Wealth Management
Larry Swedroe, Chief Research Officer for Buckingham Strategic Wealth, said investors are paying for elevated valuations due to the huge swell in inflows to ESG and the ‘greenium’ on assets. He calls for ESG to continue to outperform before leveling off and underperforming afterward. Swedroe has been criticized for this thought process because of the success of sin stocks, but he contends sin stock success has really been due to outside factors. The best thing to do in the short run according to Swedroe is to perform the fundamental value analysis but check ESG criteria afterward to get an extra boost in price.
Finsum: If greeniums are due to greenwashing, ESG could be in dangerous territory when regulation inevitably shows up.
The Secure act 1.0 has made it a feature of your retirement 401(k) to show exactly what the value of your portfolio converted to an annuity upon retirement at 67. The secure act is one factor that is spurring interest in annuities. The other driving factor is extremely volatile markets which have more investors concerned about a guaranteed plan. Still, drawbacks include inflation, which can eat away at a fixed pie and that risk is at an all-time high, as well as complexity where investors feel burdened. The bottom line is an investor will need $100k for a $440 monthly check, $400k for a $1,760 monthly check, and a million dollars for $4,400 monthly.
Finsum: Consider different annuity products like variable annuities that better match the concerns that are biggest for you as an investor.
President Biden’s 2023 federal budget levy’s a new ultra-wealthy tax that would apply 20% total income tax on those with a net worth of more than $100 million. Notably in the deal, it opens the window to tax unrealized capital gains or any asset growth. The bill is expected to meet a brick wall in congress however as even moderate Dems will have a difficult time supporting it. Biden’s selling point is the expected $360 billion in payments toward the deficit in the next decade. However, the senate proposed a very similar bill last year that was shut down by congress.
Finsum: Taxing unrealized gains is a slippery slope, and hopefully would never trickle down to different wealth classes.
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Dan Egan, VP of behavioral finance at Betterment, suggests that personality types play a critical role in invstmet decisions such as tax-loss harvesting. Investors' neuroticism and emotional intelligence are linked to the strategies they pursue and their behavior can be predictable. For example, investors with low neuroticism may not care too much about the day-to-day movements in their portfolio they don’t take advantage of tax-loss strategies for their accounts. Betterment offers robo-advisors that will offset these types of forecastable decisions in a portfolio.
Finsum: Investors' own bias can lead them to shut the doors on opportunities that could save them lots of money.
Annuities have been one of the hottest topics since the Secure Act 1.0, allowing them to be a part of retirement plans, and that could be ramping up. The House of Representatives has approved the Secure Act 2.0 with an overwhelming majority of 414-5. Provision 201 would allow the minimum requirements distribution age to be increased from 72 to 75. Another key part of the bill is the automatic enrollment in 401(k)s with a very high contribution percentage. Life insurers are ecstatic about the bill and many believe this will drastically increase the demand and supply of annuities.
Finsum: Most investors underate these small changes to legislation that really open the gates for investments and spur lots of interest.
BlackRock, JPMorgan, Goldman Sachs, Vanguard, Morningstar, and many others are swooping in to purchase direct/custom indexing firms in order to capitalize on this fast-growing market segment. While the most appealing factor is tax advantages ESG-customization is driving faster than ETF growth in the US. The rampant greenwashing problem in ETFs gives custom indexing a leg up by allowing more de-selection of these companies. It also allows a weighting that could be advantageous to different market cycles. Investors could more easily de-select their own companies' stock from an index to reduce exposure.
Finsum: Direct indexing can mirror and even enhance ETFs role while still giving tax advantages!