Banks and Brokerage Firms: How Safe Am I?


In light of the recent headlines around bank failures, which may have brought back some very bad memories for those investors who lived through the 2008 financial crisis, it is helpful to examine what the rules are in order to sleep better at night.


When it comes to a bank or a credit union, your deposits are insured up to $250,000 per depositor with the Federal Depository Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).  That ratio is per institution, not per account number.    As a result, opening two separate joint accounts with your spouse in the exact same title will not increase your coverage.    Additionally, adding a beneficiary such as a child or sibling onto an account will add an additional $250,000 per beneficiary.    This is called a Payable on Death (POD).   However, the FDIC limits this to a maximum of six beneficiaries.


We strongly encourage individuals to stay within the FDIC/NCUA limits allowable.   Recently, the FDIC has extended unlimited deposit insurance to institutions such as Signature Bank and Silicon Valley Bank.  However, there is no guarantee this will be the case with all banks.   The manner in which these banks saw increased FDIC limits is already in question.  Under the 2010 Dodd-Frank bill, the Federal regulators have the authority to raise the deposit cap to cover all accounts should a “liquidity event” take place.   However, this is only after an expedited vote by the U.S. Congress, which hasn’t yet happened.


The selection of certain banks to have unlimited deposits as opposed to other banks creates a number of rather obvious potential problems.   However, permanent unlimited deposit insurance creates a whole host of other longer-term issues.  Imagine if all deposits were unlimited.   Savers would likely overwhelmingly chase the highest rates, which would place more money in the institutions that take the highest risk, thereby encouraging more risk in the financial system.


As a saver and investor, it is important to know how and where you are protected.   When you are a depositor at a bank, your deposit is your asset.  To the bank it is a liability.   The deposits in your name are subject to the creditors of that bank in the event of a default over whatever the allowable insurance limits are over that time.   This is because banks lend out their monetary base as much as a 10-1 ratio under the Fractional Reserve Lending System.   The mechanics of that system are quite complicated and beyond the scope of this article.  What is important to know is that your deposits above the limit can very much be at risk.


Let’s then compare this to how a broker-dealer works in terms of their custody of your assets.   A brokerage firm is required to legally segregate client assets from firm assets.   This means when you examine the balance sheet and profitability of a brokerage firm, they can’t list your stocks and bonds as an asset on their balance sheet.  As a result, in the event of a liquidation of the firm, your accounts simply receive a new custodian.   During the 2008 financial crisis, we witnessed Lehman Brothers, a 158-year old investment firm that catered to some of the wealthiest investors in the world go out of business in a couple of weeks.   As scary as this was at the time, it’s important to note that 100% of client assets were returned to them as multiple divisions of Lehman were split up across many companies.   This does not mean that the value of your securities are inherently safe.   If you own 10 shares of stock in Amazon, and the stock declines, it is still worth less to you.  It only means that your 10 shares of Amazon will be returned to you simply because they are not subject to the creditors of the brokerage firm.   This is true with your employer 401k and other retirement plans as well.


Does this mean that brokerage firms don’t need insurance?  Absolutely not.    Brokerage firms maintain insurance via the Securities Investor Protection Corporation (SIPC).    SIPC covers you up to $500,000 per investor.   However, the way in which SIPC works is it insures you in the event of something like fraud.  If a firm is liquidated and the client assets are being returned to them, but somehow you uncover that shares are not there, then the SIPC would begin coverage.  A famous example would be the Bernie Madoff case, in which he provided clients with fictitious statements of their balances. The SIPC coverage reimbursed them up to the $500,000 limit.   Additionally, most major brokerage firms offer additional private coverage that can sometimes be unlimited protection from such examples of fraud or missing securities.  In the case of Madoff, he did not maintain any additional insurance above the SIPC limits, most likely because they would have uncovered the fraud much sooner.


As a result of the way insurance on deposits actually work, it could be argued that a cash position above the FDIC limits in a brokerage firm sitting in a money market is actually quite a bit safer than a bank.   Money markets are essentially mutual funds that invest in cash like short-term debt instruments that are maturing usually between 30-90 days.  As a result, they are highly liquid.   The risk with a money market has more to do with the underlying debt and the risk of default.   It is extremely rare for a money market to default.  However, an investor concerned with such a risk could choose a money market that invests only in government backed securities, or more specifically just US treasury T-Bills.  This eliminates the default risk, with the exception of the US Government declaring a default.  If such a thing were to happen, it really wouldn’t matter very much where you put your cash anyway, as it would be worthless paper and nothing more than kindling for the fireplace.


While more bank failures may possibly be possible, we would highly encourage investors to stay within the legislated FDIC limits.  However, understand that the way in which a brokerage firm segregates your assets is very different from that of a bank.



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“Timing the Market” vs “Time in the Market”


Investing can be a very emotional rollercoaster ride for many individuals.   These emotions are inherently counterintuitive.   The desire to sell during difficult periods can be quite strong.   Additionally, the desire to put money to work when markets are doing well can be equally as strong.   These emotions often lead investors to sell low and buy high, which is precisely the opposite of what they should be doing.


Ultimately, the ability to time the correct entrance and exit into financial markets has proven to be an ongoing exercise in futility.   The data around market timing consistently demonstrates this to be the case.  There are many examples of this.  The annual Dalbar studies demonstrate year after year how the average investor underperforms the overall market due to these types of poor decisions around timing.   Additionally, the Standard & Poor’s Index Versus Active Management report (SPIVA) consistently shows that professional money managers demonstrate a very poor track record of outperforming markets as well, with roughly 90% of mutual fund managers failing to outperform their benchmark.


