession produces both a rip-roaring move in stocks and bonds. But, it happened!

Politics aside, my current take on the state of the economy is it’s holding its own. The dangerous trade war has now morphed into a trade truce. And, the Fed has signaled that it is standing at the ready on the sidelines as it watches how things will unfold. Perhaps most importantly, the past concerns of an impending recession have all but disappeared.

You might be wondering, how did an investment adviser, like me, manage through a year like 2019 and what’s the game plan for 2020? As markets rose considerably throughout the year, I took two steps to lighten up on stocks and lower overall risk. My latest risk adjustment was done in August. The result is a larger-than-normal current allocation to short-term, safer investments. However, this type of conservative positioning can never be viewed as an endpoint.

After 20 years in the investment business, I’ve come to recognize that the tool that’s needed most to be successful is not a crystal ball. Rather, I rely most on an old-fashioned scale; working to weigh current risk against future reward. With many of the past clouds seemingly parting, I have some work to do in 2020. And, for that, I am thankful.

Jason P. Tank, CFA 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

25 Days on Your Money Advent Calendar

December 6, 2019 by Jason P. Tank, CFA

As soon as the pile of Thanksgiving dishes had been cleared, we now find ourselves in the fast lane towards New Year’s Eve. To make this mad dash to the end of the year just a little more exciting, let’s pretend we all have a financial planning version of an Advent calendar with only 25 days left to open.

Let’s get started by highlighting a couple of pitfalls to avoid and some tips to consider.

Retired readers recently received their annual letter from Social Security. For the lucky few, some are slated to pay extra monthly premiums for their Medicare Part B and Part D benefits in 2020. This premium surcharge was triggered by making too much money way back in 2018; two tax years ago! The tax planning maneuvers you make in the next 23 days may save you a little financial heartache in 2021.

Medicare’s premium surcharges kick in at different modified adjusted gross income levels. The first surcharge adds about $800 per year more to your Medicare premium and is tripped at income levels of $87,000 for singles and $174,000 for couples. The second surcharge adds yet another $1,200 more per year and is triggered at income levels not much higher; $109,000 for singles and $218,000 for couples.

Avoiding or lowering the impact of these surcharges can take just a little bit of planning. Two common techniques are to deliberately harvest capital losses to offset any capital gains you have or to make charitable donations directly from your IRA to help reduce your required minimum distributions.

Now, moving on from the enviable challenges faced by higher income retirees, this next bit of planning advice is for those who qualify to receive health insurance premium subsidies under the Affordable Care Act.

The basic idea of Obamacare is simple enough. The law first aims to determine the premium level you can afford based on your income. In a nutshell, the law says you shouldn’t be expected to devote more than about 10% of your income to buy a decent health insurance policy. Naturally, the lower your income, the less the government expects you to devote to your health insurance coverage.

After you make your best guess about your income for the year ahead and you are told what you can afford toward the cost of a decent health plan, the government will provide you with an allowance to make up the difference between what can pay and what it actually costs. Once that allowance is set, you can then shop for the plan that’s best for you. You might even choose a plan that’s not quite as decent, such as a lower premium, high-deductible plan. The government allowance might even cover a significant portion of your monthly premium.

But, it’s very important to think of this monthly allowance as a government loan. If your best guess about your income turns out to be spot on, the loan is completely forgiven. If your best guess is too low, the government will want that loan paid back!

However, the Affordable Care Act is downright ruthless to those who make even $1 more than the qualifying income limit set at four times the poverty line. As soon as you cross that income threshold – again, even by $1 – the government says you could have afforded the full cost of your health insurance coverage and they’ll bill you at tax time for the entire loan they gave you.

To avoid this painful surprise, throughout the year you should closely monitor your projected income against the guess you made before the start of the year. If you think you will be close to the edge of becoming completely disqualified and if you did choose a lower premium, high-deductible plan, strongly consider making a contribution to a health savings account to get back below the income threshold. That one small maneuver alone might just save you thousands of dollars.

Jason P. Tank, CFA 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

Employee Retention is a Top Priority

November 1, 2019 by Jason P. Tank, CFA

To say that today’s jobs picture is one of the best we’ve seen in modern U.S. history is not an exaggeration.

As I write this column, the official unemployment rate is 3.6%. The last time the jobless rate was this low was in the late ‘60s. That was about a half century ago.

It’s hard to argue that the labor market is anything but “tight.” That’s an economist’s way of saying that it’s not too tough to find a job. Of course, the flip side is equally true for businesses searching to fill an opening.

In this tight labor market, keeping talented and productive employees is even more imperative. The investment made in employee training cannot be understated. To watch a talented employee walk out the door for the final time is one of the quickest ways to put a business in reverse.

Beyond competitive wages, one way to retain valuable employees is by providing attractive benefits. Among the lengthy list, near the top sits an employer sponsored retirement plan.

For the small business owners and self-employed among my readers, investment adviser Derek Dall’Olmo of Tremonte Financial Consultants will offer his expertise to the Money Series on December 4th where he’ll discuss in detail Simple IRAs, SEPs, and 401(k)s.

Simple IRAs are, naturally, simple to set up. They also relieve you of many intimidating employer responsibilities. Beyond making contributions of up to 3% of your payroll, each employee can add their own voluntary contributions to their account, up to $13,000 for this tax year. At age 50, they can add another $3,000. To keep it truly simple as the employer, you don’t have to create or monitor an investment menu for them and your employees get to manage their own Simple-IRA accounts.

SEP-IRAs can be viewed as a one trick pony. They are most often used by self-employed people, but that’s not always the case. As the employer, you get to choose the fixed percentage to contribute to each and every employee’s account. The maximum is quite high at about 25% of your payroll. Importantly, there are no voluntary employee contributions in a SEP-IRA plan. Every dollar comes from you, the employer.

The 401(k) is definitely more complex than other retirement plan types. It comes with added employer responsibilities and it is more expensive to create and manage. In exchange, however, 401(k)s offer greater flexibility in their design and allow for larger employee contributions. While they are typically used by more mature businesses, their single-employee version, called a Solo or Individual 401(k), is an especially attractive solution for high earners or super savers.

To help kickstart your business planning, please join us for the Money Series on Dec. 4th at 6:30 pm in the McGuire Room at the Traverse Area District Library. The non-profit Money Series provides open-access to financial education, for all. Register at MoneySeries.org or call (231) 668-6894.

Possible Changes Coming to Your IRA

October 22, 2019 by Jason P. Tank, CFA

There isn’t much time left until New Year’s. It’s only 69 days away. For me, this has been my quickest year on record. That’s a function of age. But, in all honesty, it’s also a result of not pausing long enough to smell a few roses along the way. For this, I’ll blame my mom for her repeated reminders to act like a duck. Stay calm on the surface and paddle like mad underneath!

In the spirit of lost time and important reminders, this is the time of year to remember to take your required minimum distribution – your RMD – from your IRA. After you reach that odd age of 70 ½, it’s time to pay the taxman. Thankfully, paying the taxes you owe on your retirement savings only happens little by little.

The IRS publishes two tables to determine how much of your IRA you’ll need to include as taxable income each year. One is for you and your spouse, if you happen to pass away first. The other table will be used if you are a non-spousal beneficiary. These tables are designed to slowly push your IRA’s untaxed money onto your tax return. The idea is to allow you to stretch out your IRA’s tax deferral over the rest of your life.

Fortunately, after your first RMD is initiated, you can have your subsequent required distributions done for you automatically. However, if you happen to inherit an IRA and you weren’t the spouse, you’ll need to remember to take your annual distributions each year. If you forget, the penalty is a whopping 50% of your distribution amount.

Now, just as you get comfortable with these rules, our esteemed politicians in Washington DC are chomping at the bit to change them. Even with total gridlock, a bill called the SECURE Act amazingly passed the House earlier this year by a near unanimous vote of 417-3.

