How Different Investment Accounts Are Taxed

Hi everyone,

Before I get into the latest housing numbers and last week’s stock market performance, watch our brief video explaining how different investment accounts are taxed. Hopefully this serves as a good resource as you start prepping for tax season in January.

Let us know if anything is unclear or if you want additional information regarding taxes.

Real Estate: Home values continue to stagnate nationwide. Home prices were unchanged in the month of September and fell for the second-straight month in Seattle, down -1.3% (per the latest S&P/Case-Shiller report). Seattle was the biggest loser among the 20 major cities tracked, of which 8 cities experienced monthly price declines. Year-over-year, Seattle homes remain +8.4% higher, which is above the +5.5% national average but a far cry from the +13% growth of just a few months ago.

Take a look at how each major city behaved:

Las Vegas has been on a tear, up +13.5% annually, while San Francisco remains in the second spot (up +10%).

In The Market...

The S&P 500 gained +4.7% last week. Let's look under the hood:

(price data via

The stock market was resilient last week, almost the exact opposite of what had happened the week before. Coming off a -4% weekly loss, the S&P index rallied nearly +5% as all 10 sectors gained.

There were some distinct positives about last week, including the S&P getting back above its 200-day moving average. The end of the week happened to coincide with the end of the month, for which the S&P gained +1.8% in November. It really was not a good month for the market considering stocks lost roughly -7% in October. Most of the same risks that I have been emphasizing since then still exist. Prices are likely to remain choppy, although the news on Sunday that there may be some trade tension relief between the U.S. and China seems to be boosting stocks to start this new week.

We finally added the Health Care sector fund (XLV) that I have mentioned over the past few weeks. By my estimation, Health Care is the strongest sector and last week’s rally has it poised for a bigger run. We will see.

Most client accounts are getting closer to being fully invested, although we are still holding some cash. The bond market continues to flail around, providing no good opportunity. Until that changes, any accounts that include an allocation into bonds will continue to hold cash instead. Contact us if you would like to discuss.

In Our Portfolios...

What's New With Us?

My family went to Safeco Field on Saturday evening, which was transformed into a holiday event called “Enchant Christmas”. From the light maze to ice skating to all of the other activities and vendors there, it was a cool event that apparently will be there all month. Our daughter loved it, as did we.

Have a great week!

Brian E Betz, CFP®

Housing Prices Come To A Halt

Something happened for the first time in a long time… Housing prices fell.

Not everywhere, just on the west coast. Seattle real estate dropped -1.6% and San Francisco homes dipped -0.3% in August, per the latest S&P/Case-Shiller report. Home prices were broadly flat nationwide during the month and are +6.0% higher compared to one year ago.

Here is a city-by-city look:

Despite the monthly loss, Seattle real estate has still appreciated +9.6% annually. Las Vegas remains atop all major cities, up +13.9% year-over-year, while San Francisco moved into the second spot (up +10.6%).

The annual growth rate has slowed just as I predicted a year ago or so. But growth is still growth, even if it is not the double-digit clip that most homeowners have come to expect over the past few years. I believe prices will slow a bit more, especially amid higher mortgage rates. I cannot speak to how loose or rigid the lending standards are compared to the past few years, but two factors working against housing demand are higher rates and a tepid stock market.

In The Market...

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

(price data via

Last week was constructive, though not great. Most sectors rallied, which boosted the S&P 500 back above its 200-day moving average. This is a positive, but only if it sticks. Soon after the S&P eclipsed its 200-day moving average on Wednesday, selling picked up and pushed prices back down a bit.

These types of stalled-rallies are often the result of what many call “overhead supply”, where investors who held throughout a period of losses are looking for the first opportunity to sell their holdings once prices rebound. This amount selling (“supply”) overwhelms the number of investors looking to buy, which results in falling prices.

During strong markets, investors look to buy when prices fall. During weak markets, investors look to sell when prices rise. Is this a “weak” market right now? Tough to say. I tend to think so, but the next few weeks should bring clarity.

I do think the market will eventually resolve itself by moving higher, but right now I think investors remain a little too complacent coming off the October decline. The bet would be that this complacency leads to additional losses, until stocks have reached a truer “bottom” than the one we saw a few weeks ago.

We added a S&P 500 index fund (SPYD) that is weighted in S&P stocks that pay the highest dividends among the index components. We also added to our Utilities fund position (FXU). Health Care remains the top sector that we are looking to add when appropriate.

In Our Portfolios...

Have a great week!

Brian E Betz, CFP®

The Cost Of Business Just Went Up

The cost of business just went up. Literally.

