What To Make Of The Recent Decline In Home Values

Hi everyone,

With tax day quickly approaching, so too is the deadline for making Traditional IRA and Roth IRA contributions for 2018. This video explains the contribution limits for various types of retirement accounts.

If you have any questions regarding whether you qualify for a Traditional IRA or Roth IRA, please ask. If you plan to make either type of contribution (or both) you will need to do so not only before April 15th, but before you file your 2018 tax return.

Home values slide in December: The average home fell ever-so-slightly, down -0.1%, in the latest S&P/Case-Shiller home price index report. Seattle homes fell for the 6th-straight month, as home price appreciation slowed throughout the second half of 2018. The average home is up +4.7% annually, which is more in-line with historical averages but still a bit of a shock compared to the +7% to +8% growth we saw not much more than a year ago.

If you were reading this blog 18 months ago, this is exactly what I predicted would happen. I think this is perfectly normal, but as always, it helps to gain historical perspective before drawing any conclusions about what is next. Here is a look at the rise in home prices dating back 30 years.

(source: FRED Economic Data, via S&P/Case-Shiller HPI)

You can see how real estate has leveled-off as of late, so much so that you might argue a bigger decline is forthcoming. I am not so sure about that, but whatever happens, one thing I am pretty sure of is that the stock market will lead the way (for better or worse). Stock prices are the leading indicator that influences both hiring and real estate values. If company values rise, more people are employed and investor confidence rises, which directly boosts housing demand. If company values fall, the opposite occurs and housing demand will weaken.

Proof of this is what occurred last Summer. It is no coincidence that housing prices started to slow around June/July, just a few months after the S&P 500 had fallen roughly -10%. I can say with confidence that the shock of seeing stocks drop caused homebuyers to pause a bit in their housing pursuits. If you disagree I would be curious to hear what you think.

Here a complete city-by-city look at the latest housing numbers:

 In The Market...

The S&P 500 gained +0.4% last week. Let's look under the hood:

(price data via stockcharts.com)

It was another constructive week for the stock market, despite modest gains. The individual sectors were a bit mixed but the week ended strong, which is what we like to see. The S&P 500 finished the week just above 2,800, which many think is an important level for the index to hold given it represents the previous high from both November and December — instances where stock prices fell sharply soon thereafter. Will this time be different and see the rally continue into March?

Our cumulative analysis would suggest yes. However, there are two momentum indicators that give us pause, which were the same problems that occurred back in November and December when the S&P failed to hold above 2,800. These are shown in the chart below, which illustrates how Relative Strength (RSI) and the percentage of stocks that are above their respective 200-day moving averages are both lower compared to when the S&P 500 index hit its previous two highs back in Jan. 2018 and Sept. 2018. Take a look…

(chart created via stockcharts.com)

The large chart in the middle shows the actual price movement of the S&P, including the recent rally to start 2019. RSI is shown in the chart above that, where you’ll notice it is fading despite these price rallies. RSI compares the size of gains in periods when price rises and compares it to the magnitude of losses on days when price falls. The above is a weekly chart, so each period being considered is one week. The important takeaway is that we want to see RSI rise — or at least remain elevated — when stock prices rise. When RSI stalls or fades amid a stock market rally, it indicates that price momentum is weakening and a reversal may be near.

Additionally, the percentage of stocks that are above their 200-day moving averages is lower compared to those previous highs from 2018. Today, 61% of stocks in the S&P index are above their 200-day moving averages. That ratio was much higher during 2018. This measure of what is called market “breadth” statistically represents how well the stocks that comprise the S&P 500 are moving in unison or not. We would like to see this percentage higher, not lower. If the S&P 500 is rising, but this percentage is falling, it indicates that a few big companies are doing all the heavy lifting, which often is not sustainable.

While we remain bullish short-term, I wanted to highlight these two indicators as factors that we are closely tracking, as they influence our buying and selling decisions.

We were pretty inactive on the portfolio front last week. The bond market took a sharp negative turn, which may result in reallocating some of those positions in the coming days. We sold our Municipal Bond fund (PZA) for a modest gain within accounts that owned it.

In Our Portfolios...


What's New With Us?

It was a fairly relaxing weekend. The weather was nice, so I was able to get outside and do some yard work. I had to cut up a tree that had fallen last month as a result of the snowfall. The tree was decaying and the weight of the snow was its final blow. Luckily it did not cause any other damage, but it did take some time to saw it apart.

Have a great week!

Brian E Betz, CFP®
Principal

Tax Deduction Rules When Claiming Retirement Plan Contributions

Hi everyone,

With tax season on deck, here is a summary of the tax deductions you can claim relating to different types of retirement account contributions:

If you want to make Traditional IRA or Roth IRA contributions for 2018, you have until April 15th to do so. Contact us if you have questions. Also, the above video is available on the FAQ page of our site, under the drop-down Taxes.

In The Market...

The S&P 500 fell -0.3% last week. Let's look under the hood:

(price data via stockcharts.com)

The loss snaps the four-week winning streak stocks had been on. Six of the 10 stock sectors declined on the week. Real Estate and Technology led the way, while Energy, Consumer Staples and Health Care were each down more than -1.0%.

Stocks were resilient despite the weekly decline. Prices started the holiday shortened week lower, before rallying the rest of the way. Last week was constructive, yet there is still a ton of price resistance to contend with for the January gains to hold. So far they have, which often isn’t the case when stocks rally off of a big downward move. The best-case scenario right now is that stock prices move sideways for a couple weeks, before continuing their ascent.

Our bond positions performed well last week. We continue to own Treasury bonds and Corporate bonds in most accounts.

On the stock side, we were more active compared to prior weeks. We added a S&P 500 growth fund to many accounts, which is heavily weighted in companies in the Technology and Consumer Discretionary sectors. We also added to the cloud-computing Tech fund that most accounts already owned. The Tech sector has been leading this recent rally, specifically the Software and Semiconductor industries.

In Our Portfolios...


What's New With Us?

I painted the guest room in our house on Sunday, which was my highlight. That now makes roughly 75% of the interior of our house I have painted.

Have a great week!

Brian E Betz, CFP®
Principal

401k And IRA Contribution Limits Go Up For 2019

Hi everyone,

For the first time since 2013, the amount you can contribute into an IRA is increasing, from $5,500 to $6,000 ($7,000 if age 50 or older). The 401k contribution limit is increasing as well. The amount of pay you can defer into your 401k plan goes up from $18,500 to $19,000 ($25,000 if 50 or older). This chart Josh put together does a nice job detailing the 2019 contribution limits for various accounts, as well as the gift and estate tax exclusions. Take a look:

 A couple things to stress regarding IRA contributions:

  • Your ability to deduct your IRA contribution may be limited/restricted if you already contribute into a 401k plan. Check with us or your CPA before doing so.

  • The $6,000 limit covers all IRA plans you own. For instance, if you intend on making both Traditional IRA and Roth IRA contributions, you can split the $6,000 between accounts but your cumulative contribution cannot exceed $6,000. Meaning, you could not deposit $6,000 into one IRA and another $6,000 into a second IRA. But you could do $5,000 into one IRA and $1,000 into another IRA, or $3,000 into one and $3,000 into another, etc.

  • If you plan on making a Roth IRA contribution, we advise waiting until the calendar year is over to do so, rather than make recurring monthly contributions. This ensures that your income does not exceed the IRS limit that prevents you from making Roth contributions. You have until April 15th of the following year to make IRA contributions for the prior year, so there is plenty of time. You don’t want to risk funding a Roth IRA throughout the year, only to learn that your income was too high and have to scramble to get the funds out of the Roth to avoid paying a penalty.

  • The above IRA limits apply to 2019, not 2018. I emphasize this because if you plan on making IRA contributions for 2018 (which you have until April 15, 2019 to do), the contribution limit of $5,500 applies ($6,500 if age 50).

If you have questions on any of the above, just ask!

In The Market...

The S&P 500 gained +2.6% last week. Let's look under the hood:

(price data via stockcharts.com)

 A 3rd-straight weekly gain for the S&P 500, which saw every major stock sector finish in the green. Is this the beginning of a much larger rally? Maybe, but I would not bet on it for one major reason.

Looking back over the previous market “corrections” that have occurred since the start of 2018, the S&P 500 found what is called price “support” each time it fell to 2,600 (the dashed line in the chart below). This means that stock prices rebounded when the S&P fell to this price on three separate occasions. These points in time are circled in the chart below.

(chart created in stockcharts.com)

The fourth time this occurred in December (last circle on the right), the price support at 2,600 did not hold and the S&P sharply fell another -10% below it in a matter of days. Since then, S&P index stocks have methodically worked their way back up toward 2,600, finishing last week just below that mark.

Now what?

Technically speaking, we might anticipate that 2,600 will become a “resistance” level that prevents stock prices from building on this current rally. It is common for a price-point to turn from support to resistance after the support is broken. This potential outcome is plain as day when looking at the above chart.

If this alone were the only headwind that existed I may be more optimistic, but the fact that many of the other statistical measures we care about are damaged fuels the stock market risk I believe is present heading into next week.

With that being said, the picture is better than it was last week, which was better than the week before that, which was better than the week before that… So there has been improvement. However, the market does not go up or down in a straight line, so it is most likely that further declines come before the S&P 500 eventually mounts a sustainable rally.

If we are right, then patience pays. If we are wrong, we will adjust accordingly by potentially adding to our stock positions.

