Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Contributed by: Mallory Hunt

As you may be aware, when a mutual fund manager sells some of their holdings internally and realizes a gain, they are required to pass this gain on to their shareholders. More specifically, by law and design, registered investment companies are required to pay out 95% of their realized dividends and net capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. With that in mind, ‘tis the season!  

Many firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Whether or not a capital gains distribution is considered short-term or long-term does not depend on how long you, as the investor, have held the fund; instead, it depends on how long the management firm owned the securities that produced the gain. Investors who hold funds with capital gains distributions in taxable accounts must report them as taxable income even if the money is reinvested in additional fund shares. In tax-advantaged accounts such as IRAs or 401(k)s, capital gains distributions are irrelevant as investors are not required to pay taxes on them as long as no withdrawals are made.

It can be frustrating to know that you may even face a tax bill on a fund with a negative return for the year. There are several reasons why funds may sell holdings and generate capital gains, including but not limited to:

• Increased shareholder redemption activity during a down market. In order to fund these redemptions, funds may need to sell securities, which may, in turn, generate capital gains.

• To reinvest the proceeds in a more attractive opportunity. 

• Concerns about earnings growth (or if a stock has become fully valued in the manager’s opinion).

• Corporate mergers and acquisitions also may result in a taxable sale of shares in the company being acquired. 

Investors concerned about tax exposure may want to consider investing in more tax-efficient equity funds. Such funds tend to be managed to limit capital gain distributions, when possible, by keeping holdings turnover low and harvesting losses to offset realized gains.

Capital gains distributions are a double-edged sword. The good news? The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. Yay! The bad news is that the taxman wants to be paid. Boo! Do keep in mind that this is what you have us for, though. We are here to help manage around and alleviate the effect these capital gains distributions may have on you and your portfolio.

WHAT WE CAN DO TO MINIMIZE THE EFFECT OF CAPITAL GAINS DISTRIBUTIONS:

1. Be Conscientious

We exercise care when buying funds at the end of the year, which may mean holding off a couple of days or weeks to purchase a fund in your account in some cases. Why? We do this to avoid paying taxes on gains you didn’t earn. This also allows you to purchase shares at a lower NAV or Net Asset Value.

2. Harvest Losses

Throughout the year, we review accounts for potential loss harvesting opportunities (also known as Tax Loss Harvesting). Where available and when appropriate, we sell holdings we have identified with this potential to realize those losses and offset end of the year gain distributions from fund companies. *See our blog titled “Tax Loss Harvesting: The ‘Silver Lining’ in a Down Market” for more details on this strategy.

3. Be Strategic

We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date to avoid receiving a company’s dividend payment. Dividends are treated as income by the IRS.

As always, there is a balance to be struck between income tax and prudent investment management, and we are always here to help distinguish.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Q3 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The third quarter of the year has brought some downside volatility with it. While it can be concerning when opening your statement, it is important to remember that minor pullbacks are very normal throughout the year. August and September are, historically, the toughest months on average for markets, as shown by the chart below. The good news is that the last quarter of the year tends to be one of the strongest on average.

Over the past quarter, investor mood has shifted. The S&P 500 ended the quarter down 2.08%. A diversified portfolio ended the quarter down 2.63% if using a simple blended benchmark of (40% Barcap Aggregate Bond index, 40% S&P 500, and 20% MSCI EAFE International index). Quarters like this make it challenging to remember why you want to continue holding a diversified portfolio. Periods like that of 2000-2008 are a distant memory for most investors (and many have never experienced investing when U.S. markets and technology companies have struggled). If you dissect the returns of the S&P 500 year to date, you can see that most of the returns have come from the media dubbed “Magnificent Seven.” In reality, the remaining 493 companies in the S&P have contributed only about 2% of the positive 13% in year-to-date returns. The chart below shows how just these seven companies are responsible for most of the returns.

Source: Morningstar Direct

Maintaining a balanced approach to investing is important, as most of us are investing over a lifetime. While diversification may not always work over short periods of time, studies show it to be a successful strategy over the long term.

What contributed to volatility this quarter?

