Investment Advisor - Archive

A tale of two infrastructure deals

Investment Advisor · Jul 2, 2021 ·

It appears we have a deal on infrastructure.

Maybe.

After weeks of grandstanding, posturing, and wrangling, it looks like a bipartisan infrastructure deal that both parties can live with is in the works.

Good news: no tax hikes. But you’ll want to read on because we’re not out of the woods yet.

Before we dive in, I want to wish you a very happy Fourth of July. Wherever you are, and whoever you’re able to spend it with, I sincerely hope it’s fun, relaxing, and meaningful.

Now, onto the politics.

The bipartisan deal (can’t call it a bill yet) finds $579 billion of common ground from President Biden’s original $2.25 trillion American Jobs Plan.¹

It appears we have a deal on infrastructure.

It focuses on “hard” infrastructure — such as roads, bridges, rail, and public transit projects, as well as electric vehicle infrastructure and broadband internet — that both sides can agree on.

So, is it a done deal?

Not even close.

The current framework represents a compromise that makes no one happy, and there’s still a fair bit to hammer out (including how to pay for the plan).

The deal still needs to gather broad support in both parties, especially among those who think it’s too little or too much and might seek to scuttle the whole thing.

Fortunately, it doesn’t look like higher taxes are part of the deal. Though the math looks a little fuzzy from where I’m standing, it looks like funding sources could include repurposed pandemic funding, better IRS enforcement, and possibly digging through couch cushions for spare change (joking).¹

So, that means my taxes won’t go up, right?

Not so fast.

There’s another bill on the table. And it’s a $1.8 trillion doozy.²

The second bill, called the American Families Plan, focuses on so-called “human” infrastructure and contains many Democrat-backed priorities like childcare, climate change, health care, and education.³

Basically, the initiatives that couldn’t get Republican support are packaged up in a separate bill.

It looks like the Democrats are planning to pass that bill through a reconciliation process that doesn’t require Republican support to get through Congress.

Inside that bill are the tax increases we’ve been on the watch for. Higher taxes on wealthy individuals and corporations, as well as eliminating the step-up basis on inherited assets, among other tax hits.⁴

Since the bills are independent, it’s really not certain yet which (if either) will pass. Or when.

Will one pass and not the other? Will both grind to a halt this summer?

Hard to say.

What does all this mean?

That depends on where you’re standing. For industries expecting to benefit, it means an influx of tasty government cash.

For those worried about America’s crumbling infrastructure, it represents some critical moves in the right direction.

For those concerned about the spending spree the government’s been on (and how we’re going to pay for it all), it’s another brick in a looming wall of debt that will eventually come due.

Bottom line, it’s not nearly over yet. I strongly suspect the coming weeks will be full of more politicking, more grandstanding, and more arm twisting.

I’ll reach out when I know more.

Now, go enjoy your summer. You deserve it.

Infrastructurally yours,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

¹_{https://news.bloomberglaw.com/environment-and-energy/a-win-for-roads-and-no-tax-hikes-infrastructure-deal-takeaways}

²_{https://www.cnbc.com/2021/04/28/biden-american-families-plan-whats-in-it.html}

³_{https://www.cnbc.com/2021/06/27/infrastructure-gop-senators-say-deal-can-go-forward-after-biden-walkback-.html}

⁴_{https://taxfoundation.org/american-families-plan/}

_{Chart source: https://news.bloomberglaw.com/environment-and-energy/a-win-for-roads-and-no-tax-hikes-infrastructure-deal-takeaways}

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax professional.

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

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Getting it wrong?

Investment Advisor · Jun 24, 2021 ·

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What happens when the predictions are wrong?

Is it time to panic?

Is it time to ditch our strategy?

It’s a fascinating question because it cuts right down to the question of what it means to live in an uncertain world.

Humans are wired to dislike uncertainty.¹

And we’re used to a fair amount of (often unwarranted) certainty in the models and paradigms we use to make sense of the world around us.

We’re so attracted to certainty that when economic forecasts and reports come back with “surprises” (also known as being wrong) we tend to freak out.

Especially when the news trumpets every weird bit of data like it’s a huge deal.

Over the last few weeks and months, we’ve had a lot of “surprise” reports.

Inflation surprises.

Job market surprises.

Housing market surprises.

Economic growth surprises.

Why are we so surprised?

In a year like 2021, the margin for error is greater than ever.