We added a couple bond positions last week — a Corporate Bond fund (SPLB) and a Municipal Bond fund (PZA). The Muni bond fund was only added to taxable/brokerage accounts, as the tax-exempt nature of the bond interest paid by Muni bonds is of no benefit to IRA accounts. I believe the bond market has potential over the coming weeks and could potentially provide a hedge in the event that stock prices do fall lower from here. We shall see.

In Our Portfolios...


What's New With Us?

On my commute home from the office Friday I drove along the Highway-99 Viaduct one last time before it closed down for its pending demolition. As excited as I am for the new underground tunnel and a Seattle waterfront that may rival San Francisco’s Embarcadero, I’m going to miss the Viaduct. On a clear day, the view driving along it through downtown Seattle is been tough to beat.

On that note, our office hours will be more varied over the next few weeks until the new tunnel opens. Josh and I may potentially be working from home a bit more due to the massive increase in traffic that the Seattle Dept of Transportation anticipates. I am all about efficiency and sitting in a long, unnecessary commute is inefficient. Our business hours will remain the same, as will our effort and focus, so I expect no impactful change on our day-to-day operations. But I do want to give you the head’s up.

Have a great week!

Brian E Betz, CFP®
Principal

Deadlines To Make Retirement Plan Contributions

Hi everyone,

Quite a bit to cover this week. Let’s start with a change we are making next year, which will affect some of you.

We are going to conduct all client reviews during the first quarter, between January 1st and March 30th. If you already meet with us during this time period for our review then nothing has changed. However, if we typically meet outside of those months, expect that we will want to move up our review date in 2019. The exception would be if we met very recently then it does not make sense to meet so soon again. But contact us and we can discuss whether a review is necessary.

We are doing this for a couple reasons. First, it allows us to meet with you during tax season, which is a time when most of you are already thinking about your finances. Second, it helps us streamline our annual review process.

We have received numerous questions about retirement plan contribution deadlines. Here is a brief video we created explaining the different deadlines for various IRAs, as well as 401k plans.

There were a few interesting headlines to come out of last week. In no particular order:

  • Johnson & Johnson executives reportedly knew that the company’s baby powder contained asbestos for decades but failed to report it. J&J executives refuted the reporting done by Reuters, however J&J shares still dropped -10% Friday.

  • Apple (AAPL) plans to build a $1 billion plant in Austin, TX.

  • Amazon workers in New York are threatening to unionize due to what they say are poor labor conditions.

  • The European Central Bank (ECB), which is to Europe as the Federal Reserve is to the US., plans to end its years of bond-buying programs that have been used to boost the European economy. This is specifically known as “quantitative easing” (QE).

  • Meanwhile, the U.S. market fell to a 9-month low.

In The Market...

The S&P 500 fell -1.2% last week. Let's look under the hood:

(price data via stockcharts.com)

Another rough week for stocks. The S&P 500 finished at its lowest weekly close since March 2018. The S&P index is down -2.8% year-to-date with 2 weeks left.

As I write this the S&P is down roughly -6.5% in December. How rare is it that the S&P would be negative in December, let alone down -6%? In the past 30 years, the S&P has only been down 5 times in December. Very rare, indeed.

Entering this week the S&P faces three stiff challenges, as illustrated in the chart below. The first is that the price of the index has fallen back down to its previous low from February/March. The hallmark of a healthy market is seeing higher price-highs. Conversely, an unhealthy market is characterized by lower price-lows. In this case, if the S&P falls below that dashed line (#1) it is anything but healthy.

Take a look at this on the chart and then I’ll explain the other two problems.

(chart created via stockcharts.com)

Similarly, the other dashed line (#2) represents the long-term rising trend line that the S&P 500 has previously used to buoy itself and propel it higher. If that occurs again here, great! But if it doesn’t and the price falls below, look out.

Finally, and possibly most concerning, is that Relative Strength (RSI) is fading lower and lower (#3 above). We use this statistic to supplement our price analysis. It helps indicate whether there is strong or weak momentum behind the price moves that occur. Right now RSI is struggling, which is a problem amid falling stock prices. In fact, notice how RSI is lower today than it was back in Feb./March, a time when the S&P was roughly around the same price as it is today. Back then RSI was holding around 50, whereas today it is holding around 40. In short, we want RSI to be higher, not lower.

We made no major changes to client portfolios last week and continue to sit on a moderate cash balance.  In a rare move, we bought and sold a position within the same week. That position was Merck (MRK), which we bought/sold for accounts that own individual stocks.

It is never our intent to buy and sell this quickly, but given how flimsy the market is right now we put a stop-loss on the position, which triggered the sale when MRK fell to the specified price. Simply put, we took a stab and it didn’t work out. Nonetheless, we were out of the position at no gain or loss, so I am content.

In Our Portfolios...


What's New With Us?

On Saturday we took our daughter to a kids soccer class and then on Sunday we went out to Snoqualmie to ride a Christmas train. Both were fun. What wasn’t fun was watching the Seahawks lose a frustrating game against the 49ers.

Have a great week!

Brian E Betz, CFP®
Principal

The Benefits Of A Roth IRA Conversion

Hi everyone,

The deadline to complete a Roth IRA conversion is Dec. 31st. Our brief video below explains the benefits converting pre-tax IRA funds to a Roth IRA. Check it out:

In The Market...

The S&P 500 gained +2.5% last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks rebounded last week but the overall picture has not changed, as shown in the below chart of the S&P 500. The price of the S&P index remains below its 200-day moving average (a). There was some improvement in terms of Relative Strength (b), but that momentum indicator remains weak. And lastly, entering this week only 45% of S&P stocks are above their respective 200-day moving averages. This goes without saying given that the S&P as a whole is below its 200-day moving average, but it is worth highlighting because 45% is the lowest/worst ratio in nearly 3 years.

(created in stockcharts.com)

Midterm elections are this week. If you are wondering how those may influence our investment decisions, the answer is that they don’t influence them at all. Much like the 2016 election, we put zero emphasis on election results as it relates to buying and selling stocks and bonds.

We did trim our positions even further last week, in light of recent weakness. We will continue to be patient on the stock side, while bonds continue offering nothing. In fact, we sold our high-yield bond position last week. As a result we own no bond positions at this time.

In Our Portfolios...


Have a great week!

Brian E Betz, CFP®
Principal

Market Outlook Coming Off Its Worst Week In 7 Months

Hi everyone,

I have quite a bit to say about the rough week we just saw in the market. Before I do, take a look at our video explaining how a 401(k) rollover works…

In The Market...

The S&P 500 fell -4.1% last week. Let's look under the hood:

(price data via stockcharts.com)

The above table tells the story. Last week was the worst for stocks in seven months. Just when it looked like a new rally was underway — with the S&P index having risen nicely above its previous record high — investors had the rug pulled out from under them. The S&P is down roughly -6% from that peak, which begs the obvious question:

Now what?

Let’s start by revisiting the chart of the S&P 500 that I shared last week. My inclination seven days ago was that stocks were positioned to bounce coming off the prior week’s decline (see my notes in blue). This does not happen, as evidenced here:

(chart created via stockcharts.com)

The losses were quick and significant (see pink arrow). To the point that the S&P 500 fell to its 200-day moving average, which is that reddish shaded area. The 200-day moving average is a critical level for a lot of investors, including us. It is arguably the best reflection of the long-term price trend of any investment. In this case the S&P 500 index, which we believe most accurately represents the entire U.S. stock market.

It is no coincidence that the S&P finished the week right on top of its 200-day average because of how influential it is to so many investors. It often serves as a battleground statistical price-point between buyers and sellers, resulting in a supply/demand tug-of-war.

When the market is healthy, stock prices often bounce higher after falling to the 200-day moving average. When the market is unhealthy, stock prices can struggle to hold above the 200-day average, often falling considerably below it.

So right now, we want to see stock prices hold that 200-day moving average line. Additional losses could steepen fast if there isn’t a quick rally higher. Here are some of my thoughts, which hopefully provides insight into our process with the market entering this week at such a crucial level…

Near-term market outlook:

  • Best-case scenario right now is that we see stock prices rally back a few percentage points before getting hit with another wave of selling. This is how I thought the market would respond back in February after the S&P fell more than -10%. In that instance the market did exactly that — it rallied back, fell again, and ultimately took 3 months to regain its footing.

  • Worst-case scenario is that the losses are only beginning and that any rally attempts are quickly halted by more investors looking to sell.

Portfolio activity:

  • We selectively sold a couple investment positions last week, in effort to play a little defense. If stocks fall further in the next few weeks, playing defense will hopefully curb those losses. If stocks rally from here then we still have our other current holdings that should benefit from market appreciation.

  • If stocks prove that this past week was just a blip and quickly rally back to new highs, we will reinvest the cash from our recent sales and go back to being fully invested. I doubt this will be the case, but if it is, we will have zero regrets about having played some defense.

Bond market:

  • Normally we would look to the bond market as a potential hedge against stock market weakness. The problem right now is that the bond market is weak. Both short-term and long-term interest rates have been rising, which means bond values are falling. The lone bright spot (relatively speaking) has been high-yield bonds, which we continue to own.

  • In theory it is great to see higher interest rates, but not at the expense of a falling stock market. Rising rates and falling stock prices is a bad combination that we do not want to see because it means investors are pulling their money from both the stock and bond markets.

  • So, for now, rather than pivot and buy bonds, it is more likely we will sit tight in cash until either the stock and/or bond markets improve.

Additional thoughts:

  • We are unlikely to make wholesale portfolio changes. Part of the reason we mostly keep our investment sizes from 10% to 25% of the total portfolio is to give some flexibility when the market looks iffy as it does right now.