Additionally, a landmark study “Determinants of Portfolio Performance” done in 1986 by Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebower revealed that approximately 90% of your investment return comes from the overall allocation of assets, and has less to do with individual security selection.   The importance of this paper helped reinforce the earlier work of economist Harry Markowitz and his research in 1952 on Modern Portfolio Theory, for which he was later awarded the Nobel Prize in Economics.


Today, we see data that suggests little has changed.  The ability to time markets is as difficult as ever, and the importance of staying invested as opposed to timing the market is no different than in decades past.


Looking at some recent data on asset allocation in the above chart, we can see the 1-year, 3-year, 5-year, 10-year and 20-year rolling returns for various asset allocation models.   What we can see from the data is that the longer you are invested, the better you’ll do.  While that should be no surprise to anyone, what we can also see is the probability of posting a negative period is much lower as you reduce exposure to stocks and increase exposure to fixed income.


Looking at the data we can see that a portfolio that is approximately 55% stocks has seen few negative 3-year rolling periods.  In no circumstances were the 5-year or more rolling periods negative.


When looking at an investment portfolio that has a 73% exposure to stocks, we see a very nominal potential decline in any 5-year rolling period, with the overwhelming number of periods producing positive results.


When we expand the time frame to 10-year rolling periods, none of the asset allocation models have demonstrated any negative rolling periods, with the exception of being 100% invested in stocks via the S&P 500.  It’s also important to note that even in the few examples in which the S&P 500 posts a negative 10-year period, this is an example that illustrates only price return, and does not factor in the dividend income from investing in the S&P 500.  When we correct for the dividend cash flow generated, the worst negative 10-year periods actually go from negative to positive.


This chart demonstrates several important points.

  1. The likelihood of success by staying invested improves dramatically over time.
  2. The more of a balanced portfolio you have, the less likely you are to experience a negative result, even during a relatively short period of time.
  3. There is a point of diminishing returns in which the degree of increased short-term risk and volatility does not produce an equivalent increase in long-term return.


It is often said by the novice investor that “the stock market is like going to a casino”.   In fact, the opposite is actually true.  When you enter a casino, you may get lucky and win in the short-term, but if you stay long enough, the probability is you will lose as the odds are very much in the casino’s favor.  Investing is precisely the opposite.  You may very well see a negative return within the first year or two.  However, the probability that you are still losing money within a 3-5 year window of time is very low.  As investors, if you are disciplined enough to stay invested, you are essentially the casino owner as opposed to the gambling patron.





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Tax Savings on Series EE and I-Bonds for College Funding


In recent months there has been increased interest in US Treasury savings bonds, particularly I-Bonds, because of the higher interest rates resulting from the recent spike in inflation.  Investors who are pursuing these bond should ask the question, “what is the plan when they mature, or if you want to redeem them?”  If Inflation ends up reverting to a more normalized historical rate, then the yields on these bonds will go down, and could even go to zero as they have in some years during the 2010’s.  Given this potential issue, it’s important to have a game plan.


Clients that have accumulated a relatively significant amount in Series EE Savings bonds may have concerns about the tax implications if they cash them in, as they are taxable when redeemed.   When they have fully matured, and they stop paying interest, investors may be interested in getting their money working again.  One possibility is college funding.  Imagine if you were a grandparent looking to help with the education of your grandchildren.   Given the potential tax concerns in such a situation, we might suggest cashing in a little bit at a time each year, and subsequently opening a 529 for each grandchild with the proceeds.  This can allow you to deduct the realized interest income from the bonds that are cashed in annually.  There are nuances with this approach as it is important to ensure income is below certain limits to take advantage of this tax strategy.   Additionally, creating too much taxable income from the interest generated can impact Medicare premiums as well.  It’s also important to be aware of how the new account will be titled, as well as the gifting rules.  Although there are many things to address, if done properly, this could be a good strategy to accomplish a number of financial goals for some investors.


Technically, the income exclusion rule allows for certain savings bonds to be redeemed and the proceeds to be used for qualifying higher education expenses.  Expenses that qualify are tuition and fees, not room and board or books.  Qualified expenses also include 529 college savings plans, Coverdell Savings accounts for oneself, a spouse or dependent.  In order to take advantage of these rules the bonds must be Series EE bonds, or Series I-bond.  The Series EE bonds must have been purchased after 1989.  All Series I-Bonds will qualify.  The owner of the bonds must have been at least 24 years old when the bond was purchased.  They must be in the bond holder’s name or their spouse’s name.


There is an income phaseout, whereby being above this level precludes one from taking advantage of the income exclusion. The level is typically adjusted for inflation annually.  For 2023, the phaseout begins with a Modified Adjusted Gross Income (MAGI) of $91,850 and completely phases out at $106,850.  In the case of married couples filing jointly, the phaseout starts at $137,800 and ceases at $167,800.  The exclusion is not eligible if you are married and still filing single.   It’s important to note that when redeeming these bonds, it will create a taxable event.  As a result, you should ensure that you don’t go over these levels, after the redemption of these bonds has been factored in.  If you are under these income levels, you will also stay within the first tier of Medicare premiums increases which also can be increased as your income grows.


The next thing to be aware of is how the new account should be titled.  The new account can be a Coverdell Education Savings account or a 529 College Savings Plan.  The 529 Plan does have some advantages over the Coverdell.  However, based on the client’s needs, each plan needs to be evaluated.


The new account must have the grandparent as the beneficiary.  The owner doesn’t necessarily need to be the grandparent, but will make it easier to make changes to the plan in the future.   Then the beneficiary can be changed over to the child at a future date, perhaps in the following year.  It’s also important to be aware of the specific rules with regard to changing beneficiaries on your plan.  Also note that when changing a beneficiary, gifting rules will apply.  For 2023, a person is allowed to gift up to $17,000 per year without triggering a gift tax filing.  Remember, if you go over the annual amount, you will be required to file IRS form 709 with your taxes.  However, no actual gift tax is due.  The amount simply reduces your lifetime exclusion.  It’s advisable to consult with your tax advisor when planning on a larger gift in order to remain in compliance with the latest rules.


