It may be surprising to hear, but many people are so anxious to get their filing done ahead of time, they file their taxes before receiving all the proper documentation they need to ensure their information is accurate. This can lead to mistakes and processing delays.
MISTAKE #2: Missing Eligible Credits and Deductions
There are many credits and deductions you may be eligible for. But some of these, like the Earned Income Tax Credit, the Child Tax Credit, energy tax credits, and various itemized deductions, can be difficult to figure out, causing some to skip out on them entirely. This is why working with a good tax professional can really pay off.
MISTAKE #3: Forgetting to Contribute to an IRA
Some taxpayers forget to contribute to an Individual Retirement Account each year. These contributions are tax-deferred, meaning they can help reduce your taxable income. For the 2023 tax year, the contribution limit is $6,500 for those under age 50 and $7,500 for those over.*
MISTAKE #4: Not Reporting All Income
Many taxpayers only think of their paycheck when reporting income, forgetting to factor in dividends, bank interest, and other income sources. This information is critical for both calculating the credits and deductions you can take as well as the refund you are entitled to.
* “IRA Contribution Limits” – Internal Revenue Service
As financial advisors, we are big believers in checklists. They help us stay organized, keep our priorities straight, and ensure that everything we need to do for you gets done.
One of the items on our personal checklist this month is to send a checklist to you.
It’s 2024! A new year means new opportunities, new adventures, new goals to achieve. But doing all that requires some housekeeping. There are certain financial steps we highly recommend you take early in the year in order to make the rest of 2024 as enjoyable and stress-free as possible. So, to that end, we are including a short “Q1 Financial Checklist” with this letter.
The well-known surgeon Atul Gawande said in his book, The Checklist Manifesto: “Checklists cannot be lengthy. A rule of thumb is to keep it between five and nine items, which is the limit of working memory.”With that in mind, we’ve chosen seven items that are especially important.
The tasks on this list are all things that should be taken care of in the first quarter. Don’t worry – they’re not difficult! In fact, you may have handled most of them already. Some may not even apply to you. But each task is important in its own way. Put them all together, and you will find yourself more financially organized…and several steps closer to your financial goals.
If you need help or have questions about any of these, please let us know. In the meantime, we hope you have a great first quarter…and a wonderful 2024!
Q1 Financial Checklist for 2024 Tip: Print this out and stick it on the fridge or somewhere else it will be seen. That way, you can check off the items one by one as you complete them!
Replenish – or Add to – Your Rainy-Day Fund
If you had to dip into your “rainy-day” fund last year, begin this year by adding to it as soon as possible. Knowing you have the funds to cover an emergency is probably the single best way to remove financial anxiety from your life. You don’t have to do it all at once – even just adding a little bit each month is helpful. A good rule of thumb, though, is to have enough saved to cover three-to-six months’ worth of living expenses.
Contribute to Your IRA for 2023
If you haven’t yet contributed to your IRA in the last year, there’s still time to do so. The deadline to contribute for the 2023 tax year is April 15, 2024. (Remember that if you do decide to contribute, you must designate the year you are contributing for.) For 2023, the maximum amount you can contribute is $6,500 if you are under 50, and $7,500 if you are age 50 or older.1 Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact me if you need any help.
Rebalance Your 401(k)
The beginning of the year is a great time to check if your 401(k) needs to be rebalanced. When you originally set up your 401(k), you likely selected a specific asset allocation. (So much in domestic stocks, so much in foreign stocks, so much in bonds, etc.) But over time, your 401(k), like any portfolio, may get overly weighted in one type of asset over others due to how the markets perform. This means your 401(k) will no longer be allocated in the way you originally set. “Rebalancing” your 401(k) means to realign the investments so they match your current allocation. Let me know if you need any help with this!
Get Your Taxes Done Early
This one’s easy to understand! Starting sooner means mistakes are less likely, available deductions or credits are taken advantage of, and headaches are reduced. An important note regarding Schwab 1099 tax forms: digital tax exports and mailings are scheduled for February 16th. Please allow 7 to 10 days for the mailing to arrive.
Buy Any Discounted Items That You Need
After the national spending spree that is the holiday season, many stores will offer discounts on products. Even big-ticket items like furniture, electronics, and exercise equipment can sometimes be found for relative bargains. So, if there’s a major purchase in your future, look into doing it earlier in the year, if possible – you may just find a great deal!
Plan, Budget, and Save For Your Vacation(s) Now
Similarly, airfare and hotel costs can sometimes be found for less if booked very early. Plus, when you determine where you want to go and what you want to do well in advance, it gives you more time to set aside money specifically for your trip…so you may not need to dip into your long-term savings!
