The Press Is Bunk! Thoughts On Political Discord

By Christopher R. English, President of Lumen Capital Management, LLC                          

As we approach the end of this year (and decade), I’ve taken some time to reflect, but surprisingly not on the markets. Though the past 10 years have brought us much to talk about from a financial standpoint, I’m going to save a review of the markets for another time. 

From what I hear from clients and others I’ve talked to, I’ve observed a deep-seated anxiety about the direction our country is moving. As you know, I don’t write about politics other than stating known facts and how they play into the financial world. But multiple conversations have led me to address this undercurrent of pessimism. Please forgive my veering away from my usual discussions of all things financial. More of that will definitely be coming later this winter!

A Look Back At American History

While I understand where the overall pessimism comes from, I’m more optimistic than most. Here are a few reasons why.

First, we all know there are fissures in American society. There always have been and likely always will be. It is harder to drown these out today given modern communication tools, but heated political debate has been a constant since the founding of our Republic. George Washington famously spoke against factions while he was President, but the country paid him no heed. Many believed the nation wouldn’t survive once the unifying presence of Washington left the scene. Yet survive and thrive the nation did.  

Whatever we’re witnessing today pales in comparison to the butchery of the Civil War. Yet even then, Americans were able to bind their wounds and come back together as a nation, though bitterness remained and the promises of the war were left unfulfilled for people of color for another 100 years. The Great Depression came close to undoing us, but we pulled together to fight and win World War II. The 1960s were a truly ugly period. Cities burned while we fought an unwinnable war in Vietnam. Many of the old structures were overturned as the chits from Reconstruction were turned in. We survived that and we’ll get through this period as well.

If you listen to the view spewed daily by the press, America is more deeply divided than ever. The media and political class speak of an America that is so polarized that people are willing to turn on each other, even to the point of violence. The media panders to this narrative while locked up in their fortresses on the east and west coasts and especially in Washington D.C. The further away you get from these places, the less you notice the discord. Away from the glare is where one sees not just our differences but the ties that bind us to each other. The motto of the United States may read “from many, one,” but the inverse of that is true as well. From the one comes many and in that multiplicity is our strength.  

These United States are a nation of enormous geographic range and diversity.  It is sometimes hard to imagine the enormity of the country. That vastness also spans four time zones and everything from tropical climates, mountainous regions, deserts, island paradises, and the Arctic Circle. What eventually became the United States was first colonized and still inhabited by the indigenous nations, then came the Spaniards and immigrants from England, then those from all parts of the globe. Polynesians settled what became Hawaii, Acadians became the Cajun peoples of Louisiana. Our country reflects all of these groups. Many of us came as free peoples, some came involuntarily as slaves. Most of us have either arrived or had ancestors that arrived speaking a language besides English. We either worship or don’t worship as we please, doing so in many different ways. Most of us either have experience or had ancestors that experienced being the “Other.” Irish, African Americans, Italians, and now Hispanic peoples are a small list of groups who’ve had to fight for a place at the American table. And we are good at fighting. You could argue that it’s bred into our DNA. The country was birthed in revolution and we’ve experienced or known how to use violence ever since. We know how to throw a punch or fling venom with words.  

Different, But Not Necessarily Divided

We are, therefore, a polyglot of people, representing many, many things. But what I can tell you is that when you get down to it, people are pretty much the same everywhere. While we may not agree with each other on everything, we all have a lot more in common than many would have you believe. I travel far and wide in this country, and many of the places I have visited are not glamorous. Nobody goes to my hometown of Union City, Indiana, to see the sights, nor to any of the other places I’ve been that are off the beaten path. I found it interesting that a caddie that worked for me out in Oregon shared many of the same sentiments with a woman I met on a plane from Birmingham, Alabama. Some of the wealthier people I know harbor sentiments not too dissimilar from folks who are less well off.   

