Monthly Update
For most of us, the hard part is done regarding taxes because returns have been filed. Finish up the tax year on the front foot by sending us your 2023 tax return (upload here) so we can move forward with tax planning in 2024.
  • Stocks & Bonds Pull Back
  • Envisioning Risk
  • 529 Plan Improvements
  • Estate Plan Refresh
  • Thinking in Bets
April Pullback

Throughout the month of April, the financial markets were hit by stronger-than-expected inflation readings. The effect was a pushing back of expectations for interest rate reductions by the Federal Reserve, and a pullback of prices for stocks and bonds.

Large company US stocks, as measured by the S&P 500 Index, dropped by 4% in April. Year-to-date, US stocks are in the black by 5.9%.

Small company US stocks fell by 6.5% last month and are up a marginal 0.5% so far in 2024. Foreign stocks declined by 3.25% in April, and thus far in 2024 have gained 2.5%.

The jump in Treasury bond yields in April by somewhere between 0.2 and 0.45 percentage points, depending on the maturity, translated to a fall in bond prices.

For the month, the Bloomberg Aggregate Bond Index, the main benchmark for US investment-grade bonds, fell by 2.5%. Year-to-date, bonds have declined by 3.2%.

Below is a summary of April returns:
US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index
Envisioning Risk
For some investors, risk is a dreadful word. Risk is associated with downside and loss. Good if it can be mitigated; better if it can be avoided; best if it can be eliminated altogether.

If asked to visualize their perception of risk in canine terms, the risk-averse investor’s image of risk may look something like:

This attitude may stem from learned behavior (perhaps from parents or grandparents that lived through a life-altering event like the Great Depression of the 1930s) or from personal experience (maybe by having lost sizable sums during the Global Financial Crisis of the mid-aughts).

For other investors, risk is perceived as a necessary evil. They know that compounding is an important factor in capital accumulation.

To facilitate compounding at a satisfactory rate, they accept the risk (as discomforting as it may be) that comes with their targeted rate of return.

Fewer people associate risk with opportunity. The idea of risk as an attractive feature of the investment landscape may seem strange.

However, learning to view risk through a lens of opportunity can be good for your wealth and important for your peace of mind as an investor.

Being able to envision risk as something with beneficial aspects – though requiring regular attention and sometimes tricky to manage – is a more desirable orientation. The risk-tolerant investor’s view of risk (again, in canine terms) might be pictured like this:

In his latest client memo, the professional investor and author Howard Marks, the co-founder of Oaktree Capital Management, talks about “the indispensability of risk”. Here are a few illuminating quotes on the nature of risk:

  • As five-time world chess champion Magnus Carlsen put it, “not being willing to take risks is an extremely risky strategy.”
  • Investors must accept that success is likely to stem from making a large number of investments, all of which you make because you expect them to succeed, but some portion of which you know won’t.
  • Not every effort will be rewarded with high returns, but hopefully enough will do so to produce success over the long term… refusal to take risk in this process is unlikely to get you to where you want to go.
  • You have to sacrifice certainty (as an investor) but it has to be done skillfully and intelligently, with emotion under control.
  • The risk inherent in not taking enough risk is very real. Individual investors who eschew risk may end up with a return that is insufficient to support their cost of living.

Marks’ words are helpful in validating the need to take risk and in reminding us that, while some investments are likely to fall short of our return expectations, a willingness to bear risk in an intelligent and controlled manner facilitates investment success.

The last point from the above list seems most relevant to those who are approaching, or in, retirement – and thinking about longevity. It is worth restating: the risk inherent in not taking enough risk is very real.

The financial planning process is a particularly useful way to assess portfolio risk as it facilitates:

  • understanding the current level of risk you have
  • calibrating the degree of risk you need
  • knowing when to adjust other parts of your financial plan if the risk in your portfolio changes suddenly

For those who have a high level of concern when it comes to taking financial market risk, we find that our suite of financial planning tools can help improve risk visualization and raise the comfort level for maintaining a level of risk that supports a financial plan over the long term.

If you envision bared teeth and sharp claws when you hear the word risk, please let us know.

