On It with Offit - August 2022

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AUG | 2022 Offit Advisors' New Columbia Office is Officially Open for Business! Meet With Us Great Moments from the OA Summer Outing Enjoy our recap of a fantastic evening at the Blackwell Barn & Lodge. Time-Sensitive Financial Planning Tips for MD Residents If you are a Maryland Resident and have incurred at least $20,000 in undergraduate or graduate student loan debt, and you still have at least $5,000 in outstanding student loan debt, you can apply for the Maryland Student Loan Debt Relief Tax Credit.  Apply before September 15th, 2022! If you are a business owner in Maryland with employees on payroll, you may be required to offer your employees a way to save for retirement starting September 2022!  Maryland will require employees to remit employee contributions deducted from payroll into a Maryland Retirement Savings Program Trust IRA and employees are automatically enrolled to contribute 3% of their compensation or a business owner must sponsor their own retirement plan.  Exempt business are those that have less than 10 employees, Startups that have operated less than two years, or businesses that offer or have offered within the past two years a payroll-based retirement savings plan such as a 401k or Simple IRA.  Employers are not required to make matching contributions.  If you have questions about this or want to start a retirement plan for your business, contact us today! - More than 500 food delivery drivers were surveyed about their job and found that most of them judge us on what we buy, most have been accused of stealing packages, and 80% say they’ve eaten some of the food they’re delivering. Car and Driver, June 4, 2022 - Japan has such a punctual culture that if a train is delayed five minutes or longer, you are handed a delay certificate at the arriving station to verify for your teacher or boss why you were late. Morning Brew, May 28, 2022 In 2021, the House Energy and Commerce Committee estimated that CO2 emissions from digital mining for bitcoin and Ethereum were equivalent to the tailpipe emissions from more than 15.5 million gasoline-powered cars on the road every year. Other estimates put this figure much higher. Axios, Jan 19, 2022 New home sales plunged in April, falling 16.6% from March. New home sales, which make up more than 10% of all U.S. home sales, are tracked when contracts are signed while existing home sales are tracked when contracts close. That makes new-home sales a leading indicator of where the market is headed. Bloomberg, May 24, 2022 - More than 500 food delivery drivers were surveyed about their job and found that most of them judge us on what we buy, most have been accused of stealing packages, and 80% say they’ve eaten some of the food they’re delivering. Car and Driver, June 4, 2022 The average four-year-old child laughs 300 times a day. By contrast, it takes more than two months for the average 40-year-old adult to laugh that many times. Hidden Brain Podcast On a typical day in the United States, more people ride on New York City’s subway than fly in airplanes. Morning Brew, May 28, 2022 - “It’s true hard work never killed anybody, but I figure, why take the chance.” Ronald Reagan   July Provided a Much-Needed Reprieve for Stocks and Bonds HIGHLIGHTS After enduring the worst six-month start to a year since 1970, the S&P 500 bounced back with strong gains in July – its strongest month since 2020. Furthermore, bonds also enjoyed solid results as yields continued to fall from their mid-June peak. The 10-year U.S. Treasury yield ended June at 2.98% following a multi-year closing high of 3.49% on June 14th. Rates continued to drop in July, ending the month at 2.67%. This sharp decline in rates helped bonds advance in July. For the second straight month, the Fed made a bold move by raising the Fed Funds Target Rate by another 0.75%. The Fed has raised rates by 225 basis points since March. Strong market gains leading up to and following the FOMC meeting seemed to reflect that this hike was largely priced into the market. U.S. economic growth has moderated in light of tighter financial conditions. Inflation readings remained high and manufacturing slowed, but the job market continued to make solid advances. The housing market is starting to feel the impact of higher mortgage rates as home market activity has slowed as well. We believe the economy is going through a growth scare, but we still expect positive economic growth for all of 2022. Corporate earnings will be important to monitor as earnings estimates have come down only modestly so far this year and more reductions might be necessary as the economy slows.   EQUITY MARKETS Stocks behaved much better in July with gains across the board. As stocks advanced, volatility dropped to its lowest level since April. While this reprieve in the stock market was welcomed, the broad equity indices are still well below levels from the beginning of the year. We had expected a more volatile and challenging first part of 2022 and a more constructive market in the latter part of the year. One month does not make a trend, but the second half of 2022 has clearly started on much stronger footing than the first half of the year. Concerns still exist about this Fed rate hike cycle and how much that might slow economic growth, even to the point of a potential recession. Inflation also remains elevated and midterm elections loom. However, much of that seems to have already been discounted in stock prices, and as investors look beyond these near-term challenges, opportunities exist. Style and size were consequential in July with growth and small/mid-caps rebounding the strongest compared to large-cap value. Gains were enjoyed across the board, but those areas that had been under the most pressure so far this year enjoyed the best results in July. With very little fanfare, the S&P 500 closed the month +12.6% from its closing low on June 16th. We still believe that the value/growth disparity that reached a peak in 2020 will likely continue to shift as we move through 2022 with value improving on a relative basis. That has clearly been the case so far this year, but July saw a shift to this trend. However, we believe value will still