Quote of the Week
“I’m not in the world to live up to your expectations and you’re not in this world to live up to mine.” – Bruce Lee
First, I want to give you a few statistics that point to near term positive moves:
U.S. home prices continue their meteoric rise with the April Case-Shiller home price index +1.6% month over month from March and the Case-Shiller year over year +14.9%. This is the highest year over year in the last 30 years.
Oil is up +48% year to date with oil inventories in the U.S. at pre-pandemic levels, down -15% year over year, and -6% below the 5-year average. Good for our position in energy. Adding the summer driving demand, oil should continue to go higher.
U.S. Redbook Retail Sales finished +16.7% for June year over year.
June’s consumer confidence accelerated again to 127.3 versus 120.0 in May and now is back to the levels matching March 2000.
All this should be good for rising equity markets and rising inflation assets. Just where we are positioned.
The Notion of Randomness
Last week (access here) I discussed what we call a “short term episodic non-trending volatility spike.” Unfortunately, that is bad for the markets and was clearly evident with the big drop on Friday, June 11th. Fortunately, we have recovered almost all of the loss as the “trend” for the equity and commodities was and is still positive.
As investors, the markets routinely disappoint our deep desire for order. As much as we would appreciate a normal distribution of stock price returns, that’s just not how the stock market game works.
The challenge in our innate desire for order is that we often look for it in places where it doesn’t exist.
Likewise in our heads we tend to link prices to ones that came before, incorrectly believing that that which occurred in the recent past is likely to continue for the foreseeable future. If it were true, investing would be much easier. But sadly, it is not.
Robert Schiller a famous economics professor at Yale built on this foundation of randomness when he experimented many series of coin tosses, which he used to represent stock price moves. (Heads the “stock” goes up, tails the “stock” goes down).
No surprise, especially for those of us who subscribe to a more chaotic view of the markets, was that seeming patterns developed similar to what we see in the stock market. Except these patterns were created out of the complete randomness of doing many, many simulated coin tosses.
If you do something enough times, you will inevitably get similar patterns. That doesn’t, however, mean there is predictability or order. For us, one of the most important things to keep in the back of our minds when investing is that there is a certain chaos to it all. That is, sometimes a stock price move is simply random, especially in the absence of news or events.
Obliviously one way in which we attempt to find some order out of the chaos is to use fundamental research and mathematics to manage your money.
New Rules for Inherited IRAs
Most all of our clients who have IRAs have named individuals as their beneficiaries. If you have named a non-spouse individual as your beneficiary the rules have changed. Before the IRS allowed a non-spouse beneficiary to “stretch” the Required Minimum Distributions (RMD) over the beneficiaries’ lifetime.
Congress seeing all the tax revenue on the taxable income from the distributions being delayed over what could be a long lifetime especially if the beneficiary is a child, changed the law to get that tax revenue earlier.
Spouses can still use the “stretch” IRA strategy or simply roll over the deceased partner’s IRA into their own IRA and use their own life expectancy for the required RMDs. For everyone else, here are the new rules for inherited IRAs.
No annual RMDs
You don’t have to withdraw money each year. All that matters is that the account is emptied at the end of the 10th year following the year the original owner died. This allows the beneficiary to manage the income tax effects of the withdrawals to their individual benefit rather than having a required distribution each year.
If the deceased had an RMD due for the year they died, the beneficiary must take the distribution during that year. Failure to do that can result in a penalty of 50% of the amount that should have been withdrawn. We make sure that mistake doesn’t happen.
Even Roth IRAs must follow the 10-year withdrawal rule. You can withdraw contributions the deceased owner made at any time during the 10 years tax free. Warning, the withdraws are taxable if the account was set up by the deceased less than five years before their death. To get around that, you can wait until the account hits the five-year mark before taking any withdrawals.
Some non-spouse beneficiaries may be able to use the old RMD “stretch” method. If the beneficiary meets the IRS definition of being disabled or chronically ill, RMDs based on life expectancy are allowed. The same is true of beneficiaries who are within 10 years of the age of the deceased. Minor children can also take RMDs until they reach the age of maturity (typically age 18) at which point the 10-year rule kicks in. Thus, grandchildren are held to the 10-year rule.
These rules can be complicated and it is especially important to set up the IRA correctly at the beginning. We can advise you how to make sure there are no ugly surprises.
If you have friends or family in need of financial life planning services,
It would be the honor of Laurence Lof Financial Advisors to assist them.
We value your referrals!
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.