Predictions, forecasts, and expectations that are based on averages, trends, and other backward-looking methods are ill-equipped to handle the outliers and oddities of a year that’s unlike anything that has come before.

When in history has an entire global economy simply come to a halt?

And then arthritically restarted with many creaks and groans.

To my knowledge, it’s never happened before.

Of course the data is going to have surprises.

We’re probably going to get a lot of things wrong.

I can’t wait for the best-sellers written about all the ways we could have done things better.

So. What does that mean for you and me?

Crystal balls are out of commission.

Surprise is the order of the day, the week, and the year.

The models haven’t caught up yet (though that’s not stopping anyone from issuing very confident predictions).

So we’re being careful and looking out for the opportunities (as well as the hidden pitfalls) in these uncharted waters.

We’re cultivating patience, gratitude, and our ability to make good decisions with incomplete information.

To staying frosty,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. So many folks are making big life changes. Are you? Anything you’re excited to share? Hit “reply” and let me know.

¹_{https://www.psychologytoday.com/us/blog/the-right-mindset/202002/why-uncertainty-freaks-you-out}

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

Tax worries? Info inside…

Investment Advisor · Jun 15, 2021 ·

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Tax worries? Info inside…

Are you tired of hearing about taxes?

Me too! But here we are. Let’s dive in.

So, we’ve got dueling infrastructure bills, plus a big proposed budget with lots of spending (and higher taxes inside).

That’s a lot of expensive legislation on the table.

What’s going to happen next?

The Democrats and Republicans seem pretty far apart on their respective infrastructure deals, which opens up the possibility that Democrats could go it alone and try to pass a package entirely without Republican support.¹

That would be very difficult to accomplish.

It’s also possible that both parties could align around a smaller bill and then the Democrats attempt to pass any extras through budget reconciliation.

Bottom line, we don’t have enough clarity to know what a final infrastructure deal will look like. Given the political hurdles, the debate might drag on through summer.²

How likely are taxes to go up?

Well, my crystal ball’s about as clear as mud right now, but let’s break down what we see on the table.

President Biden’s $6 trillion proposed budget offers a lot of spending and higher taxes to pay for it.³ None of these tax hikes are a surprise as they are in line with what Biden has promised before.

Wealthy taxpayers are looking at a higher top income tax rate, higher capital gains taxes, and the loss of the step-up basis on inherited assets.

Corporations are also in the line of fire, facing an increase in corporate tax rates, which could affect profitability.

That’s currently what’s on the table.

However, Biden’s desire to raise taxes faces major headwinds (even inside his own party). His proposed budget is very much a wish list and will face challenges getting approved by legislators.⁴

It’s very possible that some (or all) of these proposed tax hikes will get axed during negotiations.

How likely is it that any tax hikes will be retroactive?

One of the big shockers coming out of recent tax news is that the higher capital gains taxes could be made retroactive to April 2021.⁵

There is historical precedent for this as it has happened a number of times before.⁶ However, retroactive tax changes are often for tax decreases.

I think it’s very unlikely for an increase to be retroactive. There is too much opposition from both sides of the aisle.

Bottom line, I do think that higher taxes are coming. But I’m not sure that they will be as big or far-reaching as the Biden administration wants.

With so much uncertainty around taxes, now is not a time to panic, but to think carefully and make adjustments where needed.

I’ll reach out if there’s anything specific we need to discuss.

Yours in tax uncertainty,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. There’s a lot going on in the economy and Washington. I’ll keep you updated along the way, but if you have any questions or concerns, please reach out. That’s why I’m here.

¹https://www.usatoday.com/in-depth/news/politics/2021/05/30/biden-infrastructure-plan-sides-odds-social-infrastructure/7451554002/

²https://www.rollcall.com/2021/05/28/budget-release-starts-a-process-that-will-run-through-summer/

³https://www.cnbc.com/2021/05/28/biden-budget-reiterates-top-capital-gains-tax-rate.html

⁴ https://www.foxbusiness.com/politics/bidens-capital-gains-tax-hike-proposal-faces-democratic-headwinds

⁵ https://www.marketwatch.com/story/biden-plans-retroactive-hike-in-capital-gains-taxes-so-it-may-be-already-too-late-for-investors-to-avoid-it-report-11622133899

⁶ https://www.natlawreview.com/article/capital-gains-rate-historical-perspectives-retroactive-changes

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

$50 burgers (should we worry about inflation?)

Investment Advisor · May 31, 2021 ·

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$50 burgers (should we worry about inflation?)