  • Most investors think of gains in terms of percentages earned and losses in terms of dollars lost. The larger your account the worse any short-term losses will feel, but stay calm. Focus on the longer-term view beyond the stretch of a few days.

  • I am sure that the media buzz will build in the coming days. What is written or said in the media has no bearing on how we manage money. You should not let it sway you, either.

  • Sometime soon there will be a nice buying opportunity. It could take a bit of time, but eventually it will come.

We are continuously assessing the long-term and short-term health of the market. We will stick to our process and make buying/selling decisions using our best judgment based on the data we employ.

If you have any questions, feel free to ask. Hopefully the above addresses some of the things you might be curious to know at this time.

In Our Portfolios...


Have a great week!

Brian E Betz, CFP®
Principal

Zillow Breaks Ground As A Real Estate... Investor?

Zillow is breaking new ground.

The Seattle-based company serving as the largest online real estate database announced it will test its hand at real estate investing. Zillow's goal is to own between 300 and 1,000 homes by year-end in the Phoenix and Las Vegas test markets. Here is how:

  1. Zillow will make immediate offers to home sellers.
  2. Zillow will update/repair the home as needed.
  3. Zillow will work with a prospective buyer's agent to sell the home within 90 days from original purchase.

If you think this sounds a lot like flipping homes, you would be right. It represents a major pivot from Zillow's ad sales-based revenue model. It poses a lot of questions about what it means not just for the future of Zillow, but for real estate agents and real estate in general. CEO Spencer Rascoff justified the decision by repeatedly citing that the company's vast housing analytics supported the move.

Okay... But something seems off about this, or at least missing. Zillow revenues are growing +24%. Why deviate so sharply from the core business model? I appreciate creative thinking and applaud any business that is mindful of skating to where the puck is headed rather than where the puck is at. If this is the case, what are the bigger implications?

Rascoff highlighted two things: Initial feedback from real estate agents has been positive and home sellers want to complete the sale faster than the industry currently allows. I have no idea about the first part. I have not had the chance to chat with any agents about this news. The second part interests me more. In addition to saying that sellers want quicker closings, Rascoff said the following:

"There are people who are basically stuck in their home that would love to go buy another home but can't sell their home. We think that this is another additive to the real estate industry. This could provide the ability to un-stick people from their home."

Is this actually true? He is implying that current homeowners cannot sell their homes because either overall demand is weak or because they cannot pull off a contingency-based purchase (where buying the next home is contingent on selling their existing one). The former cannot be true, because if it were, that would mean the housing market is weakening and logically Zillow would not want to buy into a falling market.

If the latter is true -- that contingency-based deals are cumbersome -- then inserting Zillow into the market will only drive down real estate values. Zillow will be able to offer less than a traditional buyer would because they can offer something no one else can: an instantaneous closing. As a seller, Zillow would be able to still receive top-dollar, but how long will that last before Zillow-the-buyer systemically forces prices lower?

Perhaps that is the brilliance of the idea. Zillow can have their cake and eat it too. They can offer 90 cents on the dollar as the buyer and then tap the traditional sales channel as the seller to obtain the highest price possible. I just see this playing out in Seattle where Zillow buys a property for full-ask (or less) and then turns around and attracts a bidding war when they flip it.

All of this assumes that home sellers care about quick closings as much as Zillow says they do. It also assumes that an average bid from Zillow is competitive enough to entice the seller, rather than some low-ball offer.

An industry shift coming? I heard some feedback discussing that this is merely a step in the direction of where the industry is headed, toward more automated real estate transactions. I don't know enough about the industry or technology to say either way, but I do know one thing... the more complicated the process the harder it is to automate. Real estate transactions are complicated and rarely seamless, so whatever technological shift is happening will likely be a slow one. Then again, maybe this is breaking eggs to make an omelette.

How will it impact agents? Zillow says it will work with agents. For instance, an agent representing a seller could shop the house to Zillow as the interested buyer. Beyond that, I'm unsure exactly how this endeavor benefits agents to the degree that Rascoff implied.

The looming risk: Zillow will take on loans to make these purchases, just like any other buyer, which presents considerable risk if there is a housing market decline. Hence why Zillow is testing it out in a small scale first. The initial investor reaction was negative, as Zillow shares fell -7% Friday off the news.

I am learning more about this as it develops. If you think I've got it wrong I would love to hear your insight.

In The Market...

The S&P 500 gained +2.1% this past week. Let's look under the hood:

(price data via stockcharts.com)

The S&P 500 was up +2% this week but it feels like it could have been more than that. The market jumped higher to open Friday before gradually sliding lower throughout the day. But after all it was Friday the 13th...

Despite that, the week was largely positive. Eight of 10 stock sectors were positive. High-yield bonds had the best week since early February. This time a week ago it looked like the bottom might soon fall out if the S&P fell below its 200-day moving average. That did not happen and is sitting roughly 2% above that moving average. Stocks are not out of the woods yet, but there were positive developments for sure.

On that note, we purchased a Technology sector fund (XLK) for most client accounts. Like the rest of the U.S. stock market, Tech has see-sawed since late-January and remains roughly -7% below its previous peak set back in mid-March. This offered what I believe was a nice buying opportunity so we did just that. For those accounts affected it represents an allocation size ranging from 10% to 30% of your total account size.

Additionally, we purchased an Energy sector fund (XLE) for some select accounts. Energy prices broke higher this past week and I suspect that rise to continue, at least in the near-term. I will be looking to add Energy to other accounts as well over the coming weeks if this analysis proves correct. For now though, most accounts are fully invested so it is about opportunity cost.

In Our Portfolios...


In Financial Planning...

Tax day is Tuesday, April 17th! Let me or Gale know if you have any last-minute questions. If you plan to make a Traditional IRA or Roth IRA contribution for 2017 and your bank account is not already linked to your IRA, I advise you make the contribution by check and back-date it prior to April 17. If you date it beyond April 17th it will count toward 2018. There is not enough time to link your bank account and make a 2017 contribution before the Tuesday deadline.

What's New With Us?

Quick story about the value of Amazon Prime Now...

My wife was traveling for work this past week. While she was gone, our daughter ran a temperature so I had to pick her up early from daycare. We had run out of Infant Motrin and, in my haste, thought that I had bought the right one when I made a quick stop at the store. I didn't. Apparently Children's Motrin and Infant Motrin are two different things.

Upon realizing this back at home I knew I was stuck. I was not heading back to the store, with her being sick and all. This is where Amazon Prime Now came to the rescue. Within 2 hours I got the correct Motrin delivered to our door.

Amazon Prime is great, but Prime Now is a game-changer. Even though Prime Now is available in more than 30 major U.S. cities, it is far from mainstream adoption. Of course if Amazon starts delivering pharmaceutical prescriptions in the coming year that will change fast...

On a completely different note, I am going to my first Mariners game of the year tonight. It should be fun!

Have a great weekend,

Brian E. Betz, CFP®
Principal

Seattle Mayor's Future Idea Seems Light Years Behind

Seattle Mayor Jenny Durkan might be putting the cart before the horse when it comes to her new traffic proposal.

In an effort to reduce traffic congestion and car gas emissions that pollute the air, Durkan proposed tolling drivers who use Seattle city streets. The tolls would be implemented sometime before her term ends in 2021, with the intent of promoting carpooling and public transportation. To my knowledge this would be the first U.S. city to impose such a toll.

If it were to happen I suspect it would anger people for a short time before drivers reluctantly accept the change, much like the toll that was installed on the 520 bridge connecting Seattle to Bellevue and the greater Eastside. Speaking for myself, I don't like the 520 toll and try to avoid it, but if I need to take the bridge and pay the toll so be it.

My issue with Durkan's proposal is twofold: It seems premature and it masks the bigger problem that public transportation and infrastructure in-and-around Seattle cannot keep up with the population growth. The light rail that runs north-south currently only connects from the University of Washington to SeaTac airport, spanning a whopping 16 miles. Plans are in place to extend it to Lynnwood by 2024 (adding 12 miles) and to Everett by 2036. By the time either of those projects are realized, innovation and transportation needs will have evolved. That assumes these projects actually finish on time, unlike the Highway 99-Viaduct tunnel that was supposed to open in Dec. 2015 but will be lucky if completed this year.

Forbes recently ranked Seattle as the 2nd-fastest growing city in the U.S., which is nothing new given the tech boom we have seen over the past 10 years. The population will continue to expand and I'm afraid adding tolls to the existing list of projects is not going to fix traffic congestion without other, major transportation ideas.

If you do not live near Seattle or have a need to drive into Seattle then this is irrelevant to you. It just happened to be one piece of local news that caught my attention, mostly because the proposal was not accompanied by new infrastructure ideas to expand roadways. I am all for protecting the environment but with this toll proposal it sure seems like the city is not seeing the forest through the trees.

In The Market...

The S&P 500 fell -1.4% this past week. Let's look under the hood:

(price data via stockcharts.com)

Stocks have fallen in three of the past four weeks, continuing to flirt with danger. Just when it looked like stocks might spark a rally on Thursday the market broadly reversed course Friday to finish negative on the week. Every stock sector finished in the red. Bonds rallied late in the week but mostly finished negative too.

Two things continue to concern me. First, the S&P 500 is still in danger of falling below its 200-day moving average. This could set off mass selling the longer this lingers. On Monday the S&P index did close below its 200-day average, which had not happened in nearly two years. By week's end stock prices recovered somewhat, but remain hovered just above that critical level.

