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The Trump Rally Revisited

The Labor Department had some good news for February -- 235,000 new jobs, and unemployment down to 4.7%. This caps a nearly 8-year bull rally in the stock market, and a surge of nearly 10% since last November's elections. Over the past four quarters, 71% of companies in the S&P 500 have reported quarterly earnings that beat expectations.

Although everyone is happy about the good performance, many are also worried. When is a correction coming? What can I do to take advantage of the growth, but also prepare in the event of a pullback?

The good news is that the market is already settling down from the initial euphoric highs, and moving towards more modest long-term growth. From the election to Inauguration Day, the Dow Jones Industrial Average jumped 8.2%. Since then, the DJIA has continued to move up, but at a more sedate 2.3%.

There is still room for growth. The strong and improving global economy plus above-average cash holdings held by investors supports the opinion that stocks can go even higher.¹ Consumer optimism is also high. This is important, since consumer spending drives two-thirds of the economy.² In other words, we are on a roll.

Whether the market can take advantage of the positive numbers depends a lot on the order in which President Trump implements his campaign promises. The post-election enthusiasm of the market was driven by Trump's promises of tax cuts, corporate and financial deregulation, repatriated earnings and fiscal stimulus. These moves could potentially increase earnings and drive the market to new highs. Instead, since the Inauguration he has led with protectionist trade policies, anti-immigration legislation, border taxes, and nationalism, which tend to be economic drags.

However, Trump recently indicated that in the next two to three weeks, he plans to introduce a plan to reduce corporate and individual taxes. He also signed executive orders to possibly roll back Dodd-Frank banking regulations, and the requirement that financial advisors act as fiduciaries. 

At this time of uncertainty, investors do not want to miss out on potential future growth, but would also like to protect themselves from a possible correction. The sectors that could benefit the most from economic growth include industrials, financials, energy, technology, and non-essential consumer goods. It also makes sense to put some money into defensive strategies, such as companies that pay out strong and consistent dividends. These companies tend to support strong dividends no matter what is happening to their stock price.

This would be an excellent time to rebalance your portfolio. U.S. large companies have done well in the last few months, and U.S. small cap value has leaped 35% in the last year.³ Even if you started with a balanced, diversified portfolio, it is probably now overweighted in those asset allocations. By rebalancing, you are locking in the highs, and buying other asset classes that are currently a bargain. It is a disciplined way to "buy low and sell high".

This is also a good time to review your bond investments. The Federal Reserve Bank is likely to raise interest rates this week, and may raise interest rates further before the end of the year. When interest rates go up, bond values go down. The bonds that will be most affected are long-maturity bonds that have maturities of 10, 15 years or more. If you have these in your portfolio, you may want to shift to bonds that have shorter maturities of one to three years. These short-maturity bonds still provide downside protection during a market dip, but are the least affected by increasing interest rates.

Do not let politics divert you from your long-term plan. Successful investors tend to stick to their plan no matter what is happening with the market. The market will always have volatility in the short-term, but your retirement can last 25 to 30 years. Current swings in the market may have little consequence even a few years down the road.

¹ Wall Street Journal 3/11/2017

² Kiplinger Feb 2017

³ Bloomberg 1/31/2017

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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Medicare Mistakes to Avoid

Over the next few decades, there will be one American turning 65 every 10 seconds, according to AARP. This means that a record number of people will be applying to Medicare when they turn 65. Since this is the first and only time for most people, it makes sense to know the rules and plan ahead.

Medicare covers the bulk of your health care expenses after you turn 65. But Medicare's rules can be confusing and mistakes can be costly. If you don't make the right choices to fill in the gaps, you could end up with high premiums and big out-of-pocket costs. Worse, if you miss key deadlines when signing up for Medicare, you could have a gap in coverage, miss out on valuable tax breaks, or get stuck with a penalty for the rest of your life. Here are some common Medicare mistakes you can avoid.

Forgetting That You Should Sign Up for Medicare at 65

If you're already receiving Social Security benefits, you'll automatically be enrolled in Medicare Part A and Part B when you turn 65 (although you can turn down Part B coverage and sign up for it later). But if you aren't receiving Social Security benefits, you'll need to take action to sign up for Medicare. If you're at least 64 years and 9 months old, you can sign up online. You have a seven-month window to sign up—from three months before your 65th birthday month to three months afterward (you can enroll in Social Security later).

