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Articles by Alan & Akemi

This Year's Tax Blues

If you're like many Californians, your tax return this year was a big disappointment  -- instead of the higher refund that you expected, you may have had to write a check to the IRS instead, even though nothing in your personal circumstances had changed. In fact, the IRS reports that average refunds were down about 8% compared to last year.¹

This was in stark contrast to President Trump's promise that his tax changes, passed in 2017, would give most Americans a tax cut.

The unwelcome result of the Trump Tax Plan is due in large part to the new limits on the state and local tax (SALT) deduction. Prior to Trump, there were no limits to the SALT deduction. The Trump Tax Plan caps the total you can deduct for state and local taxes to $10,000 per year, no matter whether you are single or married, and no matter how much you actually paid. The Treasury Inspector General reported that about $11 million taxpayers lost out on $321 billion of tax deductions because of this change.²

This new limit didn't cause much grief in states like Florida, Alaska and Texas, where no state income taxes are imposed. The negative impact of the new limits predominantly affected residents of states where real estate values are high, and state income tax rates are also high -- like New York, New Jersey, Minnesota, and California.

For example, if your home is close to the median price in California (about $548,000), your state and local taxes, including property taxes (1.25%), would put you close to the $10,000 SALT cap. However, in metropolitan areas, many homes have a value greater than the median, resulting in a state income tax liability that is greater than the cap.²

Some people argue that this portion of the Trump Tax Plan was designed as retribution against Democratic-leaning states where the cost of living is high, like California, New York and New Jersey. The California Franchise Tax Board reported that in 2015, about 2.6 million taxpayers deducted more than $10,000 in state and local taxes on their federal tax return. In their 2018 filing, that group paid an additional $12 billion in taxes.³

In this uneven tax landscape, what smart money moves can you make to reduce your taxes? One way is to maximize contributions to your retirement accounts, like 401(k), 403(b) or 457 plans. If you are not eligible for an employer-sponsored plan, you can maximize your IRA contributions ($6,000 if you are under age 50; $7,000 if you are age 50 or over). 

Another way is to invest more heavily in municipal bonds. If you live in California, and if the bond qualifies and is issued in California, it may provide income to you that is free of  both state and federal taxes. Munis are an attractive alternative to taxable bonds, and even more attractive in states like California where the SALT limitation is, in effect, an added tax on residents.

The Trump Tax Plan has already boosted sales of some municipal bonds. Mutual funds that invest in California municipal bonds have attracted $1.2 billion in new investments in January and February of this year. New York has generated an additional $382 million in New York municipal bond mutual bonds sales. Minnesota, with the fourth-highest state income tax in the country, saw $90 million in new muni bond mutual fund inflows in the first two months of 2019.⁴

If you feel that you're paying too much in taxes, and have a taxable diversified portfolio (where your investment is spread broadly in U.S. and international large, medium, and small companies, emerging market companies, real estate and bonds), you might consider swapping the bond portion of your portfolio for municipal bonds approved for the state in which you reside. This strategy may help you to reduce your tax burden, especially if you live in a state where real estate values and state taxes are high. Consult with your CPA and Certified Financial Planner™ to design a solution that is customized for your particular circumstances.

¹ National Public Radio 2/14/2019

² Forbes 3/6/2019

³ Sacramento Bee 3/27/2019

www.financial-planning.com/articles/tax-cuts-and-jobs-act-changes-propel-more-investors-into-muni-bonds?

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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First-Quarter Market Review

It’s hard to believe that a quarter of the year is already over!  The market has consistently been inconsistent, zig-zagging up and down on economic news and predictions.  In December, we experienced the worse market decline since the Great Depression.  The S&P 500, an index of the 500 largest U.S. publicly traded companies, declined 9.2%[i].  Immediately following that grinchy Christmas, in the first quarter of 2019, the S&P 500 posted the best quarterly gain since 2009, up approximately 13%[ii].  Better yet, some analysts are predicting another surge to come. 

Diving a little deeper, the Russell 2000 Small-Cap Index gained 15%[iii] during the first quarter and the tech-heavy Nasdaq that was the first to tumble in mid/late 2018 also recovered, gaining 16%[iv] during the same period. International markets experienced decent gains, too.  European stocks were up 9% in the first quarter and Emerging Market stocks of less developed countries were up approximately 10%[v].

In the bond market, the yield curve inversion that spooked the market in early 2019 has flattened, as of late, with the 10-year Treasury bond yielding 2.51% and the 3 month bond yielding 2.42%[vi]. This could indicate that the fear of a future recession has subsided, or it could mean nothing at all and a recession is still looming; only time will tell.

