You know you invested in a good company when even the local weed shop gives them high praise. So it is with one of our latest stock picks in our Growth Stock portfolio this year, Costco.
Other retailers like Target and Walmart have struggled to keep up with a change in consumer behavior. Consumers are changing from buying TVs and home goods during the pandemic, to buying clothing and things that make them look good as everyone resumes their social lives.
Costco once again proved they’re the best retailer on the planet by anticipating the change and managing their inventory like pros. The stock has reflected that and we’re glad to own it now.
It’s not just Costco, though. Most stocks (and the stock market in general) are significantly higher than their June 16 low, and our investment accounts are finally heading in the right direction. We gave three reasons for the pullback in a letter on April 22, and those same three reasons are why the market is bouncing:
Gas prices are declining. Not exactly news, we’ve all noticed this the last few months, but oil and gas prices dropping are part of the reason we are seeing some optimism show up in the stock market. People’s wallets won’t be quite as pressed now that gas is below $5 and $6 per gallon.
Inflation peaked…for now. The last inflation report was an 8.5% gain from last year. That was down from 9.1%. So inflation has peaked… unless next month is even higher. One encouraging sign is that commodity prices are coming down like lumber, copper, and oil, which should keep the prices of goods from inflating as much in the future.
Russia/Ukraine news is not front and center. The war in Ukraine is still going on, but it doesn’t dominate news coverage now. This doesn’t mean it can’t get worse. For now, investors seem to be taking it in stride; deciding the world will continue even with this war raging on.
The change in mood in a relatively short period of time is why we encourage people to stay invested even when the accounts are down. We can never tell when investors, which are emotional beings, will go from feeling like stocks are up-in-smoke one month, to singing their high praise the next.
It’s easy to get swept up in the emotional roller coaster when articles, like this one, pop up saying the stock market could be 16% higher in a year. But let’s take it all in stride and remember this: if the market continues higher, we will cheer. If stocks resume their decline, we will deploy the cash set aside in the portfolio and see if we can find other Costcos to invest in.
Other News
Stocks rising was not the only good news in July. I became a father for the fourth time July 27th. My son, Charlie Luke Porter, was born two weeks early. He and mom are happy and healthy, and I’m trying to remember how to sleep with a baby on my chest in the living room at night to give mom a break.
***No babies were harmed in the taking of this picture!
There are endless tutorial videos on a number of subjects now. I saw one recently that’s my favorite. “How to Lick a Lollipop.” If you have 1 minute and 6 seconds you must watch it, it’ll change your life. Ok, maybe a slight overstatement.
To be clear my daughter does not have a youtube channel, but her advice is priceless, “...you do this…”, and she licks the lollipop. It’s not hard, it’s not complicated, and she gets rewarded. No need for her to learn the molecular makeup of the lollipop, no need for her to do any math… She licks and gets rewarded.
Enduring the pullback in the stock market is similar. You do this… you endure the pullback. It’s not hard, it’s not complicated, you don’t need to know every detail, no need to overcomplicate your life by trying to assess blame for who’s responsible for it… You just endure it, and for the last 100+ years, investors have been rewarded when the stock market inevitably comes back.
Overcomplicating matters by factoring in too much information and making too many decisions… is how NOT to endure a pullback.
Overthinking the political influence on the economy is a common mistake. We often hear of people making a direct connection between the President and the stock market. Some will assign total blame every time it drops and others give all credit when it goes higher.
An example of this was in the 90s. Clinton didn’t deserve all credit for the economic boom when the internet was invented, and today Biden doesn’t deserve total blame for the inflation and subsequent pullback were in. In fact, if the stimulus is largely responsible for the inflation we’re experiencing (which we believe), Trump pushed through more COVID stimulus than Biden did, however, Biden’s round of stimulus came late and seemed the most unnecessary.
Oil prices, interest rates, the economy, the stock market… who gets credit, and who’s to blame? As a voter, these things do matter and will matter in November, but as a long-term investor, they can be unhelpful to dwell on.
Watch less news, make fewer decisions, and think about the reward that’s coming when inflation abates. That would be Penny’s advice to us.
