Happy New Year! It seems like with turn of a calendar, people place new hopes, dreams, and desires with the start of a new year. The refreshed calendar can cause a rebirth of ideas or resolution to persist through unconquered challenges and goals. Persistence and resolution will be what many communities will need in California as they rebuild from the twin events of wildfires and mudslides. Our thoughts go out to those that have had their lives turned upside-down by these events.
People often ask if financial planning is just about setting goals and achieving them; some of that is true. However, sometimes the biggest impact we can have in a client’s life is helping protect them from what could go wrong. There is rarely opportunity without risk, victory without defeat, or advances without setbacks. We strive to be the steady hand helping for inevitable ups and downs of life. We can’t prevent the unforeseen from happening, but it tends to go much better with a well thought out plan.
Perhaps the biggest surprise under the tree this holiday season was the passage of the Tax Cut and Jobs Act of 2017, the most sweeping tax code change since 1986. These rules are set to stay with us for the next decade before sunsets come into place. Here’s a quick summary of major changes which start in 2018:
- Corporate tax rate is reduced from 35% to 21%
- Most pass-through companies (think S-Corp, partnerships and LLCs) can deduct 20% of their income tax-free
- Federal income brackets have been revised
- The standard deduction is nearly doubled
- Itemized deductions have been reduced, $10,000 limit for on state & local property taxes
- Estate tax exemption increased to $11 million
Mortgage interest deduction will be reduced from $1 million to $750,000 for new mortgages, existing loans are grandfathered in
Thankfully, retirement contribution limits were not reduced to pay for the tax cuts. Contributions to 401k increase from $18,000 to $18,500 in 2018 and catch-up contributions remain at $6,000 for age 50 and up. IRA and Roth IRA limits remain unchanged at $5,500 and $1,000 catch-up.
Overall, 2017 ended up being a very nice year for investors with accounts putting up heathy returns. With the tax cuts, strong corporate earnings, and dropping unemployment, 2018 appears to be lining up to be more of the same. The nominee for next Fed Chairman is Jerome Powell. He has voted along side Janet Yellen and is expected to maintain the current course to gradual rate increases. Most economic expansions cease once the economy starts to overheat, then tip into recession. While this current expansion cycle is very long in the tooth, there does not appear to any signs of overheating yet, but they could be bubbling. It is getting hard for employers to find qualified workers and wages are starting to rise. The Fed would like to see a bit more inflation, but not too much. Will they be able to keep it, just right?
When everything seemly lines up so nicely and it has been so long without a significant drop in capital asset prices, it is important to remember the it WILL happen. Sometimes capital markets need a healthy pruning to make way for new growth, just like a nice garden. Now is the time to stick with your plan and remain prudently invested, not double down on risk or try to call a market top. Valuations can run high for many years and remain overbought for very extended periods of time. Calling when to get out can be just as foolish at the top as when to get in on the bottom.
I would also caution clients to be leery of anything or anyone claiming you can get rich quick on Bitcoins or any one of the other 1,300 and counting “crypto” currencies being created in the cybersphere. You are also seeing huge returns in any company domestic or foreign that ties its name to the word blockchain. It is being talked about everywhere, radio, tv, blogs, cocktail parties, networking events…heck even on some of my mountain bike rides. It is the Wild West out there in Cryptoland. It is also all speculation at the moment and that is very different from investing. We purchase investments because they have an intrinsic value and a market value. Supply and demand attempt to find equilibrium in the difference between the intrinsic value and market value. Bitcoin and all the other digital coins have no intrinsic value, you can’t do anything with it because it doesn’t physically exist, just a series of 1’s and 0’s. They claim to “store” value, but produce nothing. Digital coins are all market value, simply what the other person will to pay for them, no intrinsic value which is akin to speculation, not investing. I do believe the underlying blockchain technology is interesting, but we have not figured out what to do with it yet. Perhaps blockchains will be used to detour counterfeiting with smarts tags on things from shoes to handbags to whiskey to good ole’ American dollars. Time will tell. For now, consider stirring clear of the tulip like mania until the technology and means to use it prove themselves with the test of time.
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We appreciate your business, friendship, and trust. May you find 2018 prosperous and filled with memories to cherish! GO USA in the upcoming Winter Olympics
Daniel D. Sands, CFP®