We are told that the old hatreds and prejudices will never go away. For some, this is correct. In a nation of over 300 million people, you will always have some like that. Yet America has also elected an African American as president and Chicago elected a female, gay woman of color as mayor this year, with resounding margins. This would have been impossible not that long ago. South Carolina, that bastion of the Old South, twice elected a woman as governor whose parents hail from the Punjab in India. Turns out, many people usually care more about putting the most competent person in the job than worrying about all these other things. Few today seriously believe that among those running for the Democratic nomination, sexual preference, gender, or race should disqualify any of the candidates from potentially becoming president. They’ll rise or fall on their ideas and vision for the future, among other issues. On these things, our country has changed for the better. Let’s not let any of that get lost when the media tells us how bad things are. 

When all you hear is negative reports, remember what doesn’t get said, like the outpouring of aid and effort after a calamity or natural disaster. After a hurricane, you see members of the so-called “Cajun Navy” of Louisiana fishermen aiding stranded homeowners, not discriminating by race, creed, or wealth. People volunteer their time to go down to the border and help stranded immigrants. People living alternative lives hold events to buy toys for poor kids at Christmas. There was a video that aired a few years ago that shows a bridge collapsing in South Florida. While the collapse sadly killed several people and injured many more, the video shows people of all colors immediately getting out of their cars, running to help. At that moment there was no division, just the desire to do good. These things and countless more don’t get reported often enough. 

Be Careful Who You Listen To

The media and certain political entities love stereotypes. News outlets on both the right and the left love to accentuate these things, particularly their worst characteristics. Sadly, in a nation as broad and diverse as ours, you can always find evidence of the worst kind of behavior. But to take the example of an illegal immigrant that perhaps commits murder, this is a tiny percentage of immigrants here, legally or illegally. Most simply want to get on with their lives, abide by the law, and improve things for their families, which is no different than what most of us want. Remember also that the folks in the media get paid to find the bad. They hold the perspective that good news rarely sells. Data shows the most popular opinion news talk programs on both the far right or far left rarely draw more than 3 million viewers a night. Now that’s not an insignificant number, but it represents less than 1 percent of the population. In the end, the majority of us think more alike and want basically the same things, and I find that to be a positive indicator, especially in a season such as this, that’s full of hope.   

A Season Of Hope

Perhaps it’s my Midwest roots, but I carry a higher degree of optimism about the future. I hope you get a sense of this in some of my past writings. It is almost impossible for me not to be excited given the advances I am seeing in all sorts of fields around the globe, and I’m optimistic as well about the generations of young folks coming up behind us “boomers.” One of the biggest changes that has occurred in the past 10 years is that I’ve watched my children grow into wonderful young adults and, if nothing else, this letter is dedicated to them. You can bet that you’ll hear me elaborating more about why I’m so excited about the future.

Thank you for indulging my meanderings off the beaten investment letter path this one time. I am immensely grateful that you allow me the opportunity to work with you and your investments. I consider myself so fortunate to know each and every one of you. I also look forward to catching up in the new year.  Until then, from myself and my family, I wish you the happiest of holiday seasons and a prosperous 2020.  

Happy holidays, but mostly, God bless!   

If you want to catch up in the new year to review your investments, reach out to me at 312.953.8825 or by email at lumencapital@hotmail.com 

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

While I've Been Gone....

The financial blogging world has moved without me over the 10 days as events both personal and business have conspired to soak up what time I might have putting something up here.   In general stocks have been in a bullish mode.  Positive economic news, at a minimum a truce in the trade war and a quiet Federal Reserve have helped push things up a bit.  Add into that a growing sense that the end is known in the impeachment proceedings, along with a view that perhaps the moderates are gaining the upper hand over in the Democratic party.  Also I don't think one can ignore the seasonal patterns that have traditionally pointed to a more optimistic view of things in the last few weeks of the year.  

The question must be how much of this current move higher in markets is stealing gains from next year?  This is  impossible to answer because there are too many variables out there I think right now to even try and hazard a guess.  I do know that for most of the investment community things will start to shut down at the end of this week.  Whatever year most investors are having is baked into the cake now for good or ill.  The holidays are approaching and the week between Christmas and New Year's is traditionally a period where many are gone or at least have other thoughts besides the markets.  The investment class will start to worry about 2020 returns come January 2nd.  