Take Advantage of Higher Interest Rates While They Last
As you know, interest rates are historically high right now. That’s not so great for consumers, but it’s good for savers. If you have more short-term goals you want to save for – like a trip or major purchase, for example – consider taking advantage of higher rates. There are many potential ways, including Certificates of Deposit, Treasury Bills, and money market accounts. Give me a call if you’d like more information!
Every January, it’s customary to look back on the year that was. What were the highlights? What were the “lowlights”? What events will we remember? Most importantly, what did we learn?
As you know, many noteworthy and historic events happened in 2023. Conflicts in Gaza, Ukraine, and Sudan. India surpassed China as the most populous country in the world. New temperature records were set all around the globe. The use of “artificial intelligence” exploded and turned multiple industries on their heads. Chinese spy balloons and deep-sea submarines grabbed the headlines. The “Barbenheimer” phenomenon reinvigorated Hollywood.
But in some ways, one of the most notable occurrences of 2023 is what didn’t happen: We never entered a recession.
When 2023 began, the fear of a recession was so widespread that it almost seemed inevitable. According to one survey, 70% of economists expected a recession to hit the U.S. in 2023.1 Another survey found 58% of economists believed there was a more than 50% chance of a recession. 1 For politicians, pundits, and analysts, it was practically all they could talk about.
But it never happened. Instead, the economy grew by 2.2% in the first quarter, 2.1% in the second, and 4.9% in the third.2 (As of this writing, the numbers for Q4 are not yet available, but it’s expected to go up again.) None of this is to say that our economy is perfect, or that we won’t have a recession in the future. But for 2023, all the gloomy forecasts simply didn’t come to pass.
Now, let’s be fair to all those economists who got it wrong: They had very good reasons for expecting a recession. Reasons based on data, logic, and history.
You see, when the year began, the U.S. was coming off a nasty 2022. While consumer prices were already coming down from their earlier highs, the national inflation rate was still 6.5%.3 Interest rates, meanwhile, had risen dramatically, from just above 0% at the beginning of 2022 to over 4% by the end.4 It was already the highest level we’d seen in fifteen years – just before the Great Recession, in fact – and every indication was that rates would continue to rise higher. All this economic pain was reflected in the stock market. The S&P 500, for example, dropped over 19% in 2022.5
For economists, all this data seemed to point a clear way forward. The Federal Reserve is mandated to keep consumer prices as stable as possible. (Its target has long been to hold inflation to around 2%.) When inflation runs hot, the Fed’s main tool for lowering it is to raise interest rates. Higher rates often lead to lower consumer spending. Lower spending, in turn, prompts businesses to decrease the cost of the goods and services they provide. Essentially, higher rates create an environment where supply is greater than demand, thus cooling inflation.
But there’s a side effect to this. If spending drops too much, businesses are often forced to cut back on expansion, investment, and labor costs. This leads to a rise in unemployment…and a contracting economy. In short, a recession.
This string of events isn’t just logical. It’s supported by history. When inflation has skyrocketed in the past, the Fed’s playbook has usually worked to bring prices down…but it’s usually triggered a recession, too. Economists call this a “hard landing.”
Look at these two charts. The top shows interest rate levels since 1955.3 The gray bars indicate a recession. Notice how often a gray bar appears in the aftermath of a sharp rise in rates? Similarly, the bottom chart shows the unemployment rate.6 See how the gray bars always coincide with a major spike in unemployment? It’s clear that, historically, fast-rising rates often trigger a rise in unemployment…which contributes to a recession.
What about when prices come down, but the economy does not? Economists call that a soft landing, and it’s proven to be very difficult to achieve. It’s no surprise, then, that most economists predicted a hard landing in 2023.
One year later, that hasn’t happened. Interest rates did continue to rise. As of this writing, they’re at 5.3%.4 Inflation has continued to cool, albeit slowly. As of November, the inflation rate was 3.1%. That’s a 3.4% drop from the beginning of the year.3 But consumer spending has remained steady. The labor market has remained strong. The unemployment rate was only 3.7% as of November.6 And, as we’ve already covered, the economy has continued to grow.
