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  • Writer's pictureMichael Handy

Third Quarter 2021 Newsletter

Third Quarter 2021 – The third quarter was flat, reducing the one-year and three-year investment returns. Small US outpaced other areas of the market for the one-year period (red). The US was strong for the three-year period (green) in all areas compared to International. Real estate had volatility during the three years and returned 12.14%. The 60/40 blended return at 9.37% for the three-year period showed a strong overall market for a diversified portfolio.

Statistics are from Morningstar Advisor Workstation which are considered reliable.

What’s ahead for the market Uncertainty and volatility – The market has many challenges ahead with the Fed monetary policy and inflation leading concerns. The Covid-19 pandemic appears to be abating with strong continuing resistance among the unvaccinated. Millions of Americans are upset with current conditions and prospects. All national politicians have approval ratings below 50% and only 32% of Americans think we are headed in the right direction according to surveys at RealClearPolitics.

Long term prospects for the market look promising but the above concerns create a bumpy path leading to volatility. As always, a well-diversified portfolio is the favorable path.

Valuations – Equities continue to trade at high multiples with some easing as shown in the third quarter. Many workers are not returning to post pandemic employment as expected in the economic models. Underemployment has created supply chain problems and increased wages due to labor demand. Microchip supply shortages continue. These factors affect sales, earnings, and market prices.

Inflation – A recent Fed quote on inflation – “Inflation rates are already above 4% and American consumers expect inflation to remain at 4% over the next three years according to a Federal Reserve Bank of New York survey.” Inflation rates seem to be returning to a more normal range.

Tax proposalsMajor proposed changes affecting you as of this letter publishing date follow. These are still proposals and surely certain compromises may be made.

· Capital gains rates would increase to a 25% top for MFJ income over $450k. The 0% and 15% rates would still apply to lower incomes. The rates would be retroactive to September 13, 2021. Year end “capital loss harvesting” remains one of our techniques.

· Capital loss carryovers should still be available to offset future capital gains. Capital gain taxes affect taxable portfolios, not IRA and 401k portfolios. Qualified dividends from US corporations should still be taxed at capital gains rates. Oregon taxes capital gains at ordinary tax rates.

· The corporate tax rate will increase from 21% to 25%. This will lower earnings of companies, and may increase inflation as companies raise prices to compensate.

· Higher individual taxes are instore for incomes over $400k. The top rate could go from 37% to 39.6%. Higher income individuals could also have the 3.8% investment tax and 25% rate on capital gains. There is an added 3% surtax rate proposed on incomes over $5M. You will want individualized projections for your tax position.

· The estate tax exemption would decrease from roughly $11.7M to $5M. The provision to eliminate step-up in basis on estates is silent. May it RIP.

· SALT (state and local tax deduction) is still in limbo.

Portfolios – Your key to investment performance long term continues to be diversification.

The future is unknown and unknowable. Investments from world class managers at Dimensional, Vanguard, and PIMCO are in your investment base.

Best in Class – Your investments are balanced with wide diversification into many asset classes. Included are large and small US companies, utilities, and international companies. Alternative investments include real estate and energy. Income and dividend investments include bonds, preferred stocks, real estate mortgages and municipal bonds. We are independent advisors using unbiased research for your investments and use Best in Class as the investing principle.

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