In that vein I will tell you that my postings are going to be infrequent between now and 2020.  I have too much on my plate right now.  I have one thing I'm working on regarding the national mood of pessimism the press is constantly throwing our way but beyond that there's not much in the hopper.  I'm going to try and pick it up again on a more frequent basis in 2020.

I also want to thank all of you who've said such nice things to me and my family this fall during a very trying time.

See you back here in 2020!

Post & Comment {12.06.19}

This is a section of posts where I respond in brief comments to something I've seen in the news or online.  I've highlighted the headline note or post.

On the most recent spate of shootings {Pearl Harbor, Pensacola etc.}.

One of the most noticeable trends in the last decade has become the institutionalization of violence.  We as a nation seem to have become numb to the increasing number of mass shootings that are occurring.  There are between 350-400 million guns in the US and obviously not all those weapons are for hunting nor are all of them in the hands of the most stable people.  Until society is willing to adopt stricter gun control laws mass shootings will continue and likely increase.  Most of us will simply fail to pay much attention if or until they impact us.

On the trade talks.  

Still think there will be some sort of deal.  Both sides need a win.  May not occur until the 1st quarter of next year.

On the President being impeached.

Zero chance based on the evidence at hand that the Senate votes to convict.  

The President will win reelection.

Still a 50-50 prospect although the Democrats can improve their odds if they nominate a moderate candidate.  These odds go up in the President's favor if the Dems nominate a far left person.

On the divisiveness of modern society.  

We're not as divided as the press wants you to believe.  I'll have more to say on this at a later date.

On the stock market hitting new highs.

Positive economic news, meets a dovish Federal Reserve meets improving international news meets end of the year pressures.  Still a high probability we trend higher into year end.  {Not to be seen as investment advice!}.  A complete reversal of how we all felt a year ago.  

Given my family situation right now I am only committing to one post a week through the rest of this year.  Expect that early next week.  I will try to get something out more than that if able.

Year-End Tax Planning

By Christopher R. English, President of Lumen Capital Management, LLC

This may be hard to believe, but 2019 is quickly coming to an end. Although you might be focused on getting through the holidays, you may want to look ahead and start thinking about year-end tax planning. Why? Because the best way to minimize your taxes is to be proactive. If you wait until the last minute, you might miss out on some tax-efficient opportunities. That’s why I’ve teamed up with Indigo Marketing to put together this piece that hopefully shares some general ideas for you to think about as you get your tax situation organized before we ring in 2020. Please understand I am offering up some broad ideas for you to think about as we roll into year end. Anything regarding your specific situation should be discussed with your tax professional.

1. Decide If You Want To Itemize

The new tax law made the standard deduction $12,200 for individuals and $24,400 for married couples filing jointly. The TCJA eliminated many older deductions, including miscellaneous deductions for tax preparation fees, investment expenses, home office expenses (unless you’re self-employed), and unreimbursed employee business expenses. It also capped the deduction for state and local income tax (SALT) at $10,000, and limited the home mortgage interest deduction to acquisition indebtedness up to $750,000 in mortgage loan interest (for new mortgages taken out since 2018; the limit remains $1,000,000 for all existing mortgages). The floor for unreimbursed medical expenses, which was temporarily lowered to 7.5% of adjusted gross income (AGI) for tax years 2017 and 2018 only, reverted to 10% of AGI in 2019. 

These changes resulted in fewer taxpayers being able to itemize on their returns under the new law. However, for many taxpayers, the significant increase in the standard deduction made up for the loss of itemized deductions. However, you still need to tally up your allowable deductions in 2019 to determine if they add up to more than the standard deduction. In that case If you know your deductible expenses will exceed those amounts, then consider itemizing. But if you want to itemize and are coming in under the standard deduction amount, you need to take action soon. You might want to consider “bunching” your deductions.