Higher intermediate and long-term interest rates have spelled trouble for equity valuations recently. The Federal Reserve (the Fed) did not raise rates in September but signaled that they are likely to raise one more time this year and are unlikely to cut rates in early 2024. This has caused longer-term bond rates to increase drastically over the summer (about 1%). We have continued to maintain our allocation to short-duration bonds, which has helped over that time period.

Higher interest rates contribute to equity volatility because investors view all asset classes through a risk/reward lens when determining where best to deploy money. When interest rates are low, investors are incentivized to reach for yield in equities as they pay an attractive dividend (more than treasury bonds were paying for a long time!). You also have the added upside potential of capital appreciation. When you can get interest above 5% in a money market or CD with extremely low risk, investors are less incentivized to invest money into equities, as most of the return needed to achieve long-term goals can be earned with little to no risk! Rates usually don’t stay elevated like this for very long. On average, the period between the last interest rate increase by the Fed and the first interest rate cut is nine months in historically similar periods. So don’t expect these high rates with no risk to stay around long.

Political brinksmanship is yet again holding the economy hostage to further both sides’ political agendas. The government averted a shutdown with only hours left but kicked the can down the road, so we may hear about this again in November. Like with the debt ceiling, we have been here before. The good news is, generally, shutdowns don’t coincide with recessions. There is a lot of noise and, usually, short-term volatility but not a longer-term impact on markets or the economy. The longest shutdown was 35 days at the end of 2018. While it created some temporary market fluctuation, it did not cause a larger economic issue. At that time, the economy contracted about .2% that quarter but got that back the following quarter because government employees get back pay once things open back up. Moody’s, the final of the big three debt ratings agencies to have the U.S. rated AAA, is questioning their AAA rating on U.S. government debt because of the behavior of the politicians. 

Economic Growth is slowing

While Taylor Swift’s Eras Tour is coming to a close and noticeably adding to the local GDP of the cities she performs in, the rest of the economy might be better described by her song “Death By A Thousand Cuts.”

The consumer is out of extra money (one can only buy so many $90 concert t-shirts). The chart below shows how families had stockpiled excess earnings and government transfer payments from the COVID shutdown but have spent this excess savings over the past two years.

The UAW strike will continue to impact numbers like the above chart. As the strike expands, so does the risk of increased shutdowns and layoffs spread throughout the economy. It remains to be seen how long the strike will continue and, thus, how much of a negative impact on GDP it will have. While this strike will have economic consequences, it is only one industry. While there could be spillover if it goes on long enough (for example, people may go out to eat less if they are on strike and not earning their full wages), the UAW strike shouldn’t single-handedly be the cause of a recession.

Home affordability will continue to be hurt by high-interest rates.

Student loan payments restart in October, pulling more money out of the consumer’s pocket.   

Jobs are strong, but job openings are pulling back.

These items, or something yet unknown, could be the tipping point for the economy to turn over into recession in early 2024. Most don’t realize we have already been in an earnings recession this year. This is classified as two or more quarters of contraction in earnings from the prior year. S&P 500 companies have experienced this as a whole this year. Equity markets are certainly spooked about this and are reacting accordingly now, even as the Fed tries to engineer a “soft landing.”

What is a soft landing?

In short, very rare. Ideally, the Fed will stifle GDP growth enough with higher rates to bring down inflation but not stifle so much that growth turns negative. Rather, it just slows down, avoiding a recession. They are counting on the strength of the labor market to remain, keeping the economy out of recession. Only time will tell if the Fed will need to keep rates higher for longer to put the inflation genie back in the bottle. They have come a long way in fighting inflation, as it was just a year ago that we were talking about 9% inflation, and now we are below 4%. The easy sources of inflation have been targeted and curbed (think supply chain shortages), so now it is time to let high interest rates work their magic throughout the economy.

Politics

The Speaker of the House, Kevin McCarthy, was ousted in a 216-210 vote, with 8 Republicans joining the unified Democratic vote. Patrick McHenry is serving as the temporary speaker, who is well respected in the house and should provide good leadership for now. Since we are well into the congressional term, proceeding without a formal leader shouldn’t be too disruptive to normal functioning as committees have already been formed and a rules process adopted. Electing a new speaker will, however, take valuable time away from working on funding the government past the November 17th deadline.

