Money Matters_01.27.2023

Money Matter$

HELPING YOU NAVIGATE THE CHANGING TIDE OF THE ECONOMY

A guide to passive investments

How selling a home affects taxes

Risks and rewards of day trading

Passive investing - a buy and hold strategy

Individuals looking to grow their money have many options at their disposal. For example, real estate is often cited as a wise investment, as the value of property has historically increased by a significant margin over the course of a lifetime, providing a substantial return all the while fulfilling the basic need for housing that everyone has. But buying property is not the only potentially lucrative long-term investment strategy.

A small percentage of investors may have the skill, savvy and iron stomach to excel with short-term investments. But most people feel more comfortable with less risky, long-term investments. For such individuals, one strategy worth considering is passive investing.

What is passive investing?

Passive investing utilizes a buy-andhold approach to gradually build wealth.

Short-term fluctuations in stock prices do not affect passive investors, as one of the principles of passive investing is that markets will post positive results over time. So passive investors do not react with alarm when prices temporarily drop, even if they drop a lot.

What is an index fund?

Index funds are one of the most recognizable forms of passive investing. The investment experts at Vanguard, the company that first started offering index funds, note that an index fund contains a preselected collection of hundreds or even thousands of stocks

or bonds or a combination of both. The theory behind this is that, even if one stock or bond is performing poorly, another within the portfolio is doing well, thus minimizing losses and saving investors the time and effort of tracking, as well as buying and selling, individual stocks or bonds.

Diversification and passive investing

Conventional investment wisdom has long touted the benefits of diversification when investing. When investors put all of their eggs in one basket, they could then lose all of their investments if the value of that investment

goes south. As previously noted, index funds include a collection of stocks, bonds or both, thus providing investors with sufficient diversification that can serve as something akin to a safety net when the values of certain stocks or bonds within the portfolio dip. Though no investment strategy can claim it is free of risk, passive investing through a vehicle such as an index fund can be a low-risk way to grow wealth over time.

Criticisms of passive investing

The investment resource Investopedia cites lack of flexibility and smaller potential returns as two significant drawbacks of passive investing. Passive investment funds are limited to a predetermined set of investments that don’t often vary, if at all. That might not sit well with individuals who prefer a more active and flexible approach to investing.

Big returns also are less likely with passive investment funds, as these funds are designed to track the market, not beat it by a wide margin. Individuals with long-term investment strategies likely won’t be turned off by this, though those looking for bigger rewards (which, notably, carry bigger risk) may be underwhelmed by the returns on passive funds.

Passive investing is a sound investment strategy for individuals who want to grow their wealth over the long haul.

Photo courtesy of Metro Creative

Don’t forget about this when selling your home

One issue that pops up regularly from clients and friends revolves around the sale of a personal residence.

It used to be that you could roll over the capital gain from your personal residence to a new home as long as the new home cost more than the old home’s sale price. That allowed you to defer the gain from the old residence into the tax basis of the new home. But this was just a deferral of the gain, not an exclusion.

At some point when you sold that property, you would have to pay tax on the final gain, which, due to increases in value, could be huge, unless you bought another home and deferred the capital gain again.

But there was a $125,000 exclusion that was available for folks older than 55. As you might expect, there were lots of provisions dealing with issues like holding period, partial business use, etc. But all that changed in 1998 and was replaced by a new set of rules included in the Taxpayer Relief Act of 1997. But there are still a lot of folks who think this old rule is still in place.

Effective in 1998, the new basic rule is this: If during the five-year period ending on the date of sale you own and use your old home for at least two years as your principal residence, you can exclude up to $250,000 of the capital gain if single, and up to $500,000 of capital gain if you are married.

There is no rollover of gain anymore and no age requirement for the exclusion. Even if there is no taxable gain, you still have to report the sale of your tax return though. And, just as in the past, there are numerous provisions dealing with partial business/rental use and other circumstances.

There are lots of wrinkles in the law. People who try to figure it out on their

own often end up scratching their heads. If you are thinking about selling your home and have questions, feel free to reach out to me. I am here to help.

– Robert H. Jones, CPA, owns Marsh Creek Capital Management in Brentwood. Contact him with questions at 510-9061630 or visit his website at www.mccm.cpa

Photo courtesy of Adobe Stock One often overlooked complication faced by those selling their home is the way it can impact their taxes.

There are lots of wrinkles in the law. People who try to figure it out on their own often end up scratching their heads.

“It’s more gambling than anything else”

Day trading in the COVID-19 world

SEAN TONGSON

Making money on the stock market for non-professionals is often a high-wire act. For day traders, it’s often a passion measured in minutes.