Naturally, most thought a Senate vote would then quickly follow and make it law. Not so fast. Under the Senate’s rules, it only takes one member to put the bill on a very slow track. True to form, three Senators pushed pause for political purposes and it sits in limbo.

Assuming the delay ends, the SECURE Act resets the start date of your RMDs to age 72 from age 70 ½ and your non-spousal beneficiaries won’t be allowed to stretch out their inherited IRA over their remaining lifetime. For them, it will all get taxed within ten years. Even their inherited Roth IRA will need to be liquidated over a decade. Finally, among many changes to small business retirement plans, the SECURE Act also ends the current 70 ½ age restriction on making IRA contributions.

To learn more about how RMDs work and the changes that might be coming, attend the Money Series on Wed., November 6 at 3pm at the Leland Township Library. Go online to MoneySeries.org or call (231) 668-6894 to register.

Jason P. Tank, CFA 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.

Senior Centers: A Public Asset Like None Other

October 4, 2019 by Jason P. Tank, CFA

Sunshine is often the best disinfectant. That couldn’t be more true as we launched our fourth season of the Money Series last week. For our season opener, I am proud to have revisited a topic that I believe is one of the most important we’ve ever covered; the prevention of financial scams perpetrated against senior citizens.

The best defense against this scourge is education and awareness. Too often financial scams go unreported due to embarrassment and fear. According to some studies, only one out of 44 cases of elder financial exploitation get reported. In other words, what we read in the paper is just the tip of an iceberg.

Despite the unreported nature of these crimes, I can say with total confidence that our public officials have upped their game since the Money Series first presented on the topic back in 2016.

Today, senior organizations and government departments have marshaled significant resources to both train fraud prevention specialists and encourage the reporting of these crimes. For example, AARP launched their Fraud Watch Network with a hotline at (877) 908-3360. Their hotline is staffed by volunteers who work with victims to file a complaint with the Federal Trade Commission that supports further prevention efforts.

Right here in our backyard, Grand Traverse County’s efforts are also commendable. They have a scam alert system that broadcasts warnings, by phone and by email, to our region’s seniors and caregivers. Signing up for the alert is easy, just visit GrandTraverse.org and follow the link to the No Scam Zone.

For our kick-off at the Money Series, we covered five of the most common scams to avoid. I’ll highlight one of them here and invite you to watch the full video replay posted on MoneySeries.org.

The “family emergency” scam is near and dear to my heart as it affected my wife’s grandmother a few years ago. This scam preys off of an inherent desire of many seniors to help those in need. It usually begins with an urgent call from an imposter, often posing as a grandchild, who is supposedly in need of help after an accident or an arrest. The scammer’s aim is always to get your money, and do it quick!

The surefire way to prevent financial fraud targeting seniors is to keep our lines of communication wide open. This is a perfect example of it taking a village to care for one another. By encouraging our area’s growing population of seniors to develop and maintain a vibrant connection to our community, we can not only prevent financial abuse but also meet a whole host of other vital needs.

Now, I cannot think of a more compelling reason to support the effort to replace our inadequate Senior Center in Traverse City with an intentionally-designed facility right in the heart of our community! Our Senior Center network is a public asset like none other and their effort for a new building sincerely deserves our county-wide, public support.

Jason P. Tank, CFA 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

Sometimes Ice Cream Isn’t Worth It!

September 24, 2019 by Jason P. Tank, CFA

As has been our family’s tradition for nearly two decades, we spent last weekend on Mackinac Island. It was certainly a very busy place to relax, thanks to the invasion of the Republicans, their famous dignitary, and his Secret Service detail.

Our main event is a family bike ride around the island. And, since we’ve always had a young child (or three or four) along for the ride, a stop at the half-way point for an ice cream cone is required. Denying them, for any reason, just doesn’t feel like an option!

This year’s ride struck me as especially relevant to today’s economic situation. Our whole weekend felt under threat of rain, but enough pockets of sun peeked through to keep us optimistic. It felt a bit like watching the global economy stumble while ours grinds forward.

Our weekend plans, similar to the way business leaders, consumers and central bankers feel today, were somewhat impacted by the weather forecast. Just like the Fed did last week with their second straight interest rate cut, we decided to plow ahead with our predetermined plans and mounted our bikes.

A debate has been going on for years about how the Fed and other global central bankers will deal with the next recession. In a world of super-low interest rates and super-large budget deficits, the fear is the traditional tools of interest rate cuts and fiscal stimulus will be unavailable next time around. All that would remain would be the unconventional tool of quantitative easing and, possibly, even the untested tool of negative interest rates.

While the forecast is still uncertain, the future is fast approaching and the debate is growing more intense. Like children with thoughts of ice cream dancing in their heads, investors don’t typically sit around waiting for rate cuts. They often act up and force the action. So, the Fed is now pedaling around the island, too, and investors have a strong hunch about where they are going to stop.

As we approached the halfway point, our youngest knew we’d stop. It’s what we always do. We placed our ice cream orders just as we heard the thunder in the distance. Moments after we took our first licks, the rest of our family didn’t even hesitate and hopped back on their bikes.

After our ice cream bliss, and as the dark clouds grew closer, we finally headed back. Of course, the rain arrived immediately, and the cold wind began to really hit us in the face. As the Fed likely feels today, we weren’t at all dressed appropriately. And, just as the Fed so obviously wants for investors, even if it’s not their mandated purpose, all I wanted was to be a hero for my kid!

Wet and cold and pedaling uncomfortably fast, it was then that my daughter delivered her piercing wisdom, “Hey Dad, sometimes ice cream isn’t worth it!” It really made me wonder if the Fed was listening.

Jason P. Tank, CFA 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

Down the Rabbit Hole of Negative Rates

September 6, 2019 by Jason P. Tank, CFA

“But I don’t want to go among mad people,” Alice remarked. “Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.” “How do you know I’m mad?” said Alice. “You must be,” said the Cat, “or you wouldn’t have come here.”

Just as Alice ventured deeper into Wonderland, investors across the world are now entering a period of implausible madness as it relates to negative interest rates.

What once seemed utterly foreign to savers has now become a reality of epic proportions. My first mention of negative interest rates in this column was made in late June. Back then, about $13 trillion of debt around the globe was priced to produce less-than-zero return. Yes, we’re talking about a guaranteed loss to investors. Now, less than a few months later, yet another $4 trillion has been piled onto the mountain of negative-yielding government debt.

And, just as the Cat informed Alice that she’s as crazy as the others, the US now appears to be moving ever-closer to the same bizarre financial conditions we see throughout Europe and Japan. In less than a year’s time, the 10-year US Treasury yield has plunged from near 3.25% to under 1.5%. Sudden downward moves in interest rates like this are truly rare, and when coupled with an inverted yield curve typically indicates major economic weakness is on the horizon. However, this time, and for now, the stock market has simultaneously and substantially risen in 2019. This conundrum is quite palpable for students of market history.

As I’ve dug more deeply into the rationale of investors’ mysterious acceptance of negative yields, the understanding I’ve sought has not yet emerged. As Alice experienced first-hand, when faced with something you know to be crazy, others will work very hard to convince you, and themselves, otherwise!

For example, here is a fun way to convince you that negative interest rates are not so nutty. Faced with a negative interest rate in their savings account, a rational person would simply refuse to accept the slow and steady confiscation of their wealth by their bank and would instead withdraw their cash in order to bury it in their back yard or hide it under their mattress.

Of course, to truly safeguard your pile of cash – or your preferred store of value, such as gold bars or gems – you would incur some ongoing expenses to keep it secure. That expense could take the form of guns, building a tall fence, installing an elaborate security system or even hiring private security guards. Using the power of this logic, why is it so odd to think that you’d willingly pay your bank to hold your money in safekeeping?

And so, as Alice aptly noted, it appears things may keep getting “Curiouser and curiouser!” until investors eventually wake up.

Jason P. Tank, CFA 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

Quick Tips for Some Free Money

August 20, 2019 by Jason P. Tank, CFA

We certainly live in peculiar and complex times. Today’s column offers two money tips. One involves a huge consumer privacy breach and the other involves the inexplicable plunge in interest rates.

