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The World and Investing in 2030

The World and Investing in 2030

The world in 2030 may seem a long way off, but as investors it’s important to spend some time thinking about the distant future.

Imagining life in 2030 is not a hypothetical. In the portfolios we manage, the average holding period is about eight years, so we’re living that approach to investing. So, projecting out how life might change in the next decade is smart.

Here are seven portfolio managers’ perspectives on the world in 2030, and how these shifting trends influence their investment decisions.

  • COVID could be this generation’s Pearl Harbor
  • Cash is an endangered species
  • A cure for cancer may be around the corner
  • Health care innovation reaches warp speed
  • Renewable energy powers the world
  • Electric and autonomous vehicles hit the fast lane
  • What’s not changing? Successful investing

 

1. COVID could be this generation’s Pearl Harbor

 

Ten years from now we will look back on COVID as our generation’s “Pearl Harbor moment” — a period when extreme adversity spurs innovation and behavioral changes to help address some of the era’s biggest problems. When Pearl Harbor happened, the U.S. artillery was 75% horse drawn. Let’s put that another way: In 1941, three quarters of our artillery depended on horses. Yet by the end of the war we had entered the atomic age. That incredible transformation sparked a period of innovation and growth in the U.S. economy that lasted for decades.

COVID could be the trigger that spurs us to tackle critical issues over the next decade, such as the cost of health care, education and housing. We’ve already seen an almost magically rapid development of COVID vaccines at a speed few thought possible. And we’re doing things in our daily lives we never imagined would happen this quickly.

In 2030 we may be living, working, studying and playing in a radically new world. Our lives could be better, richer, healthier, cheaper and profoundly more digital, virtual and data centric. Many of the technologies already exist, but there’s still so much untapped potential for innovative companies to think bigger and use them in ways that solve societal problems.

 

2. Cash is an endangered species

 

A decade from now digital payments will be the norm, and people will give you odd looks if you try to pay with cash.

This is one area where emerging markets are ahead of the U.S. We’ve seen this trend for several years in developing countries — where many consumers had no bank accounts but did have mobile phones and adopted mobile payment technology quickly. The pandemic accelerated use of digital payments around the world, including places where it hadn’t previously been ingrained in daily life. Once this crisis is over, more people will be comfortable making digital payments, and they probably won’t feel the need to use cash as much as they did before.

investing in 2030 could mean digital payments

 

While cruising has resumed in Europe, the U.S. Centers for Disease As consumers become increasingly comfortable with the technology, companies with large global footprints could be poised to benefit. We’ve also seen strong growth in smaller companies outside the U.S. that offer mobile payment platforms for merchants.

 

3. A cure for cancer may be around the corner

 

A cure for cancer may be closer than you think. In fact, some cancers may be functionally cured with cell therapy between now and 2030. New, reliable tests should enable very early detection of cancer formation and location. Beyond that, cancer could largely be eradicated as a major cause of death through early diagnosis.

 

Investing in 2030 3 Cure for cancer

 

Vastly reduced costs and scientific developments have contributed to phenomenal growth in medical research. We’re in a renaissance period for R&D, and companies are investing aggressively to find unique ways to battle cancer and other illnesses. Genomics research and therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for companies that develop them.

 

We should see increasing amounts of pharmaceutical innovation come from outside the U.S. In fact, many blockbuster drugs from China by 2030. The country has the biggest population of cancer patients in the world, and it’s significantly easier to enroll those patients in clinical trials. They will probably begin to produce novel drugs within five to 10 years and sell them at one-tenth the cost in the U.S.

 

4. Health care innovation reaches warp speed

 

Star Trek, the classic sci-fi TV series, depicted a far-off future where space explorers traveled the galaxies equipped with cutting edge technology such as the tricorder, a hand-held medical device that scanned a person’s vital signs, issued a diagnosis and prescribed treatment in minutes. While there may not be a single tricorder that does everything, by 2030 many of us might have devices like it that will analyze blood, do cardiology monitoring and even remotely check our breathing while we sleep, some of which are available today.

