4 Financial Best Practices for Year-End 2023

Scan the financial headlines these days, and you’ll see plenty of potential action items vying for your year-end attention. Some may be particular to 2023. Others are timeless traditions. If your wealth were a garden, which actions would actually deserve your attention? Here are our four favorite items worth tending to as 2024 approaches … plus a thoughtful reflection on how to make the most of the remaining year.  

 

1.     Feed Your Cash Reserves

With basic savings accounts currently offering 5%+ annual interest rates, your fallow cash is finally able to earn a nice little bit while it sits. Sweet! Two thoughts here:

Mind Where You’ve Stashed Your Cash: If your spending money is still sitting in low- or no-interest accounts, consider taking advantage of the attractive rates available in basic money market accounts, or similar savings vehicles such as short-term CDs, or U.S. Series I Saving Bonds (“I Bonds”). Your cash savings typically includes money you intend to spend within the next year or so, as well as your emergency, “rainy day” reserves. (Note: I Bonds require you to hold them for at least a year.)

Put Your Cash in Context: While current rates across many savings accounts are appealing, don’t let this distract you from your greater investment goals. Even at today’s higher rates, your cash reserves are eventually expected to lose their spending power in the face of inflation. Today’s rates don’t eliminate this issue … remember, inflation is also on the high side, so that 5% isn’t as amazing as it may seem. Once you’ve got your cash stashed in those high-interest savings accounts, we believe you’re better off allocating your remaining assets into your investment portfolio—and leaving the dollars there for pursuing your long game.  

 

2.     Prune Your Portfolio

While we don’t advocate using your investment reserves to chase money market rates, there are still plenty of other actions you can take to maintain a tidy portfolio mix. For this, it’s prudent to perform an annual review of how your proverbial garden is growing. Year-end is as good a milestone as any for this activity. For example, you can:

Rebalance: In 2023, relatively strong year-to-date stock returns may warrant rebalancing back to plan, especially if you can do so within your tax-sheltered accounts.

Relocate: With your annual earnings coming into focus, you may wish to shift some of your investments from taxable to tax-sheltered accounts, such as traditional or Roth IRAs, HSAs, and 529 College Savings Plans. For many of these, you have until next April 15, 2024 to make your 2023 contributions. But you don’t have to wait if the assets are available today, and it otherwise makes tax-wise sense.

Revise: As you rebalance, relocate, or add new holdings according to plan, you may also be able to take advantage of the latest science-based ETF solutions.  We’re not necessarily suggesting major overhauls, especially where embedded taxable gains may negate the benefits of a new offering. But as you’re reallocating or adding new assets anyway, it’s worth noting there may be new, potentially improved resources available.

Redirect: Year-end can also be a great time to redirect excess wealth toward personal or charitable giving. Whether directly or through a Donor Advised Fund, you can donate highly appreciated investments out of your taxable accounts and into worthy causes. You stand to reduce current and future taxes, and your recipients get to put the assets to work right away. This can be a slam dunk strategy to avoid an embedded capital gain and get a tax deduction for the full value going to the charity of your choice.  If you have appreciated assets, considering gifting these and holding on to your cash.

 

3.     Train Those Taxes

Speaking of taxes, there are always plenty of ways to manage your current and lifetime tax burdens—especially as your financial numbers and various tax-related deadlines come into focus toward year-end. For example:

RMDs and QCDs: Retirees and IRA inheritors should continue making any obligatory Required Minimum Distributions (RMDs) out of their IRAs and similar tax-sheltered accounts. With the 2022 Secure Act 2.0, the penalty for missing an RMD will no longer exceed 25% of any underpayment, rather than the former 50%. But even 25% is a painful penalty if you miss the December 31 deadline. If you’re charitably inclined, you may prefer to make a year-end Qualified Charitable Distribution (QCD), to offset or potentially eliminate your RMD burden.