How can you endure this pullback? Put your phone down. Don’t investigate every day-to-day financial detail. Don’t wade into the endless financial news that can turn even a positive headline into a crisis, but look at the big picture and the likely reward that awaits us on the other side.
Details
However, if you’re a stickler for details, here’s the plan for the accounts. We used some cash earlier this year to take advantage of this pullback and bought some stocks and funds we believe will go higher in the future. We now find ourselves getting close to making additional buys if the stock market drops even further.
This is our game plan every time the market drops. Buy some if the market drops; buy more if it drops even further.
The S&P 500 was around 4100 during our last buys and we’d like to wait until it’s down around 3600 to buy again. That would be a 27% drop from the beginning of the year and another 6% drop from where we are now.
We’ll be adding to stocks we already own like Wells Fargo, Ford, and Amazon, in the Growth Stock portfolio. For our Moderate Funds portfolio, we’ll be rebalancing into more of the S&P index to capitalize on the rebound in stocks that will come when inflation moderates.
Remember, there’s no need to dwell on every detail of the financial markets. If you find yourself struggling to stomach another tough monthly statement, call us, so we can help you see the big picture and point you towards the reward that’s coming.
Often times in the news, positive headlines sink to the bottom and the negative headlines float to the top. Such is the case regarding the economy and the stock market currently thanks to another high inflation report last Friday and three straight down days in the stock market.
With that in mind, I thought I’d send out a positive prediction for the second half of 2022 from a well-known bank, JP Morgan Chase. Their Chief Global Strategist, Marko Kolanovic, who successfully predicted the stock market bottom in March of 2020, is predicting markets will rebound to end the year flat.
The article and details are below, but he’s essentially saying the S&P 500 will rebound and recover the -22% that it’s lost so far this year.
The strategist believes that investors have been too pessimistic on overblown recession fears, noting that the consumer remains strong on the back of economic reopening.
He says, “The move in market prices is more than enough recession risk, and we believe a near-term recession will ultimately be avoided thanks to consumer strength, COVID reopening/recovery, and policy stimulus in China,” Kolanovic said.
Even more encouraging is that Kolanovic is not alone. Another strategist, Jeremy Siegel, is also optimistic over the next year and believes that investors in stocks today will not be disappointed a year from now.
While there certainly are predictions stating the opposite, it doesn’t benefit us long-term investors to focus on them. In fact, selling out and sitting in cash even for a few “UP” days can be incredibly detrimental to a portfolio. Listen to these statistics over the last 10 years:
8 of the 10 biggest up days happened within 1 month of the biggest down days.
If an investor in the stock market missed the biggest 5 days they would have lost 32% of their total return over the last 10 years.
The bottom line is while the market continues to be dramatic and price in the worst-case scenario, it really does pay to sit tight.
Siegel mentions we’ve seen bigger shocks than what we’re seeing today with high inflation, and although we may still see volatility, we’re closer to the bottom than the top at this point.
He’s right, we have seen bigger shocks. One of the bigger shocks I’ve seen was during 2008-9. The wheels were coming off the financial system back then and the fear was a total collapse of the banking system. Today we suffer from concerns stemming from higher prices. Serious enough for a pullback, but not serious enough to ruin your summer.
Thank you for reading! We’re in the office and happy to talk. Please feel free to reach out if we can do anything for you.
The dreaded question of my children during our road trip to Yellowstone last year. Impatient and sick of the road, they’re desperate to get out of their seat. What’s the solution? Snacks, screens, sleep… whatever it takes to keep them in their seat…for 14 hours!
When we’re investing in the stock market, the road can feel long. We get impatient, a little car sick, we want out of our seats because we’re tired of the trip, and we ask, “Are we there yet? Are we at the bottom yet? Will the market rebound now?”
I’ve been asking these questions this week as the Federal Reserve raised interest rates by 0.50%. The market went straight up, over 3% yesterday because it was relieved they didn’t raise them more. Only to watch the stock market go down a similar amount today because the same issues still persist.
So, are we there yet? Are we at the bottom? Typically, it’s impossible to know when the market has bottomed until we’re months past it. Like picking out a valley when you’re on a peak, it’s easier when you’re out of the woods.