Long-term interest rates reached a level not seen in over 4 years this past week. The 10-year U.S. Treasury bond yield hit 3.00% for the first time since Dec. 2013. Take a look:

(chart created in

As you can see it has been a long time coming, but something that has seemed inevitable since the start of this year when rates really started to trend higher. You can also see how low rates remain compared to 10 and 20 years ago (or 30 years ago when the 10-year yield exceeded 10%!).

What this means is that the costs to finance have gone up. Mortgages, car loans, student loans, lines-of-credit, etc. are all getting more expensive. This is a big reason why I recommended refinancing debt in 2016 and 2017 because this day would eventually come. Higher rates are not a bad thing -- actually the opposite. But it does mean we are now seeing real inflation take hold.

For years we have heard that inflation is a problem and that interest rates were about to skyrocket. Those have been utter myths. But today they are more of a reality. It is natural for inflation and rates to rise as the economy expands. The key is containing both so that they rise at a steady, sustainable pace. If they rise too quickly that is when we see shocks to various markets, as we did with housing in 2008.

Home prices rise: Speaking of real estate, home prices forged higher in February, rising by an average +0.4% nationwide during the month and +6.5% over the past year. Seattle impressively continues to lead all major cities, up +12.7% annually. Seattle homes also rose the most in February, up +1.7%. Six other cities saw home prices rise by more than +1.0% as well in February alone, including Denver, Detroit, Las Vegas, Los Angeles, San Diego and San Francisco. On a yearly basis, Seattle leads Las Vegas (up +11.6%) and San Francisco (+10.1%).

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

In The Market...

The S&P 500 was essentially unchanged this past week. Let's look under the hood:

(price data via

This past week was pretty dormant considering the biggest companies – Amazon, Google, Facebook, Microsoft – all reported first-quarter earnings results. In fact this time a quarter ago stocks began what resulted in a -10% market decline. The S&P index continues to float between the January record high and the February low.

It was a defensive week, with dividend-paying sectors leading the way (Utilities, REITs) while the more economically sensitive sectors (Materials, Industrials) were the worst performers. Long-term Treasury Bonds gained as well, despite the 10-year Treasury yield hitting 3.0%.

This type of activity is what I would expect to see amid stock market volatility. The overall market outlook did not change much from the previous week. I remain cautious, particularly as we get closer to the summer months, which tend to be bumpy for stocks. We are days from May, which carries the moniker “Sell in May and Go Away” for the tendency by investors to sell stocks and wait until the Fall to start buying again. There is some precedent for this looking back over the years, however last year bucked that trend as the market plowed higher throughout the summer.

We sold our Financials sector position (XLF) across all accounts that owned it. I do not like the movement within Financials over the past two months, which has been relatively weaker compared to some other sectors. To that end I believe there are better sectors to own, namely Energy, which we are looking to buy but will be thoughtful in doing so. We are content sitting on a cash position right now given how choppy the overall market has been. We will be patient and reinvest those funds in the future.

In Our Portfolios...

In Financial Planning...

As Summer nears and the housing market heats up, I know a lot of people who are revisiting the same conversation from a year ago:

Do we sell our house and buy something new, or, do we remodel?

Many of these people are in a better financial situation than they were a year ago, so in a vacuum it may be enticing to buy a more expensive home or to pump money into their current one.

But should it be?

Consider some key differences from a year ago. Unless you are downsizing the next home is only going to be more expensive, so any additional equity you have built up over the past year will be necessary toward the new home. Second, as mentioned, interest rates are higher today. So if you end up with a mortgage balance that is bigger than what you currently have, not only will your monthly payment be bigger but your interest payments will increase. Finally, if you go the remodel route, be aware that contractors are likely more expensive and less available than in recent years. Also, unless you are paying for the remodel with cash, your line-of-credit will come with the same aforementioned financing costs.

It is important to know how the different markets have evolved, especially at a time when housing values are slowly leveling off and financing costs are really starting to rise.

What's New With Us?

As a reminder, I will be out of the office on vacation Monday through Wednesday next week. If you need me I will be available remotely, but may not be quick to respond.

Have a great weekend!

Brian E. Betz, CFP

Do Pregnancy Rates Predict Stock Market Returns?

Before I dive into this week's blog post, I want to let you all know that we are actively looking to hire an Executive Administrative Assistant. The full job posting is available on our site here. If you know someone who might be interested, let me know. They can reach out to me directly with their resume as well. Now on to this week's market thoughts...

Do pregnancy rates predict future economic recessions?