The second thing that concerns me when looking at a longer weekly timeline is how the rising trend has been broken. This is illustrated by the pink line in the following chart of the S&P 500:

(created in stockcharts.com)

Notice how stock prices bounced the previous three times they approached or hit that trend line. This is more reason I suspect that it will be a bumpy ride in the weeks ahead. We like to see trends, positive or negative, because it increases the confidence in the direction of the market. We would obviously prefer a positive trend, but at least if it is a negative one then we can pivot and act more defensively.

How we are investing right now: In light of how choppy and potentially bearish the market has been, I believe we are properly balanced relative to your risk tolerance and our process. On Thursday we added long-term Treasury bonds to a number of portfolios, mostly more conservative ones. That contradicts my long-term prognosis that interest rates will rise and bond values will fall, but in the short-term I feel it is the best hedge right now to offset additional stock market losses should they occur.

For more aggressive accounts it is likely we will hedge by holding a cash position, though we may sell Preferred Stock in order to purchase Treasury Bonds. I would like to use our existing cash position to buy a Technology sector fund (XLK), but due to the broader market concerns cited above we have held off.

All in all, patience is key right now given that I suspect more day-to-day volatility in the coming weeks. I am happy to explain which approach we are taking for your account(s). Let me know.

In Our Portfolios...


In Financial Planning...

If you want to make an IRA contribution for 2017, you have 1 week left to do so. The contribution must be made before tax day (April 17th) or else it will be considered a 2018 contribution. The maximum you can contribute is $5,500 (or $6,500 if age 50 or older). That can all go toward one IRA or it can be split between multiple IRAs, but the cumulative total cannot exceed that limit.

A few things to consider:

  • You may be prevented from making IRA contributions if your income was too high in 2017. There are multiple scenarios that could apply depending on your income, the type of contribution you want to make (tax-deferred vs. Roth) and whether you or your spouse already participate in a retirement plan through your employer. Contact me if you want the exact income limits to figure out whether you can contribute.
  • If you plan to make contributions in the future, do not make them monthly. I realize the desire to have a recurring savings behavior, but if your income ends up prohibiting you from contributing for 2018 (or future years) then you inevitably have to remove those contributions from your IRA. It is not worth the headache. Wait until year-end, see where your income winds up for the prior year and then make a lump-sum contribution if possible.
  • If you have the option of participating in your employer's plan, that is usually preferred over making IRA contributions because the contribution limits are much higher for 401k plans and Simple IRA plans (the most likely employer-provided options). You can invest up to $18,500 into a 401k plan and $12,500 into a Simple IRA plan.

What's New With Us?

It is a broken record by now, but if you received another welcome letter in the mail from TD Ameritrade or a letter referencing your account profile, just disregard. It's a long story but anything you receive from TD in that vein can be ignored. If you are unsure though, please ask.

If the weather holds up for a few days in a row I'm hoping to wash/clean our deck. If it's nice enough we might go down to Pike Place Market and (finally) ride the ferris wheel, which we have talked about doing for a while.

Enjoy your weekend,

Brian E Betz, CFP®
Principal

Is The Worst Stock Market Week In Two Years A Sign Of Things To Come?

Top Of Mind...

There is almost too much to cover from this past week:

Earnings season.
State of the Union Address.
January Jobs report.
Housing report.
The worst week for stocks in more than 2 years.
Groundhog Day.

I won't cover them all, but I do want to give my thoughts on what was the worst-performing week for the U.S. stock market since Jan. 2016. It was an ugly week all around. Most stocks were down. Bonds were down. There were few places to hide. The S&P 500 tumbled -3.8%, losing half of the previous 2018 gains that occurred in January.

Is this the beginning of the big market decline that those who have been sitting on cash for years have been waiting for? Unlikely. Could we see more losses next week and the week after? Entirely possible. But here is some perspective, consider the following:

  • Dating back to Aug. 2017 the S&P 500 index had gained approximately +18% coming into this past week. As bad as the past few days were, only one-quarter of that rally was lost.
  •  A week like this was somewhat inevitable. If you have seen some of the statistics I have shared here in recent weeks, stock price momentum was unusually high, dating back two generations.
  • It is a minor consolation, but two of the stock sector funds we own -- Utilities and Financials -- had the slimmest losses among all major sectors.
  •  In the case of the Financials sector fund we own, I still believe that is among the strongest areas of the market. More often than not, the strongest sectors are the ones that lead when the market rebounds.
  • The long-term trend of the broad stock market remains up. Of course that could change, but for now these pullbacks represent buying opportunities more than selling opportunities.

That last point is the most relevant one. We have seen virtually no market volatility since the Summer of 2016 -- and that is being generous. We really haven't seen market volatility since late-2015. Back then I viewed downswings with more of a defensive mindset than I do right now, simply because market conditions were much worse then compared to today. Whereas I looked to sell in 2015 I look at these pullbacks as opportunities to buy.

There is some bad news, of course, given that the market did slide nearly -4% this week. I detail that below in my MARKET commentary.

Seattle's lead in real estate shrinks: Housing prices nationwide rose an average of two-tenths of one percent in Nov. 2017. Prices have risen +6.2% annually. Seattle homes have appreciated +12.7% in the past year, which is still tops among the 20 major U.S. cities tracked, but that lead has narrowed. Las Vegas is closing the gap, where homes have risen +10.6% annually. San Francisco had the largest monthly gain, up +1.4%. A higher-than-usual number of cities (8 of 20) had price declines.

Here is a city-by-city look at the S&P/Case-Shiller housing report:

Despite prices falling in nearly half of the cities tracked, this report was pretty decent considering the time of year. These numbers are not adjusted for seasonality, so it is nice to see any gains whatsoever during the winter months. I am very eager to see whether this upcoming Spring real estate season in Seattle will be as hot as recent years.

To briefly touch on the other topics mentioned in the lead: The January unemployment rate held at 4.1% for the third-straight month... Earnings season had its biggest week yet, as Amazon, Google, Facebook, Apple and many others reported fourth-quarter results. I'll recap earnings season in a future post... I passively listened to President Trump give an uncharacteristically mellow State of the Union address.... And apparently Punxsutawney Phil saw his shadow, which means six more weeks of winter. Or for Seattle, just another February.

In The Market...

The S&P 500 fell -3.8% this past week. Here is how the individual sectors performed:

(price data via stockcharts.com)

It is nothing but a sea of red in the above image. Every sector was negative, as were each of the major bond categories. The latter is what makes this somewhat unique and concerning. Oftentimes investors will sell stocks to buy bonds, as a means of migrating to safety. Here, both stock and bond investors hit the sell button and moved to cash. Rising interest rates and falling stock prices is a bad combination that often leads to choppy weeks ahead. This alone makes the events of the past few days something to watch. One week does not make a trend, nor break an existing one, so we will just have to monitor how investors behave over the next few weeks while leaning on our process.

Two weeks ago I highlighted that long-term interest rates might finally be primed to spike. In those two weeks the 10-year Treasury yields has jumped from 2.64% to 2.85%. That Treasury rate is closing in on 3.00% for the first time since 2013.

In the short-term I think interest rates pause a bit either now or when 3.00% is reached. The long-term view suggests that the days of ultra-low rates may finally be over. Keep an eye on the below chart. If that falling trend (red line) is broken -- meaning that the 10-year Treasury rate jumps above that level -- bond investing will become more challenging in the months ahead (remember, bond values and bond interest rates move opposite one another).

Let's end on a positive note... The S&P index gained +5.6% in January. Not only was it the 10th-straight monthly gain for U.S. stocks, but it was also the best monthly return for the S&P since March 2016 and the best January to start any year since 1997. So there you go.

In Our Portfolios...


Q&A/Financial Planning...

As you start thinking about completing your taxes for 2017, a quick reminder about IRA contributions before you do.

If you have not maximized your IRA contributions for 2017 but would like to, do not complete your taxes until you have made that contribution. Many of you will be ineligible to make Traditional IRA contributions if you are already participating in a company 401k (or similar) plan. Some of you are eligible to make Roth IRA contributions, provided you still fall within the income limits.

You have until tax day, April 17th, to make IRA contributions of up to $5,500 (if under age 50) or $6,500 (if age 50 or older). The important thing to remember is that you can make those contributions for last year, which means you still leave yourself the ability to contribute for 2018 as well. You can invest the $5,500 into one IRA, or spread that amount across multiple IRAs. Your cumulative deposits just cannot exceed the limit. A quick reminder...

  1. Traditional IRA -- Your contributions get the tax deduction now and the funds grow tax-deferred until retirement.
  2. Roth IRA -- No current tax deduction for contributions you make, but the contributions plus earnings grow tax-free forever.

Let me or Gale know if you have any questions.

What's New With Us?

If you received a "welcome" letter or package from TD Ameritrade that references the transition from Scottrade, you can disregard it (see the image below). For some reason, because we were previously at Scottrade, TD must figure that we are apart of the mass transition that they are undertaking to migrate firms over to their platform. This does not apply to us since we migrated nearly a year ago. But, I can see why you might be confused by receiving such a big letter in the mail. Ignore.

In other news, I am excited for the Super Bowl. I don't care who wins. I just hope for a close game, although I think the Patriots will win by two touchdowns. 32-17, New England.

Have a great weekend,

Brian E Betz, CFP®
Principal

Are Interest Rates About To Explode Higher?

Top Of Mind...

Interest rates hit a high this past week that we haven't seen in 4 years.

The 10-year Treasury yield climbed to 2.64% this week, which is higher than it has been at any point since 2014. This is the annual interest rate an investor would earn if they bought a 10-year U.S. Treasury bond today. Take a look...

(chart created via stockcharts.com)

This is a pretty important development given that long-term rates have failed to get back to pre-recession levels ever since 2009. As the above chart shows, in the past five years rates have quickly fallen anytime they approached a certain peak (the pink, dashed line). The same fate could happen again here, but I suspect we may finally start to see real increase in long-term rates after a decade of dormancy.

