Tag Archives: Personal investing

Business

A 39-year-old who makes $160,000/month in passive income shares his best advice

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When starting a business, it’s sometimes hard to know what to prioritize, and going at it alone can be overwhelming. But there are strategies you can use to avoid common pitfalls.

My mission is to teach people how to earn money from their passions. It’s what I did: I went from living on food stamps to building two online businesses.

Today, I run a music blog, The Recording Revolution, and a entrepreneurship coaching company. I work just five hours a week from my home office and make $160,000 a month in passive income.

Here’s what I tell my 3,000 clients to think about in the first 30 days of starting a business:

1. Be clear about how you want to spend your time.

Many new business owners I meet know only one thing: how much money they want to make. 

While that’s a great starting point, it’s incomplete. Your business should serve your life, not the other way around. So make sure it aligns with your hopes, dreams and goals.

To get clear about the type of business and life you want, ask three questions:

  1. What does a perfect day look like to you? Don’t just think about your typical workday. Consider other life activities you want to fit into your day, like exercising or spending time with family.
  2. How many hours do you want to work a week? You don’t have to follow the standard 40-hour workweek. Knowing exactly how many hours you want to work will help you better prioritize tasks.
  3. How important is time off? Some people don’t care much about taking time off, as long as they love what they do. Others value extended time off. In order to have money flowing in when you’re not working, you’ll need to have some sort of passive income stream.

2. Simplify your business model.

When I started my music education business, people told me I needed to test my sales pages, throw launch parties and pre-record a bunch of ads in order to grow.

Rather than stretching myself thin doing things that didn’t make sense to me, I kept it simple and focused on three things: creating weekly content for my blog and YouTube channel, growing my email list from that audience, and promoting the paid products I created to that list.

If you’re just starting out, develop content around your expertise to grow an audience. It doesn’t have to be perfect. You can iterate as you go and design new products based on what your customers want more of.

3. Cut out unnecessary daily tasks.

Identify what daily activities will help you earn more. Don’t waste time or burn yourself out focusing on unimportant tasks.

It might feel good to get to inbox zero or change the color of the buttons on your website, especially in the early days where you want to feel like you’ve achieved a goal. But neither of those things will make you money.

Before you start a new task, ask yourself three questions:

  1. What’s the expected outcome for doing this task? 
  2. Does it lead to more money?
  3. Can I point to a direct link between doing that task and earning income?
  4. What’s the cost of doing this instead of something else? 

4. Prioritize having fun.

People can tell if you’re just doing something for the money or if you actually love what you do. That authenticity will connect you deeper to your customers and it will sustain you for the long haul. 

You don’t want to burn out because you spent all your time doing things that weren’t meaningful to you.

I always give my students this framework when they are beginning their entrepreneur journey: Build a business around something you see yourself doing and enjoying for the next 10 years. 

Graham Cochrane is founder of The Recording Revolution and author of “How to Get Paid for What You Know.” He has helped more than 3,000 people launch and improve their own businesses. Follow him on Instagram and Twitter.

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Business

How to save above 401(k) deferral limits with after-tax contributions

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If you’ve already maxed out 401(k) plan contributions for 2022 and you’re eager to save more for retirement, some plans have an under-the-radar option, experts say.

For 2022, you can defer $20,500 into a 401(k), plus an extra $6,500 for investors 50 and older. But the total plan limit is $61,000 per worker, including matches, profit sharing and other deposits. And some plans let you exceed the $20,500 deferral limit with so-called after-tax contributions. 

“It’s definitely something higher-income people may want to consider at the end of the year if they’re looking for places to put additional savings,” said certified financial planner Ashton Lawrence, a partner at Goldfinch Wealth Management in Greenville, South Carolina.

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After-tax versus Roth accounts

After-tax contributions are different than Roth 401(k) plans. While both strategies involve saving money after taxes, there are some key differences.

For 2022, if you’re under 50, you can defer up to $20,500 of your salary into your plan’s regular pretax or Roth 401(k) account. The percentage of plans offering a Roth 401(k) saving option has surged over the past decade.

However, some plans offer additional after-tax contributions to your traditional 401(k), which allows you to save more than the $20,500 cap. For example, if you defer $20,500 and your employer kicks in $8,000 for matches and profit-sharing, you may save another $32,500 before hitting the $61,000 plan limit for 2022.

While the number of plans offering after-tax 401(k) contributions has been rising, it’s still less common among smaller companies, according to an annual survey from the Plan Sponsor Council of America.

In 2021, roughly 21% of company plans offered after-tax 401(k) contributions, compared to about 20% of plans in 2020, the survey found. And almost 42% of employers of 5,000 or more provided the option in 2021, up from about 38% in 2020.

Despite the uptick, after-tax 401(k) participation declined in 2021, dropping to about 10% from nearly 13% the previous year, the same survey showed.

