“Nothing can be said to be certain, except death and taxes” – Benjamin Franklin
Just because they’re inevitable, doesn’t mean you shouldn’t live a healthy life for longevity, and position yourself to pay the least amount in ta
At least the final estate or death taxes.
The link below has the 10 worst states to die in, at least from a tax point of view.
Colorado — not on the list.
10 States with Scariest Death Taxes
Out with the old and in with the new!
2012 had some ups and downs, but ended up in the positive territory for the un-managed stock market indexes.
My outlook for 2013 is not quite as optimistic as it’s been the past few years for a number of reasons.
In my video, I recap 2012, provide some thoughts on 2013, and discuss my philosophy how different strategies should be considered going forward.
TRANSCRIPT:
Good morning! Mike Brady with Generosity Wealth Management, a full-service, comprehensive wealth management firm headquartered right here in Boulder, Colorado, and I am the President.
Today, I would like to talk with you about 2012, a little bit of a recap. We’ll also talk about the outlook for 2013 and what my analysis and what my opinion might be on 2013. Before I go any further, there will be a discussion here at my office, 45 minutes to 60 minutes, a seminar on the Outlook for 2013 on January 30, 2013, at 6 p.m. If you are interested in coming to that, please RSVP with Cassidy@generositywealth.com or you can call my offices: 303-747-6455. I will be sending out an invitation as well within a week or so.
Let’s look at 2012. I’m going to flip up there on the screen and you’re going to see the unmanaged stock market index for 2012. The first quarter was good. The second quarter was bad. Third was good and fourth pretty much held its own, although November wasn’t looking so good.
For the first quarter what you’ll see is if you missed January, you missed some of that first quarter’s gain and the second quarter was a tough one. That was very uncomfortable at that time. And when things like that happen (I’m going to throw up on the chart there again, there we go.) What you’ll see is it is common throughout the year for there to be declines. This does not mean that the year will end a decline. When those things happen, people have a tendency to get concerned, maybe even freak out. Last year was at 10%. The year before, it was 19% and then it was a16% decline. Three years ago, 28%. It is common for there to be a decline throughout the year.
At the end of the year, we had all of the election discussion. In case you haven’t been paying attention, President Obama did win re-election and then we went right into the fiscal cliff; right at the end of the year.
This video is really not so much about all the intricacies of the fiscal cliff and what was decided there. But in general, most people from a marginal tax bracket were not hit—39.6% for the highest tax bracket, if you’re at $400,000 or $450,000 income or greater, whether you’re single or married.
The capital gains and the dividends stayed the same for most people, except it’s now 20% for those at the highest rate. That does not mean that you are completely avoided any additional taxes. Before I go into that, there’s also a $5,250,000 exemption on estate tax and that rate did go up from 35% to 40%. However, there is a 3.8% tax for ObamaCare and the payroll tax that was 2% about a year ago, kind of a tax break, that was allowed to lapse. The full 6.2% of the employee portion of it is now going to be taken out of your paycheck going forward. You’re still going to see some kind of a tax bite at all the various ranges and income levels.
Last year there was also a little bit of a calming over in Europe but it is still, particularly in the credit market, but it is still disaster over there from a mid- to a long-term.
Let’s start talking about where we are right now in 2013. The last two or three years, I’ve been optimistic. You look back at the videos, you look back to my newsletters and you’re going to see that. I’ve always said that a diversified portfolio, while it does not guarantee a positive return, does not guarantee, particularly, in a generally trending down market that you know the perfect scenario on the outside, I do believe that it is a key ingredient to going from point A to point B in your goal planning.
Goal planning is really going from point A to point B, identifying those financial events that might knock you off and might derail you from getting to what your goal is, whatever that might be, and proactively addressing it and seeing if there is anything you can do to mitigate it.
There are a couple of different strategies from an investment management point of view as I like to think of it. There is sailing, which is like sailing your boat and then there’s rowing, like “row, row, row your boat.” Sailing and rowing.