According to the National Bureau of Economic Research (NBER) they sure might. Their study tracked 109 million births that occurred from 1989-2016 and found that the number of conceptions declined ahead of eventual declines in economic growth (GDP) back in the late-80s, then again ahead of the tech bubble in the late-90s and then once more ahead of the subprime mortgage crisis in 2007.

This chart shows the positive correlation between conceptions (solid line) and economic production (dashed line):

(per the National Bureau of Economic Research, via CNBC)

I can get on board with this. When we are financially optimistic we tend to spend more. When we are pessimistic or uncertain we tend to spend less. Kids are expensive, so it is reasonable to assume that couples might think twice about having one or more kids if they are concerned about things like job security, stock market conditions or the U.S. economy in general. There are very few areas that are truly recession-proof and two of them happen to be child care and college tuition. If birth rates decline it is very possible that it is because families consider those costs, at least to some extent.

This hopefully goes without saying but this report should not influence investment decisions, at least not in a vacuum. It is a human interest story more than anything. But it is a pretty plain way of thinking about how we feel about the market and economy.

Corporate earnings boom: It was a solid quarter for large publicly traded companies. Revenue growth was terrific and the overwhelming majority of companies surpassed earnings expectations. Here are a few of the highlights (per FactSet):

  • Earnings grew nearly +15% in Q4, which was the most for any quarter since 2011.
  • All 11 stock sectors experienced profit growth. So unlike prior quarters, positive earnings results were not limited to a handful of sectors.
  • Sales increased +8.2%, which was also a high dating back to 2011.
  • Compared to estimates, 77% of all S&P 500 companies beat their sales targets. This is the highest percentage since FactSet started tracking data in 2008.

Because we emphasize sales over profits, here is a sector-by-sector look at revenue growth in Q4:

(source: FactSet)

Housing prices inch higher: Home values appreciated by an average +0.2% in December nationwide (per the S&P/Case-Shiller report). Seattle real estate beat that average, rising +0.6% during the month, and continue to lead all major cities on an annual basis as Seattle homes have risen +12.7% in value over the past year. Las Vegas continued to narrow that gap, up +11.1% annually, followed by San Francisco (up +9.2%).

Here is a complete city-by-city look at housing price changes:

In The Market...

The S&P 500 rose +3.6% last week. Let's look under the hood:

(price data via

Last week's surge came on the heels of the S&P falling -2% the week prior, so some context is needed. Nonetheless, following a week where all 10 stock sectors were negative it was good to see all 10 sectors rally back. As a whole the S&P 500 index still remains 3% below its previous peak set back on Jan. 26th. In my view that peak needs to be surpassed soon in order to sustain this rally in the weeks ahead. Or I sense market conditions will remain choppy.

If this rally is to sustain across all/most sectors of the market, I still think Technology will lead the way. Tech continues to look the healthiest among all areas of the market, on all timeframes we analyze. This past week it was Tech and the other growth-oriented sectors that performed the best, namely Financials and Industrials.

We continue to own Financials as well as a tech-heavy index fund (SPYG) across most accounts. I have been looking to add the Tech sector fund (XLK) for a couple weeks but am still weighing whether to cut bait on our Utilities position or wait for a potential rebound in the Utilities sector. This is getting in the weeds a bit, but I am happy to share more if you're interested in my thought process.

Since I didn't send out a blog last week I didn't get to mention that the U.S. market snapped its 15-month winning streak, as the S&P 500 fell -3.9% in February. So far March is starting out much better than did February.

In Our Portfolios...

What's New With Us?

I will be sending you our updated Form ADV 2A, which is disclosure information pertaining to our firm. This is a form you received when you first became a client and is something we update at least annually. If you have any questions about its contents, please ask. However, no action is required of you. It is purely for your information.

I am hoping the sunshine lasts through the weekend so that I can mow our yard for the first time this year. I will also finish getting settled in to our new office at 2nd Avenue and Columbia St. If you happen to be in downtown Seattle please stop by and say hi!

Have a great weekend,

Brian E Betz, CFP®

'Tis The Season For A Stock Market Surge

In The News...

Eleven months down. One to go. We are officially in the home stretch and the stock market is red-hot.

Seasonal warmth: I have repeatedly said how the 4th quarter (Oct thru Dec) is historically the strongest market period of the year. That seasonal strength was slow to develop but has really taken off in recent weeks. The S&P 500 gained +3.2% in November (including dividends) and is up +20% year-to-date. December is historically the best-performing month of them all, which bodes well for market momentum finishing out 2017. More on this below.