 

investing in 2030 4 healthcare

We are already experiencing a massive wave of innovation and disruption across the health care sector that has the potential to drive new opportunity for companies, reduce overall costs and, most importantly, improve outcomes for patients. Breakthroughs in diagnostics will help lead to earlier detection of illnesses, which can help make drugs more effective — or in some cases treat disease before it progresses. One of the most exciting things today is something known as liquid biopsy, whereby a sample of your blood can be used to identify a tumor at its earliest stages.

A broad range of traditional technology and medical technology companies have been working to develop home diagnostics for some time, and patients are now benefiting from their innovation. These are cost-effective devices that can collect all kinds of health-related metrics that not only help coach us to improve our own health, but can be immediately sent to our doctor for further consultation. We’re still in the early stages of development, but by 2030 it should be a routine part of our daily lives.

 

5. Renewable energy powers the world

 

We’ll see a dramatic shift toward renewable energy over the next decade. We are in the early stages of the transition to an electrification of the grid and green energy, and there are strong tailwinds that could drive growth through 2030 and beyond. Automation and artificial intelligence are setting the stage for a golden age in renewables — pushing costs down while boosting productivity and efficiency. 

investing in 2030 5 renewable energy

 

Renewable energy has historically been perceived as expensive, impractical and unprofitable — but all that is quickly changing. Some traditional utilities are already generating more than 30% of their business from renewables and are reaching an inflection point where they are being recognized more as growth companies rather than just staid, old-economy power generators and grid operators. The move toward renewables is most pronounced in European utilities, where their governments have set high decarbonization targets. For example, the Renewable Energy Directive stipulates that a minimum of 32% of energy in the European Union should come from renewable resources by 2030.

 

6. Electric and autonomous vehicles hit the fast lane

 

In 2030 we will have widely deployed fleets of autonomous electric vehicles operating in most major and many secondary cities around the world. Ownership of a personal vehicle will go from being a necessity to a luxury. Many people will still have vehicles — just like people ride horses or bicycles for fun. But personal vehicles will no longer be necessary as the primary form of transportation for most people in major cities.

investing in 2030 6 electric cars

 

This is an area where the market hasn’t fully appreciated yet. Right now, the market leaders are embedded in other companies — such as Alphabet’s Waymo, Amazon’s Zoox or the Cruise division of GM — so investors can’t buy a pure-play autonomous driving company. But as these fleets roll out more publicly, the market should start to reevaluate these companies and realize this is a real business, not a science project.

2030 is when we’re likely to see hybrid electric engines and hydrogen engines introduced into commercial aircrafts, with widespread deployment over the following 5–10 years. The impact on global emissions could be significant if we transition to a world where we’ve got huge fleets of autonomous electric vehicles on the road and aircraft transportation shifting from oil-based fuel to a mixture of oil, electricity and hydrogen.

 

7. What’s not changing? Successful investing

 

We may be able to look at the future and imagine new products and trends, but we’d like to predict one thing that won’t be different in 2030. Despite all the change going on in the world, the nature of our work and focus as financial advisors will be exactly the same.

In 2030 — just as we did in 2020 and 2010, and every year before that — we will come upon the right solutions for our client’s unique needs. That is our true north.

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Should I be worried about inflation?

Should I be worried about inflation?

Many investors want to know if there are good reasons now to be worried about inflation. Inflation, which is the trend of prices over time to rise, hasn’t reared its ugly head too much so far in the 21st century. In fact, during the coronavirus pandemic, some sectors experienced deflation instead.

However, some Americans still recall the 1970s, with runaway inflation but without a strong economy (stagflation). Inflation has been less of an issue since Congress added monitoring inflation as part of the Federal Reserve’s mission, in addition to “full” employment.
But as you know, past performance is no guarantee of future results!

 

Why some economists are worried about inflation

To help Americans return to work after the pandemic and keep small businesses afloat, the current administration passed a stimulus bill. Some, though not all, economists are worried that the effects of the stimulus, plus the expected higher performance of the economy in the near future, in addition to continued “loose” monetary policy designed to encourage demand, could cause prices to soar.

You might recall that inflation is often described as “too many dollars chasing too few goods.” The stimulus plus loose money provides more dollars. Yet it remains to be seen whether there will be too few goods.