Sailing is a little bit more passive than rowing and just think about the wind blowing it. If the wind is going in your direction, things are good and it is very forgiving of any errors you might have. The wind stops, you stop; the wind goes the other way, you might be going backwards.
If we’re in a generally upward market, this might be a good way to have your portfolio. The last two or three years, I felt comfortable, depending on the client of course. I am always making sure that it’s an individualized portfolio for them to meet their investment objectives, having less of an active trading strategy in there. Yes, we would move and allocate appropriately as the year unfolded, but it’s been very forgiving of any mistakes.
I believe in 2013 and looking into 2014, we’re going to be more of a trading range and that we might want to add in and complement some of our sailing strategies, some of our diversified asset allocation strategies with some managers who have a good track record of being a little bit more active.
Why do I think that? I think that 2013 and 2014, we’re already seeing that taxes are going up. I already mentioned that earlier. You’ve got the payroll tax, the ObamaCare tax and that is going to lead to some less disposable income.
I’m going to put up here on the chart, we’re going to see what some inflection points are and how things have looked in the last 10 years or so. From a technical point of view, we’ve had a great run in the last three or four years. The question is, are things going to continue to go straight up?
We’ve practically, in an unmanaged stock market index, doubled in the last three or four years. In the next three or four years, are we going to double? Is it going to be quite as easy? I’m a little hesitant to say something like that.
Earnings growth for the fourth quarter has not released, but it’s expected to be down. Manufacturing inventories are up, which is a bad thing. While forward PE ratios* I take with a grain of salt, the price to earnings growth ratio is higher, which is a negative thing which basically means the pricing market in relation to the expected growth.
PE ratios are higher now than they were a year, and even two years, ago. While the debt to GDP ratio for the federal government is about 103% which in my opinion, is in a danger zone. Not to make this into a political video, whether it’s a revenue or a spending problem depending on what your philosophical views are–Democrat, Republican, whatever it might be—everyone is agreeing that having too much debt is a problem. I think that we’re getting into a danger zone, particularly that debt in relation to the Gross Domestic Product (the GDP). That has me concerned.
Profits are good for corporations. They’ve been very efficient and have really cut a lot of their expenses. They are really trying to get “bare bones” in the last two or three years, which I think is great. The amount of cash that they’re holding on their balance sheets is good and high. But the question is with some bumps in the economy going forward, how much of a buffer do they have in order to ride it out? My concern is that they might not have quite as much of a buffer as we would like and what they’ve had in the past to cut expenses than they did in the last two or three years.
One of the big pieces of news in the last month that was really overshadowed by the fiscal cliff discussion was the Fed saying that they would like to phase out some of the quantitative easing in 18 to 24 months. They even pegged that 7.5% unemployment is something that would cause them to change their strategy. Whether or not what they say in their notes and what they’re actually going to do, that could be two different things.
Even Bill Gross, who is the manager of the largest bond fund in the world, he says that you have to pay the piper at some point and that it may lead to inflation. I believe that’s the case as well. I don’t know if it’s going to be inflation in 2013, but I do know that at some point, there will be increased inflation and that’s going to be a damper on some of the stock market. When you have slower growth and you’ve got inflation and when you have prices that have really seen a high rise in the last three to four years- that causes me to question whether or not that’s going to continue going forward.
Getting back to my philosophy, I do believe that there are different types of strategies—both sailing a little bit more passive and a little bit more active ones, more of rowing strategy–and having both of them may make sense in a portfolio for a client.
I’ll be talking with my clients in the next month or so to see what’s appropriate for them. I also think that having income strategies may make sense going forward and so I’ll be talking with my clients about that as well. If you’re going to take some risks, at least get some income as well. That’s one strategy and it may make sense with whatever the particular client might need going forward.
Those are my thoughts. I am going to expand upon them January 30, 2013, at 6 p.m. when I have a seminar here at my office. You’re always welcome to give me a call or an e-mail. Mike Brady, 303-747-6455.
