InSight

Market InSights:

Dogecoin

More related articles:

Articles
Kevin Taylor

How to Survive a Bear Attack? (Pt. 2)

Don’t Discard your Strategy During a Recession We own stocks for a very deliberate reason. These equities are inflation resistant, generate cash, and the good companies grow at a rate faster than the economy they are a part of. They change prices wildly in a recession as people try to determine the long-term value of those features, but at the end of a recession, it is the only asset class that will be worth more after the economic slowdown. Stock prices might be down, but that doesn’t mean you need to change the way you invest. Remember you own these assets for a reason. This thought process applies to both long-term and short-term investors, and retirees. Long-Term Investors Long Term investors have the most to gain from a recession. It is very likely younger investors have been buying stocks at historically high prices. Any investor that began building their portfolio after 2001 has only had three windows where the broad market was trading below its historical average. That’s right, with the exception of three small windows in the last 20 years investors have been “overpaying” for their exposure to the market. Long-term investors might see the next window opening before their eyes right now.  If you’re regularly adding funds to a long-term account, such as a 401(k) or IRA, don’t stop during a recession. That’s huge! If you place most of your money in stocks, don’t “chase performance” and sell out of them. They may be falling in price while bonds are rising in price. Don’t chase bonds, don’t chase life insurance schemes, and don’t try to buy and sell rapidly. Don’t change what you are buying for the long term, in favor of what you see in the short term. Take advantage of the discount in prices – and keep saving.  Short-Term Investors and Retirees Although you may be uncomfortable during a bear market, don’t be tempted to sell your stocks or stock mutual funds at a loss across the board. Make two things a priority, lower your risk, and focus on cash flow. This is a time to focus on quality investments, and pair down the speculative portions of the portfolio – this isn’t the market for moonshots. Begin by accepting that speculative bets might be lost forever and start looking for investments that will survive economic contraction.  If you need income right away, it would be best to have money set aside in cash and bonds before the downturn. That way, you can withdraw from your cash while you wait for stock prices to recover. Then look for investments that can safely replace the cash you need on an annual basis – bonds, real estate, and dividend stalwarts are the keys here. If you can create a cash balance, then you can keep your more speculative investments grinding through the economic slowdown. Ideally, if you are retired, you and your CFP® know what your annual need for cash is, and what investments and institutions are working to replace that cash as fast as it is used. Investing Before and During a Recession It’s easy to go wrong during a recession if you forget or don’t understand how certain investments perform during a downturn. Or how they are related to each other. The stock market is a forward-looking vehicle. Stocks represent your right to a company’s future cash flows. So when warning signs of a recession “hit” these are the most skittish assets and will react the most violently. This doesn’t necessarily mean these companies won’t survive the recession or even become better as a result. What it means is that the amount that other people are willing to pay for a company’s future earnings is lower. When the recession becomes a thing of the past, people will begin to overpay for earnings again, and this is where you want to be in a position to sell shares to those people.  Stock prices often fall months before a recession begins, which also means that they often bounce back up before the recession is declared over. You can miss an entire downturn if you only follow the news. That is why it is vital to know the signs of a recession and recovery, and how assets perform during those periods.  These are our general expectations of asset behavior during a recession: Stocks: Prices for stocks tend to fall before the downturn begins, often selling off even at the scent of a recession. Stocks are the most volatile and skittish, during a recession. But they also have the most to gain. Good companies buy back their own stock during a recession, smart investors buy more shares at lower prices, and recessions make good companies leaner, and more financially fit for the next business cycle.  Real Estate: After stocks, Real Estate is the second most appetizing asset in a recession. And for some, it might be the most appropriate risk. Real Estate investors get the luxury of not having the mark-to-market value of their portfolio put in front of their face. During a recession, they make known their real estate is “down” but they are rarely bombarded with the daily and hourly reminders of the real estate market. This does two things, it reinforces patience for the investor and shifts their focus to the income the property produces. Both of these are things we noted above that stock investors need to learn in a recession.  Bonds: Prices for bonds tend to rise during a recession which means their yield declines. Good bonds (that is to say Bond from good companies) will often be over pursued their security – leading to an opportunity to sell overpriced bonds to scared or unprepared investors. Historically, The Federal Reserve (the Fed) stimulates the economy by lowering interest rates and purchasing Treasury bonds. But for the coming recession, this may not be the expectation as the Fed is in the first innings of raising its rates. This might be the macroeconomic element that causes this

Read More »
boulder investment management, tax planning, k-1, real estate
Articles
Kevin Taylor

How to use your K-1?

