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  • Michael Handy

2021 Q2 Newsletter

The second quarter of 2021 saw a continuation of the recovery from the pandemic. Real estate (DFREX) led for the quarter (blue) at 12.37%, a welcome sign. Small companies (DFSTX) were up 65% (red), a lifting all boats change, although large US companies (DFUSX) continued their dominance for the three-year period at 18.62% (green) due largely to the advance of the five largest tech companies. International was good all three periods.



Statistics are from Morningstar Advisor Workstation which are considered reliable.


What’s ahead for the market – The major challenges ahead for the market are the current high valuations, inflation prospects, micro-chips, labor shortages, political maneuvering, and vaccination resistance.


Valuations - Equities are trading at high multiples of earnings. This is wonderful for you owning them. The way equities appreciate from here is increased sales and earnings. Most analysts are expecting a market correction which is defined as a 10% decline in value. The Fed is continuing a low interest posture.


Inflation - Inflation is considered by many economists and the Fed to be transitory. There are shortages of items like household appliances and automobiles due to reduced production during the pandemic. When production matches demand, in theory prices should recede.


Micro-chips - Production of micro-chips, which operate our devices, is not meeting demand. Ask yourself how many devices you have with LED lights and need recharging to navigate your daily life. How about those high-tech autos in your garage? Taiwan Semi supplies more than 50% of micro-chips and is linked to China which causes concerns. The US needs to be independent for micro-chips.


Labor shortages - Matching workers with jobs is an issue. Dealing with covid has prompted many seniors to retire. Job opportunities are wanting for both basic jobs and high skill jobs.


Political Maneuvering and Vaccination - We are inundated with information from covid scientists, politicians and journalists. Currently the issues in Congress are the delta covid variant with increasing infections, changing voting eligibility enacted by the states, a reckoning for the January 6 rebellion at the Capital and an infrastructure bill. These issues create uncertainty in the market which increases volatility.


Covid statistics - The US has 35 million covid infections and 626 thousand covid deaths. 185 million people have been vaccinated and 160 million fully vaccinated for a US population of 333 million according to the CDC.


NIAID director Dr. Anthony Fauci said polio and smallpox would still be spreading in the US if anti-vaxx misinformation had been as popular in the past. We have the miracle of a highly effective vaccination developed in record time. All of us need to be vaccinated!


Tax proposals - A tax bill should be forthcoming. The issues that concern us are capital gains and the estate income tax basis. An increase in the capital gains rate is being considered. This is a smaller matter because 75% of investments are in non-taxable accounts like IRA’s, 401k’s, pensions and foundations. But what about dividends which have attractive tax rates?


Dividends - Most dividends from C corporations (Johnson and Johnson, 3M, etc.) are currently taxed at the 15-20% long-term capital gains rates and 9.9% for Oregon. A 3.8% additional US rate applies to investment income of couples with more than $250k of AGI. The effective rate for all three would be 33.7%. The proposed change for the highest bracket US taxpayers could tax dividends at 39.6% regular income tax, 3.8% net investment income tax and a 9.9% Oregon tax for an effective rate of 53.3%. The effective rate could decrease if Oregon taxpayers could deduct state income tax. The state income tax deduction would be a change from the current tax law.


Inherited property - A major estate issue would be a change to the stepped-up basis rules for property received from a decedent. Under current law a beneficiary takes most property from an estate at date of death value, not the decedents income tax basis. This is the stepped-up basis rule. The change would have the estate beneficiary retain the income tax basis of the decedent. This would create major headaches for inherited property sold in finding the decedent’s income tax basis. The IRS could take the position the basis is $0 until you can establish otherwise.


Portfolios – The key to your investment performance long term continues to be diversification. The future is unknown and unknowable. We use world class managers from DFA, Vanguard and Pimco for your investment base.


Our approach to your investments is a balanced approach with wide diversification into many asset classes. This would include both large and small US companies, utilities, international companies, both large and small as well as emerging market companies. Alternative investments such as real estate and energy are used. Some larger portfolios also have individual company common stocks. For your income and dividend investments bonds, preferred stocks, and real estate mortgages are used. For individual portfolios for you with high tax rates, municipal bonds are used.


What we do – Our practice is a combined CPA/Investment advisory practice. Traditional CPA services are combined with personal financial planning and investment management for our practice. We spend 90% of our time on client services. On the CPA side this includes tax and business planning, tax returns, IRS, state and local tax matters, continuing education and professional reading. On the investment side the time is spent managing current portfolios with investments and client related services like transferring funds. We do extensive reading. Investment groups like funds and ETFs, are continually reviewed for performance and volatility. Our subscription research sources are digested, compared to current investments and used to implement in your portfolios.


Many advisors spend 50% of their time chasing new accounts. We prefer to focus our efforts on these combined services to you. Every practice needs new business and our practice has grown thanks to your introductions to family, friends and business associates and we thank you.


In Karen’s Corner: Road Trip Readiness – I took a road trip recently and here are a few tips I hope will be helpful to those of you ready to embark on your own road trip. § Lower your auto insurance deductible before you hit the road. My deer (or elk?) encounter added $1,000 to my trip expense when it could have been $250. You should be able to adjust your policy as often as you want. § Get your car fully road-worthy. If you need new tires, windshield wipers, etc., get them now. § Bring healthy food (and lots of water). There were a couple of towns along the way that had NO options that weren’t fast food. I had some microwaveable rice dishes that didn’t require freezing and were perfect when I pulled into a roadside motel late at night. § Update family often. Especially if you’re traveling alone, consider sharing your phone’s location with one or two people so they can see your location while you’re driving and where you stop for the night. § Allow time for exploring back roads. For a few portions (L.A. to Joshua Tree, Dallas to Tulsa) I set my GPS navigation to “avoid highways” so I could really enjoy the drive and see more than just exit signs. 10/10 would recommend! Just make sure you have plenty of fuel.


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