Remember the highly publicized Equifax privacy breach back in late 2017? Equifax failed to protect the personal data of nearly 150 million people. To put that into perspective, that represents about half of the population of the United States. For a credit bureau entrusted with personal data on almost every consumer around, it’s safe to say it was a big deal.

Now almost two years later, Equifax has reached a settlement with both the federal government and all 50 states. As part of the settlement, Equifax has agreed to provide multiple benefits to affected people.

The most attractive benefit of the settlement is the offer to provide – for free – up to 10 years of credit monitoring. This is equivalent to about $1,200 to $1,800 of value. The government forced Equifax to pay their competitor, Experian, to provide the monitoring service for the first four years. And, among other offered benefits, those affected by the breach will also qualify for free identity theft insurance protection of $1 million.

To find out if you are eligible, go to EquifaxBreachSettlement.com. It takes mere seconds to check and only a few more minutes to file a claim for your benefits.

Speaking of free money, this brings me to my second tip.

Have you noticed what has happened to interest rates lately? If you haven’t, now is the time to take notice of today’s rock bottom mortgage rates. It might make financial sense to consider refinancing. This is especially the case for those who bought their home around 2010, 2013 and even in late 2017 when mortgage rates were much higher.

Here’s an easy example of the possible merits of today’s refinancing opportunity. Imagine you originally took out a $200,000 mortgage back in 2010 with a 30-year fixed rate mortgage of 5%. In this case, your monthly principal and interest payment is about $1,075.

After diligently making the last 10 years of mortgage payments, you’d still owe about $165,000 with 20 years left to pay. That’s just the perverse math of a mortgage during the early years. Fortunately, the principal paydown really accelerates in the later years.

Now, with the very recent plunge in interest rates, today it’s possible you could be offered a new 20-year mortgage rate of close to 3.5%. At this lower level, you could reset your mortgage payment to around $950 per month and save about $1,500 per year.

Keep in mind that banks won’t refinance a mortgage for free. The closing costs need to be closely reviewed and evaluated against your expected savings. Of course, be sure to shop around. And, remember the longer you plan to stay in your home the more compelling a refinancing becomes.

Jason P. Tank, CFA 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

Addressing the Student Debt Epidemic

August 2, 2019 by Jason P. Tank, CFA

It’s that time of year when students start to pack their bags and head back to college. I remember the feeling, even if only vaguely. What I don’t remember, however, is the cost of college being so prohibitive for so many. It’s become a financial epidemic.

I must admit, I was incredibly lucky to earn my degree without being saddled with debt. Today, about 50 million people owe a collective $1.5 trillion in student loans. To put this into perspective, approximately one in three between the ages of 25 and 35 are grappling with student debt. Predictably, student loan default rates are expected to rise as the problem has grown over the decades.

Student loan debt and the cost of college looks destined to be a top issue in the 2020 presidential campaign. Most Democratic contenders support some form of student debt relief, if not outright debt forgiveness. Similarly, the leading candidates are also in favor of more affordable, if not outright free, college.

Today, about 20 million people attend public colleges and universities. Very roughly, the average cost of tuition and books is around $8,000 to $10,000 per year. This brings our nation’s annual tuition bill to about $150 billion to $200 billion. After counting the tens of billions of dollars in tuition support already provided by federal grants and many state and local initiatives, the price tag of a national free college plan represents less than 5% of annual federal tax revenues.

Further, if the currently outstanding balance of $1.5 trillion in student debt were wiped away, the one-time cost would be equivalent to absorbing just 18 more months of our federal government’s deficit spending at the current rate.

However, even these estimates don’t paint an accurate financial picture. The negative economic impacts of the current student loan debt issue are meaningful and have been building over time. Statistics show that more young people now choose to delay marriage, delay starting a family and delay buying their first home. The ripple effects of the student debt crisis on economic growth have been consequential.

I suspect if one were to properly model the economic boost provided by both a student loan forgiveness plan and a free college plan, the overall cost would likely be far less than feared. According to the Census Bureau, over a full lifetime, people with a college degree earn about 1.6 times more than those with only a high school diploma. The lifetime boost in income tax receipts would lower the projected price tag of these plans, even after ignoring the clear benefits that result from a more highly-educated workforce and society.

As we listen over the coming months to politicians argue over the fiscal and political feasibility of their many plans, my hope as a voter is we rely on robust economic analysis when evaluating these proposals. And, perhaps more importantly, I hope we work to remember a time when college was far more financially accessible. Amazingly, it really wasn’t that long ago.

Jason P. Tank, CFA 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

Markets Are Like a Fine Wine

July 23, 2019 by Jason P. Tank, CFA

I grew up in a big family. As one of the middle children of six, there wasn’t a moment of quiet in my formative years, let alone clear memories of outright peace. Don’t get me wrong; it wasn’t war either. It felt more like a long-term truce.

Now as adults, my siblings and their families converge upon Traverse City each summer. My formerly big family has become huge. The original six have multiplied into 23. The complexity of it all seems exponential.

We’ve now got kids under five, all the way up to age 20. We’ve also got vegans and meat lovers, too. Just like my parents, my siblings were also cursed with a very opinionated lot. The many elements that determine the overall outcome of our reunions are incalculable. And, yet, the contained chaos works.

It reminds me of the way times have changed in financial markets. Information now flows faster and conflicting opinions pop up on our devices every second. Today, the opinions on the current state of the economy and the path of the markets are fast and furious.

Some are warning of an imminent recession and others call for continued growth even as we’ve reached one of the longest economic expansions in modern times. Bonds are clearly signaling a slowdown and stocks keep hitting all-time highs. Just like my family gatherings, the environment is a cacophony of conflicting opinions. You simply have to know what you can and cannot control.

When it comes to building and managing investment portfolios, there are three elements that matter most, in my view.

To start, you can control the asset allocation. That’s simply about finding the appropriate mix of stocks and bonds. Studies show that your portfolio’s asset allocation is the factor that most affects portfolio returns and overall risk.

Next, you can control the level of diversification inside your portfolios. Diversification is about finding the right mix within your asset allocation. As I remind new clients when setting our formal investment management guidelines, a portfolio with 60% in stocks isn’t balanced at all if that exposure is represented by just one stock. Sorry Warren Buffett, I really don’t care if it is Berkshire Hathaway. One stock simply isn’t enough for us mere mortals!

Last, we have control over our investment selection process. Whether it’s picking Visa over AT&T or choosing a low-cost index fund over an actively-managed mutual fund, the specific investments in a portfolio really do matter. For example, the rising tide of a bull market tends to lift all boats. However, in a recession, AT&T will likely provide portfolio protection that Visa will not.

Just like my family gatherings, both the speed and volume of market opinions has picked up exponentially. Today, the near-term outcome seems less predictable than usual. My advice is to focus on what can be controlled and what cannot is best handled with a healthy sense of acceptance. As I’ve learned at my family reunions, pouring yourself an extra glass of wine really can’t hurt either!

Jason P. Tank, CFA 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

Fiduciary Duty’s War and Peace

July 5, 2019 by Jason P. Tank, CFA

Like the stock market, political partisanship is at an all-time high. Case in point; it recently took the Securities and Exchange Commission (SEC), our nation’s protector of investors, 1,363 pages to barely tweak the rules of the road for how financial professionals should treat their clients. That’s about the same length as War and Peace, folks!

After a decades-long industry battle, with one camp laser-focused on the goal of imposing a true fiduciary duty on all financial pros, of all stripes, to place their clients’ interests ahead of their own, the big brokerage firms successfully watered down the regulations. The SEC’s final rule is ironically called “Regulation Best Interest.” The result? Brokers and registered investment advisers will continue to operate under a different set of professional obligations to their clients. And, naturally, the general public will remain unlikely to spot the difference.

