November 26, 2019
Tax reform, with an unintended consequence of larger standard deductions we each now enjoy, has put a dent in philanthropy.
Under the 2017 tax law changes, fewer people get a financial benefit from itemizing deductions on their tax returns — meaning fewer people get a tax break from their donations to charity. The Urban-Brookings Tax Policy Center estimated 21 million taxpayers will stop taking the charitable deduction because of the new law, effectively raising their after-tax costs of donating.
However, here are a few ideas you can use to maximize tax benefits for your donations.
Using Qualified Charitable Distributions (QCDs) from IRAs is a planning maneuver that has become more valuable under the new tax law and is seeing a surge in use.
QCDs allow a taxpayer over the age of 70½ to give money directly to charities using money from a traditional IRA, effectively making donations with already deducted dollars — the same as if you itemized. These distributions are now the only way for many donors to receive a meaningful income tax benefit from charitable contributions. Please note that total annual QCDs can’t exceed $100,000 for an individual.
QCDs offer two large benefits: distributions count toward satisfying an individual’s annual Required Minimum Distribution or RMD if done before the RMD, and are excluded from the taxpayer’s income. If you don’t really need income from your IRA and want to avoid being taxed on the RMD, this technique is something you should consider.
We are seeing interest in donor-advised funds as a financial planning strategy among clients who are close to the itemized deduction threshold. These vehicles allow clients to “bunch” several years’ worth of charitable deductions into one tax year, in order to help get over the hurdle of a higher standard deduction, and then later on choose how and when those funds are distributed.
Using this bunching strategy makes the most sense if your itemized deductions, before charitable contributions are factored in, are less than the standard deduction. It also makes charitable planning a multiyear exercise.
Donor-advised funds make sense especially for clients that do not have a traditional IRA from which to make QCDs.
You can support virtually any IRS-qualified public charity with money in the donor-advised fund. The public charity sponsoring your account will conduct due diligence to ensure the funds granted out will be used for charitable purposes and the grantee is an IRS-qualified public charity. Recordkeeping is simplified and this technique makes legacy planning much simpler.
Talk to your tax adviser to see if QCDs or a Donor-Advised Fund might be right for you.
What the Markets Are Doing
The Most Asked Question
The question I get most frequently is what will the Washington impeachment hearings, China trade war, potential recessions in our future, or (insert any media flogged concern) mean for the markets. The stock markets remain in a clearly defined uptrend that began in early October, which tells me that the markets are shrugging these issues off as non-events.
Investors appear to have tired of daily stories of recessions that don’t arrive, or impeachments that never happen, and are recognizing that economic growth is continuing despite these worries.
The stock markets, with cash flows from millions of participants all looking at different variables and making decisions independently, are the absolute best predictor of future economic activity, so current stock market strength is a very good thing.
We have seasonal patterns that favor a strong market, a Federal Reserve Bank that has again moved toward an easy money policy for the economy, and a lot of cash moving back into the stock markets from the bonds and money market funds held by investors made nervous by a handwringing media. Last week’s dip in the market is a good chance to step back and gather ourselves before what I expect will be a very significant move higher into year end.
The bond markets are fluctuating in a tug of war between higher and lower interest rates, with rising rates hurting bond prices and falling rates helping them. Interest rates bottomed on Sept 4th and have been rising since then, although not in a straight line. Some of my work suggests interest rates are preparing for another leg up (a leg down for bond prices).
During November through this writing on November 22nd, the 7-10 Year Treasury Bond ETF (Symbol: IEF) has lost .58%, and the broad Bond Index ETF (Symbol: AGG) has dropped .03%. This dismal performance was in a period that enjoyed two weeks of bond market strength and only one week of weakness. I would have expected otherwise and this suggests a continuing bond market weakness.
History suggests that the rise in interest rates that began in July of 2016 is part of a 60-year cycle dating back to the mid-1700s, meaning the rise in interest rates may last for approximately 30 years if the cycle continues. Since we are still early in what could be a portfolio crushing cycle for bonds, this is a good time for bond investors, as well as target-date fund holders, to rethink their strategies.
The effects of this long-term cycle in bonds suggests that bonds carry a much higher risk than we have seen since interest rates turned down 37 years ago. A fixed portion of bond holdings in a portfolio as a cushion against stock market volatility may not work as well has it since the early 1980s. If you became an investor over the last 37 years, this may become a different market than you have ever experienced. Wise investors will take heed and make appropriate changes in their portfolios.
I am automatically taking care of this issue for my clients, but if you are not yet a client, call the office at 928-778-4000 for an appointment if you are unsure what this bond cycle might mean for bonds in your portfolios.
Foreign stock markets are also showing signs of life as central banks are beginning to let interest rates rise a bit, bringing relief to the critical banking industry. Foreign markets still lag the US, but positive returns from Europe and Japan are encouraging.
Gold prices continue to drift down since early September, despite consumer price index numbers beginning to creep up as wages climb, a situation in which gold bugs would expect the opposite effect. This bears watching.
Oil prices remain stable, allowing consumers to spend gas money on other things. The gas station near my home hasn’t changed its price from the $2.85 level in many months. I can’t remember a time when we have had energy prices this stable. This is a good thing for the economy.