Rising prices are one thing and not necessarily a problem in and of themselves. The issue is when paychecks don’t grow along with inflation. When consumer grocery bills are more expensive, but their wages have stayed the same, inflation creates a problem that’s both financial and political.

It may be worth noting that in inflation-adjusted terms, workers have about the same purchasing power on average as they did forty years ago, even though productivity has risen. What wage gains we’ve seen are mostly to employees in the top wage tier, according to Pew Research. If wages don’t match inflation, workers will be relatively poorer than they were in the 1970s.

In addition, bond yields have gone up recently, which is often a sign that investors expect inflation. This attitude is often a self-fulfilling prophecy: because investors are concerned about it, inflation starts to rise.

 

Inflation isn’t as simple as it may seem

You’re probably familiar with the term permabear, a person constantly prophesying stock market drops and economic recessions. Similarly, there’s a group of economists who frequently warn of impending inflation, who perhaps should be referred to as permainflators.

Inflation is commonly presumed to increase as employment increases, which is how it worked in the 20th century. However, the US hasn’t experienced inflation during the past few unemployment events, including the Great Recession and the coronavirus pandemic.

Although people generally understand what is meant by inflation, measuring it is a bit trickier. Most models use a “basket” of consumables and calculate the price changes on the basket on an ongoing basis.

One of the more well-known measures is the CPI or Consumer Price Index. It has some quirks, including out-of-pocket medical expenses, but no changes in what Medicare is charged (which would increase the bills for seniors on the plan).

Another issue lies with the quality measurement. When telephone providers began offering unlimited data services, CPI dropped due to the assumption that people would get more for their money. But very few people actually saw their phone bills decrease.

The Fed measures things differently by viewing what businesses are selling through the Personal Consumption Expenditure (PCE) index. This calculation captures behavior changes due to price shifts. For example, it will reflect more people buying oranges when apple prices go up. It also takes Medicare into account when looking at health care expenses.

Core inflation is the term used when food and energy are removed from the baskets. Their prices fluctuate with the weather, oil supply, and other factors that aren’t relevant to inflation.
It’s not at all clear why inflation has remained so low this century, even with fluctuations in employment that would typically increase and decrease it. Also, although inflation, in general, remains low, some sectors such as healthcare and housing have experienced significant increases. Before the pandemic, inflation in services was generally higher than inflation for goods.

 

If inflation has such adverse effects, why are people worried about its opposite, deflation?

Not all inflation is bad. As in medicine, it’s the dose that makes the poison. Note that the Fed’s target is 2% inflation, not zero.

Out-of-control inflation, when wages can’t keep up with rising prices, is problematic. Consumers can’t afford to consume, which means more firms go out of business, employing fewer workers.

On the other hand, a modest amount is an indicator of a good economy. It’s great for homeowners with fixed-rate mortgages, for example. Higher inflation brings with it higher interest rates, which also gives the Fed room to cut rates in a recession.

Decreasing prices may sound good at first, but they’re a signal of a weak economy. Deflation means that debts get more expensive, and that’s bad for nations with a lot of debt. It’s also bad for economies that have workers with a lot of debt too. The US doesn’t need deflation right now.

 

But what if we turn into Argentina? Or Venezuela? Or the US in the 1970s?

Argentina is a country with hyperinflation run amok. Restaurants write their menu prices on stickers to update as their supply of food becomes more expensive. There’s no point in saving in Argentinian pesos. Hyperinflation is a key driver for many Argentinians to enter the cryptocurrency market, to varying degrees of success. Other victims of runaway inflation include Venezuela today and the US fifty years ago.

Can it happen here, to the US in the 21st century? Technically, yes, it’s possible. However, it’s unlikely. The financial system has changed quite a bit since the 1970s. None of the three countries above had a strong central bank (the Fed) dedicated to managing inflation the way it does today, for one thing.

 

Long story short for worries about inflation?

There are both short-term and long-term dynamics in play right now. The pandemic is short-term, and no one knows what will happen when we slowly resume normal activities.

Treasury Secretary Janet Yellen, previously the Federal Reserve chair, has said that employees out of the workforce are a much more significant threat than inflation. That’s why she agrees with spending money on the stimulus.