likely outperform growth on a relative basis over the near future. This better relative performance of value stocks so far this year has coincided with a rise in interest rates, which can put pressure on growth stocks. Likewise, as rates have dropped from their mid-June highs, growth stocks have rebounded. We continue to use our disciplined approach of seeking out what we believe to be high-quality companies with improving business conditions at what we believe are good prices, which those companies can be found in both the value and growth universe. The numbers for July were as follows: The S&P 500 gained 9.22%, the Dow Jones Industrial Average advanced 6.82%, the Russell 3000 rose by 9.38%, the NASDAQ Composite rallied 12.39%, and the Russell 2000 Index, a measure of small-cap stocks, jumped 10.44%. For the first seven months of 2022, the returns in the same order were as follows: -12.58%, -8.60%, -13.70%, -20.47%, and -15.43%. Looking closer at the impact of style and the clear relative outperformance of growth in July, the headline Russell 1000 Index advanced 9.31% in July while the Russell 1000 Growth Index rallied 12.00% and the Russell 1000 Value Index gained 6.63%. For the first seven months of the year, those two indices were down -19.44% and -7.08%, respectively. Growth outperformed value in July, but value has shown better relative results for the majority of the year. Small caps had a better overall July than large caps, with the bias favoring growth in this space as well. The Russell 2000 Value Index advanced 9.68% in July, while the Russell 2000 Growth Index rallied 11.20%. Year to date, those indices are still down -9.30% and -21.55%, respectively. International stocks were mixed in July and clearly lagged U.S. markets. The MSCI ACWI ex USA Index, a broad measure of international equities, rose 3.42% for the month, and was off -15.63% year to date. The MSCI Emerging Markets Index actually slid modestly lower in July, down -0.25% and was off by -17.83% year to date. As would be expected with the Russian invasion of Ukraine, emerging Eastern European stocks have been the worst regional area this year.   FIXED INCOME The yield on the 10-year U.S. Treasury continued to move lower in July after hitting a multi-year closing high of 3.49% on June 14th. The market focus seems to be shifting toward recession fears compared to inflation worries. As a result, bond yields further out on the yield curve have declined, but short-term rates, due to the ongoing Fed tightening cycle, have moved higher. The yield curve has been flattening over the last several weeks, a more typical outcome one would expect during a Fed tightening cycle. Overall, the 10-year U.S. Treasury ended June at 2.98% and dropped to 2.67% by the close of July. It is worth remembering that the 10-year yield ended 2021 at 1.52%, so this year has seen rates move significantly higher. Although bonds have been under pressure so far this year, the last several weeks have been better for bond results as rates have turned lower. Fixed income returns were as follows for July: the Bloomberg U.S. Aggregate Bond Index gained 2.44%, the Bloomberg U.S. Credit Index rose by 3.04%, the Bloomberg U.S. Corporate High Yield Index rallied 5.90% and the Bloomberg Municipal Index gained 2.64%. The 30-year U.S. Treasury Index gained as yields fell and advanced 2.70% for the month, while the general U.S. Treasury Index gained 1.59%. For the first seven months of 2022, the returns for these indices in the same order were as follows: -8.16%, -11.19%, -9.12%, -6.58%, -21.51%, and -7.69%. Clearly, bonds have struggled this year as there has been a repricing of interest rates across the yield curve and most bond sectors. Recall that in 2021, the Bloomberg U.S. Aggregate Bond Index recorded only its fourth annual decline since its inception in 1976 – and the worst year on record for the Agg was 1994 when it declined -2.92%. As it turns out, the year 1994 was another period when the Fed was in a rate hike cycle. We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment. We also believe that the role bonds play in a portfolio, to provide stable cash flows and to help offset the volatility of stocks in the long run, has not changed. Source: Clark Capital Benchmark Review, August 2022 S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index. Dow Jones Industrial Average - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.  NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. Today the NASDAQ Composite includes approximately 5,000 stocks, more than most other stock market indices. Because it is so broad-based, the Composite is one of the most widely followed and quoted major market indices. Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index which includes the 3,000 largest companies in the U.S., based on market capitalization. As of the latest reconstitution, the average market capitalization was approximately $762.8 million; the median market capitalization was approximately $613.5 million. The largest company in the index had an approximate market capitalization of $2.0 billion and a smallest of 218.4 million.  Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.  Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.  Government bonds are guaranteed by the U. S. Government and, if held to maturity, offer a fixed rate of return and fixed principal value. Securities offered through Kestra Investment Services, LLC (Kestra IS), Member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Offit Advisors is not affiliated with Kestra IS or Kestra AS. Offit Advisory Services, LLC is a tax firm but neither Kestra IS nor Kestra AS provide legal or tax advice and are not Certified Public Accounting firms.For more information on the Five Star Wealth Manager and the research/selection methodology go to: www.fivestarprofessional.com. Investor Disclosures: https://bit.ly/KF-Disclosures 6990 Columbia Gateway Drive Suite 150 Columbia, MD 21046, US Phone + Fax:  410 600 PLAN (7526) E – Office@OffitAdvisors.com W- www.OffitAdvisors.com   To schedule an appointment with us, click here! The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Want to change how you receive these emails? You can update your preferences or unsubscribe from this list.