Since we never know exactly when the top or bottom is, we pick levels to sell the gainers on the way up and buy stocks on the way down in our Growth Stock portfolio. We’ve bought several stocks already with the cash we generated from selling. With the market down again last month we bought another. The favorite store for a lot of us, we bought Costco this week.
We believe Costco has one of, if not the most, sticky and loyal customer base. They should be able to pass on higher costs to the consumers (unfortunately) and are due for a membership price hike soon which will help boost the stock. The stock is down greater than 10% from its peak and that was enough for us to jump in.
It’s important to remember we have a 3-5yr time horizon on these stocks and the volatility we’re seeing in the stock market corresponds to short-term fears regarding inflation, war, and China lockdowns.
Things could improve dramatically if the inflation number comes in LOWER than the 8.2% expected next Wednesday. If it’s HIGHER than that number, the road will get longer, more irritating, and the inevitable rebound will be pushed out.
Regardless if that rebound is next week or next year, the best way to get where we all want to be is to stay in our seats and wait for the news to turn. It’s our job to help you do that. Please call us, email us, or come in to see us, so we can talk you through the road ahead.
We started the year with a new all-time high in the stock market, which we cheered. Since then we’ve gotten new highs in inflation, new highs in gas prices, and now new highs in Russian aggression in Ukraine. We’re not cheering about these new highs, and neither is the stock market.
Stocks hit an all-time high on Jan 3rd followed by more intense volatility than we’ve seen since COVID, and stocks were down approx. -12.4%. However, March brought us back to a much more reasonable level. The S&P 500 is now only down about -6.2% for the year. We feel this is a pretty mild drop given the headlines that go From One High to the Next.
The average price of gas in Oregon is now 4.66/gal according to AAA. This is in direct response to the war in Ukraine and increased demand as the world emerges from a pandemic. Russia supplied 10% of the world’s energy, 7% of our country’s energy, and approximately 35% of Europe’s oil and gas. When we put sanctions in place to hurt Russia for their unprovoked aggression, we will suffer and are suffering from higher gas prices.
This is not catastrophic, though, and these high prices won’t last forever. Demand will reduce as we continue to discover alternatives and supply gets back to a normal level. After a long slump, the stocks of oil companies are going up, but we don’t think this is a long-term trend and haven’t added investments in that area.
Another high we don’t want. The level of inflation reached 8.5% in April, meaning, goods are 8.5% higher than they were 12 months before. This was hoped to have been temporary because of a supply shortage due to pandemic challenges but is proving to be much more persistent. The Federal Reserve has begun the process of raising rates and will do so dramatically this year if inflation does not moderate. Jerome Powell anticipates 7 rate hikes this year and is likely to increase 0.50% in May and maybe June as well. Double the 0.25% rate hikes we usually see. This is strong medicine to cure inflation, but the alternative is worse.
Where does one hideout in times of inflation? Stocks. Companies that can raise prices to offset costs can continue to do well in inflationary environments. Under the mattress is not a good place to put your money, and bonds are even worse.
Russia is ramping up aggression again and appears to be focused on carving out the eastern and southern parts of Ukraine now. This is, of course, after the spectacular defeat in Kyiv due to broken supply chains, neglected equipment, and panicked Russian soldiers retreating in disarray.
Fortunately for Russia, their unorganized and broken-down military is still being funded by all-time-high oil and gas revenues. Putin, it appears, is better at pumping gas than running a military, or a country.
The late Senator McCain said in a 2014 interview, in reference to the country’s corruption, “… Russia is a gas station masquerading as a country…”
Unfortunately, that gas station has plenty of fuel to burn down the infrastructure of Ukraine and global growth as well.
Rick Newman from Yahoo Finance says, “The International Monetary Fund estimates that Putin’s barbaric invasion of Ukraine will lower world economic growth 0.8% this year… by about $935 billion…roughly equivalent to zeroing out the entire economy of Turkey or the Netherlands. The toll could easily top $1 trillion if the war drags on or escalates.”