What does this mean? There are a few implications if long-term rates do, in fact, move higher. For one, it means bond values will go down. Second, it could spell more positive returns for the Financials sector, as banks and other firms that lend generally benefit from higher interest rates. Third, it means more expensive financing for things like home mortgages and car loans.

How this affects us: As you know, most accounts own some amount of bonds to help diversify from stocks. We would likely migrate away from Treasuries or other bonds that possess similar characteristics, such as investment-grade bonds, which we sold this past week. It could mean sitting in cash for a period of time in the event there isn't another type of bond we feel is worth owning.

We continue to own high-yield bonds in most accounts, which are a very different breed than Treasuries. I suspect high-yields will not be immune from an increase in Treasury rates, but the negative impact on high-yield bonds should be dulled compared to "safer" bonds like Treasuries.

We will continue our analysis, see what the next week brings and act accordingly.

In The Market...

The S&P 500 gained +0.9% this past week. Let's look at how the individual sectors performed:

(price data via stockcharts.com)

Another week of gains for the S&P 500, which is quickly up +5% in just three weeks to start the new year. This most recent week was more flawed though, as four of the six sectors were negative on the week. Two sectors we are looking to buy next week are Financials (XLF) or Consumer Staples (XLP). Financials continue to trend nicely higher, while Consumer Staples appear on the cusp of a new rally.

As alluded to earlier, it was another down week for Treasury bonds, which fell for the 3rd-straight week. If bonds are going to fight off this rise in interest rates then investors will need to show up soon ready to buy.

We will likely make some modifications to our bond fund lineup as well in the coming weeks. TD Ameritrade amended their list of commission-free funds, which are the ones we try to use when appropriate. I have to dig in and research the new list, but if you have any questions feel free to ask. My hope is to find a buffet of funds that are comparable to the previous ones and use those so-as to escape incurring transaction costs.

In Financial Planning...

There is one change within this year's tax reform that I had not previously touched on but is probably worth mentioning. The ability to "recharacterize" a Roth IRA conversion is no more.

A Roth IRA recharacterization is the act of undoing a Roth conversion (something I wrote about a few weeks back here). It reverses the process of having turned a Traditional IRA into a Roth IRA, and along with it reverses the tax burden you would be subject to pay on the balance converted. Many people do this if, for example, their income ends up being much higher throughout the year than they anticipated. They would rather wait for another year than pay a higher tax percentage now on the converted amount.

The old rules allowed you all the way until Oct. 15th to undo a Roth IRA conversion that stemmed from the previous tax year. Now, you cannot do them at all. I highlight this particularly because we will sometimes recommend that clients convert a portion (or all) of their tax-deferred IRA balance into a Roth, whether because they are having an unusually low earnings year or because it simply makes sense to have those funds grow tax-free. Moving forward, there are no do-overs once that decision is made.

In Our Portfolios...


What's New With Us...

I will be ramping up my hiring search for a Chief Compliance Officer in the coming weeks. If you are curious to know more about the position or what I am looking for in a candidate, just ask.

Have a great weekend!

Brian E Betz, CFP®
Principal

Quite Possibly The Worst 401k Idea Ever

In The News...

After dropping off our daughter at day care this week I stopped by Walgreens to refill a prescription. There was just one problem...

The pharmacy didn't open until 9am.

I was not going to wait an hour so I continued on to the office. As I sat in traffic on Highway-99 I thought: there must be a better way. Six hours later, the solution has arrived.

Dr. Amazon: The Seattle logistics giant reported quarterly earnings on Thursday, which included news that Amazon has acquired pharmaceutical licenses to distribute wholesale prescription drugs in 12 states. This implies being able to order prescriptions and have them delivered right to your doorstep. On the earnings call Amazon was coy about its pharmaceutical intentions, but I assume their plans will disrupt the industry and spell trouble for the likes of Walgreens and CVS. Additionally, the move into health care introduces potentially millions of Baby Boomers to Amazon.

The worst 401k idea ever: In an effort to balance their tax reform package, Republicans have apparently discussed reducing the 401k contribution limit from the current $18,000 per-year to a fraction of that, reportedly $2,400 per-year. Their logic: If workers put less into their 401k plans, which provides tax-deferral, they will be forced to pay more in current income taxes year to year.

This is true. It is also incredibly stupid.

A 401k plan is as much about providing a vehicle that encourages good retirement savings behavior as it is about postponing taxes on contributions. The overwhelming majority of Americans do not save enough for retirement. I know this because I am in the trenches. I routinely see situations where people could save more and should save more, but do not. Most Americans consume what they do not save and it would be naive to think that those lost 401k contributions would seamlessly get funneled elsewhere (though we would do our best to help). Maybe the alternative will be the "MyRA" savings vehicle that President Obama unveiled in a State Of The Union speech a few years back. Remember that? Exactly, because it was a poorly engineered idea and has since been phased out.

If the 401k contribution cap is somehow cut by 86% ($15,600), I would likely advise most of you to scrap your 401k contributions and max-out a Traditional IRA instead. The maximum IRA contribution right now is $5,500 per-year ($6,500 if over age 50). For comparison, your employer would have to match 130% of your 401k contributions just to break-even with the IRA cap!

(max 401k contribution of $2,400) + ($2,400 x 130%) = $5,500

The good news is that this proposal appears to be dead-on-arrival, wisely shot down by President Trump (though it hasn't gone away completely). But the fact it was even muttered outside of a group brainstorm has me worried about whoever is in charge of tax reform.

In The Market...

The S&P 500 climbed +0.2% this past week. Let's look under the hood:

(price data via stockcharts.com)

This was a bumpier week for stocks than we have seen in a couple months, which is what I had said I expected in last week's blog. The S&P 500 was higher by week's end, but not before falling more than -1% midweek. The S&P extended its weekly winning streak to seven, which is rare territory.

While the 10 sectors were largely split between gainers and losers, this was a net-positive week for stocks, in my view. I do still think we'll see some flattening out in the weeks ahead, but it was good to see buyers step in and "buy the dip" (ourselves included) when stocks started to fade.

Earnings season seems to have lured buyers back into the fold too, particularly across the big tech names like Google, Facebook and Microsoft. Technology was the runaway winner, up +2.4% weekly. This was nice to see considering most client accounts owned the tech-sector fund (XLK) or the comparable Nasdaq-100 fund (QQQ) -- the former being tech-exclusive and the latter being tech-heavy. We sold XLK off Friday's gains. I still like the long-term outlook for technology but selling made sense in the near-term based on my analysis. This resulted in a nice gain for accounts that owned it.

In Our Opinion...

Have you ever heard a financial professional say that investing is about removing emotion?

I would hope so, because I have said it before. But that statement needs to be tweaked. Investing is about limiting emotion, not removing it. It is impossible to totally remove emotion when deciding when to invest, what to invest in or if it is time to sell. Here are a few examples:

  1. Loving your company too much. As a result, many people own a disproportionately high amount of company shares relative to other investments (primarily through their 401k plan, exercised stock options or restricted stock).
  2. Believing the market is "due to correct". Just because you think the market cannot continue at this pace means nothing. If you think we are on the brink of World War III or that the market is rigged, to each their own. But such sentiments are usually rooted in emotion, not rational analysis.
  3. Being quick to buy a falling stock or sell a rising one. I often say there is a reason an investment is rising or falling and you typically want to be on that side of the trend.
  4. Holding an investment due to special meaning. I see this often when investors hold a certain stock simply because a family member owned it for years. There is implicit confidence because someone you trust owned it. This is poor reasoning, in a vacuum, because the world changes so much generation to generation.

You may work for a great company, especially around Seattle or the Bay Area. But do you truly know both how your company will perform in the future as well as how investors will react to that performance? The answers are maybe and no.

Now, it is ironic in a sense. If you are heavily weighted in company stock it is probably due, in part, to company success. But at some point it makes sense to find some balance and diversify away from that one stock. I'm not saying sell everything or even sell the majority, but put down the kool-aid for a moment and assess the investment risk.

If you believe the market is going to fall or crash, why is that? Fear that we will see a repeat of 2008? Your political views? Anything can happen but it could be a long wait.

Just for fun, let's say it isn't. Let's say the market drops -10% tomorrow. Would you buy then? If not, how much would the market have to fall before you buy? If you are determined to wait until the next recession passes, you have to be right not once but twice. You first have to be right about the market falling in the near future. You then have to identify when the recovery begins, which could take weeks or months. Easier said than done, especially if your rationale stems from emotion rather than a disciplined investment process.

I would be lying if I said emotion never creeps into my decision-making process when choosing investments to buy or sell. But it is a fraction of thought as compared to leaning on our statistics-driven investment process.

In Our Portfolios...

Q&A/Financial Planning...

If you own an IRA or 401k and are approaching age 70, here are three letters to know: RMD.

RMD stands for "Required Minimum Distribution". It is the amount you must withdraw from your tax-deferred retirement accounts each year once you turn age 70 1/2 (don't ask why the half year applies -- the IRS is weird). The RMD rules are the government's way of saying that you have delayed paying taxes for too long and now must start recognizing your savings as taxable income.

How RMDs work: To keep it simple, you look up your age on one of two charts provided by the IRS. Your age will correlate to a "life expectancy factor" that you divide into the cumulative value of your tax-deferred 401k's and IRAs. The resulting figure is what you are required to withdraw and recognize as ordinary income in your tax return. Each year thereafter you look up your age and divide the new factor into your overall account balance. This life expectancy factor declines as you age past 70 because presumably your account balance is falling each year that you withdraw more and more funds.