In theory, the basic philosophy of day trading, a form of speculation where a trader buys and sells securities within the same day to make a short-term profit, sounds simple enough. With a goal of making money off the markets by profiting on short-term price changes, the idea is enticing enough that many individuals during the COVID-19 pandemic and ensuing lockdown and social distancing measures forced an upswing with day trading due to the economic shutdown and those looking to make supplemental income, according to www.money.com.

Stock phone applications such as Robinhood and Webull introduced the stock market to the general public making it more easily accessible and therefore trade stocks, currencies, and other assets with just a few clicks of a button.

However, while the idea of day trading as a means to make a supplemental income

sounds alluring, the shifts and uncertainty of the economy today paint a different picture of the individual day trader than during the height of the pandemic.

“By and large, the answer is not good,” said Senior Financial Advisor David Roche of Brentwood. “It is fine when the markets are strong. But it’s more gambling than anything else.”

Day traders often make many trades in one day, and close out positions in that same day, meaning they sell every share of stock that they owned for the day back into cash to keep their liquidity for the following day

of day trading. One can make money in the stock market by buying a particular stock low and selling it high for a profit, or “shorting” a stock by borrowing a stock at a high price and selling it back when the price of a stock goes down. Day traders do this all day from the start of the stock market at 6:30 a.m. to 1 p.m. Pacific Time.

According to James Unno. a local stock market enthusiast, day traders are more successful when they know when to get out of a stock, even when they are in a profiting position, and who know when not to get greedy.

“Day traders utilize even the minute changes in a particular stock, sometimes a matter of cents up or down on a stock price to try and make a profit,” said Unno. “The smartest traders are the ones who know when to cut their losses to get out of a losing stock position, which is the hardest thing to do because most people usually wait too long in a position hoping for the stock price to move back up in profit. I think unless you are fairly knowledgeable on how to read stock graphs and charts, most day traders, in general, lose over time. In day trading, yes, you have an opportunity to make a lot of money quickly, but also have the potential to lose a lot of money fairly quickly as well.”

According to www.daytradereview. com, while 9.6 million people around the world are active traders, many of whom are younger than 35, only 15% of day traders survive longer than three years. Additionally, 97 percent of day traders lose money in the long run, with 80% of day traders losing money within the first year alone. Only the top 1 percent beat the market. According to Gunther Karger, a columnist with American Business City Journals, day trading gained popularity after the deregulation of commissions in the United States in 1975,

see Stock Market page 5B

Photo courtesy of Adobe Stock

the advent of electronic trading platforms in the 1990s, and with the stock price volatility during the dot-com bubble

During the COVID-19 pandemic, many individuals tried day trading due to the lockdown, social distancing, as well as to replace lost income. Companies that profited from the COVID-19 economic shutdown like Amazon.com, due to stores being closed and enabling people to shop online, Netflix due to people staying home to binge watch shows, and Peleton due to the closure of gyms and health clubs. According to Roche, however, the paradigm has shifted as the more aggressive companies are coming back down to earth, while the more “blue chip” companies like energy, oil, gas, and food are coming back and performing stronger. However, soaring inflation over the past year has been causing problems for many worldwide.

“It has taken the wind out of the sails for a lot of investors,” said Roche. “Stocks were down. Bonds were down. Real estate was down. Last year was the last year since 1969 that stocks and bonds were both down simultaneously. It was a rarity. The hope for everyone in 2023 is that inflation gets under control and interest rates stop being raised. That’s the hope across the board in every sector from first time home buyers, to developers, to security investors.”

According to Unno, inflation and the state of the economy don’t affect how one can make money, but they can be a good indicator of the overall direction of the stock

market in which inflation usually acts as a negative driving force.

“Just know in general, interest rate increases and inflation are very bad for the stock market,” said Unno. “The Federal Reserve is trying to combat inflation by increasing interest rates, so this is a controlled slowing down of the economy. The danger is increasing the interest rates too high and too fast, which would lead to a further stock market down trend and significant loss of jobs. The worst-case scenario is we go into another recession or even further depression or stagnation.”

Going forward, the general advice amongst financial advisers, stock brokers, and stock market enthusiasts alike all remain similar, reminding individuals to be smart and careful with their money and future, because decisions on investments should always align with goals.

“Personally, I think holding cash or liquidity is the best thing to do in this current environment,” Unno said. “Also, if you are new to investing, right now would actually be an opportune time to slowly dip your feet into the market since so many stock prices have dropped to pre-pandemic levels if you want to buy and hold stocks longterm. Bonds and CDs are also a good place to invest your money currently since interest rates are going up.”

Added Roche, “Make sure you have a long-term plan. Check in with your financial adviser. Make sure you are on track for what your goals are, and not to lose sight of what those long-term goals are.”

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CDs

Edward Jones

By Michael J. Amthor, Esq.