If inflation starts heating up, today’s Fed has ways to cool it down. Including raising interest rates. Savers would be happy with higher rates since they’d earn more than they currently do.
We can’t say inflation is gone for good. Or that no one needs to worry about inflation at all. But at the same time, it’s unlikely that the US will suddenly be in an Argentina-like situation. Right now, focusing on getting people back to work after the pandemic is a higher priority.

Would you like to discuss how your portfolio will hedge against inflation in the long term? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

    Speak to an Advisor

     

    Would you like to discuss how your portfolio will hedge against inflation in the long term? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

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    What’s in the American Rescue Plan?

    What’s in the American Rescue Plan?

     

    There’s a lot to unpack in the newly-passed, newly-signed American Rescue Plan bill. The goal is to help relieve the economic suffering caused by the COVID pandemic in various sectors. The bill makes unemployment benefits more generous, health insurance more affordable, and having children less expensive. It also reduces the pandemic’s most damaging effects on low-income homeowners and the homeless, people with student loans, state and local governments, and school systems.  

     

    Most of the press coverage has focused on the $1,400 checks. Not everybody is receiving them. Only single people with an adjusted gross income of $75,000 or below (households with $150,000 AGI or below) qualify for the full amount. The amount phases out entirely for people with incomes above $80,000 (households with AGIs above $160,000). The reporting period is the most recent year that people filed taxes; it could be 2019 or 2020.

     

    Unemployment and Cobra

     

    The American Rescue Plan also extends unemployment benefits (either through the Pandemic Unemployment Assistance program or the Pandemic Emergency Unemployment Compensation program) for an additional 25 weeks until September 6. It maintains the $300 per week supplemental benefit. It also makes the first $10,200 of those benefits tax-free for people who report less than $150,000 in income. The extra $300 federal supplement doesn’t count when calculating Medicaid eligibility and the Children’s Health Insurance Program.

     

    The healthcare provisions will be a lifesaver for some ex-employees. Under the government provisions in COBRA, people who lost their jobs can continue buying health insurance through their former employer. Still, they pay full-price rather than the subsidized price companies offer to their workers. The new relief bill would have the government pay the entire COBRA premium from April 1 through September 30.

     

    The bill will make health insurance much cheaper for those laid off than those who are still working. (This generous subsidy is not available for persons who left their job voluntarily.) Finally, the law imposes a cost cap on health insurance policies purchased through a government exchange. The premiums should not exceed 8.5% of a person’s adjusted gross income, which will benefit low-wage workers.

     

    How the American Rescue Plan helps families

     

    Families with children will receive additional benefits—but only families whose income qualifies them for the $1,400 checks. 

     

    The bill raises the child tax credit from $2,000 to $3,000 ($3,600 for children ages five and under), and it increases the age limit for qualifying children to 17, from 16 previously. These amounts could apply as a tax refund even for people whose tax bill is zero; that is, those who don’t have any reportable income to offset. 

     

    Families with incomes between $150,000 and $170,000 would receive the same $2,000 tax benefit as before, and that benefit phases out for married filers with incomes over $400,000 (singles above $200,000).

     

    A bigger set-aside for families with children is a monthly child allowance. The government will send a monthly check of $300 for each child under six years old and $250 for each child between the ages of six and 17.

    The American Rescue Plan sets aside $27 billion for financial assistance to people whose household income does not exceed 80% of the area’s median income to offset rent, utilities, and other housing expenses. 

    The Rescue Plan sets aside $10 billion to help homeowners struggling to make mortgage payments and $5 billion to help the homeless.

    Finally, if the Biden Administration decides to cancel student loan debt (which is not a given), the Act specifies that the borrowers wouldn’t have to pay any income taxes on the forgiven debt. 

    The American Rescue Plan pie chart

    You can see from the chart, with figures compiled by the nonpartisan Congressional Budget Office, that there is also money set aside to keep restaurants and bars afloat and money to help schools better control the risk of infection so they can reopen. $350 billion is going to state and local governments to prevent layoffs and allow them to continue providing essential services

    COVID Economic Projections (002)

    The administration passed the American Rescue Plan as a stimulus measure, but we can better characterize it as disaster relief. A graph prepared by the Congressional Budget Office (shown here) clarifies that the U.S. economy was on a path to never quite recover from the COVID recession before this legislation passed. 