Funding of the account should be done within 60 days of redeeming the bonds.  IRS form 8815 is the form that is filed in order to claim the income exclusion on the bonds that are redeemed.


Several factors must align in order to take advantage of this strategy.  However, if your situation checks all the boxes, it could be another way to save on income taxes, reduce your estate and help your kids or grandkids with college expenses.


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Maximizing the Return on your Savings


After nearly a decade of near zero interest rates, 2022 was a year in which the Federal Reserve aggressively reversed course and increased interest rates multiple times.  The aggressive moves by the Fed had a major impact across the financial markets.  One of the few positives for 2022 was the increase in return that good savers good generate.

A savings account is never a great long-term investment option.  However, it’s imperative that all investors maintain some degree of short-term liquidity for emergencies.  In general, it’s a good idea to have at least six months to one year of an emergency fund so you don’t have to liquidate a longer-term investment option at an inopportune time.  With the recent increases in savings rates, investors are closing in on rates of return that have not been seen since before the 2008 financial crisis.


Money Markets & Savings Account

Historically money markets offer savings rates that have higher yields than a typical savings account at a national bank.   Money market accounts are essentially a mutual fund that invests in short-term debt instruments with maturities that can be as short as 30 to 90-day maturities.  As a result, money market rates tend to adjust very quickly to rate increases or decreases.   The goal of a money market is to always maintain a constant $1 dollar share price with a changing rate of interest.  There have been some extremely rare circumstances in which a money market has “broken the buck” and returned less than the $1 per share price.  This happens when the underlying debt they invest in such as short-term corporate commercial paper defaults.  However, that is extremely rare.  In the current interest rate environment, even a government reserves money market in which all of the debt is government backed and there is no default risk can pay nearly 4%.


Another option is the traditional FDIC insured savings account.  Today competitive savings rates are upwards of 3% as well.  One option that offers some better rates can be found in the online banking space.  The lack of “brick and mortar” costs associated with online banks will often lead to interest rates that are more competitive than a larger national bank found on every corner in the nation.   It’s important to shop these rates from bank to bank, as there can be vast differences in the rates offered.  A savings account is an asset to you, but a liability to the bank.  As such, many of the larger banks that have excess reserves have no incentive to offer better rates to increase deposits.   Many of the smaller regional banks are often more competitive.

Traditional savings and money market accounts are useful when it comes to fulfilling the need for an account that will require day to day liquidity.


Certificates of Deposit

CD’s are still a viable option as a short-term savings vehicle.  While the rates may not always seem that much more attractive than a typical savings/money market, they may still make sense.   If you likely have no need to spend down cash other than an unforeseen emergency, then a CD may still make sense if it’s short-term.  Perhaps one year to possibly 18 months.   Even if you need to lock in a CD for 3-5 years, typically the only penalty you would incur should you need to break it would be the loss of the interest that you would have earned.  There is generally no risk to your principal as long as you stay within FDIC limits.  Today a one-year CD is paying in the vicinity of 3.5%-4% as a current rate of return.


Short Term Bond Funds

An ultra-short term bond fund comprised of very-high credit quality is not a savings account.  They typically come with very nominal downside risk for the investor who doesn’t have any known short-term needs.  However, with the aggressive rates hikes of 2022, it was a terrible year for bonds, and even the ultra-short-term bond funds saw negative returns.  In some of the better cases, they still lost around -1% for the year.

It’s important to pay close attention to credit quality, as a short-term bond fund in an extreme market downturn can see noticeable short-term losses if they experience sizeable defaults.   While these declines are unlikely to look anything like the declines seen in equity markets, they can still be impactful.

At the height of the market panic in late March of 2020 it was not uncommon to see a 5%-10% decline in short-term funds that took greater credit risk.  One clear indicator is the yield of a fund.  If the yield is noticeably greater than the rest of the market, then more than likely it’s worth looking closer at the credit rating of the issuers the fund is buying.  In contrast, most short-term funds of very high-quality debt actually appreciated as the markets plummeted in March of 2020, yet still saw declines in 2022 in the face of significantly higher rates.  Today, many of these short-term bond funds have yields in excess of 4%.



Many of us have had the local bank teller notice a large cash position and encouraged us to speak to the local investment professional at the bank.   One such option they will propose is what is known as a Single Premium Deferred Annuity (SPDA).  The SPDA is an insurance contract that functions much like a CD with no fluctuations to your initial investment principal.  They are not insured by the FDIC, but rather backed by the insurance company, and sometimes further backed by the state insurance commissioner’s office up to certain limits.

The advantage of the SPDA is that they sometimes offer rates that are a little better than a CD, and the interest is tax deferred.  Once they mature, the contracts usually have a floor interest rate that you can continue to collect without exchanging into a new annuity.  At times those interest floors have been attractive compared to current market rates.

The disadvantages are they don’t typically permit you to break the contract penalty free.  What you can often do is withdraw a percentage of the contract, sometimes 10% per year without penalty.   There is also a penalty on withdrawals made before age 59 ½, so it’s not a suitable option for those younger in age.


Credit Risk Caution

One area to be very cautious is in the floating rate space.   Floating rate notes are extremely short-term corporate debt that is only available to institutional buyers.  However, a number of mutual fund companies offer floating rate funds that buy such paper and offer more attractive yields.    A quick look at a chart of most floating rate funds will show price changes that are typically between 2%-3% principal fluctuation during positive or negative market changes.