HAVE YOU REVIEWED YOUR WILL/TRUST DOCUMENTS RECENTLY? IF NOT, YOU ARE NOT ALONE

When was the last time you reviewed your trust/will? If your answer is when you first signed the document, you are not alone.

Once an estate plan is completed, many of us fail to review those documents for years, if at all. It is important to review your documents occasionally, but especially during major life events such as marriages, divorces, births and especially when a family member dies.

At a minimum, you should review your estate plan every 3-5 years to make sure they still correctly reflect your wishes.

Here are some pitfalls of an outdated will/trust:

1)  Do you know who your trustee/executor is and is that person still the right person for the job?

2)  Are your children older now compared to when the trust/will was signed? If so, how mature are they, and are the trust terms relating to your children still correct?

3)  Have your assets increased? With increased wealth comes complexity, and a review of your estate plan is in order.

4)  Do you still live in the same state? Each state has their own laws regarding wills/trusts, so a

move to a new state requires a review of your estate plan.

5)  Are there charities/religious institutions that you did not consider at the time of signing your documents that you are now passionate about?

6)  Do your loved ones know about your distribution plan after death and/or do they know whom to contact upon death? A letter of instruction placed with your estate plan documents makes it easier for all involved once you pass away. The letter should include a list of assets and updated names, addresses and phone numbers of all persons named in your estate plan documents who have decision-making power.

I highly recommend discussing these issues with an estate planning attorney. We work with people who have existing wills/trusts on a regular basis, and can certainly review them to make sure they still work for you and the ever-changing needs of your family.

If you have questions on this or any other estate planning topic, call me at (925) 516-4888. East County Family Law Group, 1181 Central Blvd., Ste A, Brentwood. www.eastcountyfamilylaw.com – Advertisement

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interest accrued but not yet paid) per depositor, per insured depository institution, for each account ownership category. Please visit www.fdic.gov or contact your financial advisor for additional information. Subject to availability and price change. CD values are subject to interest rate risk such that when interest rates rise, the prices of CDs can decrease. If CDs are sold prior to maturity, the investor can lose principal value. FDIC insurance does not cover losses in market value. Early withdrawal may not be permitted. Yields quoted are net of all commissions. CDs require the distribution of interest and do not allow interest to compound. CDs offered through Edward Jones are issued by banks and thrifts nationwide. All CDs sold by Edward Jones are registered with the Depository Trust Corp. (DTC).

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BLENDED FAMILY ISSUES IN ESTATE PLANNING; RIGHT TO OCCUPANCY VS. LIFE ESTATE

by Martin C. Johnson, Attorney at Law, MBA,RMA®, EA

A common issue in second marriages or where couples are not married is what will happen to the family home on the death of the first person. This is especially true if only one person is on title to the real property. There are a couple of different ways to handle this issue. One option is for the surviving spouse or partner to have a right to occupy the property during the remainder of their lifetime. In this case, the surviving spouse or partner would not have any ownership interest in the real property and would not be on title to the real property. Usually, during the period of occupancy, title to the real property is held by the trustee of the deceased person’s trust. The right to occupy is a personal right and therefore cannot be sold or transferred. The person with the right to occupy may or may not have responsibility for expenses related to the property. The right to occupy is also sometimes used to help adult children who need additional time to save money or resolve other issues.

A second option is for the surviving spouse or partner to have a life estate in the real property. Unlike a right to occupy, a life estate is a form of legal title to the property which the holder can sell. If the spouse or partner needs to move, they then have the “right” to sell their interest in the real property i.e. the value of the remaining life to a third party. Depending on the relationship with the other beneficiaries,

the couple may want the surviving spouse to have a life estate to avoid any dispute with the remainder beneficiaries as to the rights of the surviving spouse.

Whether you choose to include a right to occupy or a life estate in your estate plan, it is very important to address issues surrounding the occupancy. The most common issues are the payment of expenses on the property, who may occupy the property, what will happen during any period of absence and the right to sell the property if the surviving spouse only has a right to occupy the property. Given the issues involved, the couple should consider having an agreement separate and apart from the owner’s trust outlining the intentions of the parties which can be signed by the party who will have the right to occupy or be receiving the life estate interest.

If you have any questions regarding an existing Trust or would like to discuss adding the right to occupy or life estate interest to your Trust, we see people Monday-Friday for a FREE 30-minute consultation in our Walnut Creek office.

This article provides only general legal information, and not specific legal advice. Information contained is not a substitute for a personal consultation with an attorney.

Martin C. Johnson, 360 ESTATE PLANNING INC., 1600 Main St., STE. 100, Walnut Creek, CA 94596. Phone 925-289-8837

Publication Date: Feb. 10, 2023

Deadline for space reservation: Jan. 31, 2023

925-634-1441

Prices continue to rise and consumers can explore various ways to stick to their spending budgets.