A K-1 form is a tax document used to report income, deductions, and credits for partners in a partnership, shareholders in an S-corporation, or members of a limited liability company (LLC). Here are the steps to use a K-1 for taxes: Obtain the K-1 form: If you are a partner, shareholder, or member of an LLC, your entity will provide you with a K-1 form that reports your share of income, expenses, and credits. You should receive your K-1 form by March 15th for partnerships and S-Corps and by April 15th for LLCs. Review the K-1 form: Before you start preparing your tax return, review the K-1 form carefully to make sure all the information is accurate. Check the name, address, and identification numbers to ensure they match your records. Also, review the income, deductions, and credits to ensure they are correct. Use the K-1 form to complete your tax return: You will use the information on the K-1 form to complete your tax return. If you are filing Form 1040, you will report your share of income, deductions, and credits on Schedule E (Form 1040). If you are filing Form 1120S or Form 1065, you will use the K-1 information to prepare the entity’s tax return. Report your income and deductions: The K-1 form will provide you with information on your share of income, deductions, and credits. You will report this information on your tax return. Make sure you report the information in the correct fields. Pay any taxes owed: If you owe any taxes, you will need to pay them by the tax deadline. You may need to make estimated tax payments throughout the year to avoid penalties and interest. In summary, a K-1 form is used to report income, deductions, and credits for partners in a partnership, shareholders in an S-corporation, or members of an LLC. You will use the K-1 form to complete your tax return and report your share of income, deductions, and credits.

Read More »
Boulder Investment Management
Articles
Kevin Taylor

The Hidden Risks of Bond Funds: Diversification and Redemptions

Investors often turn to bonds as a lower-risk alternative to stocks, and for many, bond funds offer a convenient way to diversify their portfolios. However, the notion that bond funds are an inherently safer bet can be misleading. In some circumstances, bond funds can actually carry more risk than the underlying bonds themselves. Let’s dive into how the supposed advantages of bond funds, like diversification and pooled investment, can sometimes be double-edged swords. The Myth of Diversification  The basic principle of diversification is “not putting all your eggs in one basket,” but what if some of the baskets are riskier than you’d like? In a bond fund, your investment is spread across various bonds issued by governments, municipalities, or corporations. While this mitigates the credit risk associated with any single issuer, it also exposes you to sectors or asset classes you might prefer to avoid. Unwanted Risks Bond funds often hold a wide range of assets, including corporate bonds, high-yield (junk) bonds, and even international bonds. For example, if you buy into a fund for its exposure to high-quality corporate bonds, you might unintentionally take on exposure to lower-rated or riskier bonds. You may also be exposed to interest rate risk, credit risk, and even currency risk if the fund invests internationally. Lack of Control  Unlike direct bond investments, where you can pick and choose your level of risk and yield, bond funds don’t offer the same level of control. You rely on the fund manager’s judgment, which may or may not align with your own risk tolerance and financial objectives. The Domino Effect of Redemptions One of the biggest risks with bond funds comes from the potential for large-scale redemptions. Unlike individual bonds, which you hold until maturity unless you decide to sell them, bond funds are subject to the investment whims of all the participants in the fund. Forced Selling If a significant number of investors decide to pull out of a bond fund, the fund may have to sell bonds to provide the cash for redemptions. This is especially problematic if the bonds have to be sold in a declining market, as it locks in losses that are passed on to remaining investors. Liquidity Concerns The need to meet redemptions could force the fund to sell its most liquid assets first, leaving the fund holding a larger proportion of illiquid or lower-quality bonds. This can affect the fund’s performance and potentially increase its volatility. The Importance of Due Diligence The key takeaway here is that while bond funds offer the advantage of professional management and diversification, they are not without their risks. Due diligence is crucial before adding any investment to your portfolio, including bond funds. If you or the person who manages your money insists on just stuffing more money into bond funds, it comes at a substantial cost you you in the form of added fees, performance, and risks.  Investors should carefully read fund prospectuses and reports, understand the risks associated, and possibly consult a financial advisor to see if the fund aligns with their risk tolerance and investment goals. Only then can you make an informed decision about whether a bond fund is a right investment for you.  

Read More »

Pin It on Pinterest