Slower global growth will mean slower growth for stocks. However, if you’ll forgive me for being cold and callus for a moment, war is often good for the economy and stocks. Governments have a blank check during war to spend billions on defending themselves and their allies. Our country is no different. World War II lifted our country out of the Great Depression.
So what do we do?
As always, we suggest staying the course and making no major course corrections. We’ve trimmed some of our tech-focused growth positions and bought one bank, Wells Fargo, to help us weather the higher interest rate storm in our Growth Stock portfolio. We don’t plan to make any wholesale changes to our investing strategy.
The investing strategy, which we believe is appropriate for most retired clients, already anticipates times of growth and challenges. We use a combination of several different types of investments to do this: Guarantees from a bank or insurance company, Growth Stocks to help keep up with inflation, Funds that are inexpensive and help to diversify, and Real Estate to capitalize on growth in residential and/or commercial markets.
The bottom line is although stocks may continue to get bounced around, we want to stay invested anticipating the day when the headlines will be about the END of the Russian aggression, the MODERATING of inflation, and the DROP in gas prices.
When we start to see headlines like these, stocks will head toward new highs again, and we will all benefit once again.
After a healthy run in the midst of COVID the last few years it’s time for a dose of reality; the stock market is not immune and is starting to show symptoms.
We’ve experienced three years of positive returns in our investments, but the market is struggling to get off on the right foot in 2022. The S&P 500 is now down about 10% from the start of the year and client accounts are moving in the same direction, unfortunately.
If you’ve participated in the stock market over the last decade or more, you know a 10% decline is not unusual. In fact, a 10% decline happens on average every 1.6 years. See below.
The relative frequency of this type of pullback makes the symptoms the market is showing more MILD and less SEVERE.
When I got COVID earlier this year I experienced chills for two days and a cough for one day, but thankfully nothing more serious. Within a week I was feeling better and able to perform most everyday duties. The stock market right now is showing something similar; some volatility that would equate to mild symptoms, but nothing serious.
Things get more serious when the world and the economy face more significant unknowns, like the COVID unknowns of 2020. An unknown virus leading to unknown shutdowns resulting in unknown financial ramifications. Those unknowns resulted in more severe symptoms of a rapid 30% decline in the stock market, as you may remember.
What we’re experiencing now does not have near the unknowns we dealt with during the early stages of COVID. At this point, it appears to be a more traditional pullback based on events that HAVE happened before, and we have some historical context to look back on.
Let’s briefly look at the top three fears the stock market is working through right now and the corresponding time periods of these issues:
Inflation and rising interest rates – 1970s: In the 1970s, inflation was a big problem and it took raising interest rates to unprecedented levels before we were able to get inflation in check. It’s helpful to be able to look back on this as we assess the supply chain and stimulus-generated inflation we see now.
Russian provocation in Ukraine – Crimea 2014: This relationship has a complicated past going back hundreds of years. A similar event happened in 2014. While it’s concerning geopolitically and could push the stock market around in the short-term, it’s not something that should affect the long-term earnings of companies this side of the Atlantic.
COVID pandemic becoming endemic – Spanish Flu 1918: COVID is still a lingering concern, but it’s less of a concern now because when we compare to the Spanish Flu, we see it took two years to fizzle out into the flu season we know today. We are now approaching the two-year mark in the COVID pandemic.
We can never be certain if or when there will be unknowns that pop up and create more severe symptoms in the stock market. The people we follow think this is a more run-of-the-mill style pullback that will end as COVID continues to fizzle, supply chain issues are resolved, inflation moderates, interest rates normalize, and the Russian provocation works itself out… all possibly in the second half of the year.
Looking for Opportunities
In the meantime, we’re working to do what we say we do, use these downturns in the stock market to take the large cash position we’ve built up to buy good companies and funds at lower prices.
In the growth stock portfolio, we have three on our list to buy: Ford, Costco, and Taiwan Semiconductor. Ford has seen tremendous interest in their Electric Vehicle lineup, Taiwan Semiconductor is having record profits because of demand in the computer chip space, and Costco looks to benefit from raising subscription prices possibly this summer.
These companies have been on our list for quite a while and we’re excited to finally have the opportunity to buy them at a ~20% discount to what they were just trading at one month ago.
