Almost half of active managers succeeded!

Here is an actual Wall Street Journal headline that popped up on my phone last week, “Almost Half of Stock Pickers Beat the Market in Early 2022 Selloff.” The subheading went on to exclaim that this was their best performance in 13 years.

Let me get this straight. 49% of U.S. large cap stock pickers achieved their goal by beating the S&P 500 Index over the first six months of 2022. That means 51% failed. And this is the best they’ve done collectively in over a decade. What is there to celebrate here? Was the bar really so low that more than half failing is considered a success?

Before you tell me that’s too short of a time period, the long-term numbers are consistently worse. You can see why we don’t overpay for traditional stock picking. I rest my case.

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 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

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.

Up to $20k in Student Loan Forgiveness

From 1980-2020 the average cost of college increased by 180%. In 2020, more than half of bachelor’s degree graduates walked away from graduation with debt. The average debt among them was $28,400. Early in the pandemic, the Trump administration put a pause on payments for federal student loans and the accrual of interest on those loans. While most other pandemic assistance initiatives have since gone by the wayside, this one was finally set to expire on September 1st. Last week, President Biden announced a move that would not only extend the pause on loan payments until January 2023 but would also provide widespread debt forgiveness to current and former students. While the plan may not affect you directly, it could impact your child, grandchild, friend, neighbor, and so on.

Do I Qualify?
Borrowers of most federal student loans taken out prior to July 2022 qualify for forgiveness. The income threshold for tax years 2020 and 2021 is $125,000 if filing single, and $250,000 if married filing jointly. It should be noted that these eligibility thresholds apply to the student’s parents if they are still dependents. This is of particular importance for current students. You also qualify whether or not you finished school and graduated.

Which Loans are Eligible for Forgiveness?
Federal undergraduate, graduate, and Parent PLUS loans all qualify. PLUS loans allow parents to borrow funds for their children’s undergraduate studies. The loans are not need based, but the student must be enrolled full-time. The amount borrowed can be as high as the total cost of schooling. Borrowers with Pell Grants can qualify for up to $20,000 in relief. Pell Grants are also only available to undergraduate students, although part-time students do qualify for them. They are given on the basis of substantial financial need. Private loans, from an institution such as a bank for example, would not qualify.

How Much is Forgiven?
Borrowers are eligible for up to $10,000 in relief, and that figure jumps up to $20,000 for those with Pell Grants. This is capped at the amount of debt you have, if that figure is less than $10,000.

How Many People Will This Actually Affect?
It is reported that 43 million people are eligible to claim forgiveness, and 20 million of them will see their student debt completely eliminated.

How Do You Apply?
The Department of Education already has the income information for about 8 million borrowers. Those people likely will not need to apply. However, most borrowers will need to apply through a form that should become available by the end of the year.

What if I Made Payments During the COVID Pause?
The pause went into effect on March 13, 2020. If you continued to make payments on your federal student loans during the pause, you could be eligible for a refund. If your payments would have qualified for forgiveness, it would be wise to collect that refund.

Will My Remaining Loans be Affected?
If you still have student loans leftover after the forgiveness, those loans may undergo a new income-based repayment plan. Whereas the old plan capped bills at 10% of the borrower’s discretionary income, they will now be capped at 5%. The goal of this is to decrease the average annual loan payment required for former students.

Will This Plan Come to Fruition?
It will be interesting to see how this plays out in the coming weeks. Simply put, this has never been done before. Traditionally, an act of Congress is required to change the loan system. However, now that the plan has been announced, it would likely create quite an uproar if it were to be challenged and/or overturned.

About the Author: Jared Konen

Jared is an Investment Advisor Associate for our Wealth Management Team. He focuses on client service, as well as reporting and planning. Prior to joining Cherry Tree, Jared interned with Bernicke Wealth Management, where he was introduced to all different areas of a wealth management firm.
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.

Fraud Warning

I’ve seen an uptick in fraud attempts lately. Let me give you a few recent examples:

Someone called my father-in-law claiming he’d won Publishers Clearing House. They said he couldn’t tell anyone or he’d lose his prize. He just needed to send them some money to cover the taxes. He called me to confirm his suspicions that it was fraudulent. – thwarted

Someone posing as Geek Squad called a client and gained access to their home computer.

Someone posing as Amazon called a client and gained access to their home computer.

Someone posing as the tax authorities called a client and demanded payment of back taxes. – thwarted

I can’t even list the number of bogus emails that come at everyone regularly. Our team also had loved ones and friends who experienced a catfish fraud (online phony love interest asking for money), a fraudulent kidnapping ransom request, a fraudulent bail money request, and a fraudulent request from a hockey coach asking for help buying gift cards. Some were thwarted. Some weren’t.

What can you do to protect yourself?