    With the American Rescue Plan in place, the best estimate is that the economy might fully recover as early as the 4th quarter of this year.

     

     

    Are you on track for retirement?

    Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

    Dream. Plan. Do.

    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

    How Pent Up Demand Could Fuel Economic Recovery

    How Pent Up Demand Could Fuel Economic Recovery

    With major league baseball’s spring training just around the corner, you may already be daydreaming about the smell of cut grass and roasted peanuts, hearing the crack of the bat and the roar of the crowd — just to feel normal again. 

     

    If so, you are not alone — not among fellow Americans weary of the COVID pandemic nor within the context of history. This would not be the first time Americans have lived through a period of austerity brought on by a pandemic that resulted in burgeoning pent-up demand and economic recovery. In 1918, the Spanish Flu and World War I largely curtailed social gatherings and other activities across the country. 

     

    To be sure, the U.S. was a very different place in the early 20th century, but consider that attendance at baseball stadiums in 1918 was half that of the previous year.

     

    By 1919, however, the pandemic had largely subsided, the war was over and attendance at games soared from 2.8 million in 1918 to 6.5 million in 1919. The decade that followed — the Roaring ‘20s a time of exploding economic recovery— coincided with the first golden age of the automobile. Americans eager to see the countryside bought nearly 26 million cars and 3 million trucks in the 1920s, according to Automotive News.

     

    Could pent-up demand for travel and leisure drive a Roaring ‘20s economic recovery today? 

     

    Ready, willing — and able — to spend

     

    Indeed, cabin fever appears to have taken hold of consumers everywhere. There are signs that Americans are prepared to act: Savings rates have soared since the start of the pandemic, and though they have slowed a bit in recent months they remain relatively high.

     

     

    Many consumers have boosted their savings during the pandemic

    Bar graph showing US Savings Rate 2020

     

    Once the current situation subsides, the desire to travel plus the ability for consumers to spend means we could potentially see a powerful economic recovery.

     

    The economic environment is much different than the global financial crisis of 2008.  Today, looser fiscal policy, looser monetary policy, strong banking infrastructure and a higher personal savings rate could drive a sharp pickup in demand.

     

    These conditions not only can benefit the travel and leisure industries but also the broader economy. To be sure, there will probably be hiccups along the way, and some areas will likely recover more quickly than others.

     

     

    Passenger loyalty: A tailwind for cruise lines toward economic recovery

     

    Cruise ships became the epicenter of the COVID crisis in February 2020, when 3,700 people were quarantined aboard the Diamond Princess after a shipboard outbreak. At the time, the ship accounted for half of all known cases outside mainland China.

     

    Over the past year, this industry has gotten so much negative media, yet people are still booking cruises for 2021 and 2022. 

     

    In fact, more than 70% of respondents to an industry survey said they will cruise again.

     

    Loyal customers can keep cruise industry afloat

     

    While cruising has resumed in Europe, the U.S. Centers for Disease Control imposed a “no sail” order that has not yet been lifted in North America.

     

    There is still uncertainty as to when ships will set sail again, but there is a possibility that they will be cruising near full capacity quicker than many people expect.

     

    What’s more, with intense focus on healthy sailing practices, there’s a case to be made that they could one day be considered among the cleanest places on earth to vacation.

     

    Vacation plans up in the air

     

    As was the case in the cruise industry, global air travel was down an estimated 66% in 2020, about 20 times worse than the previous record. Within the U.S., which is more dependent on business travel, the devastation was worse: Air travel declined as much as 95% in the early months of the crisis.

     

    The rollout of the vaccines and, prior historical events, leads to increased confidence that demand will bounce back. For example, we also saw this after the September 11 attacks. A lot of people thought consumers would never fly again, and traffic recovered quickly.

     

    Indeed, in China, where the virus is largely under control and the economy has rebounded, domestic air travel has nearly returned to pre-COVID levels.

     

    Air travel in China has soared back. Will the U.S. soon follow with it’s own economic recovery?

    The ripple effect for economic recovery waves

     

    A revival in travel demand can also have a powerful ripple effect, creating the need for a range of goods and services and helping drive job growth across a variety of industries. Among these are aircraft manufacturers, jet engine makers, hotels, casinos and restaurants — all of which were devastated by the pandemic.