During the 2008 financial crisis when the credit markets came to a near total freeze, these floating rate funds saw average declines of -27%.    This is an area that is often mistakenly looked at as a short-term cash position.  We would caution against such an approach.  Floating rate securities can be an attractive investment at times, but any vehicle that offers substantive credit risk is not an ideal savings alternative.

In the current interest rate environment higher quality floating rate funds pay in excess of 4%, but not much more than a higher quality short-term bond fund.  Some of the lower quality funds with much more credit risk can offer as much as an 8% yield, but much more potential for volatility.


When it comes to an emergency fund, it’s important to remember that the goal is stability at the best interest rate available with a reasonable amount of liquidity, and not to become too frustrated with the low returns.   Emergencies often happen during periods of great market volatility.  What you don’t want is to find yourself in a position of having to sell a quality asset at a depressed price, therefore eliminating your ability to benefit from an eventual price rebound.

Maintaining a proper emergency fund should actually provide you with more comfort in your ability to take greater risk with your other investment accounts with the knowledge that the short-term risk has already been addressed.

2022 was a year in which inflation reared its ugly head in a way not seen in forty years.  In reality savers were better off with rates at 0.50% and inflation at 2%, which was a net real loss of -1.5% annually on the purchasing power of cash.  Today with savings accounts at 3-4% and inflation at 7%, that is a real net loss of between -3% to -4% annually on the purchasing power of cash.  However, as inflation moderates downward over time, savers will fare much better unless the Fed begins to aggressively cut rates again.   Until that time, it’s even more important that investors maximize the rate of return on their emergency funds in this high inflationary period in order to close the gap between what they earn and what it costs them to live.


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In this holiday season, the government has given savers in retirement plans a gift in the form of enhancements to the SECURE ACT of 2019.   The original SECURE ACT (Setting Every Community Up for Retirement Enhancement Act) increased the Required Minimum Distribution age to 72 among other changes for retirement savers.  This time, they added the SECURE ACT 2.0 within the Appropriations Bill which will go into effect in 2023.   Retirement savers will be happy to hear of the changes, of which are highlighted below.

The biggest change for retirement savers, which most people would applaud is the change to the Required Minimum Distribution age.  Currently, the beginning age is 72.  This is the age of forced distributions from qualified retirement accounts.  Going into effect in 2023, the new Required Beginning Minimum Distribution age will now be 73.  The rule states after December 31st, 2022, and before January 1st 2033, the applicable age is 73.  If a person attains the age of 74 after December 31st, 2032, the applicable for Required Minimum Distributions is age 75.  The effective date of this rule applies to RMD’s after December 31st, 2022.

Another big enhancement of the SECURE ACT 2.0 will help savers for retirement in qualified plans will allow for a higher catch up for savers age 60 to 63.  If, by the end of the calendar year, a person is 60, 61, 62 or 63, then they are eligible for a catch up of up to $10,000.  The amount is the greater of $10,000 or an amount equal to 150% of the dollar amount which would be in effect under such clause for 2024 for eligible participants.  SIMPLE IRA’s will have a catch up of the greater of $5,000 or the amount equal to 150% of the dollar amount which would be in effect under such clause for 2025 for eligible participants.

Current catch-up contributions for age 50 or older will now be indexed for inflation whereas they were not previously indexed.

There are several other changes to the law that might not be as well published as the RMD age but not any less important.  They include the treatment of student loan payments to be counted as elective deferrals for purposes of matching contributions.  Employers will be able to match student loan payments.

It increases the credit for small employer pension plan startup costs.  It is a 100% credit up to $1,000.

It allows for a Savers Match for any individual who makes a qualified retirement savings contribution for the taxable year.  The match will be in the form of a tax credit.  The contribution credit will be based upon a contribution up to $2,000.

Employer matching or non-elective contributions can now be designated as Roth contributions.

Military spouses will be eligible for a Retirement Plan credit for small employers of up to $200 or $300 over all employers’ plans.

It allows additional non-elective contributions to SIMPLE IRA’s.  An employer is allowed to make non-elective contributions of a uniform percent up to 10% of compensation for each employee who is eligible.  They must make at least $5,000 in compensation.  The non-elective contribution maximum is $5,000.

The new law allows for Starter 401k plans for employers without a retirement plan.   It provides for an automatic deferral for each eligible employee.  Each employee is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation.

The contribution is not to be less than 3% but no more than 15%.  The maximum contribution is not to exceed $6,000.  There is an allowable catch up after 50.

The new law allows for withdrawals for Certain Emergency Expenses from qualified retirement plans.  A participant can withdraw up to $1,000 per calendar year.  This amount may be repaid.  There is a limit on subsequent distributions.  If there was an amount treated as distribution in the previous three calendar years, then the distribution will not be deemed an emergency distribution unless the amount was fully repaid.

The Act allows for an Emergency Savings Account linked to individual account plans.  It is a pension linked emergency savings account.  It can be designated as a Roth for tax purposes.  It will accept participant contributions.  It cannot exceed the lesser of $2,500 or an amount determined by the plan sponsor of the pension linked emergency savings account.

The SECURE ACT 2.0 affects Qualified Longevity Annuity Contracts.  It repeals the 25% limit of account balances.   It also increases the base amount of $125,000 to $200,000.

It allows for the establishment of a searchable online database for participants to locate old retirement plan sponsors along with contact information.  This will be known as the “Retirement Savings Lost and Found.”  This will help savers locate money they may have left at old employers.  The act will increase the minimum balance of cash out of inactive retirement plans from $5,000 to $7,000.