The first year is unique! Take special notice when you turn 70.5 years old. Whenever that is, your first RMD must be taken by April 1st of the following year. Every year thereafter your RMD must be taken by Dec. 31st.

Why is the first RMD deadline April 1st rather than Dec. 31st? Likely because most people are unaware of the RMD laws so the IRS gives you a break in that first year. However, it gets a bit more complicated. Not only must you take that first RMD by April 1st, you must take the second RMD by Dec. 31 of that same year. Year 1 is the only year subject to taking two, separate RMD amounts.

Let's work through a quick example. Let's assume you turned age 70.5 on July 12, 2017. Here are the deadlines for taking your first few RMDs:

Year 1, taken by April 1, 2018 = (Balance on Dec. 31, 2016) / (Factor for age 70)
Year 2, taken by Dec 31, 2018 = (Balance on Dec. 31, 2017) / (Factor for age 71)
Year 3, taken by Dec 31, 2019 = (Balance on Dec. 31, 2018) / (Factor for age 72)
Year 4, taken by Dec 31, 2020 = (Balance on Dec. 31, 2019) / (Factor for age 73)

Note that this requires you to go back and look at what your account balance was at the previous year-end. If you need help calculating this, let me know.

What if I don't take my full RMD? This is where the IRS cleans up... You are penalized 50% of whatever amount you did not take but were supposed to take. So.... let's say your RMD is $10,000 and for whatever reason you only withdraw $2,000. The $8,000 missed RMD is penalized 50%, which means an additional $4,000 tax penalty! Now you see why the RMD rules are a big deal.

Can I avoid taking RMDs? The best way to avoid taking RMDs is to convert a portion (or all) of your tax-deferred funds into Roth IRA funds prior to age 70. RMD rules do not apply to Roth IRAs. Of course, whatever balance you convert to a Roth IRA must be recognized as income, so you are still paying Uncle Sam one way or another. However, by not being subject to RMDs it is less administrative hassle during retirement and it also means future tax-free growth because that is the biggest perk provided by a Roth IRA.

I often recommend doing Roth IRA conversions in chunks by doing a series of them as you near age 70. This spreads out the tax burden over multiple years. Or even better, if you anticipate a year or two where your household income will be unusually low, that would be a good time to convert to a Roth IRA because your income tax rate would be lower than normal.

Can I apply IRA withdrawals made prior to age 70 toward future RMDs? No.

Say I am 72 years old and I take MORE than my stated RMD for the year. Can I apply the excess amount toward next year's RMD? No.

What's New With Us?

Unfortunately we do not get any trick-or-treaters on our street, which I think is due to being on a steep hill. But we will be dressing up and going to a Halloween party this weekend.

Have a great weekend!

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

Hiring Falls But Employment Rises... Wait, What?!

In The News...

The number of U.S. jobs fell for the first time in 7 years. And it may not be a big deal.

First, the facts...

  • A total of -33,000 jobs were lost in September. This followed the prior three months where an average of +180,000 jobs per-month were added.
  • Despite this jobs decline, the unemployment rate fell from 4.4% to 4.2%.
  • The participation rate improved to 63.1%. This measures the number of those either working or looking for work as compared to the total working-age population.

How can this be? How could unemployment improve as jobs are being lost? Two reasons: Hurricanes Harvey and Irma. Those natural disasters threw off the census that measures the number of jobs added or lost for the month, called the Establishment Survey. In this poll, anyone unpaid for whatever week the 12th falls on is considered unemployed. While the Department of Labor claims the hurricanes skewed the -33,000 job-loss figure, the DOL does not believe it affected the unemployment figure of 4.2% or the participation rate, both of which are computed by the other employment census -- the Household Survey.

Household Survey: This census considers anyone with a job as employed for the month, even if they miss work the week the 12th falls on. I mention this because "Employment falls for the first time in 7 years!" will likely lead news headlines. Ironically, President Trump has long-called the Dept of Labor jobs numbers "false" or "phony", but this time the unemployment numbers may actually be misleading given the unique impact of two massive hurricanes striking within weeks of each other.

The eye of the beholder: It certainly does not help that we have dozens of different ways to interpret employment data. Depending on your bias you could find any nugget you want and use that data point to argue whether the jobs market is doing well or poorly. In my opinion, the participation rate matters as much as anything because it gives a complete view of employment relative to the total working-age population. Participation had been on the decline since early-2000, until making a positive turnaround roughly two years ago. This will be key as more Baby Boomers retire and younger Millennials and Generation Z'ers step into the workforce.

In The Market...

The S&P 500 gained +1.3% this past week. Let's look under the hood:

(price data via stockcharts.com)

STOCKS: The S&P 500 index climbed for the 4th-straight week and 6th time in the past seven weeks. So much for the volatile summer, huh? Since the blip in early-August the S&P has rallied +5.5% over the past seven weeks. Again everyone, this is bullish behavior. Eight of 10 sectors were higher last week, led by those we want to see leading amid a bull market -- Materials and Consumer Discretionary.

We sold our Financials sector fund (XLF) this past week for a nice gain of roughly 5%. Not all accounts owned this -- larger accounts and smaller, more aggressive accounts did. I still like Financials long-term but based on my analysis looking out over the next few weeks it made sense to take the gain and evaluate other options. One sector I am eyeing is Industrials (XLI).

BONDS: A down week for bonds, but not as bad as I would have expected given the S&P was up more than 1%. Of course, stocks and bonds are not negatively correlated anyway, even if they show tendencies from time to time. I don't read too much into this past week. For now I still favor the odds that bonds will rally in the coming weeks.

In Our Opinion...

It happened again.

As I sat down for lunch with someone I know through volunteer work, the first question I got was... "So when do you think the big correction will happen?"

I have written at-length about how I believe pessimism has fueled the stock market higher, though there are no data points to confirm/disprove that. Major market declines -- I am talking more than the -5% or -10% drops we see every year -- do not typically come until investors have become euphoric, or at the very least, complacent.

Looking at the data, stocks are technically "overbought" right now if you look at the Relative Strength Index (RSI). This measurement actually plays a central role in our analysis because it helps substantiate whether I believe a certain trend will continue or a new one is forming. RSI gauges price momentum by comparing the size of gains versus losses over a period of time. This is typically 14 periods, which could be 14 days, 14 weeks, 14 months, etc.

A RSI reading above 70.0 is considered "overbought". The S&P 500 is currently at a daily RSI reading of 78.0, a weekly RSI of 76.0 and a monthly RSI of 83.0. Sooooo, using the S&P as our barometer, the stock market is technically overbought on all three primary timeframes we use in our analysis. This would indicate that the market is overheated and due for a loss.

But it just isn't that straightforward. A stock can stay overbought for a very long time before ever realizing the sell-off that is expected. RSI is almost counter-intuitive in that way. Momentum breeds momentum until it doesn't, if that makes sense. Even when RSI falls back below 70.0 it often leads to greater demand among investors who want to buy the price dip, which in turn sends RSI higher as momentum picks back up.

To illustrate this, look at how the S&P 500 behave back in 2013 and then again during this current bull market rally. Notice that in 2013 the S&P ripped off another +30% gain after RSI crossed above 70.0 and was technically "overbought":

(chart created via stockcharts.com)

The opposite holds true too. When RSI for a particular investment falls below 30.0 it is considered "oversold" and due to rally. Similarly speaking, when this happens you have to be careful because the investment in-question can fall further and further and RSI can remain below 30.0 much longer than anticipated. This often occurs when investors unwittingly see that a stock has precipitously fallen in value and they buy it thinking they are getting a discount. More often than not that investment falls even further, resulting in unexpected losses for the investor who thought they were going to make some quick money.

The bottom line is that there is usually a reason an investment's value is rising or falling. If it is rising you should embrace the trend. If it is falling you do not want to be on the wrong side of that, hoping for a rebound. This is where trend-analysis matters, but I won't revisit that concept here.

In Our Portfolios...

Q&A/Financial Planning...

Will your income be lower than normal this year?
Are you 10 years or more away from retirement?
Are you retired and have enough savings to avoid dipping into your 401k or IRA?

If "yes" to any of these, you might want to consider converting a portion of your 401k or IRA account into a Roth IRA.

Why do a Roth IRA conversion? To lower your tax bill. Right now the money sitting in your 401k or IRA are pre-tax (unless you opted for the Roth 401k option), meaning you have deferred paying income taxes on those contributions and the earnings that stem from them until you retire. Eventually you will have to pay taxes as you withdraw money down the road. But if you convert now you will pay taxes today in exchange for never paying them again, no matter how large your account grows.

That last part is key, because I think we would agree that your account will be larger in the future than it is today (if you are still working). That means a much greater tax burden down the road. If you think your household income will be abnormally low this year, it might make sense to do a Roth IRA conversion so the funds can be subject to a lower tax bracket than they would be if you converted them next year.

But Brian, why not just wait until I am retired and withdraw money then? At that point I won't be working and my tax rate should be much lower anyway.

Fair point, but there are a few holes in that argument. First, remember what I just said about your savings being much greater by that point than they are today. Even if you are in a lower tax bracket in retirement, the gross amount of taxes you pay will cumulatively be greater than taking your tax medicine now on a smaller nest egg.

Also, by converting to a Roth IRA you avoid the Required Minimum Distribution (RMD) rules that kick in at age 70. The RMD rules mandate that you take out a certain amount from your tax-deferred 401k or IRA accounts each year until you die. This is the IRS' way of ensuring you eventually pay your taxes, rather than continuing to stockpile savings and deferring taxes even longer.