Leverage the ‘mega backdoor Roth’ strategy

Once you’ve made after-tax contributions, the plan may allow what’s known as a “mega backdoor Roth” strategy, which includes paying levies on growth and moving the funds for future tax-free growth.

“That’s a nice way to go ahead and start boosting that tax-free money for those future years,” Lawrence said.

Depending on the plan rules, you may transfer the money to a Roth 401(k) within the plan or to a separate Roth individual retirement account, explained Dan Galli, a CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. And with many details to consider, working with an advisor may be worthwhile.

However, “there’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers,” he said.  

There’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers.

Dan Galli

Owner at Daniel J. Galli & Associates

While the “knee-jerk reaction” is to roll after-tax 401(k) funds out of the plan into a Roth IRA, investors need to “know the rules” and possible downsides, such as losing access to institutional pricing and funds, Galli said.

“There’s no right or wrong,” he said. “It’s just understanding the advantages, and my impression is most people don’t understand that you can do this all within the 401(k).”

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Business

Social Security COLA will be 8.7% in 2023, highest increase in 40 years

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Amid record high inflation, Social Security beneficiaries will get an 8.7% increase to their benefits in 2023, the highest increase in 40 years.

The Social Security Administration announced the change on Thursday. It will result in a benefit increase of more than $140 more per month on average starting in January.

The average Social Security retiree benefit will increase $146 per month, to $1,827 in 2023, from $1,681 in 2022.

The Senior Citizens League, a non-partisan senior group, had estimated last month that the COLA could be 8.7% next year. 

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The confirmed 8.7% bump to benefits tops the 5.9% increase beneficiaries saw in 2022, which at the time was the highest in four decades.

The last time the cost-of-living adjustment was higher was in 1981, when the increase was 11.2%.

Next year’s record increase comes as beneficiaries have struggled with increasing prices this year.

“The COLAs really are about people treading water; they’re not increases in benefits,” said Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare.

“They’re more trying to provide inflation protection so that people can maintain their standard of living,” Adcock said.

How much your Social Security check may be

Beneficiaries can expect to see the 2023 COLA in their benefit checks starting in January.

But starting in December, you may be able to see notices online from the Social Security Administration that state just how much your checks will be next year.

Two factors — Medicare Part B premiums and taxes — may influence the size of your benefit checks.

The standard Medicare Part B premium will be $5.20 lower next year — to $164.90, down from $170.10. Those payments are often deducted directly from Social Security benefit checks.

“That will mean that beneficiaries will be able to keep pretty much all or most of their COLA increase,” Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, told CNBC.com this week.

That may vary if you have money withheld from your monthly checks for taxes.

To gauge just how much more money you may see next year, take your net Social Security benefit and add in your Medicare premium and multiply that by the 2023 COLA.

“That will give you a good idea what your raise will be,” said Joe Elsasser, an Omaha, Nebraska-based certified financial planner and founder and president of Covisum, a provider of Social Security claiming software.

How the COLA is tied to inflation

The COLA applies to about 70 million Social Security and Supplemental Security Income beneficiaries.

The change is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

The Social Security Administration calculates the annual COLA by measuring the change in the CPI-W from the third quarter of the preceding year to the third quarter of the current year.

Benefits do not necessarily go up every year. While there was a record 5.8% increase in 2009, the following two years had 0% increases.

“For seniors, because they spend so much on health care, those years were difficult,” Adcock said.

A similar pattern may happen if the economy goes into a recession, according to Johnson.

What the COLA means if you haven’t claimed benefits yet

If you decide to claim Social Security benefits, you will get access to the record-high COLA.

But you will also have access to it if you wait to start your benefit checks at a later date, according to Elsasser.

If you’re 62 now and don’t claim, your benefit is adjusted by every COLA until you do.

The amount of the COLA really should not influence claiming.

Joe Elsasser

CFP and president of Covisum

What’s more, delaying benefits can increase the size of your monthly checks. Experts generally recommend most people wait as long as possible, until age 70, due to the fact that benefits increase 8% per year from your full retirement age (typically 66 or 67) to 70. To be sure, whether that strategy is ideal may vary based on other factors, such as your personal health situation and marital status.

“The amount of the COLA really should not influence claiming,” Elsasser said. “It doesn’t hurt you or help you as far as when you claim, because you’re going to get it either way.”

How a record-high increase may impact Social Security’s funds

Social Security’s trust funds can pay full benefits through 2035, the Social Security Board of Trustees said in June.

At that time, the program will be able to pay 80% of benefits, the board projects.

Tetra Images | Tetra Images | Getty Images

The historic high COLA in 2023 could accelerate the depletion of the trust funds to at least one calendar year earlier, according to the Committee for a Responsible Federal Budget.