You may want to delay signing up for Part B if you or your spouse has coverage through your current employer. Most people sign up for Part A at 65, though, since it's usually free—although you may want to delay signing up if you plan to continue contributing to a health savings account. See the Social Security Administration's "Applying for Medicare Only" for more information. If you work for an employer with fewer than 20 employees, you must sign up for Part A and usually need to sign up for Part B, which will become your primary insurance (ask your employer whether you can delay signing up for Part B).

Not Picking the Right Medigap Plan

If you buy a Medicare supplement plan within six months of enrolling in Medicare Part B, you can get any plan in your area even if you have a preexisting medical condition. But if you try to switch plans after that, insurers in most states can reject you or charge more because of your health. It's important to pick your plan carefully. Some states let you switch into certain plans regardless of your health, and some insurers let you switch to another one of their plans without a new medical exam.

Keeping Your Part D Plan on Autopilot

Open enrollment for Medicare Part D and Medicare Advantage plans runs from October 15 to December 7 every year, and it's a good time to review all of your options. The cost and coverage can vary a lot from year to year—some plans boost premiums more than others, increase your share of the cost of your drugs, add new hurdles before covering your medications, or require you to go to certain pharmacies to get the best rates. And if you've been prescribed new medications or your drugs have gone generic over the past year, a different plan may now be a better deal for you.

It's easy to compare all of the plans available in your area during open enrollment. Go to the Medicare Plan Finder at www.medicare.gov/find-a-plan and type in your drugs and dosages to see how much you'd pay for premiums plus co-payments for plans in your area.

Buying the Same Part D Plan as Your Spouse

There are no spousal discounts for Medicare Part D prescription-drug plans, and most spouses don't take the same medications. Consequently, one plan may have much better coverage for your drugs while another may be better for your spouse's situation. Compare the plans based on the coverage for your specific drugs. Be careful if you and your spouse sign up for plans with different preferred pharmacies—some plans only give you the best rates if you use certain pharmacies, so you could end up paying a lot more if you get your drugs somewhere else.

Going Out-of-Network in Your Medicare Advantage Plan

If you choose to get your coverage through a private Medicare Advantage plan, which covers both medical expenses and prescription drugs, you usually need to use the plan's network of doctors and hospitals to get the lowest co-payments (and some plans won't cover out-of-network providers at all, except in an emergency). As with any PPO or HMO, it's important to make sure your doctors, hospitals and other providers are covered in your plan from year to year. After you've narrowed the list to a few plans, contact both the insurer and your doctor to make sure they'll be included in the network for the coming plan year. You can switch Medicare Advantage plans during open enrollment each year from October 15 to December 7.

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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To Diversify Wealth, Think Outside the Business

Small business owners face a unique, but critical investing challenge: diversifying investment holdings outside of the business.  For business owners, diversifying your sources of wealth takes on added importance. Focusing too much on your business could leave you exposed in the event of an economic downturn or some other change in circumstances.

Luckily, there are many options to consider that can help diversify the wealth you have earned.  Earmarking funds for retirement, using a trust to bequeath your legacy to heirs, and/or broadening your investment mix may be helpful in reducing reliance on your business.

Earmark Assets for Retirement

A small-business retirement plan may help an entrepreneur divert a portion of salary for use in his or her later years.  Plans with high contribution limits, such as a 401(k) plan, may be especially helpful in this regard.  If your business elects to sponsor a 401(k) plan, traditional and Roth-style plans present different types of tax benefits.  Contributions to traditional 401(k) plans are tax deferred, which lowers taxation during the year the contribution is made.  After age 70½, required minimum distributions (RMDs) are taxable as income in the year distributed.  Contributions to Roth 401(k) plans are made with after-tax dollars, but RMDs during retirement are generally tax free.1

Entrepreneurs with the means to invest for retirement above and beyond an employer-sponsored plan may want to consider a Roth IRA.  With a Roth IRA, the maximum annual contribution for the 2017 tax year is $5,500, plus an additional $1,000 catch-up contribution for those aged 50 and older.  To contribute the full amount allowed, your modified adjusted gross income (MAGI) needs to be $118,000 or less if you are a single taxpayer or $186,000 or less if you are married and filing a joint tax return (in 2017).  Contributions are taxable, but qualified distributions after age 59½ are tax free.  RMDs are not required from Roth IRAs during your lifetime, which enhances their appeal as an estate planning vehicle.  If you desire, you can leave the assets in a Roth IRA and pass it to your heirs, income-tax free as an inherited Roth IRA when you are gone. 