Our stock market reiterates the sentiment that one week in the market hardly predicts where the market will go next.  Further, the equity market is proving once again that

volatility is the “new norm” thanks to the integration of computerized trading in the stock market.  Everywhere you go, jobs that were once done by people are now done by machines, i.e.: paying for parking with one of those machines that are impossible to reach from the driver’s car seat. Well the same goes for the investment industry.  Starting around the 2000’s engineers started tracking the criteria and decision making considerations that caused stock traders to buy and sell.  They quantified this data into programs that imitated the trading  behavior of a person.  Now, computerized trading is integrated into nearly 55% of the daily trading in the stock market and up to 90% of trading on volatile days[vii].  Due to computerized trading, the swings in the market, up and down, are larger than they used to be.  For this reason, many predict we’ll go through quoting the “largest gain” or “largest loss since…” for a couple of years until all the new records have been set.

Even with this understanding, volatility can frazzle nerves; especially for retired investors who can’t stand to lose their life savings. Those who stayed the course and did not lock in losses by selling equities in December are likely pleased with their discipline and subsequent portfolio recovery.  Even happier might be the contrarian investors who bought equities when stocks were “on sale” in December.  

If you believe in the power of capital markets, the best course of action is to try to react rationally when the market is acting wildly – easier said than done. Although it may temporarily feel better to get out of the market when the headlines are predicting doom or buy stocks when the market is hot and seems to have no cap on growth, these steps cause investors to lock in losses when the market is down and buy back into the market at a higher price after stocks have already peaked. 

Buying high and selling low is detrimental to the long-term returns on portfolios and is one of the main pitfalls to a market timing investment strategy.   

A more prudent investment strategy is to set your investment portfolio to match your risk tolerance.  In other words create a range of how much you hope to gain, paired with how much you can withstand to lose during any given investment period. Allow your portfolio to sway within this investment range knowing that the long-term average returns of this portfolio will help you achieve your end growth goals.  Whenever your portfolio is within the preset parameters, try to stay the course. 

If you find your portfolio is more volatile than you expected, examine if an extraordinary market condition has occurred or if your portfolio does not match your true risk tolerance.  If you need a second opinion on your  investment portfolio, reach out to a financial advisor for a second opinion. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 
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Inverted Yield Curve

By now, many have heard about the inverted yield curve and the impending disaster predicted to follow within the next 12 months. This broad window of looming disaster is the perfect  headline to keep viewers glued to TVs and give pundits the ratings boost they need. 

Yet, with all the news coverage, many are still asking, “What is an inverted yield curve and why does it matter?”  The yield curve is a line made of plotted data points, in this case the interest rate of various maturing bonds.  Commonly tracked yield curves are the three-month, two-year, 10-year, and 30-year US Treasury notes.  These yields are the basis of setting other benchmarks such as mortagage lending rates and bank loan rates.  The shape and movement of the yield curve is also tracked as a tool for predicting the future of the market.

In a normal (positive) yield curve, the interest rate offered on short-term bonds is lower than the rate offered on long-term bonds.  Theoretically, it makes sense to get paid more for longer-term bonds because you’re taking more risk by locking your money up for a longer period of time.  For example, you could lock in a current market return of 2% for 10-years and the going market rate could rise to 5% in the middle of your 10-year investment window creating opportunity loss. A normal yield curve is most commonly associated with positive economic growth. 

An inverted or negative yield curve occurs when the interest rates offered on short-term bonds are greater than the rates offered on long-term bonds. Often, this happens because investors are wary of  the future market and migrate out of stocks and into bonds.  This drives the return on long-term bonds down as investors are willing to take a lower return to avoid downside risk in equities.  An inverted yield curve has historically been seen (but not always) before a recession.  Therefore an inverted yield curve has negative sentiment and is feared by market watchers. 

Historically, an inverted yield curve has preceded the last seven recessions dating back to the 1960’s.  Most recently, the U.S. Treasury yield curve inverted in 2006 prior to the Great Recession in 2008.[i]  However, there have been two false indications of a recession also – an inverted yield curve in 1966 that was followed by economic growth and 1998[ii], a flat yield curve, similar to the one we are currently experiencing.