The new regulation represents the nail in the coffin for Obama’s high-risk strategy in early 2015 to require brokers to avoid and disclose all conflicts of interest and act as a fiduciary to their clients at all times. After all, registered investment advisers have long-practiced under those rules. Why did Obama try to push this through the Department of Labor and not the SEC? For years, Congress wouldn’t seat enough board members to the SEC, essentially creating complete institutional gridlock.

The epithet on Obama’s attempt was finally written just last month with a partisan vote to not impose an industry-wide, unified fiduciary standard of care. It only took about three years and heavy industry lobbying to quash his attempt.

What the new Regulation Best Interest means for clients is that consumer confusion will continue. Brokers will still be able to imperceptibly switch professional hats; on one hand acting as simple, middle men in a financial transaction and, on the other, acting as true fiduciaries to their clients. Rest assured, the color of their hats will be only shades apart.

Like a Facebook privacy policy consent button, consumers should also get ready for more financial industry disclosure forms with embedded website hyperlinks designed to obfuscate consumers’ true understanding of the nature of their relationship with their financial professional.

The SEC is even making registered investment advisers add two additional pages to their already 20+ page regulatory disclosures. It shouldn’t take 2 pages, let alone 1,363 pages, to state unequivocally that you have a legal fiduciary duty to always place your clients’ interests first. One short sentence will do.

Of course, just as transparency shines a light on the truth, opacity is the lifeblood of a complex sales process. In many ways, that’s precisely what the SEC was created to guard against. Their new Regulation Best Interest simply doesn’t get the job done. Political partisanship certainly did.

It’s once again time for registered investment advisers to take matters into their own hands and loudly beat the drum about their legal fiduciary duty to clients. Now, that is definitely in the public’s best interest!

Things That Make Me Go Hmmm

June 26, 2019 by Jason P. Tank, CFA

In my humble opinion, the best-titled financial newsletter around is called “Things That Make You Go Hmmm” Lately, that catchy title has been banging around in my head. Let me just list the reasons, in no particular order of importance.

The Federal Reserve is openly talking about cutting interest rates after finally getting them up to a whopping 2% or so! Even more astonishing, like Pavlov’s dog, the mere mention of this move is causing stocks to once again reach all-time highs. Cutting rates, all-time highs? Hmmm.

We’re on the razor’s edge of taking military action in the ever-volatile Middle East, and investors are appearing to shrug their collective shoulders. Even more bizarre, our president is tweeting about his most inner thoughts on why he ordered strikes and abruptly reversed course in the span of a few minutes. The market’s reaction? Inaudible. Hmmm.

Speaking of tweets, in just the last month or so, a trade deal with China was nearly complete only to see talks suddenly fall apart. And, how did investors learn about it all? Twitter. Clearly believing this was an appropriate way to announce changes in our trade policies, we were soon greeted with deeply threatening tweets about massive tariffs with Mexico. And those threats weren’t even tied to our trade policies. Hmmm.

We’re now over 10 years into our economic expansion with our national unemployment rate near a record-low of about 3.5% and recent inflation readings are just below 2%. Yet our federal deficit is butting right up against $1 trillion. Not long ago, this type of fiscal policy would have sparked outrage, concern and political hand-wringing. Today? Nada. Hmmm.

Speaking of debt, with the recent collapse in interest rates, the global markets now offer over $13 trillion of government debt yielding negative interest. Yes, you did hear that right. Ironically, it makes our own skinny 2% bond yields the envy of the developed world. Hmmm.

As we all know too well, we’re about to embark on another presidential campaign. With now 25 Democrats vying for the presidency, the two leading candidates are soon to turn 77 and 78 years old. That fact actually makes people forget that Trump would be 75 only a few months after his re-election. With all due respect, I haven’t personally met any men well into their 70s who think they should be running a large country, let alone a small one. Hmmm.

This fall marks my 20th year in the investment business and, yes, I do still have plenty of hair on my head and chin to scratch. Let me be clear about one thing, at no time is the world totally orderly. And, rarely are financial markets free of true head scratchers. Still, these are most interesting times and, I must admit, they are making me go, hmmm, a little too often lately!

Jason P. Tank, CFA 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

Should Worry of a Recession Be Rising?

June 7, 2019 by Jason P. Tank, CFA

People are starting to worry about a recession. Based on the Federal Reserve’s reaction, they are too. Yet, recessions don’t just happen without warning and economic expansions don’t come with set expiration dates.

Still, recessions are natural. We tend to travel between emotional peaks of euphoria to depression and back again. But, along the way, the pace of economic activity experiences fits-and-starts and the data sends mixed or false signals. This adds to a sense of futility in trying to forecast economic turning points.

When recessions do occur, however, they have a big impact. Our last two recessions produced stock market losses between 50% and 60%. In comparison, the average decline during a recession has been above 30%. Whether severe or pedestrian, it highlights the importance of being both financially and emotionally prepared heading into a recession.

On the employment front, two leading indicators look sound, regardless of the weak jobs report for May. Initial claims for unemployment benefits are still very low and aren’t really moving demonstrably higher. The same steadiness can be seen in the average weekly hours worked by employees in manufacturing. Remember, these are jobs-related data points that tend to show weakness before the onset of a recession.

Next, the latest readings of an index that tracks the mood of the manufacturing sector are down from a year ago but still don’t point to a recession either. Another leading indicator, new orders for durable goods, have also barely seen a downtick. Finally, a measure of the delivery speed of suppliers has weakened slightly but also doesn’t reach recessionary-level readings.

Turning to the housing industry, the number of building permits for new homes has basically been flat for the last couple of years and it is only down a bit from last spring. Incidentally, the current number of building permits now sits at a little more than half the level seen before the financial crisis. So, the housing industry may not have quite the economic impact as it once did. In addition, mortgage rates have recently dropped, probably providing a backstop.

Consumer confidence readings are also still quite high. After the stock market downturn late last year, confidence did fall off some. However, up until the last couple of weeks, we’ve seen a rebound in consumer confidence surveys. It should be said that the tight correlation between consumer confidence surveys and the most recent performance of the stock market tends to make this a chicken-or-the-egg type of indicator.

With the fundamental economic indicators largely in the clear, what remains are the financial market-based indicators. Since these show up on your brokerage statements, they do tend to garner attention, especially in the media.

The most worrisome is the now-inverted yield curve. This just means that longer-term interest rates are now lower than short-term interest rates for government debt. While it is not a fool-proof signal, when a yield curve inversion occurs, the odds of an oncoming recession rise.

The Fed has certainly snapped to attention. It is now strongly signaling interest rate cuts, rather than hikes. Their about-face has been very sudden and this perhaps adds to general nervousness. To quell the impression of panic, the Fed is framing their reversal as simply taking out an “insurance policy” on the economic expansion. Of course, their justification for doing so goes well beyond the shape of the yield curve in the age of Trump tweets that threaten our relationships with our major trading partners.

As I mentioned in my most recent column, the uncertainty created by the threat of trade wars does matter. It is worthy of making some proactive, risk-management portfolio adjustments. Yet, as I read the key economic data that historically behave as leading indicators of an oncoming recession, I don’t currently see obvious red flags flying. My advice is likely as bland as it is wise; keep an eye on the hard data, know your portfolio risks, develop a reaction plan and, most of all, guard against making emotional moves.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a 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

A China Trade War is a Worthy Concern

May 24, 2019 by Jason P. Tank, CFA

Things are becoming clearer, even as they remain muddy. Our trade dispute with China could spin out of control into a full-blown trade war. In hopeful anticipation of a pending deal with the Chinese late last year, up until a few weeks ago, we’ve been amply rewarded with a big stock market rebound after last fall’s sudden decline. However, negotiations appear to have broken down and the aggressive rhetoric has ramped up.

To some, this last-minute gamesmanship is just a predictable stage in the art-of-the-deal. Let’s hope. To me, however, it smacks as a sad display of amateur economic diplomacy. Rather than taking a wait-and-see approach, especially after such a strong start to 2019, I chose to make some portfolio risk management adjustments in the spirit of prudence.