Though the RMD rules seem like a first-world problem to have, they can be annoying by forcing you to pay taxes. They can also make other parts of your life expensive. For instance, your Medicare Part B premiums increase as your income exceeds certain thresholds. RMD withdrawals will send your income higher and higher, particularly when you add in other sources like Social Security or pensions.

If you are nearing retirement, consider mapping out whether it makes sense to convert some portion of your tax-deferred savings. You can convert as little or as much as you want. For example, you could take a $50,000 IRA and convert $10,000 of it every year for 5 years, thus spreading out the tax burden across five tax returns. This may pose an administrative headache over time, but it is still an option.

One last thing: I want to make sure I distinguish a Roth IRA conversion from a Roth contribution. A Roth conversion is taking pre-tax ("tax-deferred") IRA funds already in existence and turning them into Roth IRA funds. A Roth contribution is making a deposit of cash into your Roth IRA. The maximum you can contribute is $5,500 if under age 50 and $6,500 if older, provided your household income is within IRS limitations.

Deadlines: The deadline to do a Roth IRA conversion for 2017 is Dec. 31st, so you have some time. The deadline for making a 2017 contribution is tax day of next year. Let us know if you are interested in either and we can help determine if it makes sense to do so.

What's New With Us?

I will be traveling for work down to San Jose and San Francisco later next week, but will be available as always.

Have a great weekend,

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

Why September Is A Schizophrenic Month For The Market

In The News...

This time of year is conflicting. Summer starts to wind down, but the holidays are here before we know it. Game of Thrones (my favorite show) ends but football season starts up, which fills my limited TV viewing void.

This same type of seasonal schizophrenia can be said about the stock market. September is historically a bad month for stocks. The S&P 500 index has been down in five of the past nine Septembers, including the past three. This is not to suggest doom on the horizon, but rather, September is simply a weaker month for stocks. The rub is, once we get through September we enter the strongest three-month period, October thru December, which is consistently the best market quarter of the calendar year.

Why is September historically weak? Tough to say. But a few factors may be in play to explain why it could be here... First, summer travel slows and more people are back to work, which means more computer time and thought about finances. This leads to greater buying and selling of stocks. Second, it's the last month of the quarter, which often comes with the volatility associated with quarter-end. Third, the S&P 500 is currently riding a nine-month winning streak that is at-risk of being snapped here in August, with four days remaining. That alone might lead some to think that the market tide is shifting downward and it is time to sell.

I do anticipate greater volatility in the weeks ahead, but for now the edge still goes to the odds that the market will rise heading into the end of the year. At least until the longer-term trend shifts, which it has yet to do.

In The Market...

The S&P 500 gained +0.8% last week. Let's look under the hood...

(price data via Yahoo Finance)

Stocks: The S&P 500 avoided a third-consecutive losing week. Most sectors followed suit, rising between 0.5% and 2.0%. The collective weekly rebound was nice to see, but will need to continue into next week to propel the S&P index back near/above its record high set back in July.

Bonds: Treasury bonds rallied for the fourth-straight week, with interest rates falling to the lowest levels since June. We currently own long-term Treasuries (TLT) within many client accounts. We are getting close to selling this holding but would like to see the price run another 1% or so higher before doing so.

As you'll see in the Portfolios section below, we bought a Utilities sector fund (XLU) following the sale of the Health Care fund (XLV). This allocation was made for most every client account, with the exact allocation ranging from 10% to 35%. Utilities possess arguably the smoothest, rising long-term trend among all major stock sectors. Take a look at the weekly chart of XLU here, which illustrates this upward pattern dating all the way back to 2010:

(chart created via stockcharts.com)

In Our Opinion...

As a business owner, a little paranoia is a good thing. It helps you stay focused on the day-to-day. It also helps you stay aware of competition and future risks without obsessing over them. As an investor, paranoia can paralyze you from putting money to work, but if harnessed properly can create opportunity.

The past 12 months is a great example of this. Every week someone voices to me their fear that the market will crash. In the past, as recently as the presidential election, I voiced my belief that the market tends to behave in contrast to what the consensus thinks will happen. There certainly is no consensus here that the market will fall, but the fact that it seems so many are waiting for it to do so has actually helped push stocks higher (the S&P is currently up +10% year-to-date).

Why?

My guess is this... When investors are nervous or fearful what do they do? Nothing, that's what. They don't invest, which means money stays on the sidelines. As time passes these investors slowly get back into the game, particularly as they see the market rise and fear missing out. It is not until a point of collective euphoria where we see big market drops or recessions.

Are we at that point of euphoria yet? No, I don't believe so. In addition to our daily statistical market analysis, I have yet to see/hear the behaviors from clients that suggest such excessive optimism. Frankly, I need to anecdotally hear about people pursuing speculative/ultra-risky investments, or a desire to load up on real estate -- things that are beyond their risk profile or financial means. Instead, I still come across people who appear ready to invest but cannot pull the trigger. For these reasons, I would say euphoria has not arrived.

In Our Portfolios...

Q&A/Financial Planning...

Are you able to save more OR in need of tax deductions?

Now is the time to adjust your retirement plan contributions to increase the amount you save/shelter from taxes between now and year-end. If you own a 401k (or like-account) through your work, review your contribution percentage and see if it is too low. A lot of people do not consider this until November, when it is too late to enact meaningful change for the current year.

Your contribution amount should not be as simple as, say, only putting in what your employer matches. For example, you may be under-funding your 401k if you take home considerably more income than you spend each month. Or, if you are frustrated by how much you pay in taxes each Spring. Conversely, you may be over-funding your 401k if you have considerable debt that you are having trouble paying down. The benefit you're getting by aggressively funding your 401k can get swallowed up by the interest payments tied to your debt.

If you plan to make IRA contributions, you have until April 15th of next year to do so for this current year. If you think your income could exceed the limit that prevents you from making tax-deferred contributions (or similarly, the limit that prevents you from making Roth IRA contributions), wait until the end of the year before making any deposits. Otherwise, you will have to remove those contributions in order to avoid an IRS penalty. Me or Gale are happy to help you figure out your savings abilities and limitations.

What's New With Us?

A few weeks ago I mentioned that I am looking to hire an Administrative Assistant. The target start date is Jan. 1st. I realize that is a number of months away, but just want to put out a reminder in the event you may know someone who is interested and qualified in the coming months. I am happy to provide a detailed job description upon request. This person will assist me directly and assume the duties of Chief Compliance Officer.

Have a great weekend,

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

Home Prices Keep Rising. Homeownership Keeps Falling. Huh?

In The News...

How valuable is real estate exactly?

Like anything else, real estate is only as valuable as what someone else will pay for it. I mention this because I am helping a client of ours value their business, and in doing so, discussed the value of real estate in 5 to 10 years time (when they plan to sell their business). These business owners rent their building space, which they think could prevent them from getting top-dollar upon sale.

Hold on, I said. That may not be a bad thing. If they owned the property they would struggle to find a buyer to pay 100 cents on the dollar for it, as it is commercial space and the purchasing company would likely integrate them into their existing operations, conducted elsewhere. That was my initial reaction. My second reaction relates to this:

(image via YahooFinance)

Yes, that is a vending machine mounted into what used to be a department store entrance inside of a shopping mall. More and more retail spaces are vacating as consumers purchase online (Amazon, etc.). Our client does not operate within a mall, nor do they own a retail store. But that may not matter. Property owners will feel the impact as online expansion has a trickle-down effect. If you have heard the phrase "a rising tide lifts all ships", this is the opposite. Commercial real estate growth will slow as brick and mortar businesses shrink their collective footprint.

As a result, owning the property might present greater challenges to our client in the event of a sale, particularly if they have debt attached to it. So not only would they struggle to get full value for the property, but their equity at-sale would be further reduced by any residual mortgage debt (if present).

Seattle real estate leads the nation (again): Residential real estate holds steady. The latest Case-Shiller housing report shows home prices were up nearly +6% year-over-year, as of January-end. Seattle was tops among major U.S. cities, up an impressive +11.3% annually, which nearly doubled the national average. Take a look at the price breakdown by major market:

Where have all the homeowners gone? Despite the nice rebound in housing prices since the 2011 bottom, homeownership has not recovered with it. This next chart is confounding, as it shows the decline in homeowners, which started over a decade ago:

Only 64% of Americans own homes, down -6% since 2005 and rivaling lows not seen since the 1960s. I discuss why this might be in the Opinion section below.

In The Market...

The S&P 500 fell -0.2% last week. Let's look under the hood:

(data source: Yahoo Finance)

Since I didn't send out a weekly recap last week, I didn't get a chance to talk about quarter-end. The previous Friday was both March-end and the end of Q1. The first quarter was strong for stocks. Here are some highlights/takeaways from the first three months of 2017:

  • S&P 500 climbed nearly +6.0% in the first three months of 2017 (including dividends)
  • Nine of the 10 major stock sectors were positive in Q1 (Energy was negative)
  • Technology was the best-performing sector, up +10.7% (XLK)
  • Tech-heavy Nasdaq-100 index rose +12.0%, outperforming the S&P index
  • 79% of S&P 500 stocks were above their 200-day average price at quarter-end, which is bullish
  • Bonds were positive across the board, led by high-yield bonds and preferred stock
  • S&P was essentially flat in March, meaning all of the quarterly gains occurred in Jan/Feb.

That last point is important. A few weeks back I mentioned that the overall market might flatten out for a period of time and that is exactly what we have seen. Take a look at this chart of the S&P index and notice that since touching a value of 2,400 back on March 1st, the S&P 500 has not returned there since.