The media coverage is starting to pick up for the election in 2024. Undoubtedly, headlines will only pick up later this year and throughout next year. While there is no shortage of negative headlines during an election year, they tend to be positive for markets. Markets don’t care which party controls the white house. I think many view Republicans as being more pro-business and assume that returns will be far better than when a Democrat holds the office, but that isn’t true. The S&P 500 has gone up regardless of who holds the office most of the time. This is because markets focus far more on what is going on with the economy than on politics. American companies find ways to be innovative and successful regardless of who is leading the country.    

While all of this noise can create market volatility, keeping your long-term goals in mind is more important than ever. We do not generate future forecasts; rather, we trust in the journey of financial planning and a disciplined investment strategy to get us through the more challenging times and stay the course. We appreciate the continued trust you place in us and look forward to serving your needs in the future.

Please don’t hesitate to contact us for any questions or conversations!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Q2 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

While Federal Reserve (the Fed) policy, macroeconomic headlines such as inflation, and geopolitical uncertainty are themes investors continue to hear about, U.S. large cap stocks finished the first half of 2023 up 15.5%. It is important to look under the hood of these returns as they have been entirely driven by the market's largest stocks, with the top 10 companies in the S&P 500 accounting for over 95% of gains. Beyond the largest companies, performance fell off quickly. Developed markets equity (International) has had notable returns year to date ending over 11% in positive territory for the year so far. While their returns struggled to eclipse the top 10 companies in the S&P 500, international investments handily outpaced the balance of the companies in the S&P 500. Commodities struggled the most as economies and production started to slow, and inflation is coming down (even though it is still elevated higher than we would like to see).

Much of the quarter was dominated by the banking sector headlines that cropped up at the end of the first quarter and debt ceiling negotiations in Washington. Two larger regional bank failures put the markets on edge, waiting for contagion to kick off this quarter. However, the backstop provided by the government and FDIC quickly seemed to curb potential contagion. Then all attention turned toward Washington dragging its feet over raising the debt ceiling, which led to intra-quarter volatility. As the U.S. government approached the date it was expected to run out of money to pay its bills, a deal was reached on June 1st to suspend the debt ceiling through January 2025 while cutting federal spending. As we mentioned in our previous commentary, this is the outcome that would likely occur as history has served as a guide for this. This agreement averted a U.S. government default ahead of the deadline.

The strong equity returns in the year's first half may have taken many by surprise. The question is, where do we go from here? Summer tends to be a time of weakness for markets, and a strong first half of the year could cause buyers to pause. It's not uncommon to see the market stop and gather itself and digest strong gains after they occur.

Higher interest rates

We have witnessed a large amount of excitement surrounding higher interest rates in CDs, money markets, and short-term treasuries. While this is great for money, we need to keep liquid for a shorter-term need or a place to park cash while implementing a dollar-cost averaging strategy; it is important to not give up on investing in a diversified portfolio. When rates were attractive in the early 2000s, it may have been tempting to divert some of your equity investments into cash equivalents rather than invest in the S&P 500 during a recession and continue with this throughout the years. But the opportunity cost is high. The chart below shows how investing $12,000 per year into equities, whether perfectly timed or the most poorly timed, outweighs diverting excess additions beyond need into cash equivalents. Even the worst timing over the years ended up well ahead of cash equivalents.

So, what has happened in the shorter term after times when CD rates peaked and seemed their most attractive? The chart below shows 12-month forward returns for different asset classes after rates peaked. While they may offer the added protection of FDIC insurance, notice that the 6-month CDs never returned more than the peak rate. This makes sense, as you are locking in a rate. The dark blue is the U.S. bond index, the light blue is high-yield bonds, and the green is the S&P 500. As you can see, the other asset classes returned far more than the CD rates 12 months after rates peaked in most of the periods shown below.

Again this reiterates the point not to allocate more than is appropriate for you into short-term fixed strategies.

Check out the video for an economic update!

This summer, all eyes will be on the next Fed decision when the FOMC meets at the end of July. In June, the Fed decided to pause and let the economy digest the drastic rate increases of 2022 and earlier this year. They did signal that we could likely see up to two more rate hikes this summer/fall. The U.S. economy still looks strong, so the FED feels they have room to continue to increase interest rates, even though at a much slower pace to get inflation under control. GDP growth worldwide continues to hold up, signaling we aren't in a recession yet (see the chart below). The Fed will continue to remain very data-dependent when determining their next steps, but the risk is rising that they will overtighten and push the economy into recession.