A trade war is inherently an unhealthy development. The uncertainty impacts future hiring and business investment decisions. And, in turn, it sends the signal to consumers to hold back. In my view, the Trump administration is banking too much on the relative strength of the US economy compared to the rest of the developed world in its tough-talk negotiating stance. It is also a mistake for Trump to say that “we’re just playing with the bank’s money” given the rise in the stock market since his election. To most normal people, not living inside Washington’s political bubble, their brokerage statements are titled in their names, not the bank’s!

Most sensible economists, both right-leaning and left-leaning, would argue the world economy is better off with mutually-beneficial trade pacts rather than economic isolationism. However, we are quickly approaching another heated election cycle and the demonizing of China plays very well politically.

In all fairness, China is not an innocent party when it comes to trade and cybersecurity violations. China’s policies have led to many incidences of outright intellectual property theft against U.S. companies and there have been verifiable Chinese-originated breaches of both our private and public computer networks. These are worthy issues to resolve.

Of course, it should also be said that U.S. corporations have knowingly transferred their proprietary know-how to the Chinese for many decades in order to gain access to that growing market. It’s been pragmatically viewed as the price of admission. While probably too late now, some corporate leaders are re-evaluating the trade-offs that have been made through their distorted lens of short-term profit.

In light of recent developments, the possibility of escalating, tit-for-tat actions and reactions are rising. This is especially the case as a sense of national pride on both sides is at stake. Given this, it is most certainly not helpful to be tweeting about how we are “winning” while our important trading partner is “losing.” But, sadly, these ill-chosen words have been used recently. As markets enter the proverbial dog days of summer, let’s hope the Chinese leaders, too, have learned to ignore the tweets!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a 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

Making a Lag Putt for Your Retirement

April 19, 2019 by Jason P. Tank, CFA

I’m not much of a golfer. Perhaps that’s explained by the fact that I get out on the links maybe two or three times a year! They say practice makes perfect, but for some reason, I don’t think that applies to me and the game of golf.

Last weekend’s exciting Masters victory by Tiger Woods triggered, for me, the similarity between retirement planning and the idea of the lag putt. For readers who don’t know golf’s lingo, a lag putt is one that isn’t really meant to go in the hole. Instead, it is a putt that’s supposed to just make the next one a “gimme.”

Getting to a financially secure retirement is similar. It feels like one lag putt after another until the ball finds the bottom of the cup. It’s a gamble to base your retirement on a lucky stroke.

After analyzing and creating retirement plans for many years and many clients, I’ve found there are really only three variables to consider. It’s not rocket science. It’s more like a little math.

The first thing to consider is time. Creating a retirement plan projection for a 35-year old is vastly different than one designed for a 60-year old. In my financial planning work, I often imagine a person’s remaining “economic value” while they are still working. When you’ve only got about 5 years of active work left out of what’s likely to be a 50-year work history, about 90% of your economic story has already been told. Your ability to build up financial resources through additional savings is limited by time.

The next input is your accumulated financial resources that will provide the cash flow needed to sustain your retired lifestyle. These include your various investment accounts, that small business you hope to sell, your rental properties or the real estate equity you’ll free up when you decide to downsize. This also includes any pension benefits you’ll get and, of course, your projected Social Security benefit. It’s really just a comprehensive tally of what’s been built to date.

The final variable – the most important of all – rests on the cost of your desired retirement lifestyle. And, outside of your mortgage or other debts you plan to pay down before retiring, your core retirement lifestyle will probably mimic your current one. Any sound retirement plan requires you to reasonably define your life’s costs. While most financial planners work to avoid the dreaded word, a comprehensive retirement plan does require you to have a handle on your household budget.

Just like any round of golf, the course of a lifetime of retirement preparation is littered with hazards and obstacles. The occasional sand trap or tree limb or awkward swing closely mirrors that untimely lost job, unfortunate divorce, or unexpected repair, not to mention recessions and bear markets. It’s all par for the course.

Eventually, through sound planning, deferred pleasure, and emotional flexibility, the final stage of your own retirement journey can look like Tiger’s masterful round where all that remained was his boring, lag putt followed by a short gimme!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a 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

Social Security’s Shocking Statistics

April 1, 2019 by Jason P. Tank, CFA

Some statistics are meant to shock. Others do it without even trying. According to a recent population survey, half of all retirees rely on Social Security for more than 50% of their income. And, more shocking still, one in four retirees depend on Social Security for over 90% of their income. These stats are truly mind-blowing!

To see how this can be, let’s begin by imagining Lily, a typical 17-year old just starting her first job. Her early years of work won’t likely be her most lucrative. But, by the time she reaches her full retirement age of 67, she’ll have successfully recorded five decades of work. (Psst, don’t ever frame the future like this to an actual teenager; realizing that a half-century of work is still ahead of you isn’t a great motivator!)

Social Security won’t care about each and every one of Lily’s 50 years of work. They will kindly give her a free pass for some of them. In fact, she’ll get to throw out 15 of her lowest earning years. Social Security will officially only care about her best 35 years.

Once her highest earning years are logged, Social Security will then adjust each one for inflation. It’s only right. After all, even a modest 2% inflation rate will silently eat away about half of the purchasing power of one dollar after 35 years!

Of course, it’s important to note that Social Security will completely ignore any of Lily’s earnings that exceed a set annual maximum income of $132,900. This income level is also where Social Security will stop requiring Lily to contribute into the system. Think of this threshold as the start of the “no contributions/no benefits” zone. This threshold is adjusted for inflation. For example, it was only about $38,000 in 1984.

Let’s now fast forward to Lily as a 67-year old. With her 35 years of work adjusted for inflation, Social Security’s formula figures out her average monthly earnings. This monthly average is the basis for Lily’s Social Security benefit.

To show just how easily explainable those shocking statistics are, let’s say Lily’s lifetime average earnings turned out to be $4,000 per month. What portion of her earnings will Social Security replace?

Using some rounded figures, Lily will get 90% replacement of the first $1,000 per month of her historical work record. On her next $3,000 per month of earnings history, she’ll get 32% replaced. Taken together, Lily’s Social Security benefit will be about $1,800 per month; successfully replacing a bit less than half of her average monthly earnings.

From the looks of it, Lily’s reliance on Social Security is typical and the program’s importance is beyond obvious.

To learn more about Social Security, attend our next Money Series presentation on Wednesday, April 10 at 6:30pm in the McGuire Room of the Traverse Area District Library. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series, is a non-profit committed to providing open-access to financial education, for all.

Social Security and Surviving Spouses

March 24, 2019 by Jason P. Tank, CFA

After almost two decades counseling clients on many financial topics, I certainly run into recurring themes. I suppose this is why 88-year old Warren Buffett claims, like wine, he gets better with age!

For example, there is an ongoing lack of understanding, even among Social Security’s own employees, regarding the options that widows and widowers have following the death of their spouse. The result? Thousands of widows and widowers are being shortchanged. I’ve seen it happen, multiple times.

When your spouse passes, you are entitled to receive what’s known as survivor’s benefits from Social Security. This benefit is based on the earnings record of your deceased spouse. You can file to receive reduced survivor’s benefits as early as age 60.

But, there’s another factor to consider in your Social Security filing decision. You are also entitled to receive a Social Security benefit based on your own work history. As a surviving spouse, you get whichever benefit amount is larger.

At first glance, it appears your filing decision comes down to a simple comparison of these two benefits. This oversimplification explains how widows and widowers are missing out on benefits.

Imagine a husband who earned a Social Security benefit of $2,000 per month. After collecting for just a year, he passed away at age 66. His wife was age 60 at the time of his death. She decides to keep working for a while longer. Her own Social Security benefit at her full retirement age of 66 is projected to be $1,800 per month.

If she chooses to file early for survivor’s benefits at age 60, she’d receive 71.5% of her deceased husband’s Social Security former benefit and only get about $1,400 per month. By delaying all the way up to age 66, she’d get the full $2,000 per month her husband once received. Patience appears to be a virtue, once again.