Higher wages may prompt workers to contribute more payroll taxes into the program, which may help offset that. In 2023, maximum taxable earnings will increase to $160,200, up from $147,000 this year.

What could happen to future benefit increases

While 2023 marks a record high COLA, beneficiaries should be prepared for future years where increases are not as high.

If inflation subsides, the size of COLAs will also go down.

Whether the CPI-W is the best measure for the annual increases is up for debate. Some tout the Consumer Price Index for the Elderly, or CPI-E, as a better measure for the costs seniors pay. Multiple Democratic congressional bills have called for changing the annual increases to that measure.

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Business

Government bond yields soar as markets weigh threat of a recession

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Bond yields jumped this week after another major rate hike from the Federal Reserve, flashing a warning of market distress.

The policy-sensitive 2-year Treasury yield on Friday climbed to 4.266%, notching a 15-year high, and the benchmark 10-year Treasury hit 3.829%, the highest in 11 years.

Soaring yields come as the markets weigh the effects of the Fed’s policy decisions, with the Dow Jones Industrial Average dropping nearly 600 points into bear market territory, tumbling to a fresh low for 2022. 

The yield curve inversion, occurring when shorter-term government bonds have higher yields than long-term bonds, is one indicator of a possible future recession.  

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“Higher bond yields are bad news for the stock market and its investors,” said certified financial planner Paul Winter, owner of Five Seasons Financial Planning in Salt Lake City.

Higher bond yields create more competition for funds that may otherwise go into the stock market, Winter said, and with higher Treasury yields used in the calculation to assess stocks, analysts may reduce future expected cash flows.

What’s more, it may be less attractive for companies to issue bonds for stock buybacks, which is a way for profitable companies to return cash to shareholders, Winter said.

Fed hikes ‘somewhat’ contribute to higher bond yields

Market interest rates and bond prices typically move in opposite directions, which means higher rates cause bond values to fall. There’s also an inverse relationship between bond prices and yields, which rise as bond values drop.

Fed rate hikes have somewhat contributed to higher bond yields, Winter said, with the impact varying across the Treasury yield curve.

 “The farther you move out on the yield curve and the more you go down in credit quality, the less Fed rate hikes affect interest rates,” he said.

That’s a big reason for the inverted yield curve this year, with 2-year yields rising more dramatically than 10-year or 30-year yields, he said.  

Review stock and bond allocations

It’s a good time to revisit your portfolio’s diversification to see if changes are needed, such as realigning assets to match your risk tolerance, said Jon Ulin, a CFP and CEO of Ulin & Co. Wealth Management in Boca Raton, Florida.

On the bond side, advisors watch so-called duration, or measuring bonds’ sensitivity to interest rate changes. Expressed in years, duration factors in the coupon, time to maturity and yield paid through the term. 

Above all, investors must remain disciplined and patient, as always, but more specifically if they believe rates will continue to rise.

Paul Winter

owner of Five Seasons Financial Planning

While clients welcome higher bond yields, Ulin suggests keeping durations short and minimizing exposure to long-term bonds as rates climb.

“Duration risk may take a bite out of your savings over the next year regardless of the sector or credit quality,” he said.

Winter suggests tilting stock allocations toward “value and quality,” typically trading for less than the asset is worth, over growth stocks that may be expected to provide above-average returns. Often, value investors are seeking undervalued companies that are expected to appreciate over time. 

“Above all, investors must remain disciplined and patient, as always, but more specifically if they believe rates will continue to rise,” he added.

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What stock buybacks are, and how a new 1% tax affects your portfolio

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U.S. President Joe Biden gestures as he delivers remarks on the Inflation Reduction Act of 2022 at the White House in Washington, July 28, 2022.

Elizabeth Frantz | Reuters

The new 1% excise tax on corporate stock buybacks — a late addition to President Joe Biden’s sweeping tax, health and climate package — adds a new levy to the controversial practice.

But there are mixed views on how it may affect investors.

The Inflation Reduction Act provision levies a 1% excise tax on the market value of net corporate shares repurchased starting in 2023.

How stock buybacks work

When a profitable public company has excess cash, it can purchase shares of its own stock on the public market or make an offer to shareholders, known as a stock buyback or share repurchase.  

It’s a way of returning cash to shareholders, explained Amy Arnott, portfolio strategist at Morningstar, and more widely used than dividends, a portion of company profits regularly sent back to investors.

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If overall shares are reduced, stock buybacks may also boost earnings per share, one method of measuring a company’s financial performance.

However, critics have argued buybacks often come with the new issuance of stock options for executives and other employees. Adding new shares can negate some, or all, of share reduction benefits for regular investors from buybacks.

‘Buyback monsters’ drive the trend

With low interest rates boosting profits and values, S&P 500 companies bought back a record $881.7 billion of their own stock in 2021, up from $519.8 billion in 2020, according to S&P Global data.