Harvesting Losses … and Gains: Depending on market conditions and your own portfolio, there may still be opportunities to perform some tax-loss harvesting in 2023, to offset current or future taxable gains from your account. As long as long-term capital gains rates remain in the relatively low range of 0%–20%, tax-gain harvesting might be of interest as well. Work with your tax-planning team to determine what makes sense for you.

Keeping an Eye on the 2025 Sunset: Nobody can predict what the future holds. But if Congress does not act, a number of tax-friendly 2017 Tax Cuts and Jobs Act provisions are set to sunset on December 31, 2025. If they do, we might experience higher ordinary income and capital gains tax rates after that. Let’s be clear: A lot could change before then, so we’re not necessarily suggesting you shape all your plans around this one potential future. However, if it’s in your overall best interests to engage in various taxable transactions anyway, 2023 may be a relatively tax-friendly year in which to complete them. Examples include doing a Roth conversion, harvesting long-term capital gains, taking extra retirement plan withdrawals, exercising taxable stock options, gifting to loved ones, and more.

 

4.     Weed Out Your To-Do List

I love this one…it is at the top of my improvement goals.  Doing less instead of staying busy with more.  This year, we’re intentionally keeping our list of year-end financial best practices on the short side. Not for lack of ideas, mind you; there are plenty more we could cover.

But consider these words of wisdom from Atomic Habits author James Clear:

“Instead of asking yourself, ‘What should I do first?’ Try asking, ‘What should I neglect first?’ Trim, edit, cull. Make space for better performance.”

— JamesClear.com

 

Let’s combine Clear’s tip with sentiments from a Farnam Street piece, “How to Think Better.” Here, a Stanford University study has suggested that multitasking may not only make it harder for us to do our best thinking, it may impair our efforts. 

“The best way to improve your ability to think is to spend large chunks of time thinking. … Good decision-makers understand a simple truth: you can’t make good decisions without good thinking, and good thinking requires time.”

— Farnam Street

 

In short, how do you really want to spend the rest of your year? Instead of trying to tackle everything at once, why not pick your favorite, most applicable best practice out of our short list of favorites? Take the time to think it through. Maybe save the rest for some other time.

Is the Debt Ceiling Bringing You Down?

What does the U.S. debt ceiling debate really means for you? I am getting this question regularly, which means it is probably on the minds of many more folks.  As potential threats loom large, we’re seeing articles in abundance, explaining where we’re at, how we got here, and what to expect next.

We wouldn’t be human if we didn’t share in your frustration over the maddening lack of resolution to date. It’s stressful to watch huge, consequential events unfolding, over which we have no control. And who needs more stress in their life?

Which is why we encourage you to think of your investments as a bright spot of relief in an otherwise unmanageable world. In the face of everything we cannot control, the one place you can call your own shots is within your well-structured, globally diversified investment portfolio.

And here’s more good news: As an investor, you don’t really need to know that much about the real-time details of the debt ceiling negotiations. Instead, as with any other breaking news, a healthy degree of arm’s length disinterest will likely serve you best, especially if you might otherwise respond to the current fever pitch of news that’s news because it’s in the news.

To illustrate, let’s look behind three different doors to consider your most advisable investment strategy under various outcomes.


Door #1: Opportunistic Agreement

With history as our guide, it is perhaps most reasonable to expect today’s political brinksmanship-as-usual will lead to some form of resolution, probably arriving at the last possible moment. This is exactly how the debt ceiling debate has played out on multiple occasions, with each side of the isle using it as an opportunity to score new political points, and there is no reason to think this time will be any different.  Then what? Most likely, the “fix” will be partial and imperfect, and the hand-wringing will continue apace over the next challenges inherent in the latest patch.  The self-preserving nature of the Congressional representative role seems to always come through to make sure the economy doesn’t screech to a halt.  The talking points might shift, but markets will remain as volatile and unpredictable as ever. In this most likely scenario, we would advise …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.


Door #2: Meltdown

What if negotiations in Washington fail? What if we experience U.S. credit rating downgrades, debt defaults, and unpaid Social Security benefits (to name a few of the uglier possibilities)? In a worst-case scenario, the U.S. dollar could lose its global currency status, a position it’s held since before most of us were born. What then?