How much inflation can the country afford before we’re in trouble?

Let’s discuss.

First, let’s get on the same page about some basics.

If you’ve noticed the price of a thing increasing over time (say, your favorite candy bar or the cost of college tuition), that’s inflation in action.

Economists use the broad increase (or decrease) in prices of goods and services across the country as a measure of economic health.

When inflation is stable and predictable, it’s a sign of a basically healthy, growing economy.

But, high inflation can quickly eat away at the purchasing power of your dollars, indicating that the economy might be overheated.

Deflation, or a decline in prices, can be a warning sign of a shrinking economy.

Recent data highlighted a surprise spike in inflation, indicating that prices increased faster than economists expected last month.¹

Could this be a worrisome sign that the economy is overheated? Could $50 burgers be in our future?

Maybe.

On the other hand, could it be a temporary blip caused by the economy emerging from the pandemic-driven slowdown, complicated by supply chain issues?

Very possible.

Are the headlines catastrophizing?

They usually are.

Let’s look at the data.

The Consumer Price Index (CPI), one of the major indexes economists use to track inflation, showed a surprising spike in April, igniting fears of runaway inflation.

Core CPI (which excludes the highly volatile categories of energy and food) showed a 0.9% increase in April month-over-month and 3.0% year-over-year. That’s much higher than the expected 0.3% and 2.3%, respectively.¹

However, digging a bit deeper, we see that just two categories of goods (used cars and transportation services) accounted for the vast majority of the surge.²

$50 burgers (should we worry about inflation?)

That suggests things like flights and train travel suddenly became more expensive after a year of rock-bottom prices.

Is that runaway inflation or the normalization of prices as the world reopens?

We can’t tell from a single data point, but it’s not unusual to see prices increase in sectors that experienced a severe slowdown last year.

And the jump in used car prices? Well, many folks are turning to the second-hand market right now, in part because new cars are caught up in global supply chain bottlenecks for things like semiconductors and raw materials.³

Inflation is something to keep an eye on, especially in a year when so many of the usual variables have been thrown into flux. An ongoing surge in prices could hurt our wallets as our dollars buy less over time.

However, a single monthly spike following a very weird period for the economy is not cause for alarm yet; we should prepare ourselves for more odd numbers coming out of different parts of the economy in the weeks and months to come.

Shortages of everything from ketchup to gasoline could lead to price increases and fluctuations as supply chains attempt to disentangle from pandemic disruptions.⁴

Should we expect markets to react to inflation (and other) headlines?

A negative market reaction is not surprising after weeks of strong performance. We should expect volatility ahead as we (and the economy) adjust to a post-pandemic world.

Bottom line: Expect the unexpected in 2021.

Yours in an odd year,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. Questions about how inflation might affect your income? Hit “reply” and ask away. I’m here.

¹https://www.cnbc.com/2021/05/12/consumer-price-index-april-2021.html

²https://www.chase.com/personal/investments/learning-and-insights/article/top-market-takeaway-05142021

³https://www.npr.org/2021/04/09/985860442/auto-industry-continues-to-struggle-with-supply-chain-issues

⁴https://www.cnn.com/2021/05/08/business/supply-chain-shortages-pandemic/index.html

Chart source: https://www.chase.com/personal/investments/learning-and-insights/article/top-market-takeaway-05142021

How to Be a Smarter Investor in Uncertain Times

Investment Advisor · Jan 4, 2021 ·

In a perfect world, logic would always guide our financial decisions. Emotions wouldn’t come into play. But we don’t live in a perfect world, far from it. That means our emotions impact our financial choices more than we realize.¹

Shockingly as much as 95% of our purchase choices are made subconsciously, driven by our emotions—as little as 5% are based on logic (and that’s when we’re in the right headspace and feeling comfortable and secure).²

When we’re faced with uncertainty, fear and instinct can take over and push logic right out of the window.³ Your brain will make you want to react quickly to protect yourself and avoid the pain you anticipate from potential losses.⁴ Ironically, these instincts often make things worse. Emotional reactions can lead to poor choices and the losses you were trying to avoid in the first place.⁵

How to Be a Smarter Investor in Uncertain Times — In a perfect world, logic would always guide our financial decisions. Emotions wouldn’t come into play. But we don’t live in a perfect world, far from it.

The best way to avoid letting your hardwired biases take over? Use these strategies. They can help you fare better in any crisis. They may even make you a savvier investor.