Can I Make a Deductible IRA Contribution?

As financial advisors, we sometimes see mistakes in contributions to IRAs and Roth IRAs. While saving for your retirement is a good thing, you want to be mindful of the rules and doing it correctly.

An unfortunate mistake we see sometimes is people contributing towards IRAs and being fully aware that their deduction may not be eligible based on various reasons.  Typically if one has a retirement plan at their job, that is the best place to get a tax-deduction because it is not contingent upon other factors like an IRA can be.

This chart can help explain the various paths to determine if your contribution is actually eligible for a deduction.

Money and Your Financial Purpose

I have often seen some of the best financial planning clients – the ones who save and invest regularly, protect their assets, care about their futures and families, and are meticulous about being on track with their finances, and struggle to transition into retirement.  

They have done a tremendous job and deserve credit for putting themselves in the fortunate financial position they are in.  They have saved and lived within their means for so long, so starting to spend and use their money that they have accumulated feels so foreign to them.  They aren’t necessarily depriving themselves, but they aren’t necessarily enjoying their position to the fullest either.

But the reality is that none of us will live forever, and everyone’s day will eventually come, and no one gets a reward for being the richest person in the graveyard.  There are also many people who may have an underlying feeling or inkling as to what their purpose in life is or how they may want to use their money, but they don’t fully pursue it.  I feel there are many people who are fortunately successful with their money, but they also need to be more successful in not missing their opportunity to live their lives and enjoy a life of significance, right now!

I believe part of my role as a Financial Planner and Advisor for clients is to help them utilize their money as a tool to help them enjoy life and realize their life’s purpose.

It’s their money, they have busted their butt to earn, save, and grow it, and as long as they are not jeopardizing their own financial security, they deserve to enjoy their money and utilize it towards fulfilling their life’s purpose today.

If one reaches the point of financial security and can afford to utilize their money, while not disrupting their financial independence, they should strive to take advantage of their position and look for daily opportunities to enjoy life, pursue their dreams, and live their purpose.  For example: 

1. If you want that extra tall coffee at Starbucks, go get it!

2. If you have always dreamed of going to Fiji, go now!

3. If you have always wanted to help your Son or Daughter launch a business idea that they have had but couldn’t afford to pursue it, help them now!