If a worse- or worst-case scenario occurs, our marvelously efficient markets would once again respond by pricing in the good, bad, and ugly news well before we can successfully trade on it. Global diversification would be as important, if not more critical. Selling in a panic as markets adjust to the worsening news would remain as ill-advised as ever. In other words, your advisable course would remain …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.


Door #3: Proactive, Compromising Agreement

Last, and probably least likely, what if Washington defies our doubts, and achieves a happy and timely debt ceiling resolution, with little to no harm done? Hey, anything is possible. In this best-case scenario, the breaking news would be better than most of us expect, so markets would likely respond at least briefly with better-than-expected returns, rewarding us for staying put. At the same time, just in case the next bit of news were to disappoint, or even be less exciting than expected, we’d want to temper any concentrated market exposures by, you guessed it …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.

This is by no means a perfect hedge against black swan events, but it’s a good start and would allow for some long-term benefits by taking advantage of stocks in decline through strategic rebalancing.  We would be happy to offer more insights and analysis about the debt ceiling if you are interested in learning more. We’re also here to review your portfolio mix any time your personal circumstances may warrant a change. Otherwise, guess what we would advise you to do while the debt crisis continues? If you’re not sure, please give us a call. We always enjoy hearing from you!

Quarterly Letter to Clients

The first three months of the year would not be described as boring by any stretch of the imagination.  With the war in Ukraine continuing to create global uncertainty and the government-assisted closing of two of the largest regional banks in history, there is plenty to capture our short-term focus.  But even with these and other events, many stock indexes are up since early January and bond prices have seen some recovery as interest rate pressure has eased a bit. The point is that sometimes investment returns can tell a different story than does the current headlines.

However, whether the numbers are up or down in any given year, we caution against letting them alter your mood, or as importantly, your portfolio mix. Because, when it comes to future expected returns, short term performance is among the least significant determinants available.

Thumbs Down…Thumbs Up

In the thumbs-down category, U.S. stock market indexes1  turned in annual lows not seen since 2008, with most of the heaviest big tech stocks2 taking a bath. Bonds fared no better, as the U.S. Federal
Reserve raised rates to tamp down inflation. The U.K.’s economic policies3 resulted in Liz Truss becoming its shortest-tenured prime minister ever, while Russia’s invasion of Ukraine and China’s continued COVID woes kept the global economy in a tailspin. Cryptocurrency exchanges like FTX4… well, you know what happened there.

On the plus side, inflation has appeared to be easing slightly, and so far, a recession has yet to materialize. A globally diversified, value-tilted strategy5 has helped protect against some (certainly
not all) of the worst returns. An 8.7% Cost-of-Living Adjustment (COLA)6 for Social Security recipients has helped ease some of the spending sting, as should some of the provisions within the newly enacted SECURE 2.0 Act of 2022.

Recency Bias

Now, how much of this did you see coming last January? Given the unique blend of social, political, and economic news that defined the year, it’s unlikely anything but blind luck could have led to accurate
expectations at the outset.

 In fact, even if you believe you knew we were in for trouble back then, it’s entirely possible you are altering reality, thanks to recency and hindsight bias. The Wall Street Journal’s Jason Zweig7 ran an experiment to demonstrate how our memories can deceive us like that. Last January, he asked readers to send in their market predictions for 2022. Then, toward year-end, he asked them to recall their predictions (without peeking). The conclusion: “[Respondents] remembered being much less bullish than they had been in real time.”

In other words, just after most markets had experienced a banner year of high returns in 2021, many people were predicting more of the same. Then, the reality of a demoralizing year rewrote their memories; they subconsciously overlaid their original optimism with today’s pessimism.

What have we learned?

Where does this leave us? Clearly, there are better ways to prepare for the future than being influenced by current market conditions, and how we’re feeling about them today. Instead, everything we cannot yet know will shape near-term market returns, while everything we’ve learned from decades of disciplined investing should shape our long-range investment plans. 