With regards to Qualified Charitable Distributions, it will allow for a distribution of up to $50,000 to go to a split interest entity such as a Charitable Remainder Trust.

It also allows for an eligible distribution for domestic abuse.  The amount is the less of $10,000 of 50% of the balance in the plan.

One final note to be aware of is a special rule for certain distributions from a long-term qualified tuition programs to Roth’s.  It allows for up to a lifetime maximum of $35,000 to be rolled over to a Roth IRA. The annual amount that can be rolled over is the annual contribution maximum.  The distribution is allowed if the Qualified Tuition Plan is maintained for 15 years.  The transfer must be a direct trustee to trustee transfer.

The SECURE Act 2.0 is designed to help Americans that are saving for retirement, and also allows for additional flexibility with regards to those using their plans.  This will hopefully help Americans preparing for retirement, as many savers are significantly underfunded for a secure retirement.


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ESG Investing: Is it Impactful or Reliable?


ESG investing has been widely discussed in recent years, and many financial institutions have raced to roll out investment products that are designed to support the ESG agenda.    ESG stands for Environmental, Social & Corporate Governance.   While that is what the acronym stands for, what does it actually mean in reality?   In fact, there is quite a bit of controversy as to what ESG really represents and how effective it actually is in affecting any real change.



The environmental and social aspect of ESG investing is highly subjective depending on one’s perspective.   What one person might consider to be environmentally friendly, another person may view as hazardous to the environment.  As an example, the push for electric vehicles is heavily motivated by the desire to lower CO2 emissions and more renewable energy sources.  However, the batteries required to power these electric vehicles are typically lithium-ion batteries.  The recent demand has driven the cost of lithium carbonate up from about $10,000 per metric ton, to over $60,000 per metric ton.  The larger issue is how this impacts the environment.

Lithium disposal is extremely bad for the environment.  Recycling lithium from its recycled state as lithium sulphate and converting it into a reusable state as lithium carbonate is an expensive process.  This is because lithium is very volatile, as it has a tendency to explode, making it costly to recycle.  As a result, a recent study done by the Journal of Indian Institute of Science found that less than 1 percent of lithium-ion batteries get recycled in the US and EU compared to 99 percent of lead-acid batteries.   Some studies have shown higher recycling rates.  Those batteries that do get recycled undergo an intensive process of high temperature melting and extraction, or smelting.  These operations themselves are very energy intensive.  While new technology might increase the percentage of recycled lithium, the current mining for lithium, as well as other necessary components in electric vehicles like cobalt and nickel also comes at a great environmental cost to the regions being mined.    As a result, it’s easy to see why some may not see investing in electric vehicles as environmentally friendly as advertised in their current form under the current technology.



The social aspect of investing is also highly subjective.  One person might find the manufacturing of weapons-based systems by companies that service government military contracts such as Boeing or Lockheed Martin as vital and necessary to our national defense.   While another person that may be opposed to the military industrial complex might find the creation of these weapons of war to be objectionable.    The same could be said about companies that stake out a particular position on any number of issues, such as firearms or abortion.  Many investors might be surprised to find out how many of the most widely held stocks in ESG funds contract companies in their supply chain production that use slave labor in countries like China.  Ultimately, what one person considers to be socially responsible, another may consider to be irresponsible and even offensive.



What about governance?  This is an area that seemingly makes the most sense, as there should theoretically be limited debate about the need for some basic good governance around things like proper disclosure, accounting procedures and quality controls.   However, in the wake of the recent implosion of FTX and its bankruptcy, it has come to light that FTX maintained a higher ESG score than Exxon Mobil.  FTX was at best an example of an incredibly bad lack of quality controls, and at worst a very large insolvent entity engaged in more nefarious behavior.  The latter seems to be the more likely.

John Ray, the newly appointed CEO of FTX to see it through bankruptcy proceedings recently had this to say:

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

The real question is how did this ESG score miss the lack of quality controls along with all of the governance problems associated with FTX?   Perhaps the score has little to do with what is actually happening within the company.

Ultimately it appears that there is quite a bit of “greenwashing” happening.  That’s a process by which companies go to a great deal of trouble to portray their actions as environmentally friendly even when they are not in order to receive a higher ESG score in order to make their stock more attractive to a rating agency.   In fact, much of these ratings seem to resemble the poor job that was done by the rating agencies around the quality of debt leading up to the 2008 financial crisis.

If there is one thing that is certain, financial institutions are more than willing to create a product offering for whatever the latest demand happens to be, regardless of whether it is logical or not.  In some cases, financial institutions create that demand artificially with fear.   If enough people are willing to buy it, they will market it and sell it.   This is not unlike annuities, where the majority of variable annuities marketing a living benefit income rider carry excessive annual costs in exchange for a guarantee that you’ll likely never realize in most cases.

In the case of ESG investment funds, fund companies charge about 40% more on average for ESG products than for traditional investment solutions according to a recent publication by the Harvard Business Review.  As an example, the Vanguard S&P 500 index is offered with an expense ratio of just 0.03%.   Vanguard also offers their ESG US Stock ETF at a cost of 0.12%.  However, the two funds have a 99.7% correlation, with the top weightings that drive the bulk of the portfolio return being nearly identical.

In 2020, the Center for Retirement Research at Boston College completed a study on the impact of ESG investing in public pensions.   What they found was that investors clearly sacrificed long term returns, endured higher expenses, and had no material impact on social change.  They also found these vehicles to be inappropriate for public pensions, since it is unlikely that all of the pension beneficiaries would hold the same ideological values.