4. If you have always wanted to help end poverty or end cancer, do something about it today!

If you or someone you know may fit this description, please share that you have worked hard to climb up to the mountain top, and hopefully you have had a great guide or Advisor along the way to help you reach the Summit.  Enjoy your journey along the way to the top, but also don’t forget to enjoy the view once you get there.

A Simple Truth; Stay Invested.

Hello Loyal Readership!,

Today I want to discuss some cliché but truthful facts about the market and keep it simple.

If we look back and we look forward, history has shown us that market continues to rise over time, but it is not a straight line, it is a wavy line.  I fully expect this trend to continue in the future.  Take a look at the graphic below illustrating various domestic, global, and economic events we have been through, but despite all of these unnerving moments the market continues to rise over time and someone who had invested $1 in the S&P 500 in 1970 would have $80 in 2021 just by staying invested.

A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

The problem is most investors get in their own way.  They see the current investment “apocalypse du jour” and react.  This is not to not be sensitive to whatever the event that is going on – these are real events affecting people’s lives, but just not their long-term portfolio.  For example, when oil prices quadrupled in the mid-70’s many investors were tempted to exit the market and “cut their losses”.  But those that don’t get in their own way experience the gains that the market features by just saddling in and riding for the long term.  As you can see in the graphic below, over the last 20 years, the “average investor” only received a 2.9% rate of return while the S%P 500 did 7.5%.

 The final piece I want to share as to why you need to stay invested is because the best days occur without warning, often near the worst days.  So if you ride out the worst days, you will subsequently closely capture the best days.  But if you miss the best days, that has a lasting impact on your growth.  

 Stay invested.  It’s a simple truth.

Taking Advantage of Market Volatility

Hello Loyal Readership!

I hope this message finds you well today. I know that no one enjoys the volatile periods of market, but if looked at through a different perspective, once can actually use this to your possible positive financial planning advantage!

Here are some of the top to tips to consider in a down financial market, AKA – right now!

1. Roth IRA conversion – if you have the opportunity to convert some of your pre-tax accounts into post-tax accounts and pay the tax now, but never pay the tax again, this could be an opportune time to do it. If you do it today, and convert now with lower values in your portfolio, you would pay tax on a lesser dollar amount today in exchange for a future earnings on your portfolio to never be taxed again.

2. Tax loss harvesting – if you have a non-qualified (non-retirement account) you can sell out some of your holdings that may have taxable losses and buy something similar but not the same and put a loss on your tax return. This can help you offset any positive gains in your portfolio that you would otherwise have to pay tax on.

3. Rebalance your portfolio – sell what may be high in your portfolio and buy back into what is low ie. If the designed allocation on your portfolio featured 80% stocks and now stocks represent only 62% of your portfolio, you can rebalance now instead of waiting

4. Contribute and invest more now! – with market values being lower today than they were just weeks ago, this is a buying opportunity to buy securities at a discount and “on sale”. Who doesn’t like to buy things on sale?

5. Appreciate the value of being diversified – over recent years with the S&P 500 and tech stocks being the top performing asset classes, people would say there are no need to own other asset classes. The value of having a broadly diversified portfolio with other aspects to diversification is being demonstrated now.  For example, energy was one of the worst performing asset classes of the last decade, but this year it is the biggest winner.  If you have a diversified portfolio there can be segments that do better than others in different market cycles.

7. Non-market correlated assets – there is value to having some parts of your overall wealth strategy in buckets that are non- market correlated – meaning that they don’t go down when the market goes down. This is especially true of those who are very near to approaching retirement.

7. Front- load, if you can – if you have the opportunity to put more into your 401k at your job or your IRAs or Roth IRAs, now is a great time do it.  Why not put more in now when share prices are more on sale!

8. Speculative investment fads are showing they were just fads! – Crypto, NFTs, SPACs – we have said it here and will say it again most of these will go to zero.  If you got caught up in the hype over the past couple of years, now may be a time to re-think and re-position your strategy now and moving forward.

If you found any of this helpful, or have questions about any of the above strategies, please let us know and we will be glad to help you.

Compounding Magic: Positive or negative?