From a financial standpoint, this, to us, is the major storyline of 2023. Which means we must ask ourselves: “What can we learn from it?” As financial advisors, we’ve taken the time to jot down a few lessons we think are worth remembering as we move into the New Year. Here they are:
#1: Always emphasize preparation over prediction. The economists who predicted a recession weren’t stupid. They used the best data they had to make the best predictions they could. But 2023 shows that even the most well-informed people simply can’t see the future. Even the near future! There are simply too many variables to consider. That’s why, as investors, we must always emphasize planning over predicting. We can’t predict when the markets will drop nearly 20%, as they did in 2022.5 Or, when they’ll rise by well over 20%, as they did in 2023.5 What we do at Minich MacGregor Wealth Management is plan ahead for what each of our clients should do if the markets fall, or if they rise. We help our clients prepare mentally and financially for both market storms and market sunshine. So that they can weather the former and take advantage of the latter.
When investors predict, they’re essentially swinging for the fences on every pitch. Occasionally, a prediction can lead to a home run…but it can also lead to a lot of strike outs. By planning, we don’t have to swing at all. Since we can’t control the situation, we simply make the best out of every situation. We control only what we can control – ourselves.
#2: Be wary of confirmation bias. Earlier in the year, we spoke to many people who were convinced a recession would happen. Because of that, they tended to disregard all data that pointed away from a recession, and only valued information that confirmed what they already believed. As a result, many investors missed out on a stellar market recovery. Thankfully, our clients did not. This is another example of why preparing is much better than predicting. It removes emotion from decision-making. At Minich MacGregor Wealth Management, we’re not so focused on “being right” as we are on “being ready.”
#3: Remember that past performance is no guarantee of future results. You’ve probably seen this line in the past, and 2023 is a great example of why.Just because rising interest rates have led to recessions in the past doesn’t mean they always will. Just because the markets went one direction yesterday doesn’t mean they’ll go the same direction tomorrow. While history isa great resource to draw from when making decisions, it’s just a guide, not a guarantee.
#4: At the same time, don’t anchor to the present. As humans, we have a natural tendency to think that the way things are today is how they’ll be tomorrow. When 2022 ended, many investors felt that 2023 would be much the same. Now, investors run the risk of thinking that just because a recession didn’t happen last year, it won’t happen this year.
Again, it all goes back to planning and preparation. Here at Minich MacGregor Wealth Management, we will continue to prepare for all possible outcomes. We’ll help our clients plan for how to reach the outcomes they want and avoid the ones they don’t. We would love to help you, too! But instead of predicting, instead of assuming, instead of anchoring, we will accept that the future is written in clay, not stone. Only when it becomes the past does it harden. By doing this, we can help shape your future into whatever it is you want it to be.
So, that’s 2023! We hope it was a wonderful year. If you ever need any help making 2024 even better, know that we are always here. In the meantime, we wish you a Happy New Year!
As you know, this is a time of year when many people make New Year’s resolutions. Lose weight, stop smoking, save more, learn a new skill, get more sleep, visit a new place, get finances in order, etc. You name it, chances are, someone has resolved to do it.
As financial advisors, people often come to us for help with any financial resolutions they have – or resolutions that require some change in their financial situation to achieve. But often, people come onlyafter they have tried and failed to keep those same resolutions on their own.
This got us thinking: Why are New Year’s resolutions so hard to keep? In most cases, our resolutions are goodfor us. We want to do them. So why aren’t they easier?
There are many reasons for this, but one of the most important can be best explained by Aesop’s classic fable about…
The Dog and His Reflection
It happened that a Dog, after much hunger and long labor, had finally procured for himself a chunk of meat, and was carrying it home in his mouth to eat in peace. On his way home, the Dog had to cross a fallen tree trunk lying across a running brook. As he crossed, he looked down and saw his own reflection in the water beneath. Thinking it was another dog with an equally large piece of meat, he made up his mind to have that also. So, he snapped at the reflection in the water. But as he opened his mouth, his own meat slipped out, fell into the brook, and was never seen by the Dog again.
While some have interpreted this fable to be a warning against greed, we look at it a little differently. Despite being halfway to his goal – enjoying a nice meal – the Dog became distracted by a different goal, and in pursuing that, lost sight of his own.
In our experience, this happens to most of us every year. We set a goal we want to achieve, something we truly care about. But it takes time to accomplish our resolutions, and it’s very easy to get distracted by the newest, shiniest things. For example, imagine someone resolves to save $200 per week, so that they can finally take that trip to the Caribbean they’ve always dreamed of. But after doing this for three months, they see another person enjoying the latest iPhone that came out, so they decide to go for that instead. After all, the Caribbean will always be there. So, they spend all the money they’ve saved – and suddenly, they’ve sabotaged their own resolution.
This happens on a larger scale, too. we’ve seen people who dream of a retirement spent in the sun…only to go chasing shadows instead. We’ve seen people with grand plans to start their own business one day…only to spend their time watching television.