After some complex calculations related to her decision to file a bit early, she’s told she’ll be getting about $1,800 per month. Her highest benefit is the result of being a surviving spouse. Her own benefit just didn’t make the cut as it was reduced down to about $1,500 due to her decision to file early. So, she’ll start getting $1,800 per month for the rest of her life.

However, a wrinkle in the rules allows her, as a surviving spouse, to split her filing into two separate decisions. Widows and widowers get to choose to file for either their own benefit or the survivor’s benefit. Their choice can make a big difference.

As a widow, the splitting of her filing is accomplished through the use of a “restricted application” to receive just her survivor’s benefit. With this restricted application in place, she’ll get her $1,800 per month survivor’s benefit and still watch her own benefit grow and grow over the years. By the time she hits age 70, she’ll officially make the switch and see her Social Security benefit pop up to almost $2,400 per month!

Without the use of this filing strategy, widows and widowers filing for benefits are “deemed” to be simultaneously filing for both their own and their survivor’s benefit. By default, they get the biggest one and forever lose out on literally thousands of dollars over their retirement years. According to the Office of Inspector General of Social Security, the shortchanging of retirees now exceeds $130 million and counting!

To learn more about Social Security, attend our next Money Series presentation on Wednesday, April 10 at 6:30pm in the McGuire Room of the Traverse Area District Library. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series, is a non-profit committed to providing open-access to financial education, for all.

How a Variable Annuity Actually Works

March 8, 2019 by Jason P. Tank, CFA

Variable annuities aren’t simple and they aren’t cheap. I was once again reminded of this after analyzing a couple of policies in recent weeks.

Before I get too deep into variable annuities, I cannot stress enough how much a true financial plan helps to minimize the motivation to purchase a financial product, especially products designed to feed off a sense of insecurity. A deep concern of outliving one’s assets is often the key driver of most annuity purchases. No financial professional should ever dismiss this fear, out of hand. An objective adviser should instead work to understand and address the fear.

So how exactly do variable annuities work? At its simplest level, your money is invested in a basket of mutual funds. Your money then moves in lock-step with the financial markets. That certainly explains the “variable” part!

Now, without yet considering the added bells and whistles that often ride on top of variable annuities, this simple part of your policy represents your “true” account value. The cost of these mutual funds runs about 1% per year.

However, in addition to these mutual fund costs, the insurance company also imposes some other nebulous-sounding charges and fees. One is called the “mortality & expense” charge. Another is the proverbial “administrative” charge. These charges and fees typically add up to another 1.4% per year.

The high cost of about 2.5% per year in fees naturally hobbles the growth potential of your simple mutual fund portfolio. With a balanced portfolio of mutual funds, and barring a rip-roaring and sustained bull market, your variable annuity might be destined to make about 2% per year. You might fairly ask if this doesn’t just sound like a very expensive mutual fund program. I’d agree.

To combat this reality, insurance companies dangle enticing add-ons, called living benefit riders, that work to address the dual pain points of investment volatility and the fear of running out of money in your retirement.

When you add a living benefit rider to the picture, your policy actually has a second “shadow” account value that is wholly-unrelated to your “true” account value. It is typical for your shadow account value to offer a guaranteed annual return of around 6%, promised for about a decade. After that, the shadow account stops growing and can only be accessed if you agree to receive a lifetime of monthly payments. These riders cost yet another 1% per year.

Again, without the help of an extended bull market, it should be clear that the “true” account value – after all those fees are applied – simply cannot compete with the “shadow” account.

So what do you get when you make the rational choice of accepting the lifetime of monthly payments? For the next 12 to 15 years, the insurance company sends you back your own money plus the little bit of growth you got to keep. Only after you’ve been made whole does the insurance company finally start to send you their money.

As you can tell, my quick answer to the variable annuity question is “Just Say No!” As you can no doubt imagine, figuring out what to do, if anything, after you’ve already purchased a variable annuity is more complicated!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a 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

Two Tax Tricks to Remember

February 26, 2019 by Jason P. Tank, CFA

Not long ago, I highlighted two tricks to help lower your tax bill. Since we’ve entered a whole new tax year, I’ll take the risk of sounding like a broken record. It’s worth it to me, if it saves you some money.

Prior to the new tax law, about 30% of all tax filers itemized their deductible expenses. Today, fewer than 10% will itemize. The culprit? The new standard deduction essentially doubled. Your taxes got much, much simpler.

For single filers, the new, bigger standard deduction is about $12,000. For married filers, it jumped all the way up to about $24,000. Think of these as a hurdle.

If the combined total of your property taxes, your state income taxes, your out-of-pocket medical expenses, your mortgage interest, and your charitable donations doesn’t exceed the new, bigger standard deduction, you can now skip the tedious record-keeping.

But, remember, If you are no longer itemizing, your charitable donations won’t be tax deductible either. That is, unless you use one of these two tricks to preserve your deduction!

The first trick only works if you are over age 70 ½ and have an IRA. If you aren’t yet lucky enough to be over age 70 ½, the second trick is made for you.

If you are older than 70.5, you can donate to a charity directly from your IRA. These are known as “qualified charitable distributions” and they work to satisfy, in part or in whole, your annual required minimum distribution (RMD) from your IRA. Even better, the money you give directly to charity from your IRA won’t count as taxable income. Since you are giving away money that’s never been taxed, it’s just like getting a tax deduction.

The mechanics are extremely easy. Many brokerage firms will simply issue you a checkbook for your IRA. All you have to do is keep a record of the donations you make from that dedicated checkbook. Just be sure to report your gifts to your tax preparer or else you’ll end up paying tax on those charitable distributions anyway!

If you are under 70.5, you get to use a different trick to claw back your tax break for your charitable giving. In order to deliberately push up your itemized deductions above the new, bigger standard deduction, consider “bunching up” years worth of your charitable donations into a single year.

A great way to bunch up your donations without having to give it all away in one fell swoop is to open up a donor-advised fund. Just like that IRA checkbook for those over 70 ½, your donor-advised fund creates a dedicated pot of money for your future donations.

As I write this, I suspect that too many people are dutifully tallying up all their charitable donations made last year only to find that none are actually tax deductible. Well, as the old saying goes, “Only two things in life are certain; death and taxes.” If you didn’t use either of these tricks last year, there’s always this year.

The Market’s Bounce and Your Cash Holdings

February 10, 2019 by Jason P. Tank, CFA

Q: It’s been quite a rebound since Christmas Eve, so what’s going on with the stock market, lately?

A: You are very right. The market’s bounce back over the last six weeks has been both sudden and strong. It hasn’t quite clawed back all of the big decline that began last September. But, generally-speaking, it’s more than halfway there.

I’d chalk up the rebound to four factors. First, when the mood gets as dark as it was, you can usually expect a bounce back. It’s pretty typical when markets get so “oversold.” Second, the fear of a looming recession has somewhat faded. Recent economic data have been better than expected, including yet another strong jobs report in January. Third, the potentially damaging trade war with Trump and China appears to have cooled off. Continued spasms should be expected until that issue is resolved, however. Finally, the Fed blinked as Wall Street’s loud whining got their attention.

Of course, none of these factors are irreversible and the concerns of the recent past were not entirely invalid. Given this, my suggestion is to take this rebound as an opportunity to now evaluate your overall portfolio risk. After this big rebound, it feels like a second chance.

Q: With the Federal Reserve having raised rates over the last couple years, what return should I expect on my cash?

A: Cash is no longer trash. But, you need to be vigilant to get the return you deserve. Banks and brokerage firms are perfectly happy paying you far too little. It’s not evil; it’s just economics.

For example, the default money market funds at most brokerage firms pay about 0.25% to 0.5% today. You can easily get more than 2% on your cash, even if it comes with some very minor inconveniences. This difference can add up.