I’m hoping that I’ve got all my notes here. I’m going to quickly look through here. It does look like it and the nice thing is I do videos throughout the entire year. If I’ve forgotten something here, I’ll just catch up with it on the next video.
You have a wonderful week and we’ll talk to you later.
Bye, bye now.
* “PE Ratio” is price to earnings ratio of a stock.
Here are a number of articles discussing the changes from 2012 to 2013 due to the last minute tax negotiations.
The negotiations led to a wide ranging set of changes, that will affect most every American.
Your Taxes Under the Fiscal Cliff Deal
Everything You Need to Know About the Fiscal Cliff Deal
The Good, The Bad, and The Ugly From the Fiscal Cliff Deal
You’re probably hearing a lot about the Fiscal Cliff, and may be wondering
• What does it really mean?
• What are the implications?
• What can, or should, I do?
In order to answer these questions, I have a slightly longer than usual video this week (about 10 minutes), but one of the best ones I’ve done in a while (if I do say so myself).
This is a very timely subect, and you’ll be hearing about the Fiscal Cliff in all the media for the next month or so. Now is your chance to be as informed as possible, and take action if necessary.
Click on the video
TRANSCRIPT:
Good Morning! Mike Brady with Generosity Wealth Management speaking to you from Boulder Colorado. Hopefully you had a very nice Thanksgiving weekend.
Today, I want to talk about the fiscal cliff. Perhaps you have read or heard about the fiscal cliff and have wondered, “what the heck is it?” I mean they seem to talk about it like it is so obvious what the implications are and I thought I would take a step back with you and talk about the origin, kind of what the fiscal cliff is, but also what are some things that we can do between now and the end of the year and also what the implications may be for the stock market.
Let’s start off with the beginning. Back in 2001, there was a pretty much across the board reduction in income taxes from the lower rates to the higher rates about 3% give or take. At that time there were also child credit increases, which was a good thing. This was all renewed in 2010. It was supposed to expire in 2010. At that time the Obama administration with the Democrat Senate and House of Representatives extended it for another two years and that two years is coming up. So when it is described as the Bush era tax cuts, at this point really I would say it is the Bush and the Obama because really both sides of the isle have either started it or extended it. And so, at this point now, both sides of the isle want it extended as well, but they are disagreeing about how to extend it and to whom it is extended and which parts of it.
What does this really mean? Well, from an income tax point of view, pretty much across the board from the lower income tax rate all the way up to the higher ones; it is going to go up about 3%. I am going to throw up a graph there on the video and you’re going to kind of see how before and after it can go up. In addition capital gains are going to go from, at the very lowest it is going to go from 0 – 15 or from 15 – 20% on capital gains. Dividends are going to go from 15% all the way up to whatever your marginal tax bracket is, which could be 39.6 if you are in the very highest. Your payroll tax, two years ago, in addition to extending the tax cut, they lowered the FICA tax that is charged to the employees. It went from 6.2% down to 4.2%. Well that would be reversed. So 4.2%, so basically an extra 2% tax for those that are W-2 employees, well all people who pay FICA tax, so whether you are self-employed or a W-2. Also from an estate tax point of view, right now estate taxes are 35% to the amount in excess of 5.12 million, the amount that is excluded from estate taxes. If this isn’t resolved, in January it will be the amount over 1 million dollars per person, will be at 55%. It will go from 5.12 at 35 to 1 million dollars at 55%. A million sounds like an awful lot of money but once you start adding up life insurance and your house and your retirement account, it is very easy and quick to get over a million dollars. So this is a huge impact for a significant number of people.