Of course, there’s nothing wrong with buying a new iPhone or relaxing in front of the TV. But to truly change our lives for the better, we must learn discipline. We must hold ourselves accountable. We must keep our eye on what’s truly important, and not be distracted by reflections.
There are several ways we can do that. Here are a few we’ve found to be especially helpful:
Be specific with your resolutions. People who set specific goals are more likely to achieve them. For example, instead of resolving to save money, resolve to save $200 per week.
Put it in writing. Write down your resolutions and post them in a place where you will see them every day. This will help remind you of what you’re working towards, so you won’t end up like the Dog in the fable.
Set realistic goals. Set goals that are within your reach, and don’t try to take on too much at once. Be mindful of your finances and schedule. Account for the fact that sometimes, you need to kick back and relax or spend money on a whim. In addition, take your time. There’s no prize for finishing first, and anyway, to quote another one of Aesop’s fables, slow and steady wins the race.
Develop a plan. This is so important. Create a timeline with steps toward your goal. Set deadlines for each and cross them off as you go. This will help you generate both the momentum and themotivation you need to continue.
Ask for help. Whether it’s with a financial professional or a life coach, if you find yourself struggling to reach your goals, don’t think you need to do it alone! Find someone who can help keep you focused and accountable.
Reward yourself. Acknowledge even the smallest of achievements. Keeping resolutions is hard work, and you should be proud of everything you accomplish!
Regardless of what you do, always remember The Dog and His Reflection. It can make all the difference.
The only bad question is the one left unasked. That’s the premise behind many of our recent letters. Each covers a different investment-related question that many people have but are afraid to ask. In the next few messages of the series, we want to address some questions we’ve been hearing lately about recent investing trends. We’ll start with…
Questions You Were Afraid to Ask #11: What does it mean to invest in cash?
Sometimes, an investor will see a headline that mentions the word “cash.” Here are some examples just from the last year or so:
“Cash is king again.”
“Warren Buffett sits tight on cash.”
“No more ‘cash is trash’ billionaire hedge fund manager says.”
“How much of an investment portfolio should be in cash?”
Headlines like these often bewilder new investors. But even experienced investors sometimes wonder: “What does it mean to invest in cash?” After all, we don’t usually think of the word “cash” in relation to investing. For most people, cash is the stuff you keep in your wallet. So, what gives?
This is a textbook example of an intelligent question people are often afraid to ask.
Fortunately, “investing in cash” is a fairly simple concept. It means to invest in a type of short-term security for a set period of time in exchange for one or more interest-rate payments.
Certificates of deposit (CDs), money market accounts, and treasury bills are three examples. These securities are known as “cash equivalent” investments, but the word “cash” alone is often used as an umbrella term to cover all the various types. That’s because these types of investments are very liquid. That means the funds inside them can be converted to actual cash – money you can spend at a moment’s notice – quickly and easily compared to stocks, bonds, or investment accounts like a 401(k) or IRA. (Stocks and bonds aren’t always easy to sell, and depending on the timing, you may sell for a lower amount than what you paid for. Meanwhile, withdrawing the money from an IRA or 401(k) before you retire can trigger financial penalties from the government.)
That’s why these types of securities are referred to as “investing in cash.” They still provide a return – hence the investing part – but also a level of liquidity close to actual, physical currency.
Cash investments are handy if you have money that you:
Want to keep safe. Money markets and certificates of deposit are historically stable investments and are often insured up to a certain point by the federal government.
Want to earn a return on. In the form of interest rate payments, which are generally higher than with a basic savings account.
Want easy access to within a relatively short period of time. Most money markets have a maturity of six months or less. Treasury bills mature within one year or less. CDs, meanwhile, usually have a maturity of 6 months to a few years.
That said, there are some downsides to investing in cash. For one thing, if your focus is on growing your money, there are usually much better options. That’s why many investors often shun putting too much money into cash. They feel there are more productive ways to invest. And while they are very liquid compared to other securities, there are still penalties if you withdraw the money from a CD before maturity. (Money markets don’t have an early withdrawal penalty, but many banks and credit unions will charge monthly fees if the balance falls below a certain minimum.)
With all this in mind, why have we seen so many headlines about “cash” in recent years? It all has to do with interest rates. As you probably know, the Federal Reserve has been gradually hiking rates for much of the past two years to bring down inflation. When the Fed raises rates, banks and credit unions usually follow suit. As a result, some cash investments have been paying higher interest rates than normal. This, coupled with a volatile stock market, has caused cash to gain in popularity with some investors.