How to confront frequent increases in costs of living

Prices on the majority of goods and services have increased significantly over the last year-plus. Financial analysts report that inflation has reached heights that haven’t been seen in 41 years. According to the United States Department of Labor, the consumer price index, which measures changes in how much Americans pay for goods and services, rose 0.4 percent in September.

As prices have soared, families’ budgets are being pushed. What can people do in the face of rising costs on items they need, including those who may be on fixed incomes? These suggestions may help.

♦ Frequently review your budget. Keep track of how much items cost right now. Document all spending by writing down a list of weekly expenses or utilizing any number of free budgeting apps available. Tracking what is going out may make it easier to cut costs on less essential items, such as streaming services or gym memberships.

♦ Contact service providers. You may be able to negotiate better deals with a service provider, such as a mobile phone company

or a cable television provider, if they learn you are considering leaving. If they can’t work out a deal, go with the less expensive provider. You can always switch back at the end of the term if you desire.

♦ Stop automatic payments. Having subscriptions and other bills automatically deducted from your checking account is convenient, but those rising costs may be overlooked. By viewing your bill and paying it each month, you can see where costs have increased and where you might need to rethink services.

♦ Carpool to work or school. Reduce expenditures on gasoline by sharing the costs with another person. Determine if public transportation is more costeffective than driving to work or school each day.

♦ Consider alternative retailers. Brand loyalty to one supermarket or a particular retailer is quickly becoming a thing of the past. Nowadays it is wise to comparison shop across various stores to figure out where you’re getting the best deal. Venture into stores you may not have considered previously. Divide your shopping list by store category, visiting several for different items if it leads to big savings.

♦ Unplug, literally and figuratively. Cut down on energy costs by unplugging items when not in use. Reduce dependence on devices to further stem costs on electricity and gas-powered appliances.

– Courtesy of Metro Creative

Photo courtesy of Metro Creative

Mortgage rates could level off this year

CHRIS CAMPOS

Oh, the good old days of November 2012. If you were lucky enough to take out a mortgage then you were likely paying a record low interest rate of 3.35%. Or, if you were cursed by buying a house in 1981, you might be lucky to get an interest rate of 18.5%.

According to a report in Forbes, rates for home loans seemed to be on a relentless climb in 2022, now sitting at double what they were a year ago. But a steady decline in rates the past two months have convinced more economists that rates could level off through early 2023, barring an economic downturn.

The average 30-year, fixed-rate mortgage was 6.15% for the week ending Jan. 19, down from 6.33% in the previous week, according to Freddie Mac. While mortgage rates climbed a bit at the end of December, rates are still lower than last year’s peak of 7.08% on Nov. 10 and Oct. 27 — the highest rate in more than 20 years.

Consumer Price Index numbers were released last week, and they came in exactly as expected. It should have been lower except for shelter costs posted their highest monthly numbers since 1985. This baffled economists.

Ranae Callaway, a mortgage loan originator for Homebridge Financial Service in Brentwood, said Tuesday, “For the month of December, we had the highest month-over-month increase in shelter costs. This is going from November 2021 to December 2022, and it posted the hottest increase in gain between rents and housing … Housing prices are down 0.5% month over month, rental prices are down 0.8% month over month. However, shelter is showing up 0.8%. There will be

a catch-up period and it will take some time. This is referred to as ‘lagging’.”

Callaway added, “As we go through the months and we get through the first half of the year, we will start to see the shelter costs go down. Once the shelter cost numbers catch up, we will see a meaningful reduction in inflation since 39% of core inflation numbers are shelter costs. And as we know, interest rates are driven by inflation. If we see this meaningful reduction in inflation, we will see a meaningful reduction in interest rates. Most housing experts say they’re hopeful that interest rates will level off in 2023 to around 5% to 6%, but others say the increases will likely continue into early 2023 until inflation is lower.”

Here’s how other experts predict market conditions will affect the 30-year, fixed-rate mortgage in the coming months:

♦ National Association of Realtors senior economist and director of forecasting, Nadia Evangelou: “If inflation continues to slow down–and this is what we expect for 2023–mortgage rates may stabilize below 6% in 2023.” Many buyers want to believe that the 3% may come again, however, we don’t expect to see that.

♦ Freddie Mac: Forecasts the average 30year mortgage rate to start at 6.6% in the first quarter 2023 and end up at 6.2% in the fourth quarter 2023.

♦ David Meyer, BiggerPockets “On the Market” podcast host and VP of data and analytics, said recently that while mortgage rates will likely remain volatile for the next several months, they should average below their recent peak of 7% for 2023.

♦ Erik Martin of Mortgage Reports wrote recently, “The experts we polled expect average 30-year mortgage rates to land anywhere between 5.0% and 9.31% in 2023 — a huge potential range.

♦ Mortgage Bankers Association (MBA): “Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%.”