A significant percentage comes from a handful of so-called “buyback monsters,” with five companies — Apple, Google parent Alphabet, Facebook parent Meta, Microsoft and Bank of America — making up one-quarter of the dollar value of stock buybacks over the past year. 

How the 1% tax on stock buybacks may affect investors

While the full impact on the stock market isn’t yet known, experts have mixed opinions on how the provision may affect individual portfolios.

“I don’t think it should have a major impact on investors,” Arnott said. But at the margins, companies with excess cash may be “slightly more likely” to pay dividends than buy back shares, she said.

It’s estimated that a 1% tax on share repurchases may trigger a 1.5% increase in corporate dividend payouts, according to the Tax Policy Center.   

And increased dividends may have an unexpected impact, depending on where investors are holding these assets, said Alex Durante, federal tax economist at the Tax Foundation.

“People with taxable accounts may potentially be impacted,” he said.

Of course, the shift from buybacks to dividends may also change the expected tax revenue, Durante added.

The provision is expected to raise about $74 billion over the next decade, according to recent estimates from the Joint Committee on Taxation.

However, since the new law won’t kick in until Jan. 1, 2023, some experts predict companies will accelerate “tax-free” stock buybacks through 2022, especially with stock prices still well below previous values. 

General Motors on Friday announced it will resume and boost share repurchases to $5 billion, up from $3.3 billion previously left from the program. And Home Depot on Thursday announced a $15 billion share buyback program.

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Millennials’ average net worth doubled during pandemic, report finds

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Covid-19 relief and record-low interest rates boosted many Americans’ finances during the pandemic. That has been especially true for millennials, who have on average built significant wealth.

Millennials, born between 1981 and 1996, have more than doubled their total net worth, reaching $9.38 trillion in the first quarter of 2022, up from $4.55 trillion two years prior, according to a MagnifyMoney report.

And millennials’ average net worth — defined as total assets minus total liabilities — also increased twofold during the same period, jumping to $127,793 from $62,758, the report found.

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However, the report finds the average millennial net worth still lags behind older generations, with Gen Xers and baby boomers reaching an average of $647,619 and $1,021,264, respectively.

Real estate more than a third of millennial wealth

With soaring home values over the past couple of years, it’s not surprising that real estate, including primary homes and other property, is more than one-third of millennials’ total assets. 

The median U.S. home sales price was $329,000 during the first quarter of 2020, and the number jumped to nearly $429,000 two years later, according to Federal Reserve data. 

However, millennials who recently bought homes may have significant debt, the report found. Nearly 63% of millennial debt is home mortgages, followed by almost 36% in consumer credit.

I would encourage millennials to focus more on their cash flow than net worth in this stage of their careers.

DJ Hunt

Senior financial advisor with Moisand Fitzgerald Tamayo

“I would encourage millennials to focus more on their cash flow than net worth in this stage of their careers,” said certified financial planner DJ Hunt, senior financial advisor with Moisand Fitzgerald Tamayo in Melbourne, Florida.

He said millennials may be “losing financial ground in the long run” if monthly mortgage payments prevent them from fully funding their retirement accounts.

Of course, the definition of a fully funded retirement account varies by individual, Hunt said.

While older millennials in their early 40s should aim to max out 401(k) contributions at $20,500 in 2022, younger workers should deposit enough to receive their company match, striving for up to 15% of gross income, he said.

Diversification is ‘name of the game’

Although owning and living in your home serves an important purpose, diversification is “the name of the game,” especially for younger investors with more time to build assets, said Eric Roberge, a CFP and CEO of Beyond Your Hammock in Boston.

If most of your wealth is home equity, it may be wise to focus on building retirement plans or a brokerage account, he said, suggesting 20% to 25% of gross income annually for long-term investments. 

“For many people, a diversified portfolio will likely provide higher returns in the long-term,” he said.

Applying for a home equity line of credit

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If you’re sitting on wealth in your home, it may be worthwhile to apply for a home equity line of credit, or HELOC, allowing you to borrow from a pool of money over time, if needed. 

“It is always a good idea to have a HELOC in place if you have substantial equity in your home,” said Ted Haley, a CFP, president and CEO of Advanced Wealth Management in Portland, Oregon.

HELOCs are typically inexpensive to set up, with lower interest rates than credit cards, and there’s no added cost until you use it. While higher interest rates may impact how much and when to borrow, it’s still a “good idea” to have one, he said.

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70% of Americans think a recession is coming. How to prepare

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Woman on her back pushing shopping cart in supermarket aisle

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Experts are weighing the odds as to how likely a recession is and how fast it could come upon us.

Most Americans — 70% — already believe an economic downturn is on its way, according to a new survey from MagnifyMoney. The online survey was conducted between June 10 and 14 and included 2,082 respondents.