     

    Consider aircraft engine makers, which operate a recurring revenue business model. Companies like Safran and General Electric build the engines and sell them at a modest profit, but the engines must be serviced regularly, and the engine makers can generate a great deal of revenue from the service contracts.

     

    Unlike other sectors of the economy during COVID, aircraft engine makers are not going to see digital disruption upend their business. After all, there are no digital aircraft engines. 

     

    Markets tend to anticipate recoveries

     

    Markets often anticipate recoveries in the underlying economy, so it’s important to recognize underlying trends early. Consider the global financial crisis, a period when the housing and automobile industries were severely beaten down. By 2012 it became clear that demand was building, thanks to changing demographics and an aging auto fleet. In both industries, a full recovery took several more years, but a rebound in auto- and housing-related stocks anticipated the recovery in demand and earnings. From February 2009 through December 2010, auto sales fell 6% while auto stock returns advanced 496%.

     

     

    Auto stocks rebounded ahead of sales after the global financial crisis

    More recently, since the introduction of the vaccines, shares of companies across a number of travel-related industries have registered strong gains.

     

     

     

    The market often reflects a recovery in earnings before they materialize.  In a year from now, we could be in a very different environment where demand and earnings for some of these companies begin to recover in a more meaningful and sustained way.

     

     

     

    Maintaining a balance

     

     

     

    Students of history can look to many examples of past crises and declines that were followed by powerful economic recoveries thanks in part to pent-up consumer demand. Examples include the travel sector after 9/11 and the housing and auto industries following the end of the great financial crisis in 2008–2009. 

     

     

     

    For investors and their advisors, it is important to make sure portfolios are balanced with exposure not only to growth strategies but also to strategies focused on more value-oriented companies, like many of the travel-related stocks.

     

     

     

    A review of more than 4,000 portfolios by Capital Group found that investors significantly reduced allocations to value equities over the last three years. It may be time to rebalance. 

     

     

     

    Returns for leading growth companies have continued to be strong, for good reason. But it may be shortsighted for investors to become seduced by the runaway growth stories, considering that many of the beaten down stocks in travel and other sectors have attractive valuations. And recently there have been some early signs that the market rally may be broadening as many of these stocks have posted meaningful gains.

     

    Investors have scaled back their exposure to value funds

     

    We just experienced a market downturn and recovery where the growth-oriented companies led during the decline and on the way back up.  Historically, that is an unusual pattern.  As the vaccines roll out and the recovery broadens we may begin to see companies in the travel industry, or perhaps energy or financials, all of which had been very hard hit during the downturn, participate in the recovery.

     

     

     

     

    Are you on track for retirement?

     

    Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

    Dream. Plan. Do.

    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

    How the Latest Relief Packages Affects AGI’s, RMD’s, Deductions

    How the Latest Relief Packages Affects AGI’s, RMD’s, Deductions

    The U.S. Congress recently passed, and the President signed, the 5,593-page Consolidated Appropriations Act of 2021 relief package—and experts are still mulling over what the impact will be on ordinary citizens. There are stimulus checks, tax planning relief provisions, and a break for people who experience high medical expenses during the pandemic.

     

    There’s even a new paycheck protection program extension.

     

    New AGI and tax considerations in latest relief package

     

    First, the new legislation provides for stimulus checks, with a “base” credit of $600 per eligible individual plus $600 more for any dependent child (technically, any children qualifying for a Child Tax Credit). But, as with the CARES Act, eligibility starts phasing out for individuals earning more than $75,000 of adjusted gross income or joint filers with over $150,000 AGI.

    These phaseouts, based on the 2019 tax return, seem unfair. The economic hardships the bill was designed to address took place in the final three quarters of 2020. But if the taxpayer’s 2020 income calculation indicates a larger check amount, the government will issue an additional check to make up the difference. If someone receives a stimulus check based on 2019 income and then reports higher 2020 income, that would make that person ineligible to receive the check. There will be no requirement to pay the money back to the government.