Housing cracks? Home prices grew +0.4% nationwide in September, showing steady growth similar to prior months. The big news is that home values actually declined in Seattle (down -0.3%) for the first time in nearly 3 years (Jan. 2015). Only two other major markets, Detroit and Washington D.C., saw prices fall in September. Despite the monthly drop, Seattle real estate continues to lead the nation year-over-year, up nearly +13% in the past 12 months. Las Vegas ranks second over that same time (+9.0%), followed by San Diego (+8.2%).

I am not surprised that housing prices flattened a bit here locally. While I don't foresee prices sustaining double-digit percentage growth, I don't see prices falling, either. I would expect that housing prices continue to rise but at a slower, more moderate pace than we're used to in Seattle and across the West Coast at-large.

Here is a detailed look at the latest S&P/Case-Shiller housing numbers:

In The Market...

The S&P 500 gained +1.6% this past week. Let's look under the hood:

(price data via

When you look at the broad stock market through the lens of the S&P 500, you would really have to go back to the mid-90's to find a market period this strong. Consider this... the S&P just completed its 13th-straight monthly gain. That literally has not happened since 1995. The size of this bull market, as measured by the total gains, are not bigger than more recent winning streaks but the rise has been more consistent, as evidenced through the 13 consecutive monthly gains.

The S&P 500 index blew through 2,600 and appeared on its way to an even bigger week than the +1.6% gain suggests. But pretty soon after the Michael Flynn news broke on Friday stocks got choppy in a hurry and ended the week with a whimper. Financials led the way, which were likely buoyed by the prospects of the GOP tax plan passing through Congress. Technology and Real Estate were the lone losers.

Bonds were down, despite a big Treasury bond rally on Friday. High-yield bonds showed some cracks, which I am intently watching for a couple reasons. First, high-yield bonds have taken a tumble around this same time each of the past two years. Second, when high-yield bonds fall they usually pull stocks down with them in the days ahead. We'll see if either or both of those things happen into mid-December. Market momentum today is stronger than it was at this same time in 2015 or 2016, so that is a plus.

In Our Opinion...

Every month that the market moves higher investors become more willing to invest. I know this because I hear about it, both from you as clients and others who are not. This is a normal reaction and in some ways makes sense -- if the market is trending higher we should be willing to invest more, or at least refrain from selling the investments we own. This occurs because if the market is rising we want to make more money. We expect it.

But what exactly do we expect?

This is essential when talking about investment returns. Expectations should stem from having a coherent plan. We recommend using these two steps to work backward:

  1. Identify your end financial goal(s).
  2. Calculate how much you need to invest each year, and subsequently how much you need to earn each year, to achieve that goal.

This is obviously over-simplified, but the point is, once you know what you need to earn the year-to-year performance of the "stock market" becomes less important. I mention this because the S&P 500, which I use to broadly define the market, is currently up +20% for the year. So long as you are close to earning what you need for the year, that is much more important than whether you are keeping pace with the S&P 500.

If your plan specifies a need to earn +10% per-year and you are currently up +11% year-to-date, you are right on track. But if you need to earn +10% and are only up +3% year-to-date, different story. Do not get frustrated if you feel like you should be earning more if you don't know how much you need to earn to begin with.

Arbitrarily feeling like you should make more can encourage bad behavior. It often compels us to take investment risks we otherwise would not take, which can turn out disastrous. It convinces us to be more aggressive than what our true risk appetite can stomach. Over the long run it is more likely that the market will settle down and only rise by +10% in 2018 than encore with another +20% return in 2018.

The opposite holds true too. Suppose the market were down -20% for the year right now rather than being up that amount. This can compel us to turn more conservative than we should be, which is equally as damaging. Part of being able to participate in stock market gains is understanding the potential for loss. Yet when losses happen, we become prisoners-of-the-moment and quickly forget that:

a) The stock market has consistently risen in the long run.
b) We can actually stomach greater short-term loss than we think, because we have properly planned.

As long as you understand what you need to earn on the upside each year and what percent you can afford to lose in the event of a down year, whatever happens in "the market" is mostly noise. As an investment management firm we strive to achieve the gains you need while limiting losses. Generating gains has particularly been the focal point this year given the overall market's ascent. We always keep one eye on loss-prevention too, so we can respond well should the market take a negative turn.

In Our Portfolios...

Q&A/Financial Planning...

There are a few tax planning related things I want to discuss, but since they stem from the proposed GOP tax plan that has not fully passed, I will hold that commentary for now.