Leaving a Legacy

As you age, estate planning is likely to become increasingly important.  A trust can help you maintain control of assets during your lifetime, shield assets from taxes, and create a legacy for heirs.  There are many types of trusts, and your ultimate selection may depend on whether you want the trust agreement to be revocable or irrevocable.  Depending on the type of trust selected, a trust agreement can make it possible to use life insurance proceeds income- and estate-tax free, to remove your residence from your estate, to bequeath assets to grandchildren, or to capitalize on a low-interest-rate environment and potentially reduce estate taxes.  You should discuss the many trust options available with your tax or legal advisor.

Your Investment Mix

When managing investments, the old saying about not putting all your eggs in one basket is especially important for entrepreneurs.  Exposure to equities, fixed income, real estate, and other types of assets can potentially help to diversify your investment mix and protect the wealth you have accumulated.  Although there are no guarantees, if one area within your portfolio declines in value, another could potentially increase or hold steady, possibly reducing your exposure to loss. This strategy of balancing asset classes and diversifying your holdings is known as Modern Portfolio Theory.  When implemented correctly and tailored to your individual risk tolerance, this strategy can help you achieve returns market rate returns in a conservative portfolio that also allows downside protection.   

To truly diversify when investing, small business owners need to think outside the business.  Reach out to a financial advisor that will work with you to help define an overall investment strategy that is in line with your goals and objectives.

Source/Disclaimer:

1Early withdrawals may be subject to a 10% penalty tax in addition to regular income taxes on any investment earnings.

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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The American Dream and Your Investments

The "American Dream", as defined by James Adams in his 1931 book, was "a land in which life should be better and richer and fuller for everyone." A disturbing study was released recently by a team of the nation's leading economists at Stanford, Harvard and the University of California at Berkeley. The study reported that it has become extremely unlikely that this generation of American children will earn more than their parents, after adjusting for inflation.¹

The change over the last few years has been alarming and dramatic. If you were born in 1940, the probability of success was much better. Ninety-two percent of children at that time would do better than their parents. This was a virtual slam-dunk, regardless of whether the children went to college, got divorced, or suffered a layoff. The economy was growing strongly, and benefited the rich, the middle and working classes alike.

Unfortunately, this was short-lived. If you were born in 1980, only 40% of children would earn more than their parents. This lack of mobility hit the middle class more than the poor, and not surprisingly, struck the industrial Midwest states particularly hard. Going backward has now become the norm.

Paradoxically, this national glass ceiling is not due to a slowdown in growth, or a reduction of wealth. We actually have more wealth as a nation. Harvard economist, Nathaniel Hendren, found that the American economy is far larger and more productive than in 1980, and per capita Gross Domestic Product is almost twice as high.² He found that the reason for the growing gap was that nearly 70% of income gains from 1980 to 2014,went to the top 10% of the wealthy in America.

Wealth inequality is even more pronounced than income inequality. The richest 10% of American households owns a whopping 76% of all the wealth in the U.S.³ The source of net worth is also vastly different. The top 1% owns nearly half of the total wealth in stocks and mutual funds. By comparison, the bottom 90% holds most of its wealth in their principal residences.⁴ As a result, the Great Recession of 2008 and 2009 had little consequence for the wealthy, while it devastated hundreds of thousands of Americans who lost their homes.

Trump's campaign tapped into the anxiety and anger of working Americans who felt that the American Dream was slipping out of their reach. However, he did not address the inequality. Hendren's study of Trump's tax-cut plans found that they would do little to improve the finances of struggling families. Instead, they disproportionately benefit high earners. This, combined with the loss of health insurance, the privatization of education, and other proposed changes may lead to more economic insecurity for most Americans.

What does this mean for your investments? If you have investments at all, count yourself among the fortunate few. Over half of Americans have zero money in the market, including money invested through pension funds, 401(k) accounts, Individual Retirement Accounts, mutual funds and Exchange-Traded Funds, as well as individual stocks.⁵

Investing in the market remains one of the few ways that you can participate in the growth of the economy, and keep up with inflation. For example, between March 2009 and now, if you were not invested in the market, you would have missed out on one of the strongest rallies in history. The Standard and Poors 500 Index, which tracks the 500 most well known publicly-traded U.S. companies, rose over 200%.

The biggest barrier to investing in the market is fear.⁶ People feel they don't know enough about the market, or don't trust stockbrokers and banks, or think it's too risky. There are good reasons for this apprehension. Most financial advisors are not fiduciaries who are required to act in their clients' best interests in order to keep their licenses and certifications. Clients could not be sure if the advice they were receiving, or the investments that were recommended to them, were the best-performing and least expensive choice to accomplish their goals, or best for the advisor. Positive change was in motion last year when the Department of Labor passed a ruling requiring any advisor who gave advice on retirement accounts to be a fiduciary. Trump opposes this ruling, and plans to reverse it or stall its implementation. In the meantime, investors must do their own due diligence and check whether their advisor is a fiduciary.