While the taxable bond yield curve remains strongly inverted, the Municipal bond yield curve is less inverted. This means that investors are better compensated for moving out longer in duration. For those in a higher tax bracket, municipal bonds can provide attractive taxable equivalent yields.

Continue to expect some volatility through the summer as markets digest hefty first-half returns, and we learn more regarding future interest rate action. A sound financial plan and regular rebalancing, when needed, help bring a portfolio through uncertain times. We are here to answer any questions you might have! Do not hesitate to reach out! Thank you for the trust you place in us each and every day!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Morningstar’s “Star Rating”

Contributed by: Nicholas Boguth, CFA®, CFP®

You may have seen Morningstar’s popular “star rating” at some point in your investment lifetime. Sometimes it shows up on account statements, lists of investment options, or marketing materials – but what exactly is it telling you?

A common mistake we hear is that a fund is presumed to be a “good investment” because it is a “5-star fund” at Morningstar. While the fund may be a good investment, that is not what the star rating tells us.

The star rating is simply telling us how the fund performed compared to peers in the PAST, and we know from one of the most common financial disclosures in the industry that “past performance does not guarantee future results.”

In Morningstar's own words, "It is not meant to be predictive." They do have a qualitative rating that IS meant to be predictive, but that is only available to subscribers of their service (like The Center!) Morningstar is one of our team's many resources in its investment process.

We hope this provides some clarity for when you see these ratings out in the wild. Don't fall victim to what hedge fund billionaire Ray Dalio calls "the biggest mistake in investing" by thinking that just because an investment has done well in the past, it will do well in the future.

Nicholas Boguth, CFA®, CFP® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth, CFA®, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. With the Morningstar rating system, funds are ranked within their categories according to their risk-adjusted return (after accounting for all sales charges and expenses), and stars are assigned such that the distribution reflects a classic bell-shaped curve with the largest section in the center. The 10% of funds in each category with the highest risk-adjusted return receive five stars, the next 22.5% receive four stars, the middle 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. Funds are rated for up to three periods--the trailing three, five, and 10 years and ratings are recalculated each month. Funds with less than three years of performance history are not rated. For funds with only three years of performance history, their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their overall rating will be calculated based on a 60% weighting for the five-year rating and 40% for the three-year rating. For funds with more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year rating, and 20% for the three-year rating. The star ratings are recalculated monthly. For multiple-share-class funds, each share class is rated separately and counted as a fraction of a fund within this scale, which may cause slight variations in the distribution percentages. This accounting prevents a single portfolio in a smaller category from dominating any portion of the rating scale. If a fund changes Morningstar Categories, its historical performance for the longer time periods is given less weight, based on the magnitude of the change. (For example, a change from a small-cap category to large-cap category is considered more significant than a change from mid-cap to large-cap.) Doing so ensures the fairest comparisons and minimizes any incentive for fund companies to change a fund's style in an attempt to receive a better rating by shifting to another Morningstar Category. For more information regarding the Morningstar rating system, please go to https://www.morningstar.com/content/dam/marketing/shared/research/methodology/771945_Morningstar_Rating_for_Funds_Methodology.pdf Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Today’s Winners May Have Been Yesterday’s Losers

Contributed by: Nicholas Boguth, CFA®, CFP®

The markets can be described as cyclical, volatile, and full of booms and busts. Often those cycles seem clear as day when looking back on them through history, but they are much harder to identify in real-time. And even when most investors seem to be on the same page about what point of its cycle an investment is in, there is no telling just how far that investment can continue to climb or fall before it turns around. If many investors agree that Nvidia is in a “bubble” at ~35x price to sales, but its stock price climbs another 100%...were they right?

That cyclical nature creates an unpredictable stream of winners and losers every year, but it is important to recognize that it is just that…unpredictable. Today’s winning investments very likely could have been yesterday’s losers. Here are a few recent examples:

• Energy was the worst-performing sector in 2020 (down over 30% while the market was generally positive). Then from 2021 through 2022, it ran up an incredible 150% (the next closest was healthcare at +23%)

• The financial sector was the worst performer in 2011 but the best performer in 2012.