Instead I want to share my latest blog post that is available on our general blog page: Why So Emotional? Avoid These 5 Irrational Thoughts About Investing. I briefly wrote about the topic of emotional investing a few weeks back and thought it was worthwhile to flush out a more complete blog post. I hope you like it.

What's New With Us?

From time to time you will receive emails from TD Ameritrade regarding such things as trade confirmations or fund prospectuses. A few of you have asked if you can turn off these email notifications. Unfortunately, we cannot. The only way to do so is by electing physical mailing of account statements, which you do not want because of the service charge assessed for mailing documents (as companies go green). If you have any questions about the emails you receive please ask, but you should be able to ignore/delete most of them.

Have a great weekend,


Brian E Betz, CFP®

GOP Unveils Its Tax Plan. Could It Lead To A Housing Recession?

In The News...

Republican Congressional leaders released details of their tax plan. Here are the major reforms:

  • Income taxes: The number of tax brackets would fall from the current seven to four: 12% (assessed on taxable income between $24,000 and $90,000 for married couples), 25% (on income from $90,000 to $260,000), 35% (on income from $260,000 to $1 million) and 39.6% (income above $1 million). The most notable change is that the 25% bracket would cover income up to $260,000 for married couples. Today, income that exceeds $153,000 is taxed at 28% and income exceeding $233,000 is taxed at 33%. 
  • 401(k) contributions: No changes to contribution limits or deductions.
  • Small business taxes: A portion of pass-through income from business profits would be taxed at 25% rather than the owner's likely higher personal tax rate.
  • Mortgage interest deductions: Today you can deduct interest on up to two home mortgages, not exceeding $1 million in mortgage debt. The $1 million limit would be cut in half, meaning you could only deduct interest tied to a maximum of $500,000 in mortgage debt.
  • Standard tax deduction: This would double to $12,000 for individual tax filers and $24,000 for marries couples.
  • Personal exemptions: Would be eliminated. Today, you get to deduct $4,000 apiece for you, your spouse and any dependents in your household. So, a family of four would go from $16,000 in exemptions to $0.
  • Alternative Minimum Tax (AMT): Would be eliminated.

There are more changes, but these are the major ones. For my personal thoughts on this initial GOP tax plan, scroll to the OPINION section below.

New Fed Sheriff In Town: Four years after taking the reigns of the U.S. Federal Reserve, Chairwoman Janet Yellen is being replaced. President Trump's nominee, Jerome Powell, will take over the Fed in Feb. 2018 when Yellen's term expires. Yellen has held the position since 2014. She took over the post from former Chair Ben Bernanke (2006-2014), who in turn took it over from Alan Greenspan (1987-2006).

What does this regime change mean to future monetary policy? Probably not much. From what I have read Powell was a supporter of Yellen and the two were largely in lockstep with regards to the timing of interest rate hikes. I highlight that because among those who have bashed the Fed, the biggest backlash has been how long it took the Fed to begin raising interest rates. While the change in leadership initially seems like no news, remember that this is Trump's appointee. Trump had promised major shake-ups to monetary policy and it appears that will not be the case. In my view that is wise. I am also not surprised at the pivot, either.

Latest on real estate: Housing prices gained +0.5% in August, per the latest S&P/Case-Shiller report. The tide might be turning a bit, as Seattle homes appreciated just +0.2% for the month and Portland homes were up +0.1%. San Francisco was the only of the 20 major cities tracked that saw prices decline, slipping -0.1%.

Annually speaking, homes have appreciated nationwide by an average of +6.1%. Seattle real estate has gained +13.2%, while Las Vegas ranks second with prices rising +8.6%. Here is a complete city-by-city look:

I would expect housing prices broadly to settle in to the +4% to 5% annual growth range in the coming year. That is more representative of a smooth housing market. I would expect prices in/around Seattle to slow a bit as well, meaning prices that rise at a slower pace than the currently torrid +13% growth. Seattle homes should remain near the top compared to the other major cities, given the ongoing tech migration and recent success of Amazon, Boeing and Microsoft.

In The Market...

The S&P 500 gained +0.3% this past week. Let's look under the hood:

(price data via

Ten months down, two to go. So far 4th quarter seasonal strength I have preached has been as advertised. The S&P index rose +2.3% in October. Staring down the barrel of November and December, here is a recent historical look at how the S&P 500 has performed in these two months, cumulatively (including dividends):

2016: +5.9%
2015: -1.4%
2014: +2.4%
2013: +5.6%
2012: +1.8%
2011: +0.7%
2010: +6.7%
2009: +8.1%
2008: -6.6%

As you see, broad market performance has been positive nearly every year in these two months over the past decade. Coming off a somewhat mixed week, with four of the 10 sectors being in the red, I still believe market conditions look strong moving forward. Next week I will dig into earnings season results, which will begin to wind down.