The question on everyone’s mind is, “Are we going into another recession?”  The most common indicators of a recession haven’t occurred – A high GDP growth rate hasn’t happened in our long slow recovery from the Great Recession, we do not have rising unemployment, nor spiking interest rates.  Additionally, some market analysts state that the interest rates on long-term bonds is no longer indicative of market demand due to large, steady foreign investments in U.S. Treasuries.  These sustained purchases create a simple supply and demand condition that drives down long-term U.S. debt, regardless of the current or future market environment[iii]

Keep in mind that the yield inversion that occurred on Friday, March 22nd was a mere 0.035% crossing of the 3-month and 10-year Treasury bonds[iv].  A recession could hit later this year, or in the next few years to come.  Some investors are considering whether now is the right time to cash out and wait on the sidelines; ready to jump back in right as the economy shifts upwards again.  The concept sounds great, in theory, but few if any have become overnight millionaires executing this strategy perfectly. 

A sounder and more logical approach to market downturns is to limit your risk exposure by balancing asset classes.  Rather than having all your eggs in one basket, implement an investment allocation that balances your exposure in large and small US companies, large and small international companies and balances your equity exposure with high-quality fixed income to shield you on the downside when equities lose value.  This dependable approach to investing not only reduces your portfolio volatility, but allows you to stay invested during difficult periods in the market so you can capture gains when the market recovers. 

At the end of 2018, people were already throwing around the term “tech-wreck” and cashing out their portfolios, referencing the Dot-com crash of 2000.  Just two months later, the S&P 500 booked the best January dating back to 1987[v].  It goes to show, market downturns and recoveries can happen very quickly.  Chasing the market can be an emotional rollercoaster that hurts your heart and your wallet in the end.  If you need a second opinion on your current investment portfolio, reach out to a financial advisor who is a Fiduciary and will put your best interest first. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.investopedia.com/news/inverted-yield-curve-guide-recession/

[ii] https://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22

[iii] https://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22

[iv] https://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22

[v] https://www.cbsnews.com/news/stocks-today-sp-500-posts-best-january-since-1987/

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Deficit Prompts Attack on Health Programs

Just over a year ago, President Trump gave corporations a "tax holiday", a levy of only 6% on $620 billion of tax-free profits sheltered overseas. Then, he granted corporations a massive, permanent tax cut from 35% down to 21%. It was unprecedented, because this sort of government largesse is only doled out during times of recession, when the economy badly needs a stimulus to recover. This time, it was granted when corporations were already making record profits. It created an unnecessary burden on the federal deficit.

Trump campaigned on the promise to wipe out the government's $19 trillion in total debt. Since the tax cuts, corporate revenue to the government plummeted 21%, from $76 billion to $60 billion. Consequently, this sharply accelerated the federal deficit.

The Congressional Budget Office said that, compared to 2017, the interest expense on U.S. debt increased by nearly 50%, and is scheduled to hit $390 billion next year. Within ten years, the annual interest expense is projected to be $900 billion. This would represent 13% of the federal budget, more than the expenditure on the military, on Medicaid, or on programs for children. 1

The increased expenditure would also draw resources away from infrastructure projects to repair or replace America's aging roads, electrical grid, clean water systems and public buildings. Although Trump vowed to put $1 trillion into improving infrastructure, he couldn't get his own party to agree to it, while the deficit hung over their heads.

Who does Trump blame for this runaway debt?  -- the Federal Reserve Bank. The two basic goals of the Fed are to maximize employment, and to keep inflation at bay. To accomplish that, Fed chair Jerome Powell raised interest rates gradually, a quarter-percent at a time, last year. As of March 2019, inflation hit the lowest rate in nearly 2 ½ years, and unemployment is at a record low. Yet, Trump attacked the Fed, an independent body, leading to rumors that he would fire Powell for the rate increases. Trump demanded that the Fed, instead, use its power to support his trade plans and goals, and ignore its own mandate. ²

Since last year, Trump has waged a tariff war against China, imposing tariffs on over $250 billion worth of Chinese products. It started with a 25% tax on $50 billion of Chinese imports last June. Then in September 2018, there was another 10% tax on an additional $200 billion of Chinese products. China responded by imposing duties on about $110 billion of U.S. exports. This has ended up hurting Trump's own supporters in the farming and manufacturing sectors. Trump said the trade deficit was crushing the U.S. economy. The tariffs, he said, would reduce the U.S. reliance on imported goods and materials.

However, despite the tariffs, the Commerce Department reported this week that the trade deficit with China hit a record $419 billion last year, up from the previous record of $375.5 billion in 2017. The overall trade deficit was $621 billion, the highest since 2008. ³

The other result was that customs duties nearly doubled, from $12.6 billion to $24.5 billion due to the Administration's tariffs. These additional duties were in actuality paid by American consumers at the cash register. The tariffs were really a hidden tax on the economy.