We’d like to use our expertise and planning tools to begin shifting your perception of risk, and to help you see it as a beneficial and desirable aspect of investing and a necessary part of your financial plan.
College Planning: 529 Update

Our colleague and college specialist Donna Cournoyer contributed the following update for college planning.

529 Plans Provide a Smart Savings Vehicle to Fund Your Child’s College Education, and New Options and Features Make 529s Even More Beneficial

Even if you do not have children old enough to be thinking about college just yet, it would be hard to escape the news on what is happening at colleges and universities right now, along with the fact that a college education has been rising exponentially for decades to almost incomprehensible figures.

Planning and financing a college education for a child is one of the biggest expenses you will face over your lifetime as parents, so planning ahead and finding smart ways to maximize what your child will receive for assistance at application time is critical.

One of the best ways to grow education savings is with a 529 college savings plan.

Investing your college savings for a child in a 529 plan allows that savings to grow tax-free. And withdrawals, if used for qualified college-related expenses, are free of tax.

Also, contributors to 529s can benefit from tax savings in some states.

Massachusetts residents contributing to a qualified 529 plan can claim a state income tax deduction of up to $1,000 for single filers and up to $2,000 for married persons filing jointly. In Rhode Island, single filers can deduct up to $500, and married people up to $1,000.

Since its inception in 1996, the main drawback of the 529 education-savings plan has been its relative inflexibility.

If the beneficiary did not go to college, or they did not use all the funds, the owner (usually parent) of the plan had few options for the account savings and faced tax penalties for withdrawing funds for other uses if they did not have another beneficiary to transfer the funds to for college costs.

Some recent changes to the rules make the 529 plan a more flexible option for parents. The SECURE Act 2.0 was signed into law in December 2022. One provision of the act, effective this year, allows for owners of a 529 plan to move unused funds in the account into a Roth IRA for the beneficiary.

New Rollover Rules

As of January 2024, 529-plan account owners can now make tax- and penalty-free rollovers of unused funds to Roth individual retirement accounts if the beneficiary is the original beneficiary or a family member.

Here are some limits and restrictions on the rollovers:

  • A provision in the Secure 2.0 retirement-savings act allows up to a lifetime limit of $35,000 in unused 529 funds to be rolled over into a Roth IRA.
  • 529 contributions and earnings in the last 5 years cannot be rolled over.
  • The 529 account must have been open for at least 15 years.
  •  Rollovers are considered contributions to the Roth IRA and are subject to the Internal Revenue Service’s yearly contribution rules. This year the limit for those under age 50 is $7,000. The beneficiary must have earned income, and the rollover amount is whatever is less, the earned income or the contribution limit.

529 Contribution Limits

There are options when considering how much to contribute to a 529 plan. It may also depend on your overall financial plan and when you start (how old your child is). It is best to think of college funding as part of your overall financial picture.

Here are some limits for funding a 529 Plan:

  • In 2024, you can contribute up to $18,000 per beneficiary a year before needing to file a gift-tax return with the IRS.
  • Married couples filing jointly can contribute up to $36,000 per child.
  • There is also a “superfund” option. The IRS allows a per-child contribution of $90,000 in 2024 without gift-tax implications. Married couples can each contribute up to $90,000 for a total of $180,000.
  • A caveat with “superfunding”: You cannot make any additional contributions to the same beneficiary for the next five years.
  • Total 529 balance limits are determined by the state you live in and fall somewhere between $235,000 and $500,000. (Massachusetts is $500,000 and Rhode Island is $520,000.)

Types of 529 Plans

  • College Savings Plans: These work like a 401(k) or IRA by investing your contributions in mutual funds or similar investments. The account will go up or down in value based on the performance of the chosen investments.
  • Prepaid Tuition Plans: These allow for the pre-purchase of tuition based on today’s rates, primarily at a public institution. (Be sure to check with your state for options and all requirements and restrictions.)

529 Plans Owned by Grandparents and Relatives - and Federal Financial Aid
In many families, grandparents (or other relatives) like the idea of creating a 529 college savings plan for their grandchildren or family members.
In the past, this affected a student’s eligibility for financial aid.