In Our Opinion...

Among the proposed tax reforms, the most significant may be the slashed mortgage interest deduction. You can currently write-off interest tied to $1 million in mortgage debt. Under this tax proposal that $1 million limit falls to $500,000, meaning a reduced tax deduction if your mortgage exceeds $500,000. Here is what Jerry Howard, CEO of the National Association of Home Builders, had to say about it on CNBC:

"There are seven million homes on the market right now that are more than $500,000. Those houses are automatically going to be devalued." -- Jerry Howard, National Association of Home Builders

Howard went on to say that this would lead to a housing recession, as such depreciation would become contagious and spread across real estate markets. This is a bombshell quote considering the source.

Rather than use $500,000, a more appropriate number to cite would be $625,000. At that purchase price, assuming the home buyer puts the standard 20% down toward the home, the resulting mortgage would be exactly $500,000. If your mortgage balance today is less than this, you are unaffected. If it is more, your tax deduction falls.

But is it that straightforward? Maybe not. First, remember that deducting mortgage interest is part of itemizing your tax deductions, rather than taking the standard deduction. Under this tax plan the standard deduction would double from $6,000 to $12,000 for individuals and $12,000 to $24,000 for married couples. On its surface it appears this would compel more people to take the standard deduction and fewer people to itemize. Let's just see...

Let's assume that your average mortgage balance during the year is $500,000 and the interest rate on that mortgage is 4.50%. That means you would have paid the following in mortgage interest throughout the year: $500,000 x 4.50% = $22,500 in mortgage interest paid.

Is it a coincidence that this is very close to the $24,000 standard deduction for married couples? Probably not. So, in a vacuum, if the only itemized deduction you had was interest tied to a $500,000 mortgage, you would be very close to the break-even point between itemizing vs. taking the standard deduction.

Back to Howard's quote... I disagree that this change would lead to a housing recession, for two reasons. First, if we are talking about residential homeowners, their list of reasons for buying a home likely does not include whether they can deduct all of the resulting mortgage interest. If their list of reasons does include such math, it is probably toward the bottom of their priorities. Existing homeowners will still upgrade into a bigger/nicer home if their life needs it and their finances allow it. First-time home buyers are new to the game and won't know any different.

Second, real estate investors (the other type of buyer) are unique. I would suspect many of them purchase with cash, meaning little-or-no financing. I would further assume real estate investors are already deducting the interest tied to the mortgages on their primary residence, if they have a mortgage at all. If they purchase additional real estate with the help of a mortgage they cannot deduct that mortgage interest today anyway, so reducing the debt limit from $1 million to $500,000 is irrelevant to them.

It is hard to give too much opinion on the overall tax plan because the details are fresh and there seems to be a number of potential tax offsets. I do favor a simpler tax code and like seeing fewer income tax brackets (I have actually long-favored a flat tax). I would be interested to know your thoughts -- feel free to email me with them.

In Our Portfolios...

Q&A/Financial Planning...

Do you know your 401(k) vesting schedule?

Mostly likely not. If you just started a new job or are unsure how long you will stay at your current one, make sure you know the vesting requirements on these employee benefits:

  1. Employer contributions made into your 401k account
  2. Restricted stock (RSUs)
  3. Stock options

"Vesting" means how long you have to wait until you have earned the dollars or shares granted to you. When it comes to restricted stock or stock options awarded to you, the vesting is usually stated pretty clearly on a statement. When it comes to employer 401k contributions, namely the matching provisions, you usually have to dig into the 401k plan summary to know the vesting schedule.

For example, I recently reviewed the new 401k plan for a client who changed jobs earlier this year. He earns a 25% employer match on up to 6% of his pay. So, if he contributes the full 6% that is eligible for the match, his employer effectively contributes 1.5% of his salary into his 401k. Those employer dollars vest in four increments: 25% after 1 year of service, 25% after 2 years, 25% after 3 years and the remaining 25% after 4 years.

This is key because he is not sure if he will be with the company for four years (as most people aren't given how frequently workers change jobs these days). There is value in pointing out what money he would be at risk of losing should he leave at any time within the first four years of employment.

It is common for the quality of the employer match to persuade or dissuade people from participating in the 401k at all. That is for another conversation, but the point here is that if you are spending time evaluating the employer match you better look at the vesting schedule while you are at it.

What's New With Us?