When Marketplace interviewed former Fed Reserve chair, Janet Yellen, last month, they asked, "Do you think the president has a grasp of macroeconomic policy?" "No, I do not," she replied, adding that she doubted if he understood how the Fed worked. ²

Now, Medicare and Medicaid are in the crosshairs as a way to reduce the deficit. During the 2016 presidential campaign, Trump declared he would protect Medicare and Social Security. However, his budget last year proposed a $550 billion cut to the programs. The budget also endorsed the Medicaid block grant idea.

Medicaid is a federal assistance program that began in the 1960s as part of the War on Poverty. It guarantees states a federal share of funding for anyone who is eligible for the program (those who have low income, low assets, or are blind or disabled).

Trump's budget proposal calls for a spending cut of nearly $1.5 trillion to Medicaid over the next 10 years. It also eliminates funding for Medicaid expansion under the Affordable Care Act. 

Under the newly proposed budget, the federal commitment to fund Medicaid would end. Instead, states would receive small fixed grants and would have to bear the healthcare burden themselves by 2021. The growth of the grants would be limited to the Consumer Price Index, even though the actual cost of healthcare inflates at about double that amount, at 5.3% per year. This means that states would be saddled with escalating healthcare costs. ⁴

Charles Kahn, president of the Federation of American Hospitals warned that the budget "imposes arbitrary and blunt Medicare cuts. The impact on seniors and low-income Americans will be devastating." ⁴

1 New York Times, 9/25/2018

² Time, 2/25/2019

³ Politico 3/6/2019

⁴ Washington Post, 3/11/2019

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Rainy Day Funds

Globally, many view America at the peak of prosperity with limitless upward potential.  This January marked the best January returns for the history of the stock market since 1987. February was equally lovely with investors hoping the US and China would reconcile and soon come to a trade agreement.  Technology stocks rebounded well from their 2018 lows and the Federal Reserve committed to raising interest rates at a slower pace in 2019 than they did in prior year. 

Many might assume that with all the good news, Americans are more prosperous than ever, but a recent study revealed that average American families are not nearly as financially secure as first thought. When examining American household spending, savings and debt ratios, the Center for Financial Services Innovation found that only 28% of Americans could be considered “financially healthy.” Such statistics are disturbing because financial health can impact family stability and upward mobility for generations to come.

The same study revealed that approximately 44% of people said their expenses exceeded their income in the past year and they were reliant on short-term debt vehicles like credit cards, to close the gap.  Additionally, 42% of those polled said they had no retirement savings at all.  Although the future is always uncertain, we are at a clear crossroads where the government is not in a position to fund public benefit programs like Medicare and Social Security for the long haul unless drastic changes to our government budget are achieved.  Therefore, it would be naïve to count on government programs to provide substantial retirement benefits for Millenials and generations to follow. 

For these reasons, it is sound and prudent for every household to have a rainy day fund or savings reserved for the unexpected – a change in employment, an unexpected home or auto repair, a sudden drop in the stock market, etc.  For single-income households, it is advised to keep six months’ to one year’s worth of living expenses in a highly liquid savings vehicle.  For dual-income households, six months’ worth of savings may suffice under the logic that if one source of income is disturbed, the second income may carry the family over until normal finances resume. 

Rainy Day Funds should be held in a liquid investment that you can access with ease in the case of an emergency.  These days you can get a decent return on short-term CDs at your local or online bank.  It may make sense to ladder the maturity of your CDs so that some matured funds are on the horizon regularly.

While 2019 appears to demonstrate strong economic growth potential, there is no guarantee that the market decline at the end of 2018 was the end of a down market cycle.

With savings in excess of your emergency fund, consider employing a diversified investment strategy that is built to withstand normal market cycles.  A properly constructed diversified portfolio should aim to provide you with steady market returns over a long-term investment window by adding to your bottom line when the market is doing well and protecting you on the down-side if the market is contracting. 

Reach out to your Certified Financial Planner ™ or CPA if you need a second opinion on your investing and saving strategy.  Your financial professionals are built to serve as a financial sounding board and keep you on track during the good and not-so-good times.

 

¹ https://www.marketwatch.com/story/only-3-in-10-americans-are-considered-financially-healthy-2018-11-01

² https://www.nerdwallet.com/blog/banking/why-you-should-save-a-rainy-day-fund-and-an-emergency-fund/

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS

2019 SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 4, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*Not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 11, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.,

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 13, 2019

9:00 a.m. - 11:00 a.m.

Kondo Wealth Advisors Pasadena Office (tentative)

300 N. Lake Ave. Suite 920

Pasadena, CA  91101

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 20, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 7, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 14, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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