You might ask yourself, who cares about all taxes, whether or not they are higher or lower, etc. And the argument, the reason why this is such a big deal is when taxes are raised, that is usually a decrease in production of some amount and so the question is although, for each dollar there is more of a tax in my example, right now we are talking about 3%, there might be less productivity in order to charge it on, so that your net after-tax is actually less to the federal reserve, to the federal treasury than you had before. Both sides of the isle ultimately want the tax rates to be lower because they believe that it will hinder the growth that has been happening most recently and harm the recovery that we’re seeing some legs under right now. So both sides want it. The question is to whom is the extension really going to be applied to. Is it going to be applied since the reduction was across the board, is the reduction across the board going to stay or are some at the very highest going to allow to be lapsed and so their rates go up when everybody else gets to stay the same?
That right there is where a lot of the compromise is going to happen in the next month or so. Now let’s talk about what could happen. I mean, essentially, number one, they could let it lapse. I don’t think that’s very likely. Both sides want something to happen. Congress has a tendency to work well when the pressure is on, when the public and when the media is putting so much of a spotlight on it. They could extend some but not others. That is absolutely possible. As a matter of fact, I would even argue that that is more likely, either some to all is going to be extended. Of a lack of the overhaul, the whole tax mode and that’s great, wonderful thinking, but that’s not going to happen.
What does this mean for the markets? Remember about a year and a half ago, the AAA rating of the US government was downgraded. At that time there was a huge decline in August and September and a little bit into October of 2011. There was a huge deal by S&P, or was it Moody’s? I can’t remember. One of the two, basically saying that they felt that the deficit was getting out of control and that we didn’t have the political will in order to solve it. This would be another further confirmation that that assessment a year and a half ago was actually true. I think that that would be a very bad thing if we are not able to get this resolved.
I still believe and you’ve heard me the last nine, 10 months or so, feeling strong about the underlying fundamentals of the private sector of the corporations, etc. Although we have a kind of a jobless recovery, the efficiency and the profitability of some of the corporations are great and I am feeling very optimistic and positive about that. This is a huge drain on the full economy of the United States and, of course, on the world because we are the world’s largest economy. I do believe that the market would go down and there is going to be a reaction to it. The question is how long that would be, whether that would be temporary or whether that would be permanent. If it does go down, I believe that it would be a temporary thing because the underlying fundamentals I still feel strong about.
A year and a half ago, let’s not forget, that the markets went down in August in September and they actually had a very nice rally after that. We got rid of some of the people who got scared. Those of us that were still invested in October, in general, in an unmanaged stock market index, did very well in the six months following. I think that this would be potentially a temporary downturn as well. We still have a whole month before now and then and it’s been hard to try to guess what the federal government is going to do and our particular politicians.
What can you do between now and then if you believe that tax rates are going to go up and it is not going to get resolved, basically you try to do more taxation in this year. You can sell those assets that have capital gains. You could reposition your assets, like for dividend paying stock, they can go over to maybe reposition in IRAs and some things of that nature. Or you are looking at bond issues, maybe it would make sense to go into municipals or tax-frees or something that is not fully taxable. There are a number of different things that you can do. If this does occur and what can we do in 2013? Absolutely we should consider the estate tax. At that point I will be talking with many of year to ensure that you have your estate planning and your estate planning attorney have really reviewed your particular situation as it relates to estate tax with various types of trusts and other things that you can do to try to minimize the very high estate tax that you might suddenly find yourself.
Anyway, that is the fiscal cliff in a few minutes. A few minutes, I think, probably turned into an even longer time, maybe ten minutes, which is a longer video than normal, but this is your summary.
Mike Brady
Generosity Wealth Management
303-747-6455
Hopefully I can help you out. If you are one of my clients, of course, I have an ongoing conversation with you. If you are not one of my clients and want to give me a call, go ahead and do so at 303-747-6455. My pleasure talking to you. You have a great day. Thanks, bye bye.
One month left in 2012.
Now is the time to ensure you’ve done your last minute tax planning for 2012, and looking towards 2013.
I reference the important Tax Policies in my video that should be addressed by the end of the year.
With the election over, will Congress finally address it?