Start the New Year Right: Financial Best Practices for 2020

Happy New Year! Let’s take a moment to recall the wild ride the markets have taken over the past 12 or so months. Remember the rough December of 2018? As The New York Times reported at the time, “Stocks plunged in December [2018], posting their worst monthly loss since the financial crisis and the worst December since 1931 and the Great Depression.”

It’s amazing how quickly memories fade and markets move on. Around this time last year, we were busy encouraging everyone to avoid any emotion-driven panic. The six financial best practices we shared then focused on maintaining your steadfast resolve. That’s never bad advice, but as we start the New Year, let’s turn to a fresh new batch of financial best practices to help you hit the ground running in 2020.

Revisit your tax plans. Old habits die hard. Although the Tax Cuts and Jobs Act (TCJA) is now in full swing, you’re probably still following a few well-worn tax-planning paths that may no longer apply. You (with your tax planner) may want to revisit them. For example:
    • Holding a mortgage is much less likely to offer the tax-deductible advantages it used to. Have you altered your payment plans accordingly?
    • Ditto on charitable contributions. Have you looked at creative new strategies, like establishing a Donor Advised Fund, to continue engaging in tax-favored giving?
    • Unless Congress acts to extend them, TCJA’s lower individual income tax rates will expire in 2026. Have you considered how the current, lower-rate environment might impact your retirement planning? For example, performing a Roth IRA conversion with pre-tax dollars may make more sense today than it used to.
    • With the passage of the SECURE Act at the end of 2019, it may be time for you to revisit any plans to leave your IRA to a non-spouse beneficiary. The Act eliminated so-called “stretch” IRAs, meaning a non-spouse beneficiary must take all distributions from an inherited IRA by the end of the 10th year following your death, possibly pushing your beneficiary into a higher tax bracket.\

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Consider rebalancing your portfolio. If you work with AMDG Financial, rebalancing is a service we already perform for the majority of our clients. But if you manage your portfolio by yourself, and it’s been a while, you may find some of your strongly performing assets have now overshot their target allocations. Depending on trading costs and tax ramifications, you may want to sell some of your winning asset classes from 2019 (in which you’re now over-invested), and buy recently underperforming ones (in which you’re now under-invested). It may feel counterintuitive to sell “winners” and buy “losers,” but not if you recognize you’re selling high and buying low.

Take advantage of $0 trading. If you’ve been watching the financial headlines this year, you may have noticed that many brokers have been competing to lower online trading commissions – often, all the way down to $0 for individual stock and ETF trades. This doesn’t really affect our clients because we don’t typically make these kinds of trades. However, we know that some people ­­— clients or not ­­— still have some individual stocks. If so, now might be a good time to deconcentrate out of any individual stock positions you’ve been hanging onto for no particular reason. Or, next time you’re engaging in tax-loss harvesting, we may be able to reduce the trading costs involved by identifying an appropriate ETF with which to maintain your portfolio’s target allocations mid-harvest.

Of course, if it undermines rather than advances your greater investment goals, even a “free” trade can cost you dearly. But zero-commission stock and ETF trades may have opened new cost-saving opportunities when managing your portfolio to reflect your investment plans. 

Keep an eye on your cash. On those “free” trades, there’s a side effect worth noting. Brokerages are businesses, not charities. If they’re not profiting one way, they’ll need to profit somewhere else. One tactic we’ve seen brokers using is slashing interest paid on your cash accounts, charging market-rate interest on loans, and keeping the spread for themselves. In October 2019, The Wall Street Journal’s Jason Zweig observed of one zero-commisson firm: “The firm automatically sweeps idle cash not into money-market mutual funds or other assets that could yield about 2% at today’s rates, but into its own bank, which pays peanuts.”

It’s important to maintain enough liquidity for near-term and emergency spending, and to do so in an FDIC-protected or similarly protected institution. But you might consider looking beyond your brokerage accounts to earn market-rate interest on any significant cash reserves.

Live a little. You may not have noticed the news, buried as it was in a year’s worth of jittery geopolitical headlines: As of mid-December, investors have earned double-digit year-to-date returns across most asset classes. Not only might this warrant some rebalancing, you might find yourself on top of your financial goals. If so, you may want to be inspired by Benjamin Franklin’s sentiment from his 1736 Poor Richard’s Almanack: “Wealth is not his that has it, but his that enjoys it.” If you were a steadfast investor in 2019 and your portfolio is doing well, consider treating yourself to a bit of a year-end reward. You’ve earned it.

As always, AMDG Financial is here to assist you in implementing any or all of these best practices – and more. In the meantime, we wish you and your family a most happy and healthy new year.

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