  • Don’t answer calls from numbers you don’t recognize. If it’s important, they’ll leave a message.
    • If it’s a message from the IRS, delete it. The real IRS sends letters if there’s an issue. They won’t call you. Heck, they don’t even have enough representatives to answer their phones.
  • Don’t click on links from emails you weren’t expecting. If it’s a legitimate issue, they’ll reach out again.
  • If you do want to verify something suspicious, open a new web browser to access your account the way you always do. From there find a trustworthy phone number to call. That will ensure that you don’t accidentally call a phony number or click on a malicious link. – Need help with this step? Ask me.
  • Most of all, slow down and take your time. If you’re being rushed to do something, that should be a red flag that something is wrong.

The fraudsters are not going away. In fact, they continue to get better. I’ve seen some of my brightest clients get fooled. Don’t be embarrassed if it happens to you. Reach out to us. We can help lock down your accounts and look for suspicious activity.

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 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

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.

The Step-Up (or Down) in Basis

While the step-up in basis rule at death has been on the chopping block in Washington the past few years, it has maintained its form through each challenge. The cost basis rule, when used correctly, can save the next generation (or surviving spouses) anywhere from 10’s of thousands of dollars to millions in select cases.

As in physics, there is an equal and opposite reaction: in tax law, for all of the benefits offered, there are plenty of situations where they can turn detrimental.

The prime example in my mind is the step-up in basis. Step-up in basis, in its most basic definition, is the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent’s death. These investable assets can range from stocks, mutual funds, real estate, precious metals to your home if held outside of a retirement account. Because of the growth in many of these markets over time, planning for the step-up in basis can be an incredibly important element of estate planning.

As many stock market indexes across the board have seen double digit losses so far this year, some recent investors may find themselves holding assets underwater for the time being.

 Enter “the Step-down in basis”.

Straight from the definition above, at death the ”adjustment in the cost basis of an inherited asset to its fair market value.” It most certainly doesn’t clarify that the adjustment must be up or down. In financial planning terms, by passing away with an imbedded capital loss in an asset, neither you nor the next generation can use that capital loss to offset other capital gains.

To avoid losing these tax benefits, one must be diligent in knowledgeably tax-loss harvesting later in life.

While we can’t predict where the market will go nor how long we will live, being diligent about both a step-up and step-down in basis can help pass on the most legacy to those we care about.

About the Author: Conner Kolodge

Initially focused in financial compliance, Conner transitioned into personal finance to utilize his knowledge and skills to make meaningful differences in the lives of family and friends. He strives to connect client’s life goals with their finances.

Conner has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine for 2019 and 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.

Money Market Funds – A 2022 All-Star

Naming investment all-stars for the first half of 2022 is somewhat like naming an all-star on Minnesota Twins teams in the lean years. There’s somebody who’s among the best players on the team, but is the performance worth celebrating? Yet baseball has a requirement that every team be represented with an all-star. In that spirit, I would like to name money market funds as my 2022 investment all-star.

Give me a second as you roll your eyes. Yes, money market funds are a top performing fund just because they didn’t lose money. It wasn’t a tough competition. That’s not why they are my all-star though. They are an all-star because they are quickly becoming a top choice for your emergency fund dollars. That’s right – money market funds are paying a competitive yield again.

Most money market funds are paying above 1% interest today, and you can expect that rate to keep rising as the Fed continues to raise interest rates. Compare that to your bank account or default cash option in your brokerage accounts. Yields in those funds still around with 0.1%. Banks are flush with cash and don’t need your deposits. If you’re sitting on a lot of cash, consider a money market. It has daily liquidity, a steady $1 value, and a better than average interest rate.

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 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

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.

My Oversimplified Financial Plan

Financial planning is easy in your early years. If you’re wise and received good advice, you started saving 12%-15% of your income from your first day of full-time work. That works for the first few decades.

When you hit middle age, you will want to see if you’re on track to retire comfortably. That’s when you start to realize there are a lot of assumptions built into a long-term financial plan. Thankfully big companies like JP Morgan and Fidelity put together savings checkpoints that give you a clue about whether you’re on track.

As an example, Fidelity says have 3x your salary saved by age 40. JP Morgan breaks it down to a more specific multiple based on your salary. Those are super helpful for busy professionals who want a basic idea.

By the time you hit your 50s, you ought to take a closer look at when you can retire and what you can spend. Cherry Tree has a one-page financial plan that we use with our clients. But what if you’re looking for something simpler? Try this:

Step 1: Add up all your assets excluding your primary residence.

Step 2: Multiply your assets by 4% (we can argue about whether the number should be 3% or 5%, but 4% works for a rough plan).

Step 3: Multiply your monthly Social Security and pension payments by 12.

Step 4: Add the numbers from Step 2 and Step 3.

Example

Step 1: Assets = $1,500,000
Step 2: $1,500,000 x 4% = $60,000
Step 3: Monthly Social Security = $3,000; $3,000 x 12 = $36,000
Step 4: $60,000 + $36,000 = $96,000 annual spending if you retire today

That’s what you’ve saved up for today. If you want to know how much you can spend on the date you retire, you need to use a more detailed calculator. Reach out to me if you want help, or check out your 401k provider. I’m sure they have one where you can add in outside assets.

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 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

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.