My suggestion is to first review your cash holdings as a percent of your portfolio. If your portfolio has much more than 5% sitting in cash, talk to your adviser about shifting it into a “position-traded” money market fund rather than the default, “sweep” money market fund. Yes, when you need access to your cash, you’ll need to sell (for free) your money market fund, like you do with a normal mutual fund. But, it takes just one day of planning ahead in exchange for getting an extra 2% return on your cash. It’s an easy move!

Join us for our next Money Series presentation this upcoming Wednesday at 6:30pm in the McGuire Room of the Traverse Area District Library. This month’s talk is based on a thought-provoking academic study on the power of working longer to boost your retirement planning. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series programs, is a non-profit committed to providing open-access to financial education, for all.

Year-End Letter to Investors

January 5, 2019 by Jason P. Tank, CFA

Financial markets were not friendly in 2018. Over the last few months, the markets were actually just plain mean.

For my clients, I’ve been sticking to a more conservative approach that helped to somewhat lessen the blow. That basically means I chose to invest less-heavily in stocks than I could have been. However, in all honesty, I didn’t position things conservatively enough. Hindsight always appears crystal clear!

I’ve been asked lately if we’re heading into a recession. Here’s why I feel it’s too early to tell.

There are two major types of recession indicators. The first is made up of “betting” indicators. They are a reflection of the shoot-first, question-later collective guesses made by the markets. The second type is comprised of “fundamental” indicators. These include both business and consumer surveys as well as economic releases.

The market-based indicators are often way out in front of the economy’s fundamentals; zigging and zagging and garnering alarming media headlines. Today, the financial markets are currently flashing red.

The stock market recently crossed over the official line that marks a bear market. And, both the yield curve and bond prices for lower-quality companies foreshadow a weakening economy. On the whole, these signs raise concern.

However, financial markets aren’t all-knowing. They often get it wrong. Since 1950, there have been 13 bear markets and nearly half of the time no recession followed. Markets can’t see the future, because (most) people can’t see the future!

The fundamental indicators currently offer a less-concerning picture. Most economist see slower economic and company earnings growth ahead. But, still, positive growth is expected this year. The Fed now appears ready to calm markets by slowing or even pausing its rate hiking plans. And, for different reasons, it’s conceivable that both Trump and China might blink on the trade spat. Overall, the best way to describe the fundamental indicators is they appear to be taking on an unattractive yellow-green tint.

The current split in the indicators forces me to avoid looking to the market to either validate or refute my current game plan.

At the highest level, I rest on the knowledge that my clients’ overall asset allocation is diversified, balanced and appropriate for them. Next, I’m focused on making sure the investments I’ve chosen are both sound and safe. Soundness places a premium on quality investments backed by financial strength. Safety emphasizes value, as measured by price relative to things like earnings or cash flow.

Beyond asset allocation, soundness and safety, the game plan has to remain flexible. To be sure, if the fundamental indicators begin to better align with the market’s signals, taking proactive steps to lower risk is in the cards.

As famed value investor, Ben Graham used to remind his students, including a young Warren Buffett, “Mr. Market” is a fickle man who is prone to bounce between elation and despair. In the face of his emotional roller-coaster, the wisest thing is to be prudent, stay rational, weigh the evidence and think independently. That’s just what I was hired to do!

Your New Year Advisor Checklist

December 21, 2018 by Jason P. Tank, CFA

The turn of a new calendar year holds special appeal. It’s a natural time to reflect. It’s also a moment to set a new course for your personal finances.

For some, seeking the help of a financial pro feels unnecessary. I know people who run circles around some financial advisors! But, most people aren’t comfortable going it alone and do want support.

As I get ready to celebrate my twentieth year in the industry, I’d like to offer up some guidance to help ensure you find a good fit with a financial advisor.

Find a good communicator. Like a good marriage or friendship, communication is number one.

Perhaps using overly-technical terms makes some advisors feel smart or we simply become a bit tone-deaf over the years. The fact is, industry-centric terms hold little meaning for regular people. Help us by asking us to use plain English!

Beyond actually understanding the advice you’re paying for, you should expect to always be kept informed along the way about your money.

Find a seasoned advisor. Like money, knowledge is accumulated over time.

Essentially, a financial advisor’s experience comes from two sources; education and years on the job. The first centers on credentials. And, on behalf of my entire industry, I deeply apologize for the alphabet of letters behind everyone’s names! Even I’ve lost track. To focus you, first look for the letters CFP (financial planning) or CFA (investment management.)

However, a professional designation doesn’t mean much if it’s not backed by years of relevant experience. I used to joke that investment advisors who cut their teeth during the long bull market in the ‘80s and ‘90s accumulated just a few good years of experience – over and over, again. Some stretches are like the movie, Groundhog’s Day. My suggestion is to seek someone who has operated through some market cycles and some volatility.

Find a financially- and ethically-aligned advisor. As the saying goes, form follows function.

Over the years, there’s been a clear movement away from advisors who sell financial products for a commission and toward advisors who provide investment management and planning on a recurring or one-time fee-basis. I feel strongly that a strictly fee-only arrangement ensures advisors will uphold their legal fiduciary duty to place your interests ahead of their own. But, these principles haven’t completely sunk in as evidenced by annuity sales people still offering free dinners just to hear their pitch!

Over the years, I’ve come to recognize that choosing a professional advisor is a daunting task. If the last few months of market turmoil is any indication, ensuring a good fit with your chosen financial advisor may become increasingly important.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm, and the founder of the Money Series, a 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

Driving the Yield Curve Roundabout

December 7, 2018 by Jason P. Tank, CFA

“To every thing there is a season, and a time to every purpose under the heaven” – Ecclesiastes 3. Like our decade-long economic expansion, nothing lasts forever.

Recession is on the tips of many tongues today. Judging from recent increased market volatility, this possibility is being intensely pondered. What’s driving the conversation? The shape of the yield curve.

To begin, the level of interest you pay on a loan clearly depends on how long you intend to borrow money. Borrowing for just a few months? You’ll pay a different interest rate than if you wanted to borrow for a decade or more. The yield curve is simply a graphical representation of the different interest rates you’ll pay relative to the length of the loan.

In a healthy, growing economy the normal shape of the yield curve is upward sloping. Naturally, a shorter-term loan usually costs less than a longer-term loan.

However, the yield curve isn’t at all rigid. Like all things, it changes a little from day to day. Instead, think of the yield curve as more of a wet noodle. It can shift, twist flop and flip; changing its shape as millions of lenders and borrowers negotiate in real-time.

In early October, I was lucky enough to visit Ireland with my brothers. Even more fortunately, my brother-in-law from New Zealand knew how to drive on the “wrong” side of the road and expertly navigate roundabouts. It seems the Irish love their roundabouts as much as they do their beer! So, in the spirit of the Irish, please follow me (slowly) around my very own “yield curve” roundabout.

As you now know, yield curves are all about interest rates. And, of course, interest rates are all about borrowing and lending. Borrowing and lending activity supercharges our economic booms and busts. And, you guessed it, perceived changes in our economy drive investors to act ahead of the pack. So, coming full circle on my roundabout, the yield curve definitely impacts markets.

But why exactly are investors reacting to the yield curve today?

The once healthy-looking upward sloping yield curve has been slowly flattening for quite a while now. However, this past week, some longer-term interest rates are now actually slightly lower than some shorter-term rates. The shape of the curve has actually started to move from flat-looking to downward sloping. In financial lingo, the yield curve appears to be slowly “inverting.”

An inverted yield curve is an unnatural concept that signals a possible change in the economic cycle; from economic boom to bust. As a matter of fact, each of the past seven recessions were preceded by an inverted yield curve. So you see, the yield curve can strike fear in investors.

While we haven’t seen an officially inverted yield curve just yet, go tell that to those who write the computer algorithms that drive markets today. Based on last week’s wild ride, it’s clear the algorithms, unlike my Kiwi brother-in-law, simply aren’t programmed to drive carefully on the yield curve roundabout!