A recession is defined as a significant economic decline that lasts more than a few months.

The biggest recession warning sign, which 88% of respondents pointed to, is high inflation.

Respondents also reported seeing signs of an economic downturn in housing and rent prices, with 61%; rising interest rates, 56%; the stock market, 55%; declines in consumer spending, 42%; and rising unemployment, 36%.

Some of those perceptions may lean on how people feel about the economy, rather than hard numbers. While the U.S. economy still has bright spots — including a strong overall job market and rising wages — higher prices have raised Americans’ feelings of financial insecurity, according to Matt Schulz, chief credit analyst at LendingTree, which owns MagnifyMoney.

“When something as fundamental to people’s every day lives as gas prices and grocery bills goes sky high, it really has a huge impact on the way people look at things,” Schulz said.

New inflation data expected to be ‘highly elevated’

Forthcoming inflation data could further fuel consumer’s feelings of concern.

The Consumer Price Index, which measures the average change in prices over time for certain goods and services, climbed 8.6% in May from the previous year, the highest increase since 1981.

New data for June is slated to be released on Wednesday.

“We expect the headline number, which includes gas and food, to be highly elevated, mainly because gas prices were so elevated in June,” White House press secretary Karine Jean-Pierre said during a Monday press briefing.

However, those June numbers are already out of date because energy prices have since fallen substantially, she said.

“The President’s number one economic priority is tackling inflation,” Jean-Pierre said. “And looking ahead, there are a number of reasons why we expect those high prices to ease over the coming months.”

What people are doing to prepare for a recession

The biggest worry people citied about a looming recession is the inability to pay their bills, with 44%, according to the MagnifyMoney survey.

In order to prepare for a downturn, many are focused on keeping their spending in line — 62% of respondents said they are cutting back on spending, while 39% are sticking to a budget. Those steps can be important in the event of a job loss or other financial setback, experts say. Others are building emergency savings, with 26%.

MagnifyMoney respondents also reported taking steps to shore up their income streams, with 24% working a side gig and 6% improving job performance. Another 6% reported adjusting their investment portfolio.

Meanwhile, 11% of respondents said they are doing nothing.

Reducing debt can have a ‘significant’ effect

There are proactive steps individuals can take now to get themselves in a better financial position, according to Schulz.

One in 4 respondents in the MagnifyMoney survey reported paying down debt as a way to get their finances ready for an economic downturn. As the Federal Reserve raises interest rates, people may want to consider their options to control their personal interest rates on their debts, he said.

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For those with good credit, a 0% transfer credit card can by “very, very helpful,” Schulz said.

For those who don’t have good credit, a low interest personal loan may help reduce the interest you’re paying on your balances.

By calling the issuer for a current credit card, you may be able to negotiate a lower rate. That has worked for about 70% of people who have asked in the past year, according to Schulz.

“Any of those moves can reduce your rates significantly more than the amount that the Fed is raising them by on a monthly basis, so it can be a really significant thing,” Schulz said.

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Business

Experts answer three tricky questions about Series I bonds

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The demand for Series I bonds, an inflation-protected and nearly risk-free asset, has skyrocketed as investors seek refuge from soaring prices and stock market volatility.

While annual inflation rose by 8.6% in May — the highest rate in more than four decades, according to the U.S. Department of Labor — I bonds are currently paying a 9.62% annual rate through October.

That’s especially attractive after a rough six months for the S&P 500, which plummeted by more than 20% since January, capping its worst six-month start to a year since 1970.

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Indeed, since the annual I bond rate jumped to 7.12% in November, 1.85 million new savings bond accounts have opened through June 24, according to Treasury officials. 

“I bonds are a wonderful tool for both cash reserves and investment portfolios,” said certified financial planner Byrke Sestok, co-owner of Rightirement Wealth Partners in Harrison, New York.

Backed by the U.S. government, I bonds won’t lose value. And if you’re comfortable not touching the money for 12 months, the current rate “dwarfs” other options for cash reserves, he said.

Still, there are nuances to consider before piling money into these assets. Here are answers to some of the trickier I bond questions. 

1. How does the interest rate on I bonds work?

I bond returns have two parts: a fixed rate and a variable rate, which changes every six months based on the consumer price index. The U.S. Department of the Treasury announces new rates on the first business day of May and November every year. 

With inflation rising over the past year, the variable rates have jumped, increasing to an 7.12% annual rate in November and 9.62% in May. However, the initial six-month rate window depends on your purchase date.  

For example, if you bought I bonds on July 1, you’ll receive the 9.62% annual rate through Dec. 31, 2022. After that, you’ll begin earning the annual rate announced in November.

2. How do I pay taxes on I bond interest?

While I bond interest avoids state and local levies, you’re still on the hook for federal taxes.