As I mentioned a few weeks ago, I am going to start creating some short, YouTube-like videos that address different aspects of our firm. The first one will be on our investment philosophy and how it compares to traditional long-term investment theory. I'll be eager to get some feedback.

Last weekend it was 70 degrees here in Seattle. Today it is snowing. Go figure...

Have a great weekend,

Betz Signature 250px.png

Brian E Betz, CFP®

Trump's Tax Plan Has Holes, But Also A Good Shot Of Happening

In The News...

Are major tax changes coming?

We got the first glimpse of President Trump's tax plan, and well, it told us a lot while telling us very little. Here are the notable changes:

CURRENT tax structure:

  • Income taxes: Today there are 7 different progressive tax brackets, ranging from 10.0% to 39.6%.
  • Standard deduction: $6,350 for individual tax filers and $12,700 for married couples who file together.
  • Itemized deductions: You can write-off many expenses, such as mortgage interest, donations and medical expenses exceeding 10% of adjusted gross income (AGI).
  • Corporate tax rate: 35% for C-Corporations.
  • Smaller biz tax rate: Varies for S-Corporation and Sole Proprietorship earnings as they flow through to the individual/family's personal tax rate.
  • Federal estate tax: 40% is applied to the value of assets left behind, if taxable estate exceeds $5.5 million.
  • Alternative minimum tax: AMT is paid by high-earners who receive what the IRS deems are too many deductions and exemptions.

TRUMP tax structure:

  • Income taxes: Reduced to 3 different progressive tax rates of 12%, 25% and 35%.
  • Standard deduction: Doubles to $12,000 for individuals and $24,000 for married couples.
  • Itemized deductions: Most deductions would be eliminated. Only home mortgage interest and charitable donation deductions would remain.
  • Corporate tax rate: Reduced to 20% for C-Corps.
  • Smaller biz tax rate: The maximum tax rate assessed on S-Corp and Sole Proprietorship earnings would be 25%, even if family rate is higher.
  • Federal estate tax: Estate taxes would be eliminated altogether at the federal level.
  • Alternative minimum tax: Similar to federal estate taxes the AMT would be eliminated altogether, without replacement.
  • Overseas income: Offshore income is given a one-time "repatriation" to come back to the U.S. at a low tax rate (currently, overseas income is only subject to foreign taxes).

Is the Trump tax plan good or bad? Unfortunately the devil is in the detail, which we do not have. We only heard what amounted to the positive tax changes, not the offsetting tax hikes or spending cuts likely needed to balance out the budget in future years. The argument will be made that economic growth will help subsidize lost tax dollars, channeling the age-old argument that...

Low taxes = More business production = Rising incomes = More gross income tax revenues

Is this true? I won't debate macroeconomics here. Besides, it may be a moot point anyway based on Trump's most probable path to passing tax reform. This path requires showing that his plan does not add to the federal deficit 10 years post-implementation. This refers to the "Byrd Rule", which essentially prevents laws from going into effect that will add to the nation's long-term debt. From what I have researched, Trump and the GOP would have to offset their various tax cuts with other sources of revenue (other tax hikes? budget cuts?) in order to comply with the Byrd Rule in the eyes of a non-partisan reviewer. Economic growth assumptions cannot be used as rationale to pacify the Byrd Rule. But we know darn well Trump will try to argue that, for better or worse.

So will tax reform happen? There is a legitimate chance it will, though like many people I am notoriously cynical and critical of Congress. This particular type of bill would only need a simple majority of 51 votes in the Senate rather than the normal two-thirds majority (60 votes). This has to do with the "reconciliation" clause that allows bills involving revenue, spending or the debt limit to pass with just 51 votes. This is a big deal because it simply means that a tax bill passes so long as all Republican senators approve it, rather than needing all GOP senators plus 8 Democrats to pass the bill. Republicans already control the House of Representatives, so any bill originating in the Senate would likely breeze through the House and quickly become law.

As for ensuring that any tax plan satisfies the Byrd Rule and does not add to the federal deficit 10 years down the road, it appears there are workarounds Republicans can employ. One option would be to sunset certain tax provisions as the 10-year mark approaches. Politically that would give the appearance of the "biggest tax cuts in history" while quietly allowing them to fizzle over time. Apparently this sun-setting technique was used 3 different times to implement tax laws under the most recent Bush administration.

A more likely scenario may be that there are, in fact, massive federal spending cuts or offsetting tax increases coming and Trump would rather let the air out of that balloon much more slowly.