• Real estate was the worst sector in 2013 but the best in 2014.

This trend has been common throughout history. Does that mean we just cracked the code? Just buy the worst-performing sector from the prior year and profit! Well, that doesn’t always work out either:

• Energy was the worst-performing sector in 2019 and also the worst-performing sector in 2020.

• Communications was one of the worst in 2013 and again in 2014.

• Financials were the worst in 2007, and again in 2008.

The uncomfortable fact about the markets is that they are unpredictable, risky, and do not always seem to make sense at the moment, but with that risk comes reward. Trying to time market cycles is a losing game. We believe in creating an approach that positions our clients for success through every boom and bust in their lifetime. No one knows WHEN those booms or busts are coming, but we do know that they will happen sooner or later, and we want you to be prepared either way.

Nicholas Boguth, CFA®, CFP® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth, CFA®, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Reconsidering Series I Savings Bonds

Contributed by: Kelsey Arvai, CFP®, MBA

In May 2022, I wrote a blog about The Basics of Series I Savings Bonds (I-bonds). At the time of my blog, inflation had been steadily increasing, making I-bonds very attractive for a brief period. With inflation starting to slow, it may be time to review this investment. Here are a few factors to consider when considering I-bonds regarding your individual financial circumstances and investment goals.

Interest rates: I-bonds are affected by changes in interest rates. If interest rates rise, the fixed rate on I bonds may become less competitive than other investment options. For example, if you bought an I-bond between May 2022 and October 2022, you would have received six months of interest at 9.62%. For the next six months (November 2022 to April 2023), you received 6.48% of interest. The new rate for your bond beginning in May 2023 is 4.3%.

The minimum holding period for an I bond is one year; however, if you cash in the bond before a five-year holding period, the previous three months of interest is surrendered. As rates have steadily declined, now is the time to consider if it is time to cash in. Ideally, you would hold the bond for three months past the one-year mark to give up the lowest interest rate, especially if you purchased an I-bond between May 2022 and October 2022. For more information, you can visit Treasury Direct on their website.

As mentioned earlier, the current composite rate of an I bond issued from May 2023 through October 2023 is 4.30%. Other short-term and low-risk investment options, such as CDs and Money Markets, are currently yielding higher returns in the 4% and 5% range. Depending on your goals, the I bond may be less attractive.

Inflation: I bonds were designed to provide protection against inflation. If inflation is expected to remain low or decrease, the variable rate of the I bond may be lower, which could make other investments more attractive. With inflation starting to slow, moving into another investment option is something to consider.

Investment goals: If you need access to your money in the near future or if you have other investment goals that require liquidity, I bonds may not be the best option. Conversely, money market funds are highly liquid near-term instruments intended to offer investors high liquidity with low risk.

Diversification: It is generally a good idea to diversify your investments to minimize risk. If you have a large portion of your portfolio invested in I bonds, you may want to consider diversifying into other asset classes.

It is important to consult with a licensed financial advisor before making any investment decisions. Our Team of CERTIFIED FINANCIAL PLANNERS™ are happy to help; reach out to us at 248-948-7900!

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kelsey Arvai, MBA, CFP® and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

When Volatile Markets Stop You from Moving Forward

Contributed by: Sandra Adams, CFP®

The year 2022 was a historically volatile market, with returns in both the stock and bond indexes ending in negative territory for the first time in many years. While 2023 has been positive year-to-date, we are not without continued volatility and concerns, including a possible recession, tax uncertainties, inflationary concerns, and the continuing military tensions abroad in Russia and Ukraine, amongst others. 

I have a more significant number than normal of clients and prospective clients that seem "stuck" when it comes to making decisions about their money and investments in this market environment, almost appearing paralyzed by fear. The concern is that there could be greater harm in not doing anything in these situations than doing something. Let me explain.

The first situation is clients sitting in cash because that is where they feel their money is "safest." With these clients, as interest rates have begun to rise, they may still have cash sitting in bank accounts earning little to no interest and essentially "losing" buying power, as these dollars cannot possibly keep up with rising costs. Certainly, when markets are volatile, wanting to protect your hard-earned dollars from loss can be a top priority. However, not taking advantage of the rising interest rates on things like money markets, U.S. Treasuries, CDs, and instruments that can help earn extra interest on cash can harm a financial plan's long-term success. A commitment to slowly getting back into the market with a small amount of cash (via a dollar-cost-averaging strategy) can be a great way to ease someone back into a more traditional portfolio allocation once markets become more stable. In doing so, clients can get back on track to keep up with the returns they need to meet their long-term financial goals.