There are two options for covering the bill: reporting interest every year on your tax return or deferring until you redeem the I bond.

While most people defer, the choice depends on several factors, explained Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

All of these decisions come back to the ultimate purpose of this investment.

Tommy Lucas

Financial advisor at Moisand Fitzgerald Tamayo

For example, if you opt to pay taxes on your I bond interest every year before receiving the proceeds, you’ll need another source of income to cover those levies.

However, if you’ve earmarked those funds to pay for education expenses, the interest is tax-exempt, so paying levies annually doesn’t make sense, he said.    

“All of these decisions come back to the ultimate purpose of this investment,” Lucas added.

3. What happens to my I bonds if I die?

When you create a TreasuryDirect account to buy I bonds, it’s important to add what’s known as a beneficiary designation, naming who inherits the assets if you pass away. 

Without this designation, it becomes more challenging for loved ones to collect the I bonds, and may require the time and expense of going through probate court, depending on the I bond amount, Sestok explained.   

“Personally, I make sure that my clients do it correctly in the first place,” he said, explaining how adding beneficiaries upfront may avoid headaches later.

However, if you set up an account without a beneficiary, you can add one online by following the steps outlined here at TreasuryDirect. You can call support with questions, but they are currently experiencing “higher than usual call volumes,” according to the website.

With a named beneficiary, I bond heirs can continue holding the asset, cash it in or have it reissued in their name, according to Treasury Direct. 

The accrued interest up to the date of death can be added to the original owner’s final tax return or the heir’s filing. Either way, the beneficiary can decide whether to keep deferring interest or not, Lucas said.

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Business

How to buy stocks on the brink of a bear market

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It seemed like everyone was in a buying mood on Friday, except Elon Musk. The Dow Jones Industrial Average broke a six-day losing streak, the Nasdaq Composite turned in its second positive session in a row, and the S&P 500 was up over 2%, a small step back from the brink of a bear market, ending the week 16.50% off its 52-week high. But any single-day stock gains in this market are tenuous. The Dow was down for its seventh-consecutive week for the first time since 2001.

“We saw the exact same thing in 2000 and 2001,” says Nicholas Colas, co-founder of DataTrek Research. “You knew asset prices were going down, but trading action always gave you just enough hope. … I’ve had so many flashbacks to 2000 in the past three months. … If you haven’t seen it before, it’s very hard to go through, and you don’t forget.”

For many investors who flooded into stocks since the pandemic as the bull market again seemed to have only one direction, this may be their first time dancing with the bear for an extended period. For Colas, who earlier in his career worked at the former hedge fund of Steve Cohen, SAC Capital, there are a few lessons he learned from those years which “saved a lot of heartache.”

People with umbrellas pass by bull and bear outside Frankfurt’s stock exchange during heavy rain in Frankfurt, Germany.

Kai Pfaffenbach | Reuters

To start, the standing philosophy at the trading firm was to never short a new high and never buy a new low. As investors who have only ever experienced a bull market are now learning, momentum is a powerful force in both directions. This doesn’t mean investors should take any particular stocks off their radar, but stabilization in stocks isn’t going to be measured in a day or two of trading. Investors should be monitoring stocks for signs of stabilization over one to three months. An exception: a stock that rallies on bad news may be one in which the market is signaling that all the bad news is already priced in.

But for the moment, Colas said, making a big bet on a single stock as a buy-in-the-dip opportunity isn’t the best way to proceed. “The No. 1 rule is lose as little as possible,” he said. “That’s the goal, because it’s not like you’re going to kill it, and investing to lose as little as possible … when we get the turn, you want to have as much money as possible.”

Here are a few more of the principles he has at the top of his stock-buying list right now and how they relate to the current market environment.

The importance of the VIX at 36

Volatility is the defining feature of the stock market right now, and the clearest signal that investors can look to as far as the selling being exhausted is the VIX volatility index. A VIX at 36 is two standards deviations away from its mean since 1990. “That’s a meaningful difference,” Colas said. “When the VIX gets to 36 we are well and truly oversold, we’ve had the hardcore panic mode,” he said. But the VIX hasn’t reached that level yet during the most recent bout of selling.

In fact, the stock market has only experienced one 36-plus VIX close this year. That was on March 7, and that was a viable entry point for traders because stocks ended up rallying by 11% — before the situation again deteriorated. “Even if you bought that close, you needed to be nimble,” Colas said. The VIX is saying that the washout in stocks isn’t over yet. “We’re dancing in between the rain drops of the storm,” he said.

Short-term bounces are often more a reflection of short squeezes than an all-clear signal. “Short squeezes in bear markets are vicious, and it’s easier trading than being short,” he said.