We all hear a lot about how assets work for you while you sleep.  That’s true.  If you have money growing for you in a positive direction, you are making money on your money without doing anything and compounding can be magical.  

For example, if you have $10,000 invested at a 6% growth rate, it can grow to over $18,000 in 10 years, and over $60,000 in 30 years!

To take it a step even further:

If you have $10,000 invested at a 9% growth rate, it can grow to over $24,000 in 10 years, and over $148,000 in 30 years!

But, the opposite is also true.  Debts can work against you while you sleep and you need to pay off and avoid high cost debt as quickly as possible or “reverse compounding” can lead to financial ruin.  In fact, 55% of Americans don’t pay the full amount of their credit card debt each month.  

For example, if you have $10,000 of credit card debt growing at a invested at an 18% interest rate, and you pay the minimum payment of around $175 per month, you ultimately will end up paying $12,872 in interest over 10 years to pay it off, plus the $10,000 you originally owed, so the total is $22,872!

But, that is not the real total cost of credit card debt.  Because, not only are you paying the original loan balance, and the interest, but you are also paying the opportunity cost of not having that money growing for you during that time like in the previous examples above!

So over a 10 year period, you are paying $22,872 with the loan balance and interest on the credit card, but also ultimately paying $24,000 in money could have gained if it was invested and growing at 9%.  So the real cost of the $10,000 in credit card debt can total to $46,872!

Control debt before it controls you!

To expand upon this further, here are some simple tips to live by:

1. Before investing pay down high interest credit card debt. (unless you have the opportunity get a match in a retirement plan like a 401k – at least put in to capture that).

2. Establish an emergency reserve fund

3. Loved ones need money if you die – get some life insurance

4. Insure your ability to earn (disability insurance) and big assets (like your home)

5. Pay yourself first, investing in any plan with a match

6. Focus on your goals, not on keeping up with your friends 

7. Invest part of every check, even if it’s a small amount

8. Diversify investments enough to ensure financial security

Start today!

Top 8 Estate Planning Goals for 2022

Today we are going to talk about the top goals for estate planning in 2022, but really in any year!  And just a warning, I put a bunch of exclamation points below, but I promise I am not shouting, just trying to emphasize!  Also,  I am not an estate planning attorney but know good ones that can vouch for what I am saying below!

1. Put an estate plan in place! – this is important if you haven’t done it yet, get it started and have your wishes documented.

2. Sign your estate plan! – if you have created it but haven’t signed it, you need to do so!  If your documents aren’t signed it’s as if you don’t have a plan at all!  Also, you need to do this in front of a notary and two witnesses.

3. Review existing documents -  make sure there are no changes needed for who you want to receive your assets or any law changes that may necessitate updates needed.  

4. Review all of your accompanying documents – these are documents like your Health Care Power of Attorney, Financial Power of Attorney, Guardians of minor children – make sure they are all the same people you would want today.  If you did your documents 10 years ago you may have elected someone else, but today that may be different, so make sure it’s reviewed and updated!

5. If you have established a Trust, make sure its funded!  - a Trust is like a bucket and if you haven’t pointed things towards it to fund it with, you will be back to probate, and defeats the purpose of having a Trust in the first place.  If you have a Trust and it doesn’t have assets to fund it, it’s like having an expensive piece of paper that won’t do anything for you.  

6. Consider drafting a Letter of Instruction – for the person that you put in charge of your estate plan, you may want to give finer detail on your wishes and instructions.  For example, you may want to list the the types of things you may want them to distribute assets to children for, where you might want your kids to go to school, etc.  It’s not a legally binding document but it gives your agents direction as to what you would have done in that scenario and makes sure your wishes are fulfilled

7. Make sure your Fiduciaries know where you keep your documents! -   They can’t use them if they don’t have a copy of them.  So if the documents are in a safe – make sure they know where the safe is and the code or key to get in! Or if you are comfortable enough, you can send copies of your documents in advance to them now, so if something happens to you they already have a copy and don’t have to go searching for them later.

8. File a Gift Tax Return – in 2021, if you gifted any one person more than $15K as a single person or $30K as a married couple you need to file this.  In 2022, the amount is $16K as a individual or $32K as a couple.