Most importantly, as a fiduciary our job is to represent what is in our client’s best financial interest.   Personal preferences around environmental issues, social issues or religious issues are best addressed individually by contributing to causes that you personally feel are of importance, or by possibly volunteering your time to an organization that holds your values.    We are highly skeptical of not only ESG products and the way they are marketed, but also of the notion that an advisor that is building such a portfolio is actually achieving any of the stated objectives.



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2023 Tax & Retirement Plans Update


Every year or two since 2001, there are annual increases to IRA contributions that are adjusted due to inflation.  However, IRA contributions are not the only thing that is adjusted for inflation.  Many components in the tax code are adjusted that can impact various aspects of retirement planning.

Some of the important new limits and phaseouts are as follows:




IRA & ROTH IRA-contribution limits are increased to a maximum of $6,500 ($7,500 if over age 50).

The deductibility phaseout for IRA contributions for those with a retirement plan at work should increase for singles to $73,000-$83,000 in 2023, and for those married filing jointly to $117,000-$137,000 in 2023.

The direct contribution limit phaseout will increase to $138,000-$153,000 in 2023 and for those married filing jointly to $218,000-$228,000 in 2023.  If your Modified Adjusted Gross Income-MAGI is above that, you’ll need to contribute indirectly via the backdoor conversion process if eligible.  Some info regarding backdoor conversions can be found here:


SEP IRA-contribution limits will increase to $66,000 per year for 2023.


SIMPLE IRA & 401k-contribution limits will increase to $15,500 in 2023.(Employees over age 50 are entitled to an additional $3,500 catchup contribution).


401k & 403bEMPLOYEE contributions will increase to $22,500 in 2023 ($30,000 if over age 50).


401k & 403bTOTAL contribution limits with EMPLOYER matching will increase to $66,000 ($73,500 if over age 50).


457-contributions will increase to $22,500 in 2023.  (457 plans can have unique catch-up contribution rules, so consult with your plan administrator about your plans limits).


401(a)-the compensation limit (the amount of earned income that can be used to calculate retirement account contributions) will increase to $330,000 in 2023.

(This is typically 5X the maximum 401(k) plan total contribution limit).


Defined Benefit Plans-415(b) limit for maximum annuity limit will increase to $265,000 in 2023. (The highly compensated employee definition will increase to $150,000 in 2023).



Some other important changes are:


Flexible Savings Accounts-FSA contribution limits will increase to $3,050 in 2023.



Health Savings Account-HSA’s for single people, the contribution limit will increase to $3,850 in 2023. Family coverage will increase to $7,750.


Social Security-benefits will also increase by 8.7% for 2023. The maximum possible Social Security benefit for someone taking benefits at age 70 for the first time will be $4,559 per month.


Additionally, the IRS updated the 2023 income tax thresholds to adjust for the impact of inflation.  A breakdown on the marginal tax rates are as follows:



These are just a few important retirement planning and tax updates.  It’s also important to note that other aspects of the tax code can and will change as well.   That can include things such as the child tax credit and various other items that may have a substantial impact on you.  It’s important to consult with both your financial advisor as well as your tax advisor to see how these changes may impact you.



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What Does a Recession Mean for Investors?


In recent weeks we’ve heard more and more talk of the U.S. entering into a recession.  As expected, many investors are concerned about the implications of a recession on their investment portfolio.   In order to understand what might happen in the future, it’s helpful to look at what has happened in past recessions.

Recessions happen approximately every five years or so.  However, they do not necessarily happen in a linear fashion with every fifth year turning negative.  They are more random than that.  Sometimes they can be grouped more than one within five years, and sometimes it can be more than a decade before the next recession.

What is a recession?  Well, historically the textbook definition of a recession was generally defined by two consecutive quarters in which the Gross Domestic Product (GDP) of the United States contracts rather than expands.  GDP is a measurement of overall economic activity.  After the 2008 financial crisis, the National Bureau of Economic Research (NBER), a private non-profit group re-defined the definition of a recession as a “significant decline in the activity spread across the economy, lasting more than a few months”.    NBER somehow became the official arbiter of what is or isn’t a recession.  The U.S. has now officially seen two consecutive quarters of negative GDP growth in the first two quarters of 2022.  It remains to be seen if this is the first time in history in which GDP has contracted for two quarters, and we are not in an “official” recession according to the NBER.

A recession can be triggered due to numerous things such as fiscal or monetary policy mistakes, and/or non-economic exogenous shocks to the system, such as the 2020 lockdowns, or the 9/11 attacks.

More importantly, the question is what is the impact to the investor, and the public in general?  As it pertains to financial markets, the good news is that the market tends to serve as a discounting mechanism.  This means that the market is attempting to anticipate good or bad news before it becomes a known certainty.

As we can see from the data above provided by First Trust Advisors LP, more often than not the market decline precedes the recession.   This would likely explain the negative start to 2022 that put financial markets into “Bear Market” territory, which is generally defined as a 20% or more decline in the market.

There have been times when the market has declined by 20% and a recession did not follow, though that is less common.   There have also been recessions that didn’t see a 20% decline preceding the recession.   What we can also see from the data above is that the average bear market lasts only about 11.3 months, while the average bull market lasts 4.4 years.

We can also see that most often the market recovery begins before the economic recovery.    Based on the historical data above, there is an excellent chance that the majority if not all of the recent decline that has preceded this current recession may already be done.   This is not a certainty, because we can never tell for sure how deep and long lasting the recession will be.   It’s entirely possible that the third quarter may also be a negative quarter for GDP.  It’s also possible that this can be an extremely short-lived recession, not unlike 2020.   However, regardless of the depth and length of the recession, it is highly probable that the markets will have recovered long before the economy has recovered.    This is what makes market timing so difficult, and precisely why we don’t endorse such an approach.