Many people are not aware that there are proven strategies available to reduce the volatility of the market and increase downside safety when they invest. These more conservative strategies, based on balancing asset classes and broad, global diversification, have helped families weather the ups and downs of the market, maintain their purchasing power in the face of inflation, and achieve their hopes and dreams.

If you have investments, congratulations! Work with your advisor to make your money work for you and capture some of the wealth of the nation for your family. If you are not investing, consider meeting with a fiduciary advisor to learn more about the benefits of planning and diversification. At the same time, keep in mind that many Americans are not as blessed as you, and support efforts to protect healthcare, civil rights and education for all people.

¹ Washington Post, 12/8/2016

² New York Times 12/8/2016

³ Organization for Economic Cooperation & Development, 5/2015

⁴ Household Wealth Trends in the U.S., Edward Wolff 12/2014

⁵ BankRate Money Pulse 4/2015

⁶ CNN Money 4/2015

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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Retirement Tax Breaks You Don't Want to Miss

Some federal tax laws adjust to offer varying benefits or tax breaks at different age brackets.  This can present opportunities to save or alternatively, create costly pitfalls to avoid.  Being alert to the rolling changes that come at various life stages is the key to holding down your tax bill to the legal minimum.  Below are a few ideas that the 65 and older might want to consider.

1.  Bigger Standard Deduction

When you turn 65, the IRS offers a gift in the form of a bigger standard deduction. For 2016 returns, for example, a single 64-year-old gets a standard deduction of $6,300 (it will be $6,350 for 2017). A 65-year-old gets $7,850 in 2016 (and $7,900 in 2017).

The extra $1,550 will make it more likely you’ll take the standard deduction rather than itemizing and, if you do, the additional amount will save you almost $400 if you’re in the 25% bracket. Couples in which one or both spouses are age 65 or older also get bigger standard deductions than younger taxpayers. When both husband and wife are 65 or order, for example, the standard deduction on 2016 joint returns is $15,100 (and $100 more for 2017). Be sure to take advantage of your age.

2.  Easier Medical Deductions

Until 2017, taxpayers age 65 and older get a break when it comes to deducting medical expenses. Those who itemize on 2016 returns get a money-saving deduction to the extent their medical bills exceed 7.5% of adjusted gross income. For younger taxpayers, the AGI threshold is 10%. If you’re married, only one spouse needs to be 65 to use the 7.5% threshold. For 2017 returns, the 10% threshold will apply to all taxpayers.

3.  Deduct Medicare Premiums

If you become self-employed—say, as a consultant—after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.

This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses for those age 65 and older in 2016. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have retiree medical coverage, for example) or your spouse's employer (if he or she has a job that offers family medical coverage).

4.  Spousal IRA Contribution 

Retiring doesn’t necessarily mean an end to the chance to shovel money into an IRA.  If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own.  If you use a traditional IRA, spousal contributions are allowed up to the year you reach age 70 ½. If you use a Roth IRA, there is no age limit. As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), this tax shelter’s doors remain open to you. The $6,500 cap applies in both 2016 and 2017.

5.  Avoid the Pension Payout Trap

Upon retirement, many retirees are offered the opportunity to take a lump-sum payment from their company plan, such as pensions, annuities, IRAs and other retirement plans.  However, if you take a lump-sum payment from a company plan, you could fall into a pension-payout trap where the IRS mandates you withhold a flat 20% for income taxes… even if you simply plan to move the money to an IRA via a tax-free rollover.  The IRS will hold on to the 20% until you file a tax return for the year and demand a refund. 

Fortunately, there’s an easy way around that miserable outcome when initiating a rollover from your employer sponsored plan to an IRA.  Simply ask your employer or Certified Financial Planner to send the money directly to a rollover IRA.  As long as the check is made out to your IRA and not to you personally, there’s no tax withholding.

Even if you intend to spend some of the money right away, your best bet is still to ask your employer to make the direct IRA transfer.  Then, when you withdraw funds from the IRA, it’s up to you whether there will be withholding.

To find out which of the above strategies is appropriate for you, consult your Certified Financial Planner or CPA.  Some can be utilized in combination, but others should be selected in lieu of one another, so find out which will provide you with the greatest benefits overall. 

 

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 TENTATIVE SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

10:00 a.m. - 12:00 p.m.

South Pasadena Public Library Community Room**

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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*

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Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

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