Under the new rules, the grandparent or relative accounts no longer factor in and no longer count against the beneficiary’s calculations for federal financial aid. (Some schools that use the CSS Profile form in addition to the Federal Application for Student Aid may factor this in.)

Considering the 529 Plan Option for College Funding

The features of the 529 plans make a compelling option for parents and families to save for college in a tax-efficient way. And the new Roth IRA rollover option can help your college graduate or college-aged child start to build their retirement savings.

If you are considering a 529 plan, be sure to compare plans and understand all your options thoroughly and ask for advice from your trusted financial advisor to be sure you make a decision that is best for your situation.
Estate Plan Refresh

Spring cleaning season is upon us. As the weather warms and the days lengthen, we typically have a higher level of motivation to clean and refresh our living spaces.

This is also a good time to consider an Estate Plan refresh.

As situations in life change our estate plans should be updated. For example, my oldest and middle sons are now in their mid-20s, and we’ve used this as a trigger to review our estate plan and revise certain elements of it.

It’s advisable for every estate plan to contain the following four legal documents:

  1. Will: specifies how a person’s assets should be distributed after their death, and includes an executor who will manage the estate and ensure the will is carried out as written.
  2. Durable Power of Attorney: grants another person the authority to make financial decisions on behalf of the individual if they become incapacitated.
  3. Medical Power of Attorney (aka Health Care Proxy); grants another person the authority to make medical decisions if the individual is unable to do so themselves.
  4. Advance Directive (aka Living Will): specifies an individual’s preferences regarding medical treatments they want to receive or refuse, particularly concerning end-of-life care.

Other elements of estate planning include:

  • Trusts, which can be used for various purposes, such as minimizing estate taxes, protecting assets from creditors, or managing assets for minor children.
  • Beneficiary Designations, which allow an account owner or policy holder to specify who will receive the assets in those accounts directly upon the holder’s death, bypassing the probate process.
  • Guardianship Designations, which allow parents to name a guardian to care for minor children or dependent adults if the parents or current guardians are no longer able to do so.
  • Letter of Intent, which is a non-binding document intended to guide the executor or beneficiaries on the personal wishes regarding the distribution of assets or funeral arrangements.

If you need help with sorting through estate planning issues, or thinking about how to go about a refresh if you haven’t updated your plan in some time, the two guides provided below are a good place to start (click on the images to download a pdf).

Issues to Consider When Creating an Estate Plan
Issues to Consider When Reviewing an Estate Plan
Reading Room: Thinking in Bets

Annie Duke knows a thing or two about risk and how to manage it.

As a former World Series of Poker champion, with total tournament winnings of over $4 million, Duke draws from her experiences at the card table to share methods for embracing uncertainty and making better decisions in her book Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.

For example, Duke contends that we, as humans, are bad at separating luck from skill. We are uncomfortable knowing that results can be beyond our control. And we often create a strong connection between results and the quality of decisions preceding them.

One of my favorite stories about the quality of decision making is told within the first few pages. Duke highlights events of the final seconds of Super Bowl XLIX in 2015. The Seattle Seahawks, with twenty-six seconds remaining and trailing by four points, had the ball on second down at the New England Patriots’ one yard line.

The Seahawks had three chances to walk the ball over the goal line, and a touchdown would likely have sealed the victory. But the Seahawks coach, Pete Carroll called for a pass. The Patriots intercepted and won the game.

Carroll was vilified by the press the next day. The Seattle Times opined that it was “the worst call in Super Bowl history.”

But considering clock management and end of game considerations, Carrol’s call was defensible.

Also, empirical evidence supported the call. In the previous fifteen seasons, the interception rate in that situation was about 2%. The bottom line was that it was a good decision with a bad result.

Duke tells us that Pete Carroll was a victim of our tendency to equate the quality of a decision with the quality of its outcome. Poker players call this “resulting”. It is a routine thinking pattern that trips up most of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day.

As a Pats fan, I was certainly pleased with the outcome of that game.

More importantly, though, the lessons Duke teaches throughout her book are useful for developing a better understanding of the behavioral aspects of decision making and can be directly applied to investing and risk management.
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Moore Financial Advisors
83 Leonard St, Suite 9
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