    The new legislation also extends regular unemployment compensation benefits for an additional 11 weeks and adds $300 a week to the unemployment checks. This “pandemic unemployment assistance” for individuals who wouldn’t usually qualify for unemployment benefits (such as self-employed persons) was also extended for 11 more weeks. Note that the $300 a week and 11 weeks is lower than the $600 a week and four-month extension passed in the CARES Act.

     

    Medical and charity deductions in the new relief package

     

    On the tax front, the hurdle for deducting medical expenses in any given year was reduced from 10% to 7.5%, meaning that anything over that percentage of adjusted gross income would now be deductible on your next tax return. And the bill extends a provision from the CARES Act relating to charitable deductions.

    People can take a full deduction of up to 100% of their AGI for any cash donation to a public or private charity (but not a donor-advised fund).

    In the bill, Congress did not extend the temporary waiver of required minimum distributions, which means that people over age 72 will have to resume taking their RMDs in 2021.

    What else can we find in those 5,593 pages?

     

    Taxpayers will use their 2019 earned income to determine eligibility for the 2020 earned income tax credit and additional child tax credit.

    Business lunches and dinners have become 100% deductible for 2021 and 2022.
    And the bill creates a second round of the Paycheck Protection Program forgivable loans, with $284 billion set aside.

    Finally, the bill provides funding for the federal government’s operations for another nine months.

     

     

    Are you on track for retirement?

    Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

    Dream. Plan. Do.

    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

    GameStop Gambling

    GameStop Gambling

    GameStop: A David and Goliath story or a cautionary tale of feverish gambling?

    The GameStop David and Goliath story has given us a short break from 2020 doom and gloom. It’s a surprising story of how masses of small amateur investors managed to bid the share prices of three largely-unprofitable companies—GameStop, AMC Entertainment Holdings, and Blackberry—up nearly 1,000 percent, collectively. GameStop alone rose more than 14,300%—a record for a firm whose market share is eroding and which most analysts think is clinging to an outmoded business model. (The company sells video games through bricks-and-mortar retail outlets competing in a streaming internet world.)

    The story was allegedly about David (the small investors) pitted against Goliath (several prominent multi-billion-dollar hedge funds). The only reason you heard about it is that the small investors won and nearly put the hedge funds out of business.

    The GameStop short squeeze: a pessimistic gamble

    Market professionals recognize the story as a classic short squeeze. Investors on one side (in this case, the hedge funds) borrow the stock of companies they think are overpriced, expecting to buy them at a discount after the price falls. They pocket a quick profit. These short sales have an expiration date, so if the stocks unexpectedly rise in price, the short-sellers have to scramble to buy the stock at the inflated price to limit their losses.

    On the other side of the gaming table were a group of amateur investors who engage in online conversations on subreddit r/wallstreetbets, who ganged up to raise each others’ bids. When the hedge funds had to buy to close out their positions, the share prices went through the roof. The hedge funds, meanwhile, lost an estimated $5 billion on their bets. Roughly $1.6 billion on January 29, when GameStop’s stock jumped 51%.

    The financial media neglected to mention that this activity is not investing; instead, it is a form of gambling, and the story tells us a great deal about the mindset of many retail investors these days.

    When their goal is to make bets and destroy other gamblers at the table, the game for everybody else becomes increasingly dangerous. Take a look at the past six months of GameStop’s stock price and see if you can pinpoint when the gamblers started taking an interest.

    GameStoppers take note: the gambler always loses

     

    Toward the end of every bull market cycle, there is an invisible line crossed. The public starts to look at the stock market, not as participation in the growth and profits of public enterprises, but as a roulette wheel where the ball keeps stopping at a higher price. These shareowners cease to be long-term investors and bid prices up- not based on the underlying value of the companies- but on the expectation that whatever you buy, at whatever price, someone else will come along and pay even more.

    Of course, markets only work that way for a short time, typically at or around market tops. Eventually, the share prices of GameStop, AMC Entertainment Holdings, and Blackberry will return to something that more closely resembles the real value of the actual company. Long-term investors have tended to win the kitty over every past historical time period. Gamblers have seen their short-term winnings evaporate in the ensuing bear market. The jubilant traders on subreddit r/wallstreetbets can enjoy their winnings today, but it may not be long before they’re counting their losses and wishing they hadn’t gambled away the money they could’ve used to buy shares when they finally go on sale.

     

     

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