In our fund’s portfolio, we’ll be rebalancing and buying more of our fund SPDR Stock Index Fund SPTM, so we can take advantage of this pullback and start to increase our exposure to a fund that will go up when symptoms in the stock market abate.
SMB Financial News
In SMB news, Bruce is taking more time off and entering into a semi-retired role. He’ll be stepping away from day-to-day duties in the office to allow for more travel and personal time, but is still available to us here on a consultative basis. He’s been in Brazil with his wife over the holidays, but I imagine he’ll find his way back to the office for the best tri-tip and salmon client lunches on 67th Ave! (Not much competition).
Jeremiah, myself, and our other advisors are still in the office as usual. We’re looking forward to bringing on an intern or admin person to help us with calls and paperwork in the near future. We’ve had several interviews so far, but nothing has been finalized yet.
Something we’ve been celebrating since November is that Jeremiah, one of our advisors and the one in charge of day-to-day operations in the office, has completed his training and passed the Certified Financial Planner exam this year! Like myself, he is now a card-carrying member of the CFP club, and we are beyond proud of him for the work he’s put in the last two and a half years.
Since joining SMB in 2017, Jeremiah’s worked tirelessly to get up to speed and has earned our respect, the respect of seasoned advisors here at SMB, and of the clients, he’s worked with. One example of the respect he’s earned is that one of our retiring advisors at SMB is looking to Jeremiah to take over his client relationships when he retires in the next few years. He has an incredibly bright future in this business.
My life is getting back to normal after I ruptured both bicep tendons within nine months of each other doing projects on our house we remodeled last year. Both required surgery to reattach. It was incredibly frustrating, but not serious. I now think twice before I pick up anything heavy and can’t wait for my 10-year-old son, Henry, to grow some biceps of his own so he can help me. The fun never stops though, my wife Holly and I are looking forward to another eventful year as she and I just found out we’re having another baby! Surprise! Luckily, we have a few kiddos already that are excited to help out. Time will tell if they will actually be helpful.
As always, we appreciate the relationships we have with our clients and encourage you to contact us if there’s anything we can do for you, or, if you just need a pep talk during a tumultuous start to the new year. If we don’t hear from you, we’ll be reaching out to clients again around tax time to check-in.
Yesterday we saw yet another ridiculous display of our politicians using their few minutes on the mic, not to accomplish anything constructive, of course, but to try and appear tough and relevant and get their face on the news.
Senator Elizabeth Warren from Massachusetts used her two minutes during a senate hearing to lob insults at Fed Chairman Jerome Powell. Powell is the head of the Federal Reserve and the one who is ultimately responsible for keeping people employed and keeping inflation in check using interest rates and the money supply.
Warren: “So far, you’ve been lucky” that there hasn’t been a financial crisis like 2008.
“Your record gives me grave concern.”
“You are a dangerous man to head the Federal Reserve.”
Her accusation was that he, as a Republican, is favoring big banks and corporations and not looking out for the health of the economy.
Jerome “DANGER” Powell didn’t seem too bothered, or really even offer much of a defense. I assume because he just got us through an unprecedented and difficult time in our nation’s economy… and his work seems to be speaking for itself.
Jay Powell is no stranger to insults. He took the brunt of many of President Trump’s tweets. Marketwatch says, “All but one of Trump’s 14 tweets about the man he picked to lead the Fed were critical. Powell is a “bonehead,” “a terrible communicator” possessing a “horrendous lack of vision,” among other Trump characterizations.”
My favorite one was when Trump implied that Powell was equivalent to the Chinese…
Trump: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”
I don’t know about you all, but something tells me when both sides are using someone as a punching bag for not being political enough, they must be doing something right.
The work that Jay Powell and the Federal Reserve have done to get us through the last 18 months must now change. We can no longer keep interest rates as low as they are and expect inflation will not be a concern going forward.
Powell’s job is now to gradually reduce the economy’s reliance on low rates without spooking financial markets and slowing the economy down too fast.
This is a tall order and only time will tell whether he was successful, or not.