Look at some of the recent action in the pandemic “meme stocks” such as GameStop and AMC, as well as pandemic consumer winners such as Carvana, and Colas says that buying those rallies “is a tough way to make a living, a tough way to trade,” but back in 2002, traders did look to the heavily-shorted names, the stocks most sold into earnings.

Whether Apple, Tesla or any other, stocks won’t love you back

For investors who made a fortune in the recent bull market riding Apple or Tesla higher, it is a time to be “incredibly selective,” Colas says, and even with the stocks you’ve come to love the most, remember that they don’t love you back.

This is another way of reminding investors of the most important rule for investing amid volatility: take the emotion out of it. “Trade the market you have, not the one you want,” he said.

Many investors learned that lesson the hard way through Apple, which was down more than 6% in the past week alone. Year-to-date, Apple had dipped into its own bear market before Friday’s rebound.

“Apple had one job to do in this market, and that was not implode,” Colas said.

Everyone from mom-and-pop investors to Warren Buffett saw Apple as “the one great place to be” and watching it break down as quickly as it did shows that the stock market’s closest equivalent to a safe haven trade is over. “We’ve gone from mild risk-off to extreme risk-off and it doesn’t matter if Apple is a great company,” Colas said. “Liquidity is not great and there is a flight to safety across any asset class you can name … the financial assets people are looking for are the safest things out there and Apple is still a great company, but it’s a stock.”

And with valuations in the tech sector as high as they have been, it’s not a slam dunk to dive in.

“You can buy it at $140 [$147 after Friday] and it still has a $2.3 trillion market cap. It’s still worth more than the entire energy sector. That’s hard,” Colas said. “Tech still has some pretty crazy valuations.”

S&P 500 sectors in a better position to rally

On a sector basis, Colas is looking more to energy, because “it’s still working,” he says, and as far as growth trades, health care as the best “safety trade” even if that comes with a caveat. Based on its relative valuation and weight in the S&P 500, “It’s a good place to be if we get a rally and to not lose as much,” he said.

History says that during periods like this, health-care stocks will get larger bids because growth investors bailing out of tech need to cycle into another sector and over the years the options they have available to turn to have narrowed. For example, not too long ago there were “growthy” retail names that investors would turn to amid volatility, but the rise of online retail killed that trade.

Colas stressed that there isn’t any evidence yet that growth investors are cycling into anything. “We’re not seeing health care yet, but as growth investors sticks their heads up again, there are not many other sectors,” he said.

What Cathie Wood buying a blue-chip means

Even as Apple capitulated to the selling, Colas said there is always a case to make for blue-chip stocks in a bear market. Autos, which Colas covered on Wall Street for decade, are one example of how to think about blue-chips for long-term investors.

The first lesson from Ford in this market, though, may be its dumping of Rivian shares the first chance it got.

“Ford does one thing well, and that is stay alive, and right now it’s batten down hatches,” Colas said. “Hit the sell button and get some liquidity. They see what’s coming and they want to be prepared to keep investing in the EV and ICE business.”

Whatever happens to Rivian, Ford and GM are likely to be around for a while, and in fact, guess who just bought GM for the first time: Ark Invest’s Cathie Wood.

This doesn’t mean Wood has necessarily soured on her favorite stock of all, top holding Tesla, but it does suggest a portfolio manager who may be acknowledging that not all stocks rebound on a similar timeline. ARK, whose flagship fund Ark Innovation, is down as much as the Nasdaq was peak to trough between 2000 and 2002, has some ground to make up.

“I don’t have a point of view on whether Cathie is a good or bad stock picker, but it was smart of her to look at a GM, not because it is a great stock ….I wouldn’t touch it here, but regardless, we know it will be around in 10 years aside from some cataclysmic bankruptcy,” Colas said. “I don’t know if Teladoc or Square will,” he added about a few of Wood’s top stock picks.

One big disconnect between many in the market and Wood right now is her conviction that the multi-year disruptive themes she bet heavily on are still in place and will be proven correct in the end. But buying a blue-chip like GM can help to extend the duration of that disruptive vision. GM, in a sense, is a second order stock buy “without having to bet the farm on the ones that are not profitable,” Colas said.

Even in a market that doesn’t love any stock, longer-term there are names to trust. After the Nasdaq bottomed in 2002, Amazon, Microsoft and Apple ended up being among the great trades of the 2002-2021 period.

Bear markets don’t end in a “V,” but rather an exhausted flat line that can last a long time, and stocks that do end up working don’t all work at the same time. GM might benefit before Tesla even if Tesla is at a $1.5 trillion three years from now. “That’s the value of a portfolio at different stages and there will be stuff you just get wrong,” Colas said.