2. “Bunch” Deductions

December 31st is the deadline for capturing medical expenses or making charitable donations for the 2019 tax year. Some taxpayers may find themselves on the fence when it comes to itemizing due to a significant amount of unreimbursed medical expenses, or a desire to take advantage of the higher floor for charitable deductions, which rose to 60% of AGI under the new law. 

“Bunching” deductions into the current tax year is a strategy you may want to explore to increase your itemized deductions. For example, if you have a significant amount of unreimbursed medical expenses, it may make sense to accelerate elective treatments, procedures, or medical equipment costs into 2019 if your combined deductions will bring you over the standard deduction amount.

If bunching charitable deductions in years where you will be able to itemize makes sense in your situation, you may want to consider a donor-advised fund to achieve that goal. Donor-advised funds are established with public charities. As the donor, you transfer money or appreciated stock and receive a deduction in the year the charitable donation is made. 

Make the most of your generosity when donating to charitable organizations. Contribute appreciated assets such as stocks or shares in mutual funds, provided you have owned the property for more than a year. If so, you can deduct the full value and neither you nor the charity pays tax on the appreciation. 

3. Make Sure You Fund Your Retirement Accounts

Contributing the maximum allowed to tax-deferred retirement accounts, such as 401(k)s or IRAs, is one of the most effective ways to reap the tax benefits and reduce taxable income. In 2019, you can contribute up to $19,000 to a 401(k) or 403(b) in the form of salary deferrals. And if you’re 50 or older in 2019, you can make an additional $6,000 catch-up contribution, for a total maximum contribution of $25,000. In 2020, these limits will increase to $19,500, and $6,500 for catch-up contributions. If you’ll be 50 or older next year, that provides an opportunity to reduce your taxable income by $26,000 in 2020. 

The contribution limits for individual retirement accounts (IRAs) have also increased in 2019, to $6,000 for those under age 50, and an additional $1,000 catch-up contributions for those age 50 or over, for a total annual contribution of $7,000. (IRA limits will remain the same in 2020.) In addition, many employers match some or all of your contributions. 

Even if you can’t save up to the limit, deposit as much as you can before the end of the year and at least enough to receive your full employer match. Free money into a tax-deferred account is a tax-planning dream!

If you participate in an employer-sponsored retirement plan, you may be able to designate some or all of your contributions as Roth contributions. While Roth contributions are made on an after-tax basis and don’t reduce your current MAGI, qualified distributions will be tax-free. Roth contributions may be especially beneficial for higher-income earners who are ineligible to contribute to a Roth IRA.

Keep in mind you only have until December 31st to maximize your 401(k), 403(b) or other employer-sponsored retirement plan contributions for the 2019 tax year. This is unlike individual retirement accounts, or IRAs, where you can make 2019 contributions up until April 15, 2020. 

4. Consider A Roth IRA Conversion

If you have a traditional IRA, consider whether you might benefit from converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth while providing important estate planning advantages. Unlike traditional IRAs, Roth IRAs are not subject to RMDs so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

Whether a conversion makes sense for you depends on a number of factors, including your age, whether the conversion would push you into a higher income tax bracket, and your current tax bracket now and expected tax bracket in retirement. One very important factor when considering a Roth IRA conversion is whether you can afford to pay the tax on the conversion in the year you are making the switch. All monies converted into a Roth IRA are taxable in the year of conversion. Also, remember that you do not need to convert the entire amount to a Roth at one time. You can transfer the money in stages over time, and space out the taxes owed on the conversion. Keep in mind that under the Tax Cuts & Jobs Act (TCJA) you no longer have the option to undo a Roth IRA conversion by “recharacterizing” the account as a traditional IRA. However, you can still recharacterize new Roth IRA contributions as traditional contributions if you do it by the applicable deadline and meet all other requirements. 

Deciding whether to do a Roth conversion is a discussion I would highly suggest you take up with your tax professional. Don’t do anything without considering the cash flow consequences of that decision.  Finally, keep in mind that the conversion to a Roth means you are relying on the U.S. Government not to change the taxing provisions on Roths in the future. While there does not seem to be any movement to tax Roth IRAs at this time or require an RMD on these accounts, keep in mind that what Congress gives it can also take away.