Markets
Because inflation is starting to show up and rates are starting to rise, stock markets are now showing signs of concern. This is the first volatility we’ve seen after a nearly uninterrupted run in the last 18 months. Don’t forget, though, volatility is natural and needed. Gains without pullbacks are how bubbles are formed in markets.
The upside to volatility is it provides opportunities to put some cash to work. Stocks are down almost 5% from the peak we saw several weeks ago. We are waiting to see closer to a 10% decline before we start putting cash to work in a meaningful way.
In the meantime, we’ve found a company that piqued our interest. Dutch Bros (BROS) went public on September 15th and is from Grants Pass here in Oregon. Travis Boersma (the Co-Founder) became the latest Oregon billionaire and his “cool kid” coffee stands draw a line of cars around the block. We believe the company will likely continue to do well as they shoot to increase their 400 stands to 4,000.
Although I don’t spend much time there, my girls are starting to ask us to stop there. We want to participate in their growth and we bought a starter position in our Growth Stock Portfolio the day it went public. The stock has gained since then, but we will likely buy more if the price drops back to where we bought it around $37/share.
We hope everyone had a fantastic summer and we look forward to talking with clients as we make calls in anticipation of year-end. If you need anything before we reach out to you, please don’t hesitate to contact us.
When a pandemic strikes and causes the United States to shut down, what’s the first thing Americans stock up on? Apparently, toilet paper is the first thing we think of. What’s the first thing Americans stock up on now that the pandemic is coming to an end? Lumber! This has left some people scratching their heads, but it’s not too surprising when you look at the demand for remodeling, homebuilding, and I don’t know how many outdoor seating structures at restaurants.
We’ve been talking a lot about “bubbles” over the past year here at SMB. Everywhere you look, it seems there’s news of a hot item everyone wants to get their hands on. Would you ever expect lumber to be one of those items? We didn’t. Bitcoin, meme stocks, and toilet paper are one thing, but heading over to Home Depot to stock up on some 2x4s during the shutdowns didn’t land on our to-do list. It did for plenty of other Americans!
Much of this issue stems from a mix of supply shortages and excessive demand. The stimulus checks have continued to pour into all areas; remodeling and building at the top of the list. All the while, lumber mills were forced to shut down or slow production throughout 2020. And when you mix low supply with high demand, bad things happen.
The result: lumber prices have skyrocketed over the past year. We have heard about this from clients and friends on a word-of-mouth basis, with many noting that a single piece of plywood had tripled in cost. We now have plenty of data and fancy charts to illustrate.
Normal prices for lumber typically come in just under $400 for every 1,000 board feet (the average for a good portion the past decade). This year alone, prices have quadrupled that number, putting the cost above $1,600 in May…and, as you can see from the chart, it didn’t stay there for long. Prices have dropped like this tree my son, Henry, helped me take down recently. Timberrrrrr!
Prices for lumber have now dropped 40% since the high in May. Before you get too excited, prices are still incredibly high. This only puts us at just over double what is commonly seen in stable years. It could be some time before the prices we’re paying at the hardware store go lower.
On a practical level, the higher lumber prices are yet another sign of inflation.
Federal Reserve officials came out today to discuss the rise in inflation which is now well above their goal of 2% per year, with a year-over-year increase of 3.6%. As inflation continues to rise the Federal Reserve will be forced to raise interest rates. Projections now show interest rates will gradually start increasing again, slated for two increases in 2023.
If rates rise gradually, the stock market and our accounts should react well. If inflation picks up and does not moderate over time, as the Federal Reserve expects, they may feel they need to raise rates at a faster pace and this could present some volatility in the market.
As most of our clients know, we don’t shy away from volatility and believe it’s actually healthy for the stock market to go through these periods. We’ll be watching for this and look to do some buying if/when this happens.
The stock market is off to a good start this year and, surprisingly, there’s not much drama in the financial news. So let’s get philosophical.
Does money help you accomplish your goals, or is money the goal of your life? Does money serve you? Or do you serve money?
It’s the underlying questions we often address when we do financial planning here in the office. Someone that can’t stop spending more than they make, ending up buried in debt, probably serves money. Someone that never has enough in their investment accounts, resulting in crushing anxiety during a downturn or pullback, might overvalue money.
