Well, here we are. We are into the final lap of 2017, and it has been quite a year for stocks not just in the U.S. but around the world. But of course, it is also FORECAST SEASON! You see, this is the time of year when all of the really smart people in the financial world let us know what will happen next.
Nothing sells news like a good old fashioned “The market is about to crash/soar and here’s why!” headline. Here is a screenshot I took today (12/07/17) off of the home page of www.marketwatch.com.
Wow, now isn’t that helpful? I’m kidding of course. I expect we’ll see many more of these “headlines” over the next 60 days. Forecasts and outlandish headlines like these are geared to do one thing and one thing only, and that is to “Click-Bate” you into reading it. Have you ever wondered what the historical accuracy rate is of any market prediction? Depending on what study you read, most of them reveal it is no better than a coin flip. Worse yet, you don’t even know how accurate it is until after the event.
Here’s a forecast I’ll make. The Dow will reach 1,000,000. Is my forecast good or bad? Is this a 50/50 coin flip? What most fail to recognize is that a forecast must right twice, once in the accuracy of the prediction and also that it achieves the stated results within a specific period of time. After all, what good is a forecast if the good news is too far off in time for us to benefit from it? Therefore, any forecast that comes without a specific time period needs to be ignored, deleted, or trashed.
Why do our human minds find these forecasts so alluring? Most likely it is because we are human and tend to feel before we think. If we always made decisions based upon logic, we would ignore every 50/50 coin flip forecast we see. We are emotional beings, and tend to make decisions based upon how we feel. Last year, I wrote about how the financial media feeds off of this emotional bias in the blog “The Tale of the Investment Unicorn”.
In addition, our brains naturally hate uncertainty and because of that, we are influenced by the illusion of certainty. You take a bold headline written by someone with gusto and confidence and one might find themselves influenced by that confidence. That is dangerous when you disregard the natural skepticism that should be present when reading such bold claims.
We help clients overcome these pitfalls by educating, implementing, and monitoring deliberate and purposeful steps. Our goal is to help you understand the psychology of sound decision making.
7 planning moves to consider as tax reform looms
Right off the bat, let’s talk about what is on everyone’s mind…tax reform.
1. Sweeping changes in the tax code were supposed to be enacted much earlier in the year, but Congress has been preoccupied with health care. Instead, changes appear to be in the pipeline for 2018.
Both the House and Senate have passed their respective versions of tax reform. The House and Senate will now convene a conference–a give-and-take session that is designed to craft a single bill that must then be approved by each chamber. Only then can the President sign the legislation, which will usher in a new tax code.
That said, how we file for tax year 2018 may differ from how we file for tax year 2017.
For example, will the alternative minimum tax (the AMT) be wiped from the tax code? Will Congress kill the estate tax?
Both the Senate and House proposals make few, if any, changes to retirement accounts, but we could see tweaks in a final bill.
Personally, I’m encouraged that the House and Senate have yet to materially alter the tax treatment for retirement accounts and the favorable treatment dividends and capital gains receive.
However, I should point out that the Senate bill changes the way we would account for capital gains, i.e., a first-in, first-out method to calculate gains when a stock is sold. That said, I’m reluctant to speculate how these key categories may emerge if tax reform is signed into law.
Investment and financial planning
2. Is it time to rebalance your portfolio? Changes in the market can cause your asset allocation to shift. As we head into the homestretch, we’ve witnessed strong gains in stocks this year, both domestic and international. Year-end is a great time to review your portfolio and make any necessary adjustments.
Typically, I would counsel that profits should be taken next year, pushing the tax burden into tax year 2018.
But I must caution that there is an outside possibility the final version that may land on the President’s desk could produce changes in how capital gains are treated.
3. Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.
However, let me caution about making changes based simply on market performance.
One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring and to sell when stocks have taken a beating.
We know that markets rise and fall. I get that declines can be unnerving, I really do. Yet over the long term, markets rise much more than they fall.
While stocks have been on a record run, it’s a good time for me to once again remind you that a disciplined approach that avoids emotional decisions has historically been the shortest path to reaching one’s financial goals.
I know I’ve said this before, but it is a key principle for successful investing.
3. Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
Tax planning in the context of possible changes in the tax code
5. Tax loss deadline. You have until December 31, 2017 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.
6. College savings. Tax reform looms large over college savings accounts. A limited option, called the Coverdell Savings account (IRS Publication 970) gets the ax in the House bill. The Senate bill maintains the status quo, according to the Senate Finance Committee document, “Tax Cut and Jobs Act and College Access.”
Currently, total contributions for a beneficiary cannot exceed $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, the amount is $220,000. Contribution limits get phased out after hitting the respective limits.
If reform passes, the House proposes that Coverdell Savings Accounts be converted into 529 plans. A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.
7. Charitable giving. Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)?” A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity (“Rules to Do an IRA Qualified Charitable Distribution”–www.kitces.com). The IRA owner must be at least 70½ when the distribution is made.
You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
I hope you’ve found this review to be educational and helpful, but keep in mind that it is not all-encompassing. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.
Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
Portions of this article were created with the assistance of Horsesmouth