How long this trend continues is impossible to know. And it’s worth emphasizing that cash, like all securities, is an investment that is sometimes right for some people in some situations…not always right for all people all the time. So, if you’re interested in cash investments, be sure to talk about it with a qualified financial professional first to make sure it’s right for you.
In the meantime, now you know what it means to “invest in cash.” In our next post, we’ll discuss another recent investing trend. Have a great month!
John Wooden, the legendary coach from UCLA, once said, “Success comes from knowing you did your best to become the best you are capable of becoming.”
Why are we sharing this quote with you right now? Because a valued member of our team at Minich MacGregor Wealth Management just took a huge step toward becoming the best.
Andrew Pallas just became a CERTIFIED FINANCIAL PLANNER™!
Now, there are many different credentials and designations in financial services. But earning your CFP®, as it’s known, is a big deal. In our opinion, the CFP® is one of the highest and most important certifications a financial advisor can earn. It is a mark that the holder has the education and expertise to help people from all walks of life be able to effectively manage their money, plan for retirement, and work toward their financial goals.
Of course, Andrew always had the talent for doing these things. Now, he also has the training.
We are so proud of what Andrew has accomplished because we know how much work it took. To become a CERTIFIED FINANCIAL PLANNER™, he had to complete demanding courses in various aspects of finance, including investing, tax planning, retirement planning, estate planning, risk management, government regulations, and more. Then, Andrew worked to pass a grueling, six-hour long test to prove what he learned. (A test that, on average, only 65% of people pass.1) Of course, this was all on top of the thousands of hours of professional experience Andrew had to acquire first. The result is an even greater ability to serve you and our other clients!
Andrew has consistently impressed us with his desire to help clients, learn new skills, and be the best financial professional possible. We’re so lucky to have him on our team. So, please join us in congratulating Andrew on this accomplishment. And as always, please let all of us here at Minich MacGregor Wealth Management know if there is ever anything we can do for you!
Happy holidays! We wanted to drop one more update on how the markets are doing before you “settle down for a long winter’s nap.”
As you know, the markets endured some cold weather earlier in the fall. In September, the S&P dropped 4.9%.1 The autumn chill continued in October, when the markets dropped 2.2% and even briefly dipped into correction territory.2 (Defined as a drop of 10% or more from a recent peak.)
In November, however, the markets found something to be thankful for: A better-than-expected inflation report. The result was a major bounce back, with the S&P 500 climbing 8.5% for the month.3
As you know, the U.S. experienced historically high inflation for most of 2021 and 2022. Things peaked in June of 2022 when the Consumer Price Index – which measures the year-over-year price change of a wide variety of common goods and services – reached 9.1%.4 Since then, a combination of rising interest rates and improving supply lines gradually cooled prices down all the way to 3% this past June.4 (For reference, the Federal Reserve, which is tasked with keeping prices stable, aims for a 2% rate of inflation.)
Over the next three months, however, inflation crept back up to 3.7%, largely due to a rise in oil prices.4 This spooked the markets badly, as it worried investors that the Federal Reserve would keep raising interest rates, or at least keep them higher for longer. It also caused an influx of money into bonds. This drove up bond yields while simultaneously draining the stock market.
In October, however, inflation fell back to 3.2%.4 This was slightly better than expected, and it proved to be a shot of adrenaline for investors. Most analysts feel it means the Fed will not raise interest rates for the foreseeable future, as it appears inflation may already be coming back down again without the need for further rate hikes.
So, what does this all mean for us? Well, it’s undoubtedly good news, but it also signals a need for caution.
For one thing, it’s important to remember that cooling inflation does not mean that goods and services are getting cheaper. (That’s called deflation, and it can be even worse economically than inflation.) It simply means that prices are rising less and slower. Except under extraordinary circumstances, inflation is always going to be around. Low and stable inflation, the kind the Fed wants to see, is normal. As a result, though, cooling inflation tends to excite economists more than consumers, who may still feel profound sticker shock at the grocery store, the gas pump, or even when shopping online. That’s important because it can have a direct impact on consumer spending.
Spending is the lifeblood of our economy. That’s especially true around the holidays. Investors will be closely watching consumer spending as we round out the end of the year. If higher interest rates and still-higher-than-normal prices put a winter chill on holiday spending, investors may take it as a sign of an economic slowdown. That would certainly affect the markets negatively. On the other hand, if spending goes up or at least remains stable, we may see this market rally continue.