The GM buy could be a signal that Wood will make more trades to diversity the duration in her funds, but investors will need to watch where she takes the portfolio in the next few months. And if it remains a conviction bet on the most disruptive, money-losing companies, “I like the QQQs,” Colas said. “We don’t know what will be in ARK, but we know what will be QQQs,” he said. “I would much rather own the QQQs,” Colas said, referring to the Nasdaq 100 ETF.

Even that has to come with a caveat right now. “I don’t know if big tech will be the comeback kids the same way it was, because valuations are so much higher,” Colas said. Microsoft is worth more than several sectors with the S&P 500 (real estate and utilities), and Amazon valued at over two Walmarts, “but you don’t have to be betting on Teladoc and Square,” he said.

“We knew they were good companies, and who knows where the stocks go, but fundamentals are sound and if you have to trust you’ve picked the next Apple and Amazon, that’s a hard trade,” he added.

Where Wall Street will still get more bearish

There are plenty of reasons in the macroeconomic lens to remain skeptical of any rally, from the Federal Reserve’s ability to manage inflation to the growth outlook in Europe and China, which all have a range of outcomes so wide that the market has to incorporate the possibility of a global recession to a greater extent than it normally would. But one key market data point where this isn’t being incorporated yet is earnings estimates for the S&P 500. “They are just too high, ridiculously too high,” Colas said.

The fact that the forward price-to-earnings ratios aren’t getting cheaper is telling investors that the market still has work to do in bringing numbers down. Currently, Wall Street is forecasting 10% sequential growth in earnings from the S&P 500, which, Colas said, doesn’t happen in this environment. “Not with 7%-9% inflation and 1%-2% GDP growth. The street is wrong, the numbers are wrong, and they have to come down.”

 

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Worried about a recession? Here’s how to prepare your portfolio

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“We all understand that markets go through cycles and recession is part of the cycle that we may be facing,” said certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts.

However, since no one can predict if and when a downturn will occur, he pushes for clients to be proactive with asset allocations.

Diversify your portfolio

Diversification is critical when preparing for a possible economic recession, said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan.

You can eliminate company-specific risk by opting for funds rather than individual stocks because you’re less likely to feel a company going bankrupt within an exchange-traded fund of 4,000 others, he said.

Value stocks tend to outperform growth stocks going into a recession.

Anthony Watson

Founder and president of Thrive Retirement Specialists

He suggests checking your mix of growth stocks, which are generally expected to provide above-average returns, and value stocks, typically trading for less than the asset is worth.     

“Value stocks tend to outperform growth stocks going into a recession,” Watson explained.

International exposure is also important, and many investors default to 100% domestic assets for stock allocations, he added. While the U.S. Federal Reserve is aggressively fighting inflation, strategies from other central banks may trigger other growth trajectories.

Bond allocations

Since market interest rates and bond prices typically move in opposite directions, the Fed’s rate hikes have sunk bond values. The benchmark 10-year Treasury, which rises when bond prices fall, reached 3.1% on Thursday, the highest yield since 2018. 

But despite slumping prices, bonds are still a key part of your portfolio, Watson said. If stocks plummet heading into a recession, interest rates may also decrease, allowing bond prices to recover, which can offset stock losses.

“Over time, that negative correlation tends to show itself,” he said. “It’s not necessarily day to day.”

Advisors also consider duration, which measures a bond’s sensitivity to interest rate changes based on the coupon, time to maturity and yield paid through the term. Generally, the longer a bond’s duration, the more likely it may be affected by rising interest rates.

“Higher-yielding bonds with shorter maturities are attractive now, and we have kept our fixed income in this area,” Herman from PRW Wealth Management added.

Cash reserves

Amid high inflation and low savings account yields, it’s become less attractive to hold cash. However, retirees still need a cash buffer to avoid what’s known as the “sequence of returns” risk.

You need to pay attention to when you’re selling assets and taking withdrawals, as it may cause long-term harm to your portfolio. “That is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” Watson said.

However, retirees may avoid tapping their nest egg during periods of deep losses with a significant cash buffer and access to a home equity line of credit, he added.

Of course, the exact amount needed may depend on monthly expenses and other sources of income, such as Social Security or a pension. 

From 1945 to 2009, the average recession lasted 11 months, according to the National Bureau of Economic Research, the official documenter of economic cycles. But there’s no guarantee a future downturn won’t be longer.

Cash reserves are also important for investors in the “accumulation phase,” with a longer timeline before retirement, said Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts.

I do tend to be more conservative than than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.

Catherine Valega

Wealth consultant at Green Bee Advisory

“People really need to make sure that they have sufficient emergency savings,” she said, suggesting 12 months to 24 months of expenses in savings to prepare for potential layoffs.

“I do tend to be more conservative than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.”

With extra savings, there’s more time to strategize your next career move after a job loss, rather than feeling pressure to accept your first job offer to cover the bills.

“If you have enough in liquid emergency savings, you are providing yourself with more options,” she said.

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