In other words, stay informed but be careful to not be swayed into a reactive decision. Keep your long-term lenses on and your future self will thank you for it.
 

As we head into a new quarter, always know that we are here to help and are grateful for your
continued trust.

Josh

 

Quarterly Letter to Clients

Well, we made it to 2021 so how are you feeling?  The start of a new year can breed hope for new possibilities.  Even though 2020 was oppressive to most in so many ways, I do think we can still hold hope for the new year.  I have never been one to focus on New Year’s resolutions as they always felt like a recipe for disappointment (I know that is not the case for everyone, though).  What I am striving for this year is not new resolutions, but rather strengthening routines.  Routines feel more in my control, and if 2020 taught anything, it is to control what we can control.  One of these areas for me is to practice gratitude.  I have begun by thinking of 3 things I am grateful for each night before I go to sleep.  It is refreshing and encouraging to think on these things.  When we talk later this year, feel free to check on my progress with this.  This is just one small example, and I am sure that you have others that jump to your mind.  Let me encourage you to pursue practices like this for the sake of your own mental health in 2021.

Speaking of control…

You likely have heard us say in the past that market performance is not an area that any of us have control.  Because of this, it is wasted energy to focus and worry about market movements.  You should spend that energy doing things you can control: spend less than what you make, avoid debt, build cash reserves, plan your generosity and plan your future – practical principals that have an outsized impact on your life.

Small, quiet acts

Whether the temptation is to abandon a free-falling market (like the one we encountered less than a year ago), or chase after winning streaks, an investor’s best move remains the same.  Concentrated bets on hot hands generate erratic outcomes, which makes them far closer to being dicey gambles than sturdy investments.  Trust instead in the durability of your carefully planned investment portfolio. Focus instead on small, quiet acts.  That is what we are here for, for example, to:  
  • – Remind you that your globally diversified portfolio already holds an appropriate allocation to Tesla stock (which may be a lot, a little, or none, depending on your financial goals.
 
  • – Guide you in rebalancing your portfolio if recent gains have overexposed it to market risks.
 
  • – Help you interpret the 5,600 pages of the newly passed Consolidated Appropriations Act, 2021, so you can manage your next financial moves accordingly.
 
  • – Assess potential ramifications of the Biden tax proposals and advise you on any additional defensive tax planning that may be warranted for you in the years ahead.
 
  •  -Remain by your side as you encounter whatever other challenges and opportunities 2021 has in store for you and your family.
  These are not loud acts that you will read about in the paper, but they are the stuff financial dreams are made of.  2021 will be interesting to say the least, but let’s hold onto the hope and possibility that a new year brings.  Stay healthy, stay grateful and know that we are here to help.   Josh, Mike, Matt and Sandra  

Fee Reductions

Happy New Year!  I hope this message finds you well after enjoying the holidays.  I just have a quick note to share to start off our new year.  A longer post will be coming later this week as our quarterly letter to clients.

2020 was a tough year on many fronts, but one thing it taught us is that market performance in the short term is wildly unpredictable.  In addition, short-term performance will likely have a small impact, if any, on your probability of success with your own financial goals.  So it is really not worth your mental energy to ever spend a moment worrying about your short term investment performance.   Plus, none of us really have any control over investment performance.

What do we have control over?  From a planning and investment standpoint, we discuss fees quite often, and look to reduce this financial headwind where possible because this is something we can control.  Most of our clients have Dimensional Funds as core holdings in their portfolio, so we were happy to hear this fall that they announced that fees would be reduced across a broad range of their equity funds effective February 2021, representing an approximate 15% reduction on an asset-weighted basis.  They were already significantly lower than the average mutual fund expense ratio, so this is a great move in the right direction.  It is exciting because it means that, all else equal, our clients will get to keep more of the investment’s returns which will have a compounding effect on wealth over the years.

Reducing fees is only one way to increase your wealth over time.  Let us know if you would like to discuss the other planning tools that can be used to increase wealth as well.