Either way, we should be prepared for more volatility in the months ahead. You see, we’re in an environment where the markets are hinging on every bit of new data and the release of every government report. In such times, investor sentiment can swing one way and then the other very rapidly. That makes the markets something like a swinging door. So, as we enter a new year, we must continue to be mindful when we step through the door…so that we never get taken by surprise or hit square in the face.
In the meantime, it’s always nice when the markets enter the holidays on an upswing. So, our advice to you? Forget all the noise and focus instead on what matters most: Spending time with family and friends. Devote more care to hanging your stockings by the chimney – our team will be here to mind everything else.
As one year draws to a close and a new one approaches, we will continue to monitor the markets carefully. If there are any changes we need to make or developments we need to inform you of, we will do so…even faster than a reindeer-driven sleigh. And, as always, please let us know if you have any questions or concerns. We may not be able to slip down a chimney to answer them, but our door is always open…and our inbox, too!
The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask. So far, we’ve discussed the essentials of how the markets work, the differences between various types of investment funds, and the ins and outs of stocks and bonds.
A few months ago, however, an acquaintance of ours asked us a question not about investments but investing. Specifically, she wanted to know our thoughts on the modern trend of using mobile investing platforms — aka “investing apps.”
It’s a terrific question, because the use of such apps — and the number of apps available — has exploded in the past few years. So, in this message, we’d like to continue our series by answering:
Questions You Were Afraid to Ask #10: What are the pros and cons of investing apps?
Mobile investing apps enable people to buy and sell certain types of securities right from their phone. They have provided investors with a quick and easy way to access the markets. For new investors who are just getting started, these apps have made the act of investing more accessible than ever before.
That’s a good thing! Even today, many people only invest through an employer-sponsored retirement account, like a 401(k). That’s because they may lack the resources, confidence, or ability to invest in any other way. But not everyone has access to a 401(k). And while 401(k)s are a great way to save for retirement, many people have other financial goals they want to invest for, too. Mobile apps provide a handy, ready-made way to do just that.
Continuing with the accessibility theme, many apps enable you to invest right from your phone, anytime, anywhere. In addition, many apps don’t require a minimum deposit, so you can start investing with just a few dollars. Finally, the most popular apps often charge extremely low fees – or even no fees at all – to buy or sell stocks and ETFs.
Many apps also come with features beyond just trading. Some apps will help you invest any spare change or extra money, rather than let it simply lie around in a bank account. Others enable you to invest automatically – daily, weekly, bi-weekly, monthly, etc. That’s neat because investing regularly is a key part of building a nest egg.
It’s no surprise, then, that these apps have skyrocketed in popularity. In fact, app usage increased from 28.9 million in 2016 to more than 137 million in 2021.1 Part of this surge was undoubtedly due to the pandemic. With social distancing, many used the time to try new activities and learn new skills from the safety of their own home…investing included.
But before you whip out your phone and start trading, there are some important things to know, first. Investment apps come with definite advantages…but also some unquestionable downsides. When you think about it, an app is essentially a tool. Like any tool, there are things it does well…and things it can’t do at all. And, like any tool, it can even be dangerous if misused.
The first issue: the very accessibility that makes these apps so popular is also what makes them so risky. When you have a tool that provides easy, no-cost trading, it can be extremely tempting to overuse it. Researchers have found that this temptation can lead to overly risky and emotional decision-making, as investors try to chase the latest hot stock or constantly guess what tomorrow will bring.2 The result: Pennies saved on fees; fortunes potentially lost on speculation.
The second and biggest issue is that while these apps make it easy to invest, they provide no help with reaching your financial goals. No app, no matter how sophisticated, can answer your questions. Especially when you don’t even know the questions to ask. No app can hold your hand and help you judge between emotion-driving headlines and events that necessitate changes to a portfolio. No app can help you determine which investments are right for your situation. Just as you can’t hammer nails with a saw, or tighten a bolt with a screwdriver, no app can help you plan for where you want to go and what you need to get there.
Take a moment to think about the goals you have in your life. They could be anything. For instance, here are a few our clients have expressed to me over the years: Start a new business. Visit the country of their ancestors. Support local charities and causes. Design and build their own house. Play as much golf as possible. Volunteer. Visit every MLB stadium. Send their kids to college. Read more books on the beach. Tour national parks in a motorhome. Spend time with family.
Achieving these goals often requires investing. But there is more to investing than just buying and selling stocks. More to investing than simply trading. Investing, when you get down to it, is the process of determining what you want, what kind of return you need to get it, and where to place your money for the long term to maximize your chance of earning that return. It’s a process. A process that should start now, and last for the rest of your life. A process that an app alone cannot handle – just as you can’t build a house with only a saw.