A Peek into the Future
Judge Issues Warrant to Raid Commercial DNA Database – First such warrant approved
‘When Judges Let Police Shake Your Family Tree’ By Kashmir Hill and Heather Murphy, New York Times 11-6-2019
“For police… the genetic profiles that 20 million people have uploaded to consumer DNA sites represent a tantalizing resource that could be used to solve cases both new and cold… The two largest sites, Ancestry.com and 23andMe, have long pledged to keep their users’ genetic information private, and a smaller one, GEDmatch, severely restricted police access to its records this year…
“Last week…a Florida detective announced… he had obtained a warrant to penetrate GEDmatch and search its full database of nearly one million users… this appeared to be the first time a judge had approved such a warrant, and that the development could have profound implications for genetic privacy… ’That’s a huge game-changer,’ said Erin Murphy, a law professor at New York University…
“DNA policy experts said the development was likely to encourage other agencies to request similar search warrants from 23andMe, which has 10 million users, and Ancestry.com, which has 15 million. If that comes to pass, the Florida judge’s decision will affect… huge swaths of the population, including those who have never taken a DNA test… because… emerging forensic technique makes it possible to identify a DNA profile… through distant family relationships.
“Using public genealogy sites to crack cold cases had its breakthrough moment in April 2018 when the California police used GEDmatch to identify a man they believe is the Golden State Killer, Joseph James DeAngelo… After his arrest, dozens of law enforcement agencies around the country rushed to apply the method to their own cases. Investigators have since used genetic genealogy to identify suspects and victims in more than 70 cases of murder, sexual assault and burglary, ranging from five decades to just a few months old…”
What’s Happening in Your Portfolio
To accommodate holiday schedules, this newsletter is being written on November 22nd, a week before our regular month-end cycle.
We enjoyed steady gains across all of our growth and Flexible Income* portfolios through November 22nd, and are now fully invested as you would expect during a well-defined uptrend in the stock markets.
I have added two new strategies to our Shock Absorber Growth* suite of strategies. One is a Long/Short Index* strategy that invests in the two strongest of the main indexes, rotating them as strengths ebb and flow.
The other strategy is a seasonal strategy that invests in both the strongest single country or industrial sector, with the intention of holding them as long as their gains continue.
Each strategy enjoys a different buy/sell discipline to provide better diversification in our portfolios.
In addition, my new buys for you have been focusing on value stocks that have taken leadership over growth and momentum stocks. This leadership shift became noticeable with a sharp rise in market volatility in September, and is continuing. It is the kind of change that often becomes a persistent trend. I love persistent trends as it makes my systems work much better for you.
Our Flexible Income* portfolios now are about 50% devoted to dividend producing stocks which may be able to perform better in a rising interest rate environment than traditional bond funds. And it sports a 3.25% dividend yield, meaning that if the stocks do nothing for a year, we will still gain 3.25%. Better than your average CD.
Our Flexible Income* suite of strategies has recently outperformed the Vanguard Total Market Bond Fund (Symbol: VBMFX) the largest bond index fund, producing nice gains versus the index’s losses.
When someone asks me what I think the stock market might do, I usually reply with how fully invested we are. That best reflects my confidence in the market, or lack of it. Right now, we are fully invested, so I expect good things out of our portfolios.
And that is how we are staying in sync with this market.
- Shock Absorber Growth* is our 100% growth portfolio.
- Flexible Income* is our 100% income portfolio.
- Adaptive Growth Portfolios* are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
- Adaptive Balance* is 50/50 between growth and income.
- Why is the third hand on the watch called the second hand?
- If a word is misspelled in the dictionary, how would we ever know?
- Why do we say something is out of whack? What is a whack?
- Why does “slow down” and “slow up” mean the same thing?
- Why does “fat chance” and “slim chance” mean the same thing?
Our Spotlight Strategy – Adaptive Growth
With our Adaptive Growth Strategy, we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Shock Absorber Growth strategy to range from 20% to a maximum of 80% of account value. The balance, 20% to 80% is invested using the HCM Flexible Income strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced.
Click here to read more about Adaptive Growth.
Here is a list of our upcoming holiday hours:
- Wed, Nov 27th, 9:00am-12:00pm
- Thurs & Fri, Nov 28th & 29th, Closed
- Tues & Wed, Dec 24th & 25th, Closed
- Tues, Dec 31st, 9:00am-12:00pm
A Slice of Life
Making Your Christmas Go Smoothly
A friend recently came by to pick up two of my new books, Why Bad Things Happen to Good Investments, with nice comments about the great insights that he had never before realized in 50 years of investing. He was planning to give them out as Christmas gifts, which I thought was a wonderful idea.
Locally I give the books away for free so I don’t have to be caught up in the hassle of collecting and then paying sales tax on the books. Besides, it makes me feel a little like Santa Claus to give them out to people I know or meet. So, come on by to pick up a gift or two.
If you prefer to have books delivered to you or your gift recipient, they are available on Amazon, in either print or electronic versions.
We also have a wonderful Christmas wrapping tool for you at the office. Disguised as a 7” ruler and letter opener, these do a great job of slicing wrapping paper. We have several handfuls left, so stop by to pick one up or even call because they fit nicely in an envelope and can be mailed to you easily.
And don’t forget, you can use our mailing service to avoid long lines at the post office. Just bring your wrapped-for-shipping packages in and we can weigh them, calculate the postage, affix approved postage paid stickers and have them picked up at our office by the Postal Service.
We hope we can make your Christmas season a little brighter and easier with these ideas.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2019 William T. Hepburn. All rights reserved.