6 Secrets to Make You a Smarter Investor

1. Avoid the Overconfidence Trap

Overconfidence is a killer. In fact, research shows that the more experience you have as an investor, the more overconfident you tend to be.⁶

Stay realistic and grounded by a strategy. Get advice before making big decisions.

2. Force Emotions Into the Backseat

Losing money hurts. The truth is that the pain of losses can actually be more intense than any satisfaction from gains. Economists call that “loss aversion.” ⁷ The pressure of anxiety or uncertainty can lead to irrational choices that actually work against our big-picture financial goals.

Don’t give into fear or panic when they show up. Focus on logic and rely on your professional for guidance.

3. Frame Performance in a More Meaningful Way

Framing is everything when it comes to evaluating performance. That’s because the way information and events are presented to us can sway our perception and influence our decisions.⁸

Look beyond short-term outcomes when framing performance. Think about your longer-term goals and the progress you are making towards them, even when short-term corrections slow your progress.

4. Neutralize Your Recency Bias

Recent events usually influence you more than those in the distant past. Why? The human brain remembers recent events more clearly and gives them outsized weight when making decisions. Your brain can mislead you by expecting more of what you’ve seen already. And that can lead to overconfidence and emotional decisions.⁹

Resist this tendency by remembering the market is constantly changing. Over the long term, bear markets recover. And no bull market lasts forever.

5. Consider Multiple Perspectives

With decision making, it’s natural to focus on one aspect or one piece of information as a starting point. Often, that can greatly influence your final choice. This is known as “anchoring bias,” which can give you tunnel vision. It can lead you to fixate on a single data point, like an investment’s price, while ignoring other key information.

To fight it, seek out more information. Think critically about multiple perspectives, and don’t forget to consider future potential.

6. Slow Down & Take Time To Think More Deeply

Humans like to make snap decisions. And, when you’re stressed out, you’re far more likely to make impulsive decisions. The problem is that “gut” decisions are made based on instinct, habit, and emotions, instead of logic and facts. When you’re in gut-decision mode, it can be much harder to make goal-oriented choices.¹⁰

Take your time when making financial decisions and let your brain shift into analytical mode. With a little time, emotions cool down, and you’ll typically consider more alternatives.¹¹

Financial Lesson: Keep Your Cool & Focus on the Long Game When Crisis Strikes

Markets and economies are never predictable or under our control. We can’t foresee or control downturns or upswings. We can only control our mindset, our emotions, and our financial choices.

That’s easy to lose sight of during periods of economic uncertainty and financial stress.

But, if you can focus on the long game and improve your mental game, you’ll come out stronger and more prepared.

That can make you less vulnerable to hardwired human biases and help you make better financial decisions, no matter what the markets are doing.

As a financial adviser, one of my most important jobs is to help you become a smarter, more capable investor. That involves using psychology and behavioral finance to help you learn more about how your brain works and improve your financial behaviors.

I’m also here to be an objective accountability partner. I talk my clients through emotional decisions, and I can be an important voice of reason and calm when markets are turbulent and it feels like the sky is falling.

If you’re curious about behavioral finance—or if you need a sounding board for a financial decision—I’m here for you. Don’t hesitate to call me at (971) 350-8068.

I’d be happy to answer your questions and share some more advice.

Sources & Disclosures

¹ https://scholar.harvard.edu/files/jenniferlerner/files/annual_review_manuscript_june_16_final.final_.pdf

² https://hbswk.hbs.edu/item/the-subconscious-mind-of-the-consumer-and-how-to-reach-it

³ https://www.psychologytoday.com/us/blog/the-divided-mind/201207/logic-and-emotion

⁴ https://www.psychologytoday.com/us/blog/science-choice/201803/what-is-loss-aversion

⁵ https://www.cmu.edu/dietrich/sds/docs/loewenstein/RoleEmotionEconBehav.pdf

⁶ https://www.sciencedirect.com/science/article/pii/S0970389615000944

⁷ https://www.scientificamerican.com/article/what-is-loss-aversion/

⁸ https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/framing-bias/

⁹ https://www.sciencedaily.com/terms/anchoring.htm

¹⁰ https://www.sciencedirect.com/science/article/pii/S2352289515300187

¹¹ https://www.scientificamerican.com/podcast/episode/making-a-decision-take-your-time-10-04-17/

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. These are the views of Finance Insights and not necessarily those of the named representative or firm, and should not be construed as investment advice.