Broker Check

Monday Money Report

| May 02, 2022

Wow! Fasten your seatbelts because the ride is bumpy. Stocks declined, then rose, then declined again last week. We’re still in earnings season, and the S&P 500 is tracking a 4.3% growth year over year in revenue, with 86% of reporting companies beating expectations. Communist China announced they will prop up their ailing economy even as Covid shutdowns continue. Even still, investors are worried about the ongoing challenges in China impacting the supply chain further, as well as the continued war against Ukraine, and the uncertainty around the Fed’s efforts to control inflation and manage the economy to a soft landing.

It seems like a lot of bad news, and a lot to worry about. We are down for the year and officially in correction – a 10% or more drop – territory. But we’ve been there before.  And every single time, the market has recovered.  

While equities are up and down, bonds are just down. And we expect them to continue falling. When interest rates increase, bond prices fall.  If I buy a bond from Cogswell Cogs that pays 3% interest, and interest rates are steady, I would expect to sell that bond for what I paid for it.  If interest rates fall, and I have a choice of buying a new bond from Spacely Sprockets that pays 1% or buying an existing bond from Cogswell Cogs that pays 3%, I would pay more for the 3% bond – I’m going to earn three times the interest over the life of the bond.

When rates rise, and new bonds pay more, my existing bonds are not worth as much if I need to sell them.  But if I hold the bond to maturity, meaning I keep it until the principal is repaid, I don’t lose anything.  Then, I can reinvest the principal into a new bond, paying a higher interest rate.  Which means that, if you hold bonds, do just that, hold the bonds. You’ll see the amount you can resell them for fall, but the face value stays the same. Over time, you’ll continue to reinvest and increase the income, or yield, on your portfolio.

Speaking of bonds, I had the discussion multiple times last week about where to hold bonds. It sounds very counterintuitive, but for people in a high tax bracket and with larger portfolios, it can make sense to hold your bonds inside your retirement accounts. Everything inside a retirement account is going to eventually be taxed at ordinary income rates.

If you hold bonds in a taxable account, they will usually be municipal bonds, because the income is largely free from federal tax.  The downside is that they also typically pay a lower interest rate. Moving them to a retirement account usually provides more income.

If you hold stocks in a taxable account, you can harvest losses, and any long-term gains are taxed at more favorable capital gains rates. Holding stocks in a retirement account will result in ordinary income on all gains, and no loss harvesting.

Your action item for the week is to review your tax return and adjust your withholdings.  A big refund means the government is getting an interest free loan from you.  And a big tax bill can also mean a failure to pay penalty if you didn’t withhold enough. Adjust withholding now to hit that sweet spot in the middle.

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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.