5. Give, Then Give Some More

You can give up to $15,000 to each individual of your choice in 2019 without paying gift tax or tapping your lifetime estate and gift tax exemption. Your spouse can also give $15,000 to the same person or persons in 2019, for a total of $30,000 tax-free gift. Any unused amount is gone forever. You cannot give extra next year to make up for it. Annual gifts over the exclusion amount will trigger the filing of a gift tax return for the year. But no gift tax will be due unless your total lifetime gifts exceed $11,400,000.

One way to give is by opening a 529 account for a child or grandchild. While 529 accounts are funded with after-tax money, it could save you on taxes in the future since the money grows tax-free and no taxes are due when you take the money out for qualified expenses. Plus, some states offer a tax deduction or credit for 529 plan contributions. (1)

6. Make A Qualified Charitable Distribution (QCD) 

If you’re over age 70½ and have an individual retirement account (IRA), a qualified charitable distribution (QCD) may be a more beneficial way to satisfy your charitable giving goals, especially if you don’t have enough deductions to itemize. With a QCD, the custodian of your traditional IRA makes distributions directly to a charitable organization on your behalf. The advantage here is that distributions paid directly to a charity are not taxable and will not be added to your adjusted gross income, so it will not trigger a Medicare premium surcharge and will count toward your required minimum distribution (RMD) for the year. You can direct all or a part of the RMD (up to $100,000 per tax year) to a qualified charitable organization and you will only be taxed on any remaining portion of the distribution that you received. You cannot deduct the donation. 

Transfers to a donor-advised fund, charitable gift annuity, charitable remainder trust, or any other life-income or split interest gift arrangement are not treated as a qualified charitable distribution. Make sure you obtain a receipt from the charity to substantiate the donation. 

7. Max Out Your HSA

If you have access to a health savings account (HSA) with your high-deductible health plan, you can enjoy triple-tax savings with no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. Your contributions are tax-deferred and withdrawals are tax-free for medical expenses. 

Since your balances roll over from year to year, you can max out the account without worrying about using it up right away. For 2019, the contribution limit is $3,500 for an individual and $7,000 for a family, with a $1,000 catch-up bonus for those over age 55. 

Why Pay More In Taxes Than You Need To? 

Tax planning can be a smart way to not only move closer to realizing your goals, but in identifying gaps in your overall financial plan. Engaging in tax planning throughout the year can help lessen or shift your tax burden, free up more money to save or spend, and help you avoid mistakes that can result in penalties or paying more than your fair share. 

However, you never want to make decisions based solely on the tax consequences. Tax planning is part of a comprehensive approach to planning driven by your financial and lifestyle goals. Before putting any of these strategies in place, be sure to meet with your tax professional as well as your financial advisor to coordinate and implement the strategies that are right for you.

We Can Help

Tax planning is one of the most critical aspects of your financial plan because you can save significant amounts of money by implementing strategies and working the tax law to your advantage. Because it’s so important, you should turn to a knowledgeable professional to help you make the right tax decisions and set up your tax plan for success, year after year. If you’d like to learn more about how Lumen Capital Management can help you meet your financial and tax planning needs, reach out to my office at 312.953.8825 or lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

Back Friday.

__________

(1)  http://www.savingforcollege.com/articles/coming-soon-big-changes-to-529-plans

Asset Returns

A list of various asset returns for the year and the period 2008-2019.  This is through December 2 and likely doesn't include the drop we've seen at the beginning of trading today.  A balanced list of all of these assets would have returned about 14.40% this year.  Annualized and simply holding all 15 of these various assets 2009-2019 would have yielded 4.16%.  I'm assuming this takes into account all the horrible declines in 2008 and doesn't start on December 31st of that year.  

The list comes from the excellent twitter feed of Charlie Bilello which you can find here. Also long US large Caps, US REITS, Preferred Stocks, EAFE stocks and EEM in both client and personal accounts, although not necessarily in the same names listed above.  Also own a minimal amount of GLD in certain personal accounts.