So isn't tax reform a slam-dunk then? Like everything Congress does, it's complicated. Earlier this year Republicans applied reconciliation rules to the health care repeal/replacement. It seems because of that, some Republicans don't want to move forward with taxes until health care is completed. This led to the fumbled health care replacement vote back in July when the GOP could not muster 51 votes because a few Republicans (including AZ Senator John McCain) opposed it. Health care reform is priority to some Senate Republicans, who would prefer addressing that first before turning to tax reform.

(You might wondering... How did the health care bill qualify as a simple majority vote? Aren't the "reconciliation" vote rules reserved for budget-related bills only?

Great question. This is where I found myself digging way too deep into Congressional protocol. The best answer I have is that there is a disconnect between the spirit of the reconciliation rule and how it is used. Although the simple majority vote is technically reserved for budget legislation, many bills - including health care - can be argued to have budgetary consequence. If this is true, it seems like a slippery slope where more and more bills will avoid the normal two-thirds vote requirement over time because, well, what bill does not have budgetary consequences? This is a massive development considering Republicans could effectively pass any bill in the Senate if every one of the 52 GOP Senators are unified in their vote.)

One more roadblock: Additionally, a 2018 fiscal budget is necessary before tax reform can go to vote. While that should be easier since it will only need 51 Senate votes, we know it won't be. Similar to the failed health care vote, there is no guarantee that every Senate Republican will vote for whatever budget or tax plan is proposed. The longer this goes, the more fatigued Congress becomes and the longer everything drags on with little-or-no action. A movie we have seen before...

(Feel free to correct me on any of the above. Some of these procedures were news to me when I researched them this past week.)

In The Market...

The S&P 500 rose +0.7% this past week. Let's look under the hood:

(price data via

STOCKS: The S&P 500 ended the third quarter with a bang, closing the week, month and quarter at a new all-time high of 2,519. For the week, 9-of-10 sectors were higher, which continues to be bullish entering what is seasonally the best quarter of the year. Our Utilities position was unfortunately the lone loser last week, but only down -0.3%. Our positions in Financials and Technology both outperformed the broad market on the week by a nice margin.

BONDS: Long-term interest rates rose for the third-straight week. As such, conservative bonds slid while high-yield bonds and investment-grade corporate bonds were up mildly. We continue to own investment-grade corporate bonds in most accounts.

We invested the cash we had been previously holding by repurchasing bond funds. One of those, long-term Treasuries (TLT), is one we sold a few weeks back. At that time I posted the following chart here:

(chart created via

The first two notes on the above chart are what I wrote back in late-August. The shaded area highlights the weeks since then, showing how the price has fallen since we sold. We did so believing that Treasury bonds still posed a nice long-term opportunity. With the recent pullback I think bonds could be due to rally again. So we bought them again.

In Our Opinion...

Home prices appreciated +0.7% in July. Here are the notable price changes over the past year:

Seattle: +13.5%
Portland: +7.6%
San Francisco: +6.7%
National average: +5.9%

Seattle continues its reign as the hottest housing market, going on nearly a year now. Portland clings to its spot at #2, just ahead of a slew of major cities. This shows just how wide the gap is behind Seattle and everywhere else.

I often hear people say they will buy in the greater Seattle area when prices come back down. What they need to understand is that not everything that rises quickly in price is a bubble due to burst. I do think Seattle price gains will slow in the next 6-12 months, but prices slowing is far different from prices falling. I think San Francisco is a good reflection of this. Price growth in San Francisco ranks 9th among the 20 major cities in this latest S&P/Case-Shiller Home Price Index, whereas San Francisco was #1 for a very long time and was well ahead of the next-best city much like Seattle is now. I would suspect that Seattle will experience a similar arc.

But even if homes in Seattle appreciate at just 7% or 5% or even 3%, the point is they ARE rising. If you think timing the stock market is tough, good luck with real estate. Housing recessions do not come along often. In fact, 2009 is the only time over the past 60 years where prices definitively dropped. There were instances in the late-60's and early-90's where prices plateaued, but again, we're talking flattened prices not falling prices. I will side with history and say that, if anything, a price plateau is more realistic than a precipitous drop.

Here is a complete look at the monthly housing numbers by market:

In Our Portfolios...

Q&A/Financial Planning...

Quick comment in light of potential tax reform coming. If it looks likely that tax reform will happen and that new laws will dramatically impact how your investments are taxed (good or bad), we will work to make any necessary decisions before year-end.

I have not received any questions for a couple weeks. If you have any questions as it relates to financial planning, investing or our process, feel free to ask!

What's New With Us?

I will be trying to stay dry this weekend, with the exception of going to the Seahawks game this Sunday night.

Have a great weekend,

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Brian E Betz, CFP®