If the U.S. slides further into contraction, there could be more downside left to stock prices below the recent lows.  If the recession is short lived, then we have probably seen the bottom of this recent downturn.   It’s also important to note that this recent market downturn will not be the last, nor will this be the last recession.   If you are a 65 year old that recently retired, you could very well live another 30 years into retirement.  This would mean that statistically you would be likely to see about six more recessions in your lifetime, and probably many more market corrections along the way.

In an economic sense, while the market tends to recover first, the economy usually lags somewhat.  This is why data points such as unemployment figures tend to be a lagging indicator of economic growth.  The layoffs don’t generally start to any significant extent until the slowdown is present and demand declines.   So peak unemployment in the business cycle is usually at the end of the recession, or when the recession has already ended.   In fact, when a recession is short lived and confined to just two quarters, you sometimes don’t officially know you’re in a recession until it’s already over.

We cannot say with any degree of accuracy if this will be a prolonged recession, and frankly, neither can the “experts”.    Let’s remember that entering the summer of 2021 the vast majority of economists believed that inflation was “transitory”.   We were a bit more concerned about inflation and believed this to be a longer lasting problem that will still likely take at least a couple of more years to fully work through.   Coming into 2022, very few economists were predicting a recession, with most believing that we would not slide into negative GDP territory until 2023 at the earliest.   Yet here we are in a recession with the “experts” being wrong yet again.

The economy is a massive financial eco-system in which millions of possible variables impact millions of possible outcomes.   More often than not, “expert” opinions about the short term are ambiguous and generally not very helpful as it pertains to investment decisions.   When it comes to making short term predictions, we would suggest that there are no experts.  As it pertains to managing money, we take a long-term strategic approach to investing using proper asset allocation to address risk management and avoid market timing.   The markets have shown they are remarkably consistent over the long term.  However, in the short term, it’s important that you know enough to know, that you just don’t know.



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I-Bonds: What Are They, And Do They Make Sense?


Considering the recent high inflation environment where the March 2022 CPI figure was 8.5%, and in 2021 the average inflation was 4.7%, savers have rightfully so been looking for a safe place to put their money where its purchasing power doesn’t get eroded from the effects of inflation.   To make matters worse, savings rates on money markets and 1 year CD’s are 0.60% and 1.35% respectively, meaning savers are losing purchasing power after inflation is taken into consideration.  There are other options of course that historically have kept up with inflation but it comes with additional risks, such as stocks, commodities or real estate.  So, what is a conservative saver to do?

One option that has recently been in the headlines are Treasury Savings Bonds called Inflation Bonds (I Bonds).  I The recent attention is a result of the current interest rate paying 9.62%!  So, what are I Bonds?  Think of savings bonds that you would get for a birthday or a holiday gift which you buy at half the face value, and they mature at face value at some future date. They were issued in series such as Series E or EE bonds, which was on the front of the bond.  Many of us still have them in the safe deposit box.

I Bonds by comparison were created by the Treasury Department back in 1998 to help savers keep up with inflation.  The Series E or Series H savings bonds accrue at a fixed interest rate.  Therefore, if we have high inflation, the purchasing power of your savings is eroded if the inflation rate is higher than the fixed rate.  I Bonds were designed to have an interest accrual adjustment as well which is explained below.   Due to the fact that they are issued by the government they are safe, with interest and principal guaranteed by the United States.  They have a 30-year maturity, after that, they stop accruing interest.

Bonds can be bought at or using your Federal Tax Return.   When bought online, they are electronically held at the Treasury.  The minimum purchase starts at $25.  You can buy in any dollar increment right down to the penny.  They are issued in paper if you buy them through your federal tax return.  You can buy them by filing Form 8888 along with your return and the refund will be used to purchase the paper bond. The remaining portion of your refund will be sent to you. The paper bond is sold in denominations of $50, $100, $200, $500 or $1,000.

The rate of an I bond is composed of two parts, the fixed part and the variable part.  The fixed rate is determined at the time of purchase and remains the same throughout the life of the bond.  The fixed rate on new bonds is determined by the Treasury every six months, which is based upon their borrowing needs and current market rates.   The second part, the variable rate is based upon the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U), including food and energy.  The rate is set every 6 months on the first business day of May and November.  The change is applied to your bond on the bonds issue date.  If you bought a bond in January, then the change is reflected in January, not November and then runs for 6 months.   The interest is earned every month and accrued every six months.  Therefore, the interest accrued from the past 6 months is added to the bond and you start earning interest on the prior months interest.   The principal and interest are paid to you when you cash in your bond.

Currently, the fixed rate is 0.00% but the current variable inflation accrual rate for May of 2022 through October 2022 is 9.62%!  That has been the recent attraction to these type of savings vehicles because of the high accrual rate.  There are caveats one should consider before going out and buying I Bonds for your portfolio.

First, there is a maximum purchase amount that they Treasury allows, which is $10,000 per calendar year.   You can buy an additional $5,000 per year via your Federal Tax Return.  If you wish to buy them on behalf of others, there is no maximum number of people for whom you can do this.  For example, if you want to buy for multiple grandkids, you can purchase $10,000 for each grandchild, and an additional $5000 per grandchild via your tax return.  The owner is determined when you buy them and who they are registered for, such as a grandchild.

Next, as noted earlier, I Bonds have a 30-year maturity, so they stop earning interest after 30 years.  However, you can cash in your bonds after one year.  It’s important to note, if you cash in your bond before 5 years, you will have a penalty of the last 3 months of interest.  Given the one-year hold requirement and five-year interest penalty, buying savings bonds should be thought of as longer-term commitment as opposed to putting your emergency fund into I Bonds.