(chart via Stockcharts.com)

More importantly, Relative Strength (RSI, the upper chart) has been falling. This is often a good leading indicator of future price. In this case, if RSI falls much further below 50.0 we likely will see stocks slide further in the near future. The long-term picture still looks bullish though, when looking out weeks and months. That is important because I believe it means investors are in "buy the dip" mode rather than "sell the rally" mode.

At the end of the quarter our primary stock holding is a Consumer Discretionary fund (XLY). We had previously held a Materials sector fund (XLB) up until two weeks ago. As a result, we hold a cash position across most accounts that we will look to reinvest in the near future.

In Our Opinion...

Continuing my earlier thoughts on real estate, how is it that home prices are rising but homeownership is not? Here a few reasons to consider:

  • We are evolving into a society of "renters" as much as "owners", whether by choice or by force. For example, 31% of people lease cars rather than buy them. This is up from 25% a few years prior.
  • The average worker changes jobs more frequently than ever, an average of 10 to 15 times in their career. This makes buying a home less appealing if the job change requires a geographical move.
  • Real estate prices have outpaced wage growth, making it more difficult to keep pace with home prices.
  • However, many prospective buyers simply have not saved enough to accommodate a 20% down payment, or an amount close to that.
  • Some people are still reluctant to buy due to fear that another housing crisis looms.
  • The average person gets married in their late-20s, as compared to Baby Boomers who wed in their early 20s. Marriage is the most common life event that precedes buying a home, which means there is a large pool of working 20-somethings who have yet to buy.

I'd be curious to know what you all think explains the rise in home prices and subsequent decline in ownership.

In Our Portfolios...

Stocks: We sold our Materials fund (XLB), which was owned within most client accounts. We will use the proceeds to most likely buy a Utilities fund (XLU) or a Nasdaq-100 index fund (QQQ).

Bonds: We sold a high-yield bond fund (ANGL) within accounts that owned it. We still own another high-yield bond fund (HYG) across certain accounts.

Q&A / Financial Planning...

This is your last week to make IRA contributions for 2016. If you wait past tax day you will lose the ability to contribute for last year, which matters if you want to deposit more than the following annual limits:

Under age 50: $5,500
Age 50 or older: $6,500

The annual limit applies across all IRAs you own, so while a 40-year-old could contribute $2,000 to one IRA and $3,500 to another, their combined contributions cannot exceed $5,500. However, if you already participate in a retirement plan through work beware of the tax deduction restrictions if you earn above a certain level. Contact Gale or myself if you have questions.

What's New With Us?

We will begin migrating accounts from Scottrade to TD Ameritrade this week. We will be in touch regarding the forms required. My hope is to make this a quick, seamless process. Again, I view this as a positive move for both you as clients and our firm as a whole.

Have a great week,

 

Brian E Betz, CFP®
Principal

A Trade War We Can Get Behind

In The News...

The dominoes fell nicely last week.

First it was Fidelity. Then Charles Schwab quickly followed suit. A day later TD Ameritrade did the same. One after another, the major investment custodians lowered their trading fees on stocks and exchange-traded funds (ETFs) last week, in the name of competition. Here are the changes:

Fidelity: Reduced from $8.00 to $5.00
Schwab: Reduced from $7.00 to $5.00
TD Ameritrade: Reduced from $10.00 to $7.00
Scottrade: No change, held at $7.00

Executing buy & sell orders for stocks has become more commoditized as technology evolves. This drives down costs, which is good news for investors. You may wonder why our custodian, Scottrade, did not move. It likely has to do with the pending sale to TD Ameritrade, which is set to close in September. That, and the fact that Scottrade is already competitive at $7.00 per-trade.

This is pretty good timing. As mentioned a few months back, I have been diligent, but patient, in evaluating which new custodian to use given the pending TDA-Scottrade deal. We have decided to go with TD Ameritrade and will begin that transition very soon. TDA was a top choice before news of this acquisition. I will contact each of you in the coming days to discuss what should be a seamless and secure account transition from Scottrade to TDA. There is no cost or tax implication related to this move. Paperwork should be minimal, with the option to be completed 100% electronically. I have vetted this process thoroughly and am very excited about the move.

Among the positives of choosing TD Ameritrade:

  • TDA offers a menu of commission-free ETFs, which means it costs nothing to buy or sell those funds. This is a nice perk considering we invest in some of the funds on that menu.
  • TDA is a growing firm, while already being one of the biggest players in the space.
  • Improved banking features, which will help those of you looking for a savings account-like solution. Banking that is smoothly integrated with your investment accounts.
  • An improved online platform (could be a personal preference).
  • At $7.00 per-trade, that cost is not the lowest in the industry but we can live with that for two reasons. First, on smaller accounts we do not excessively trade. Second, effective March 1st, we pay for all trading costs for clients who invest over $100,000. So the impact of an additional couple dollars per-trade is minimized on smaller accounts and is a non-issue altogether for larger ones.

Scottrade has been a fine home for us these past few years, but this is the right time to move. I will be in touch, but if you have any questions in the meantime, just call.

In The Market...

The S&P 500 index gained +0.7% last week. Let's look under the hood:

It marked the 6th-straight weekly gain for the S&P index. Turns out we did not see the follow-through across defensive sectors (i.e. Utilities) and bonds that I anticipated may happen. Not yet, anyway. Growth-oriented sectors regained the lead, while both dividend-heavy sectors and bonds fell. Overall, no major messages to take away from last week. I sense there will be more jockeying within sectors and a potential pause coming at the S&P 500 level, but overall the longer-term view looks good.

We currently hold Materials and Consumer Discretionary sectors across most client accounts. We remain invested in high-yield bonds and preferred stock as well. Those asset classes have been steady despite lagging last week, thanks in part to their nice dividend yields.

In Our Opinion...

I sold my car this past weekend. My Nissan and I had been together for 11 years. It is not practical with a baby on the way, so the break-up was inevitable. Our next car is to be determined, but I can say one thing for sure, as my advice:

Lease, don't buy.

I am not a "car person" so cars are not a big deal to me. I am a finance person and I believe the merits of leasing outweigh those of owning. The idea of owning a car outright may seem like the better financial decision. But I disagree.

In terms of overall wealth, few assets depreciate quicker than a car. The only way buying trumps leasing is if you own the car for a really long time or you'll exceed the annual mileage restrictions tied to the lease. If you are able to get 15-20 years and 150,000+ miles from a car, then owning may win out. But the depreciation that occurs over time is money you don't get back when you eventually sell, which is likely equivalent to what a lease payment would alternatively be. Lease terms typically cover major repairs or malfunctions, so you reduce your financial risk, and if you end up loving the car so much you wish to own it there is usually an option to buy when the lease ends.

What tips the scales for me is that I believe cars will become more obsolete in the years ahead. On-demand cab services and ride-sharing services will expand. In densely populated areas like Seattle, where the population is expanding but the infrastructure isn't, something has to give. If families merely cut back from three cars to two, or two cars to one, that will hurt auto demand. This means an even lower price for your used car when you eventually want to sell.

If you are in the market for a car, consider leasing. You can negotiate the terms just like you're buying. You can relieve yourself of the financial risk associated with major repairs. And, if you save money by leasing you can use those savings in other ways -- retirement, other debt payments, vacations, etc.

In Our Portfolios...

Stocks: We purchased a Consumer Discretionary fund (XLY) for accounts that did not already own it. We also purchased a Real Estate sector fund (VNQ) for certain accounts.

Bonds: No changes last week.

Q&A / Financial Planning...

Many of us grumble this time of year about how to reduce our tax bill. There is not much that can be done to affect 2016, so use this fuel to start planning for 2017. A few tax-deferral or tax-reduction options to consider:

  • Max-out your 401k contributions. Up to $18,000 if under age 50 or $24,000 if age 50 or older. I know many of you only contribute the percent your employer matches. Lets reevaluate.
  • Max-out your IRA. Up to $5,500 if under age 50 or $6,500 if age 50 or older. Lets first make sure you qualify, as you likely will be restricted from making tax-deductible IRA contributions if you also participate in your company 401k plan.
  • Exercise your stock options. If you have vested options that are in-the-money, meaning the current share price is greater than the strike price to buy them. Exercising starts the 1-year clock on capital gains, which could mean significant tax savings if you wait to sell one year (or more) from when you exercise.
  • Change your paycheck withholding. Reduce the number of exemptions you claim on your W-4. Fewer exemptions means more federal income taxes withheld, which increases your odds of owing less come tax season. (The lowest number you can claim is zero.)
  • Convert a portion of your IRA to a Roth IRA. Wait, what? I know, I know... Converting your IRA to a Roth means paying taxes on the amount/balance you convert, but this is a long-term play if the shoe fits. If your income will be lower in 2017 than most years, convert your IRA now while you can take advantage of a lower tax rate. That way your new Roth grows tax-free moving forward in perpetuity. Second, the Required Minimum Distribution (RMD) rules mandate that you withdraw a certain amount every year starting at age 70 1/2. This might force you to withdraw more than you need or want, increasing your tax bill against your will. RMD rules do not apply to Roth IRAs so you do not have to take anything out if you do not want (not to mention Roth withdrawals are tax-free if you do). Third, if you simply think your tax bracket will be the same (or higher) in retirement, consider a Roth conversion.

What's New With Us...

I covered the biggest news in the first part of this weekly blog. Again, if you have any questions regarding our choice of TD Ameritrade please call me. This is a positive move, following months of patience and due diligence on my end.

Have a great week,

 

Brian E Betz, CFP®
Principal