The second situation is clients who were relatively aggressive in their investment accounts prior to 2022 (i.e., in their former employer 401k accounts), and now that their accounts are down, they are afraid to make any changes in the portfolio allocations "until" the market comes back. Again, this is an example of seeming paralyzed by fear. It could take many years for the current account to come back, and the question is, are we in the right allocation for your current situation to be leaving it there? If not, perhaps it is better to move on and reallocate to a more appropriate allocation, or if appropriate, roll the 401k over to an IRA and have someone more actively watch it for you on an ongoing basis.

Positive markets are indeed much easier to invest in and to make decisions around. However, when we have volatile markets, we cannot get stuck and be paralyzed by fear, causing our financial plans to fail in the long run. If you or someone you know is feeling stuck and needs to talk to someone about options, please reach out to one of our financial planners for a conversation. We are always happy to help!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Sandra D. Adams, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Tax Loss Harvesting: The “Silver Lining” in a Down Market

Contributed by: Mallory Hunt

"The difference between the tax man and the taxidermist is the taxidermist leaves the skin." Mark Twain

Three to five years ago, we would be singing a different tune, talking about capital gains and how to minimize your tax drag during the bull market. These days, we may be looking at capital losses (like those likely carried over by many investors after 2022) from this tumultuous market. Given the recent market downturn, tax loss harvesting is more popular than ever. While investors can benefit from harvesting losses at any time, down markets may offer even greater opportunities to do so. Investors who hold securities in taxable accounts (i.e., not your retirement accounts) can harvest losses that may benefit them in a couple of different ways depending on their specific situation. So let's look at the ins and outs of the unsung hero and how to use it to your advantage.

What is Tax Loss Harvesting and How Does it Work?

Tax loss harvesting is an investment strategy that can turn a portion of your investment losses into tax offsets. The strategy is implemented by strategically selling stocks or funds at a loss to offset gains you have realized or plan to realize throughout the year from selling other investments. The result? You only need to pay taxes on your net profit or the amount you have gained minus the amount you have lost. In turn, this reduces your tax bill. When and if capital losses are greater than capital gains, investors can deduct up to $3,000 from their taxable income. This applies even if there are no investment gains to minimize for the year, and harvested losses can also be used to offset the taxes paid on ordinary income. If net losses for a particular year exceed $3,000, the balance of those losses can be carried forward and deducted on future tax returns. 

With the proceeds of the investments sold, similar (but not identical) holdings are usually purchased to help ensure your asset allocation and risk profile stay unchanged while you continue to participate in the market. These newly purchased investments are typically held for a short period of time (no less than 30 days) and are then, more often than not, sold to repurchase those holdings that we sold at a loss initially. Do take heed of the wash-sale rule to ensure the proper execution of the strategy. This rule prohibits investors from selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. The IRS provides a substantially identical definition and, unfortunately, has not been very clear on what is determined to fall into that category, leaving a lot of gray area. If the same investment is purchased before the wash sale period has expired, you can no longer write off the loss. However, the opportunity is not lost as the loss will be added back to the cost basis of the position, and the opportunity to harvest the loss at a later date is still an option.

Additional Considerations

Keep in mind that your capital gains taxes on any profits are based on how long you have held an asset. Long-term holdings held for one year or more will be taxed at long-term capital gains tax rates (0%, 15%, or 20%, depending on your taxable income and filing status), which generally tend to be lower than short-term capital gains tax rates. Short-term assets held for less than one year will be taxed at the same rate as your ordinary income (10%-37%). Investors in higher tax brackets will see the most significant benefits from tax loss harvesting as they will save more by minimizing taxable gains.

If you want to harvest losses, transactions must be completed by the end of the year you wish to realize the losses. For example, if you want to harvest losses from 2021, transactions would have needed to be completed by December 31, 2021.