Taxes are due on the interest when the bonds are cashed in.  They are federally taxable but state and local tax free.  The tax form, which is a 1099 will be sent to you from the institution you cashed them in with.  If you redeemed them through Treasury Retail Services, they would issue the 1099.  If you redeemed them through a financial institution, they would issue the same tax document.

There are additional considerations when thinking of adding I bonds to your holdings such as the opportunity costs.  Recall that the fixed rate is currently zero.   Before the recent inflationary environment, rates and inflation for the past decade had been very low.  This meant that the rate was zero on the fixed rate as well as the variable inflation rate.  Should inflation moderate, it’s possible that you could have a much lower rate of return.  As a result, you should consider what other options may provide a better overall return during the duration of time you plan to commit your money.

As you can see, there are several considerations to make before adding I bonds to your savings strategy.  As always, diversification is key to a well-constructed investment strategy.   If I Bonds make sense for you then they can serve as another conservative portion of an overall financial planning strategy.  If you have additional questions, feel free to reach out us to see if you should consider I Bonds for your financial plan.

The best place for additional information is which provides FAQ’s on I Bonds and other government debt instruments.








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Losing Money Safely: The Risks of Being Too Conservative


Market volatility is something that can cause investors a great deal of stress.  Losing money is something that nobody enjoys.  Yet we all enjoy making money when assets prices rise.   Paul Newman’s character “Fast Eddie Felson” in the 1961 film “The Hustler” reprised in the 1986 film “The Color of Money” once said that “Money won is twice as sweet as money earned”.   There is probably some truth in this statement, as people tend to really enjoy watching their portfolio go up during strong market environments.  However, experience and research shows us that losing money is more stressful to the average investor than the pleasure they gain from making money on their investments.

Psychologist Daniel Kahneman’s 2011 book “Thinking, Fast and Slow” examined how people react to losing money.  What he uncovered is that most people are about 2.5 times more concerned when they lose money versus when they make money.   This research was very consistent with what we have observed in the financial services industry over the last several decades.

Unfortunately losing money is something that happens in more than one way.   We would argue that there is no such thing as a riskless investment.   Among the ways you can lose money, some key ways would include:

  1. Principal Risk
  2. Interest Rate Risk
  3. Credit Risk
  4. Inflation Risk


Principal Risk

It’s no surprise to most people that if they buy a stock or a stock fund, they could lose money.   Investing in a single stock can lead to a total loss, as many companies have gone bankrupt and ceased to exist.   Investing in a well-diversified stock fund mitigates such a risk of a total loss to the point of near zero, unless markets cease to exist.  Given enough time, the diversified approach has always worked.  However, in the short-term, principal risk is always a possibility.


Interest Rate Risk

If you were to buy a fixed income investment such as a government bond, corporate bond, or even a CD, you run the risk that rising interest rates can make your investment worth less.  The longer the maturity of the fixed income investment, the more interest rate risk you take.  Imagine owning a bond that matures in ten years that was paying you 3%.  Then the interest rate environment changes and short-term rates rise to 4%.  Nobody wants to buy your bond at 3% and wait the remaining years to get their money back when they can get 4% in something shorter term.   If you want to sell your bond, you’ll have to take a loss to account for the interest rate change.  If you hold the bond until it matures, you’re losing 1% annually, which is the difference in what you could be making if you had the cash to invest now and weren’t tied to the original bond you bought.


Credit Risk

When you buy the bond of a corporation, private mortgage portfolio, or in some rare cases local municipalities, there is always the risk that one of these entities could default on that debt.  This is what we call credit risk.   In the event of a default due to a corporate bankruptcy, bond holders in a corporation have a higher position than stockholders.  In some cases they are awarded stock in the new entity that emerges from bankruptcy.  This is not always the case, and sometimes the loss is a total loss.


Inflation Risk   

Inflation risk is something that is being more frequently talked about today, as we are now seeing inflation at levels not seen in 40 years.  As an investor, buying a US Treasury provides you with what is often referred to as the benchmark for a risk-free return.   This theoretical risk-free return is based on the premise that you can hold your treasury to maturity, and there is no credit risk with a US Treasury, therefore you’ll eventually get your money back.  This line of thinking ignores not just the interest rate risk mentioned previously that is always present in fixed income investments.  It also ignores the inflation risk that is always present to some degree or another.  No matter the investment vehicle, there is always a rate of inflation that this must be measured against.

Looking at the chart above provided by Bloomberg, you can see that the net return on a 10-year US Treasury note year over year since 2008 has produced five separate years in which the net return after inflation is a negative return.   That’s 1/3rd of the time in the last 15 years the real return (net of inflation) was negative.

What this illustrates is that the safest investment isn’t always so safe.

Simple math tells us is that if an investor were to have an average annual return of 7% on their investments, before inflation they’d double the value of their portfolio in approximately ten years.    However, what if you chose to put the money under the mattress?  With a 7% annual inflation rate, you’d lose half of your purchasing power in approximately ten years.  Which is effectively the same as losing half of your money.   Today inflation is more than 7% annually.  We certainly hope inflation doesn’t run that hot for 10 years, nor do we expect it will.   Although if we’re wrong and inflation does run that high for that long, those earning zero sitting in cash will suffer a 50% loss in a decade or less.

The important lesson here is that there really is no such thing as a riskless investment.  The risk of being too conservative can be just as dangerous as the risk of being too aggressive.   Ultimately the point of investing is to grow your assets to both keep up with and outpace inflation over the longer term.  The best way to do this is always a well-diversified strategy that utilizes many asset classes rather than trying to time markets.  History shows us repeatedly that market timing is an exercise in futility, and given enough time, all asset classes will rise.   Having the discipline to allocate assets across many asset classes according to financial goals is the best way to mitigate the collective of all of these risks.

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