Jason P. Tank, CFA is the owner of Front Street Wealth Management, a purely independent and strictly fee-only firm located in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Taking the Temperature of the Market

December 1, 2018 by Jason P. Tank, CFA

I’ve been a parent now for almost two decades and, yet, I still have a 10-year old daughter who periodically requires me to play act as a nurse. In her mind, I’m woefully deficient. When she’s sick, my wife is obviously her preferred caregiver. Who can blame her. Accurately diagnosing a fever in just seconds with the back of your hand is a true confidence builder!

This weekend, I read a book entitled, Mastering The Market Cycle, by Howard Marks. Mr. Marks is the co-founder of Oaktree Capital and his quarterly client letters are widely-followed by investment professionals. His latest book seemed especially appropriate to read given that we’re closing in on the ten year mark of our current bull market and economic expansion.

His book’s primary theme is to tilt against the crowd; to be the skeptic. For some, like me, this is a natural state of mind. For most, however, adopting this mindset is a challenge. Being agreeable is a social asset, after all. On the contrary, following the crowd doesn’t work that well in investing. Howard Marks actually argues for just the opposite; watch the crowd and act accordingly.

In his book, he referenced a checklist to help investors take the temperature of the markets. Like my wife’s trick with our daughter, it only takes a few seconds.

Marks asks readers to make a qualitative judgment for each item in the checklist; forcing a gut-level choice between an optimistic and a pessimistic descriptor. When your answers tilt heavily in either direction, his advice is to open your eyes for a market inflection point.

His checklist basically covers four main areas; the state of the economy, a review of general lending conditions, the overall market backdrop and a reading of the mindset of investors.

To give you a flavor of his checklist, here are some examples. On the economy; vibrant or sluggish. Its near-term outlook? Positive or negative. On lenders; eager and loose or reticent and tight? How about interest rates? Low or high, rising or falling? On investor attitude; aggressive and eager or cautious and distressed? On investor appetite; own the entire market or invest selectively?

So, you are likely wondering, what’s my back-of-the-hand temperature reading of today’s environment? Things are changing, especially compared to one year ago.

Unlike last year, with the tax cuts imminent, investors are openly nervous. In addition, interest rates have risen and lenders have grown more cautious. As a result, major industries, such as housing and autos, are feeling challenged. Further, while admittedly a recent phenomenon, the investor crowd is tilting toward conservative stocks and fleeing once-loved tech stocks. The broad stock market has completely given up its gains from this summer. And, after its total absence last year, volatility is firmly back.

For my daughter and, importantly, for your portfolio, taking an accurate temperature most certainly provides a confidence boost. However, it’s really just the first step in a true game plan. As a New Year’s resolution, I’d suggest taking a fresh look at your portfolio’s overall risk, be on alert for a sense of complacency and then, as Howard Marks suggests, act accordingly.

Jason P. Tank, CFA is the owner of Front Street Wealth Management, a purely independent and strictly fee-only firm located in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Bonds Behaving Badly

November 11, 2018 by Jason P. Tank, CFA

Bonds are behaving badly. This year, the bond market has lost about 2.5%, after factoring in interest payments received and the downward shift in market value. For most investors, a loss is unusual in this typically steady part of their portfolio. Why is this happening?

To begin, visualize a teeter-totter. Like a teeter-totter, when interest rates drop, bond prices rise. This downward movement in interest rates has been the general trend since way back in Ronald Reagan’s first term. But, like a teeter-totter, it also works in reverse. When rates rise, bond prices fall.

Lately, interest rates are rising. I’m not talking short-term rates, though. Those are controlled by the Federal Reserve. Like a steady drumbeat, the Fed has raised rates three times this year, just as they did last year. But, short term rates really don’t directly affect bond prices much. I’m talking about long term rates. That’s where today’s losses in bonds come into play.

At the start of the year, the 10-year US Treasury rate was just under 2.5%. Today, this closely-watched “benchmark” rate is almost 3.2%. This has caused the teeter-totter to swing; rates up, prices down. An upward shift of almost 1% in long term rates is quite big. For those who are familiar with teeter-totters, it’s never fun when your partner jumps off!

With longer-term interest rates having reached a decades-long low not too long ago, the fear of rising rates has been palpable. Yet, it has largely been all bark and no bite. Lately, that fear has been validated.

With this, there are two burning questions. Why have rates risen? And, what should we expect now?

The typical explanation of why long-term rates rise is inflation. This makes sense. After all, when you lend money, you’d like to first keep up with inflation and also make some “real” money to boot.

When you look at investors’ inflation expectations, though, not a lot has changed since the start of the year. Future inflation expectations have held steady at around 2%. No, interest rates have risen because bond investors now demand more of a “real” return on their money. This often happens when the economy looks strong.

If the economy keeps wind in its sails, it’s not inconceivable to expect longer term rates to keep rising, perhaps up another 0.5% or so. If that happens, bonds face some more headwinds. However, I believe the bulk of the pain in bonds is likely over.

If, on the other hand, the economy’s sugar high from the recent tax cuts and deficit spending wears off, the teeter-totter just might swing back in bond investors’ favor again.

With the balance of risk about even, in my view, my generalized advice is to shift your bond portfolio into some shorter-term bonds. This analogous to scooting your bum a little closer to the center of that teeter-totter. If your partner keeps jumping off, the swings won’t be quite as jarring!

Jason P. Tank, CFA is the owner of Front Street Wealth Management, a fee-only wealth advisory firm located in Traverse City. Comments welcomed by phone at (231) 947-3775, by email at Jason@FrontStreet.com or online at www.FrontStreet.com

New Tax Law; A Professional Obsession

October 26, 2018 by Jason P. Tank, CFA

At our upcoming Money Series at Traverse Area District Library, I will be speaking about a topic that I now believe is bordering on an obsession; the new tax law.

Perhaps that’s due to its important changes that affect charitable giving. Perhaps it’s due to how it affects families with younger children. Perhaps it’s due to the new law’s effect on business owners. Perhaps still, it may be due to how it has affected the stock market and the federal budget deficits for as far as the eye can see. The fact is, it’s a pretty big deal, worthy of a small professional obsession.

On the evening of November 14th, the Money Series will provide a sweeping overview of what’s changed in the world of taxes for individuals and couples. And, I’ll give proper focus to the wildly impactful and still-misunderstood small business deduction.

According to the Tax Foundation, about 90% of all tax filers will benefit by claiming what’s known as the “standard deduction.” This means most taxpayers will no longer have to gather piles of paperwork to hand to their tax preparer. No more property tax statements. No more investment fee statements. And, no more verification of the deductibility of charitable donations. Instead, the vast majority of people will rely entirely on the new, much higher standard deduction. It’s a big simplification for many.

However, as a result, many people will need to change their charitable habits in order to gain a tax benefit for their generosity. If you don’t, Uncle Sam will cease to be your “partner in giving.” After all, when the federal and state government reimburse you by lowering your tax bill after you donate money, it’s as if they picked up part of the tab.

My presentation will also provide a layman’s perspective on the very important small business tax deduction. Ironically, it’s the opposite of tax simplification. As a result, I expect it will occupy a good amount of time. If you know of anybody who owns a business, they need to know how Congress handed them a big bone and how to use it to their advantage.

I also suspect the Q&A segment will delve into the mind-boggling projections on the federal budget deficit. While I sense that today’s financial markets don’t foresee an issue with our profligate spending as a nation and, in the end, the US has an infinite printing press, Ernest Hemingway’s quote may someday carry the ring of truth, “How did you go bankrupt? Two ways. Gradually and then suddenly!”

Before the upcoming Nov 14th Money Series, there’s also a chance to catch attorney Diane Huff’s talk, “What the Heck is a Trust, Anyway”, to be held on Wed., Nov. 7 at 10:30am at the Senior Center. The Money Series is a program of the Front Street Foundation, a non-profit committed to providing open-access to financial education, for all. To register, go to MoneySeries.org or call (231) 714-6459.

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