In the end, tax loss harvesting is one way for investors to keep more of their investment earnings. According to researchers at MIT & Chapman University, tax loss harvesting was calculated to yield, on average, an additional 1.08% annual return each year from 1926 to 2018*. Overall, this is a time-tested strategy and potentially helpful tool, particularly during down markets. Consider speaking to your Financial Planner about how they implement this strategy, and always consult a tax advisor about your particular tax situation.

*Source: https://alo.mit.edu/wp-content/uploads/2020/07/An-Empirical-Evaluation-of-Tax-Loss-Harvesting-Alpha.pdf

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Put On Your Boxing Gloves: Active v. Passive Management

Contributed by: Mallory Hunt

Tale as old as time? Not quite, but the active vs. passive management debate is a familiar one in the financial industry. An already intense deliberation has turned up the heat a couple of notches during the most recent market turmoil. So which one wins, and how does it affect you and your portfolio? Let’s start with the basics.

Active Management- What Is It?

Active management is an investment strategy in which a portfolio manager’s goal is to beat the market, take on less risk than the market, or outperform specific benchmarks. This strategy tends to be more expensive than passive management due mainly to the analysts and portfolio managers behind the scenes doing the research and frequent trading in the portfolios. 

When the market is volatile (sound familiar?), active managers have had more success in beating the market and those benchmarks. Scott Ford, the president of affluent wealth management at US Bank, claims that “active managers probably do their best work in times like this of market dislocation and stress.” In the first half of 2022, 58% of large-cap mutual funds were beating their respective benchmarks.

Even after the decline throughout the rest of the year, actively managed funds were down roughly 5% less than the S&P 500 over that same period. Much can be said regarding outperforming on the downside, and risk management is one of the potential extras investors may receive with active funds.

And Passive Management?

On the other hand, passive management is an investment strategy that focuses more on mirroring the return pattern of certain indexes and providing broad market exposure versus outperformance or risk mitigation. 

Conversely to active management, with no one handpicking stocks and trading happening less frequently, this allows passive funds to pass on lower costs to the investor and tends to assist in outperformance when put up against active funds in the long term. These funds tend to be more tax efficient and do not typically rack up much in terms of unexpected capital gains bills unless you are exiting the position, giving you control over when the capital gains are taken. In turn, the less frequent oversight provides little with regard to risk management, as investors own the best and worst companies of the index that the fund tracks. 

This easy, cheap exposure to an index has caused an influx of funds over the past four years or so, and we are at a point where passive funds (black line) have actually superseded active funds (yellow line) in the US domestic equity market as evidenced by the graph below.

So, Whose Time Is It to Shine?

As with most things, while both strategies have advantages and disadvantages, the answer may not be so black and white. The question may not be active OR passive, yet a combination of the two; this does not have to be an either/or choice. We have extensively researched the topic and implemented a balanced approach between the two in our portfolios.

Just as the market is cyclical, so is that of active and passive management. Both skilled active management and passive investing could play an important role in your investment strategy. This can be even more applicable after periods of volatility, as investors close in on meeting their investment goals.

In certain asset classes, such as US Large stocks, consistently achieving outperformance for active managers has proven more complicated, and it may make sense to rely more on passive funds. In areas like International stocks and emerging markets, it may be helpful to depend on active management where it has historically proven more beneficial.

When all is said and done, there will never be an exact strategy that works for everyone; the correct mix will still depend on you and your investment goals on a case-by-case basis.

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Source: “Active vs. Passive: Market Pros Weigh In on the Best Strategy for Retail Investors”, Bloomberg News August 2022 

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Mallory Hunt, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance may not be indicative of future results.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Q1 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The year has started much stronger than it may have felt so far. Growth-style investments trounced value-style investments as tech names came back into favor. International development beat U.S. while EM equity lagged, which was contributed by a weaker U.S. dollar. Small company stocks lagged large company stocks mainly due to a heavier technology exposure for large company indexes like the S&P 500. In contrast, the smaller company indexes had a heavier weighting in financials. The Morningstar asset allocation category of funds had 50-70% stock and 30-50% bonds, so on average, a 60% stock/40% bond allocation was up about 3.9% in the first quarter of the year.

Speaking of financials, Silicon Valley Bank (SVB), a lender to some technology companies and startups, became the largest bank to fail since 2008. Signature Bank became the 3rd largest bank to fail within hours of the SVB failure.  