So, our thoughts on mobile investing apps? They are a tool, and for some people, a very useful one. But they should never be the only one in your toolbox.
In our next post, we’ll look at two other modern investing trends.
When Dr. Harold Brown was young, he dreamed of flying. So, he worked hard as a “soda jerk,” making ice cream sodas at the local drugstore every afternoon to save up enough money for flight school. Eventually, he amassed a grand total of $35…enough for seven lessons.
It was the early 1940s.
While Harold didn’t know it, hundreds of young men like him were all doing the same thing. Teaching themselves to fly, so that when their country called, they would be able to answer.
That call came on December 7, 1941. After the attack on Pearl Harbor, over 134,000 Americans rushed to enlist.1 Harold was no exception. As soon as he graduated from high school, he applied to join a new, recently activated unit of airmen.
But there was a major obstacle to overcome – Harold and many of these other pilots were Black.
Due to the racial attitudes of the day, many in the military did not believe Black people could make good pilots. During World War I, all African-American pilots were rejected from serving. In 1925, a War Department report suggested Black soldiers were “cowardly, incapable of higher learning, and lazy.”2 Even by 1940, the U.S. Census counted only 124 Black pilots in the United States.
Despite this prejudice, many, like Harold, had participated in civilian pilot training programs, and were eager to show what they could do in service to their country. So, after sustained public pressure, the War Department finally created an all-Black unit called the 99th Pursuit Squadron. (The 100th, the 301st, and the 302nd squadrons would come online later in the war.) The pilots began training at facilities in Tuskegee, Alabama, where they were joined by thousands of other African-Americans, all training to be navigators, bombardiers, flight surgeons, mechanics, and engineers.
These were the legendary Tuskegee Airmen.
From the start, nothing was easy for these trailblazers. They were spat on and laughed at. Abused and humiliated. Passed over for promotion. Denied entry into nearby clubs, movie theaters, and restaurants. Forbidden to train with white pilots. Local laundries sometimes refused to wash their clothes. One Black lieutenant was court-martialed after trying to enter the base Officer’s Club. Most of the airmen experienced segregation and poor treatment just getting to Tuskegee. Perhaps worst of all was the constant expectation they would fail. As Harold later described it: “It was felt that this big experiment was going to fail and fall flat on its face. ‘They’ll never make it as pilots.’ That was really one of our biggest motivations – that we cannot fail. We just can’t.”2
Things weren’t any better in Europe. Harold and the other pilots would have to fly from their base to a “white base” just to receive their orders. And they would see enemy propaganda posters depicting them as gorillas or apes…as people somehow less than human.
Despite these conditions, the Tuskegee Airmen became one of the most elite groups in the entire American military. After their combat missions began in 1943, the records followed. Number of enemy aircraft destroyed. Number of sorties flown. Number of missions completed. Their ability to protect bomber formations from harm became the stuff of legend. (There is a story that the Tuskegee Airmen never lost a bomber. That’s not quite true – records indicate at least 25 bombers were shot down – but this was a much higher success rate than other units, which lost an average of 46 bombers.3)
And, of course, they gave their lives in service to our country. At least 66 of the Tuskegee Airmen were killed in action, while another 32 were captured as POWs.3 That includes Harold, who was shot down in Austria and nearly murdered by an angry mob.
When the Tuskegee Airmen returned home after the war, they came home to a country that was still in the grip of segregation. Despite being ace pilots, many who left the military were prevented from flying commercially and had to turn to other jobs. But without realizing it, they had changed the military. They had changed the country.
Because of their example, the Tuskegee Airmen helped prove to the nation that it didn’t matter what color your skin was. When it comes to serving your country, all that matters is what’s in your head and in your heart. Courage, commitment, self-sacrifice…these are qualities that transcend any sort of category. They were qualities the Tuskegee Airmen showed every day. Qualities that helped lead to the desegregation of the military in 1948…and, eventually, the end of segregation everywhere.
When World War II ended, there were nearly a thousand pilots who trained at Tuskegee. Today, in 2023, there are less than 10.4 Harold himself passed away in January at the age of 98. But, as we prepare to celebrate another Veterans Day, I think it’s important to remember the Airmen and their legacy. Like all veterans, their choice to serve was not an easy one. It was filled with danger and difficulty. But because of their decision – because of their courage, their commitment – they not only helped win the war…they helped shape our country. And that is what makes Veterans Day so important. It’s a chance to truly give thanks to the men and women who not only defended our nation but made it what it is today.