Our goal is to help people value money appropriately. Money is not the cure for all unhappiness. It is simply a tool we use to care for ourselves and our families. Like a car is helpful to run errands, or a house is there to provide shelter. If we overvalue these things and try to obtain meaning and purpose from them, they will disappoint us. Money should be viewed similarly.
So, what’s the first step to addressing the issue? Acknowledging that money may pull at your heartstrings too much is a great way to start. We all have to use money to handle the mechanics of life, so it’s easy to get caught up believing it’s more important than it is.
Another step toward valuing money appropriately is to… give it away. Being generous and giving money away helps prove that money is not the meaning of our lives (at least with the dollars that we’re giving away).
Is generosity included in your financial plan? It’s not in most financial plans. Here are some questions to start thinking about if this sounds interesting to you:
How much did I give away last year?
Who did I give it to?
How much did I put aside to be hospitable (also generosity) to friends and family?
What people and/or organizations would I like to give to in the future?
How much can I increase my generosity in future years?
What are some creative ways I can be generous? (House down payment, pay off a debt for someone, help someone start a side hustle…)
Thinking about where we can be generous helps us consider other people. This is a good thing because it helps us think of ourselves less. I know I’m making a case to help others here, but giving money away makes us feel good too. It’s science!
Scientists believe that being generous releases endorphins in the brain called the “helpers high.”
And Proverbs wrote about it a few years before that…
Proverbs 11:24-25
“One gives freely, yet grows all the richer; another withholds what he should give, and only suffers want. Whoever brings blessing will be enriched, and one who waters will himself be watered.”
Investments have done well recently. This has helped many people grow their accounts, some significantly. We are grateful for this and hope for continued success in the future, but being rich and living a rich life are two different things. Don’t forget to focus on the latter.
True riches come from living a grateful, generous life.
How much can one afford to spend before they become broke and destitute? It appears our country is trying to discover this right now. Biden is unveiling another massive $2 Trillion spending bill, this time aimed at infrastructure, housing, education, and broadband spending. And this is on top of last year’s budget breaker of a year.
2020 US Government Spending: $6.5 Trillion
2020 US Government Federal Tax Revenue: $3.5 Trillion
We spent about twice what we made last year as a country. Spending double what you make is typically not great for a budget. And now we’re likely going to overspend again in 2021 (click below for up-to-date figures), although not for a crisis, that was last year’s $4 Trillion.
Let’s just say for the sake of argument this will be a great investment into our country’s future and pay us back well more than we’re going to spend. Who will make the payments on that extra debt?
Biden plans to raise taxes to pay for the extra debt load. A lower than average tax rate on top earners and corporations is being used as the rationale. Here are some of the details (sorry, probably too much detail) talked about during Biden’s campaign:
Increase the corporate tax rate from 21% to 28%
Increase taxes on those earning more than $400,000 by: 1) Reinstating the 39.6% tax bracket. 2) Phasing out the Qualified Business Income deduction 3) Imposing Social Security payroll taxes.
Repeal the reduced capital gains and qualified dividends tax rate for taxpayers making over $1 million per year. Their gains would be taxed at the 39.6% tax rate (plus the 3.8% NIIT rate).
Further limit itemized deductions by placing a cap on the tax benefit that can be received to 28% and reinstating the pre-TCJA overall limit on itemized deductions
Repeal the step-up in basis for inherited properties
Why does this matter?
Many of our clients will be unaffected by the tax increase, so most won’t have to worry about that. But all of us will own the ever-increasing level of debt that is being taken on. The debt, now at $28 Trillion and growing, is a risk to our future. We imagine much of the pain will be felt by younger generations in the years to come.
At the end of the day, the heavy spending in 2020 was likely a necessity to kickstart the economy and avoid another economic crisis. We’re hard-pressed to say the same for this infrastructure bill. We expect to see higher taxes as a trending topic in the coming years. For the clients that are affected by this, we work with accountants and attorneys to find ways to strategize and reduce the impact.
If you have concerns, make sure to set aside time to give us a call. We’re here to do the worrying for you!
