The Only Constant in the Tax Code is Change

For the second time in four years, we find ourselves with a president whose party holds a narrow majority in both houses of Congress. Both presidents took the opportunity to try to pass big changes to the tax code. The narrow majority tends to limit their reach. How do they get around that? They enact changes that are temporary, hoping that the changes become popular enough to be made permanent. Ultimately some things stay, and some go. The result is an ever-changing tax code.

I’m starting to view the current tax code like a quarterly earnings report. It’s useful, but it’s hard to base a long-term decision on it. How should you plan in an environment like this? Stay flexible. Be knowledgeable about the current laws and understand what might change over time. Don’t act on anything until it becomes law, and even then, consider how it actually impacts your situation.

It will be interesting to see what of Biden’s proposals become law and for how long. Then we can determine whether it should change our plans. Call me if you need help with that.

Also, this reminds me of one my fundamental investing beliefs. Never invest in something based on its tax treatment. That favorable tax treatment may change.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

What is a SPAC?

I got a call from a client the other day. Our quarterly client letter listed several speculative investments we would avoid, among them SPACs. He wanted to know what a SPAC was. SPACs have been around for a while but have become increasingly popular in the past year. Now everyone talks about them like you should already know what they are.

A SPAC (Special Purpose Acquisition Company) is a creative way for a private company to publicly list its stock. First someone creates the SPAC, which is a company formed for the sole purpose of publicly listing its shares and then looking to merge with an existing company. Let’s say I want to create a SPAC. O’Connor Acquisition Company is born. I tell all the major financial companies that I’m going to raise $2 billion and sometime in the next two years I’ll tell them what company I’m going to buy. People love gambling in the stock market today, so I raise my money and my stock starts trading.

Now I’d better find some company to merge with. If I don’t merge with a company within two years, I must give my investors their money back. Lucky for me, there are plenty of private companies looking to cash out while valuations are high. I find a widget manufacturer and announce the terms of the deal. The widget manufacturer is happy because they avoided the hassle of doing a traditional IPO (Initial Public Offering) and they can be a bit rosier about their prospects in public statements because they aren’t yet a publicly traded company.

My investors who trusted me with a blank check do get some say in the deal. They get to vote for whether the merger should happen. They also get a warrant to buy more shares at a specified price.

What do I get as the SPAC sponsor? I get a bunch of shares at a very steep discount. I hate to tell you that this will dilute the value of my investors’ shares. I also get a lot of nice fees paid to me by the investors in the SPAC.

It’s clear SPACs work out well for the sponsor. How have these deals worked out for the investors? SPAC stocks in aggregate have underperformed a small company index fund. On average you are giving up returns for the excitement and hype. If you’re here for entertainment, go ahead and invest in one. If you’re here to make money, skip them.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

A Debt Collector’s Dream

Did I ever tell you about the time I got a notice from a debt collector? No, this wasn’t a mistake in my youth. It was last May. I was quite surprised. I always pay my bills on time. My family lives below our means. I’m the one who pays all the bills in our family. I would know if I missed one, right?

My first thought was that this letter must be a scam. I went to the internet and independently verified that the company was a legitimate business. I called them to get more details on the bill I supposedly never paid.

It was an even bigger surprise to learn that I had a legitimate medical debt from almost two years earlier. You see I fell off my bicycle in rather spectacular fashion back then. This resulted in an ambulance ride, a four-hour surgery in the ER, multiple follow-up appointments and physical therapy. Somewhere along the line one of the providers never got paid.

I honestly don’t remember ever seeing a bill, but that’s okay. The debt collector offered to settle it for pennies on the dollar. I was happy to pay it and move on. I hope I made that debt collector’s day – easiest payment ever.

This unexpected expense was easily covered by the rainy-day fund. That’s why I have a rainy-day fund. It builds a little margin for error into my family’s finances. I hope you have one too. It should cover 6-9 months’ spending. Build up to that over time if you need to.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Accountability Partner

As I was getting ready to walk out the door this morning, Rae (my two-year-old) said, “Wait Daddy. You almost forgot to bring an apple.” She watches me pack my bag each day. Normally it includes two eggs, an apple, coffee, and water, among other things. I knew I was skipping an apple, mostly because I was in a hurry and didn’t want to take the 10 seconds to grab it. With my daughter’s help, I went back and grabbed the apple. I will eat healthier today thanks to her.

We all need an accountability partner in life. They help us make the choices we know we should do but might otherwise skip. For many people, this is the reason they have a financial advisor. The steps to achieve financial success are pretty easy:

  1. Identify your goals
  2. Track your progress
  3. Make needed adjustments as your goals or progress changes

It’s the implementation that gets tricky. When life gets busy, I’m here to keep you on track to achieve your goals. Let me know if you want help.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Active Management Still Doesn’t Work

The latest S&P Index Versus Active report was released today. Every six months, S&P releases this report to compare the performance of actively managed funds to their benchmarks. Each time it comes out, the conclusion is the same. Most actively managed funds underperform their benchmarks over long time periods.

This is no longer a surprise. People have been selling their high priced actively managed funds for years and replacing them with index funds. That’s a good start. Now how do we get the word out to everyone who is picking stocks themselves?

We just concluded that professional money managers who invest as their full-time job cannot consistently outperform an index. What makes you think you can do it in your spare time? Maybe you had some luck buying Moderna early last year or you’ve ridden Tesla to big gains. If that’s you, stop while you’re ahead. The odds are not in your favor.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Goals, goals, goals

The three most important things about real estate are location, location, location. If we broaden that out to all financial decisions, I think the three most important things are goals, goals, goals. If you don’t know what you’re trying to achieve with your money, it’s hard to know how to get there.

We all have different financial goals in life. Some people are working hard to give their children an ivy league education and buy a house on Lake Minnetonka. Some people want to retire at age 35. Some want to leave a giant legacy for charity.

Those different goals lead to very different financial choices. I paid off my mortgage in my 30s because I want more flexibility in my monthly budget. I have friends my age who took out as much mortgage as they could afford at record low interest rates. They are more concerned with maximizing their wealth. Both are good decisions.

The next time you compare financial decisions with someone at happy hour, make sure you share your goals. Otherwise, one of you might give the other one bad advice.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.