As Harold once said: “I always hoped that the country would change…and, of course, the country has changed. Are there still problems? Sure, there are still problems out there. But even with the problems, we aren’t anyplace close to where we were 70-some years ago. It’s a whole new world.”2
A whole new world. A world that the Tuskegee Airmen – and all our veterans – helped make for us.
On behalf of everyone at Minich MacGregor Wealth Management, we wish you a happy Veterans Day…and a heartfelt “Thank you” to all who serve.
You probably saw the news: On October 27, the S&P 500 officially slid into a market correction.
A correction is when the markets decline 10% or more from a recent peak. In the S&P’s case, the “recent peak” was on July 31, when the index topped out at 4,588.1 On Friday, the index closed at 4,117 – a drop of 10.2%.1
Market corrections are never fun, and there’s no way to know for sure how long one will last. Historically, the average correction lasts for around four months, with the S&P 500 dipping around 13% before recovering.2 Of course, this is just the average. Some corrections worsen and turn into bear markets. Others last barely longer than the time it took for us to write this message. (On Monday, October 30, for example, the S&P actually rose 1.2% and exited correction territory.3) Either way, corrections are not something to fear, but to understand – so that we can come through it stronger and healthier than before.
To do that, we must understand why the markets have been sliding since July 31. We use the word “slide” because that’s exactly what this correction has been. Not a sharp, sudden drop, but a gradual slide, like the bumpy ones you see on a playground that rise and fall on the way to the ground. While the S&P 500 dropped “at least 2% in a day on more than 20 occasions” in 2022, that’s only happened once in 2023, all the way back in February.4
At first glance, it may seem a little puzzling that the markets have been sliding at all. Do you remember how the markets surged during the first seven months of the year? When 2023 kicked off, we were still coming to terms with stubborn inflation and rising interest rates. Many economists predicted higher rates would lead to a recession. But that didn’t happen. The economy continued to grow. The labor market added jobs. Inflation cooled off. As a result, many investors got excited, thinking maybe the Federal Reserve would stop hiking rates…or even start bringing rates down.
Fast forward to today. The economy continues to be healthy, having grown an impressive 4.9% in the third quarter.5 Inflation is significantly lower than where it was a year ago. (In October of 2022, the inflation rate was 7.7%; as of this writing, that number is 3.7%.6) And the unemployment rate is holding steady at 3.8%.7 But the markets move based either on excitement for the future, or fear of it – and these cheery numbers no longer generate the level of excitement they did earlier in the year.
The reason is there are simply too many storm clouds obscuring the sunshine. While inflation is much lower than last year, prices have ticked up slightly in recent months. (We mentioned the inflation rate was 3.7% in September; it was 3.0% in June.6) As a result, investors are now expecting the Federal Reserve to keep interest rates higher for longer. Seeking to take advantage of this, many investors have moved over to U.S. Treasury bonds, driving the yield on 10-year bonds to its highest level in 16 years. Since bonds are often seen as less volatile than stocks, when investors feel they can get a decent return with less volatility, they tend to move money out of the stock market and into the bond market.
As impressive as Q3 was for the economy, there are cloudy skies here, too. This growth was largely driven by consumer spending – but how long consumers can continue to spend is an open question. Some economists have noted that Americans’ after-tax income decreased by 1% over the summer, and the savings rate fell from 5.2% to 3.8%, too.5 Mortgage rates are near 8%, a 23-year high.8 Meanwhile, home sales are at a 13-year low.9 All this suggests that the Fed’s rate hikes, while cooling off inflation, have been cooling parts of the economy, too.
Couple all this with violence in the Middle East, political turmoil in Congress, and a potential government shutdown later in November, and you can see the problem. Despite the strong economy, investors just aren’t seeing a good reason to put more money into the stock market…but lots of reasons to think that taking money out might be the prudent thing to do. It’s not a market panic; it’s a market malaise.
So, what does this all mean for us?
We mentioned how the markets operate based on excitement for the future, or fear of it. But that’s not how we operate. We know that, while corrections are common and often temporary, they can worsen into bear markets. Furthermore, any decline can have a significant impact on your portfolio, and by extension, your financial goals. So, while our team doesn’t believe in panicking whenever a correction hits, neither do we believe in simply standing still. Instead, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending. We have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell. This enables us to switch between offense and defense at any time. This, we feel, is the best way to keep you moving forward to your financial goals when the roads are good…and the best way to prevent you from backsliding when they’re bad.
In the meantime, our advice is to enjoy the holiday season! Our team will continue to focus on investments, so our clients can focus on why they invest: To create happy memories and live life to the fullest with their loved ones. Happy Holidays!