How did they get to the point of failure? SVB was a commercial bank that specialized in servicing the venture capital community. Over the last few years, there has been much activity in venture capital fundraising, and many deposits flowed into the bank in late 2020 and 2021. SVB's balance sheet at this time went from $70 Billion to $200 Billion, while lending was only a fraction of what they did. So they had excess levels of liquidity and took most of that money to purchase treasuries. Their intention was to hold to maturity, so while they didn't have credit risk exposure, they had a lot of interest rate risk. During 2022 they experienced deposit outflows as venture capital companies were experiencing a lot of spending outflows and not as many inflows. At the same time, interest rates increased, causing unrealized losses in these bonds. As money continued to flow out of the bank, this caused a liquidity issue which forced the bank to sell treasuries at a loss to meet withdrawal demands. So ultimately, high amounts of interest rate risk and sector concentration were the main reasons for failure.

What about contagion? It's important to remember that banks do fail almost every year. Usually, they are caused by Fraud or mismanagement. But there are times when something bigger is going on that can cause multiple banks to fail. In the chart below you can see the largest amount of failures happened in the 1980s due to the farm crisis, oil prices, and the S&L crisis. The great recession was another big wave of bank failures.

Source: https://www.bankingstrategist.com/history-of-us-bank-failures

In the case of the most recent failures, the government acted quickly over the weekend to create policies to back-stop banks that may need to sell treasuries to meet customer withdrawals. These policies allow banks to take cheap loans backed by those treasuries for a short term to meet depositor withdrawal demand if needed without booking losses.

Are my deposits with you covered by FDIC? We diligently review FDIC coverages for our clients. If you're unfamiliar with the Raymond James Bank Deposit program, here is a primer. One account at Raymond James through the Raymond James Bank Deposit Program (RJBDP) can provide up to $3,000,000 ($6,000,000 for joint accounts) of total FDIC coverage. Raymond James does the work behind the scenes as available cash is deposited into interest-bearing deposit accounts. RJ uses a waterfall process to ensure higher cash levels for clients than the traditional limits. With the Raymond James Bank Deposit Program, uninvested cash is deposited into interest-bearing deposit accounts at up to 20 banks, providing this increased FDIC eligibility.

Raymond James will deposit up to $245,000 ($490,000 for joint accounts of two or more) in each bank on a predetermined list. Another way to qualify for more coverage is by holding deposits in different ownership categories (account types such as an individual account, a trust account, and an IRA all qualify for their own FDIC coverage).

Is my money safe in Raymond James Bank? Questions about how Raymond James is positioned in this stressed environment? Watch this video.

Cash management is a much more active process than in the past. Short-term treasuries, Certificate of Deposits, and money market mutual funds offer attractive rates for the right investor. While these options don't carry FDIC coverage, they shouldn't be ignored. Talk to your advisor to explore what might be right for you if you're carrying large cash balances at your bank with no immediate need of utilizing the cash.

The U.S. government is close to its limit (Debt ceiling), where it can no longer borrow additional funds. Several months ago, Congress had to begin using "extraordinary measures" to fulfill some obligations, and the clock is ticking for them to be able to come to an agreement and raise the debt ceiling so that spending can continue without pause. Estimates show these measures run out as early as June. The issue is typical (see other times when the debt limit was raised in the graphic below), but a divided Congress can make the issue more contentious. The main holdup is that Republican opponents want to see spending cuts before the ceiling is raised, and spending cuts are not easy for anyone to agree upon. 

https://www.pgpf.org/analysis/2023/01/debt-ceiling-update-whats-at-stake

Expect volatility as deadlines to meet obligations approach and the market's price is in more uncertainty. The direct impact and potentially biggest worry for investors is the risk of the U.S. government defaulting on its Treasury debt. Additional pain in the form of spending cuts would have a direct economic impact, with uncertain outcomes and hard decisions being made on where to cut the spending. There is no way to predict the future, but history as a guide would suggest a deal is reached and the ceiling is once again raised as it has been every other time the issue has come up in our lifetimes. We lean on diversification, conservative portfolio positioning, and a sound financial plan during times of uncertainty, and we're always here to answer any questions you might have on the topic.

Is ESG Investing Political? Check out our upcoming webinar on April 19th!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results.