give to the rich, give to the rich

(Bloomberg) -- Tax cuts for rich people breed inequality without providing much of a boon to anyone else, according to a study of the advanced world that could add to the case for the wealthy to bear more of the cost of the coronavirus pandemic.

The paper, by David Hope of the London School of Economics and Julian Limberg of King’s College London, found that such measures over the last 50 years only really benefited the individuals who were directly affected, and did little to promote jobs or growth.

“Policy makers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies,” Hope said in an interview.

That will be comforting news to U.K. Chancellor of the Exchequer Rishi Sunak, whose hopes of repairing the country’s virus-battered public finances may rest on his ability to increase taxes, possibly on capital gains -- a levy that might disproportionately impact higher-earning individuals.

It would also suggest the economy could weather a one-off 5% tax on wealth suggested for Britain last week by the Wealth Tax Commission, which would affect about 8 million residents.

The authors applied an analysis amalgamating a range of levies on income, capital and assets in 18 OECD countries, including the U.S. and U.K., over the past half century.

Their findings published Wednesday counter arguments, often made in the U.S., that policies which appear to disproportionately aid richer individuals eventually feed through to the rest of the economy. The timespan of the paper ends in 2015, but Hope says such an analysis would also apply to President Donald Trump’s tax cut enacted in 2017.

“Our research suggests such policies don’t deliver the sort of trickle-down effects that proponents have claimed,” Hope said.

Mohnish Pabrai

[12/14/20] Being an investor is a continual learning process. The only way one can keep up with the investment environment is to change with the times, learn about different subjects and adapt to the changing environment.

There are many examples of successful investors who've needed to make these changes to stay relevant. One is Mohnish Pabrai (Trades, Portfolio). In a recent speech to the UCLA Student Investment Fund on Nov. 5, Pabrai explained how his investment strategy has adapted over the past few years.

A changing style

Pabrai started off as a deep value investor. When he started his hedge fund around 20 years ago, he focused on finding deeply discounted securities, buying them at a fraction of their net worth and then holding the stocks until the discount between intrinsic value and the market price had narrowed. As the value investor explained in his recent speech:

"I was always looking -- for the last 20 years -- for discounted pies. I didn't really care whether the pie grew or not. My take was that if I bought a business for 40 cents or 50 cents on the dollar, and I've always implicitly assumed that market efficiency would kick in in two or three years. So if I'm correct that a business is worth a dollar and I'm buying it for 50 cents, and I sell it for 90 cents and that convergence takes place in two or three years, it's a very nice rate of return in the 20s."

This "very nice" rate of return, he explained, removed the need to find high-quality compounder style businesses.

However, as he went on to explain, there were two problems with this approach: the fact that "you've got to keep finding the next one and the next one" and "taxes."

A much better approach, he observed, would be to find high-quality businesses and sit on them for decades. But this was not the way "Mohnish is wired," the value investor explained to his audience.

"He is unable to pay up for great businesses," Pabrai added. Other investors are more willing to pay up, but "I know Mohnish and Mohnish is just not wired that way."

This is a remarkable statement because it shows the need to understand our own qualities as investors. Lots of different investment strategies achieve positive results, but there's no point in following a process if you're not comfortable with it. This realization won't occur overnight. It requires emotional intelligence and experience to know what you are comfortable with, and more importantly, what you're not comfortable with.

Rather than pursuing an investment style he was not happy with, Pabrai took the best of both the quality and value methods and merged them into something he was happy with:

"So I am limited to a universe where a compounder is maybe not recognized, or it has hit a temporary hiccup or something where the valuation is really cheap, but there is a genuinely long runway for growth ahead. Instead of just getting off that train when it looks fully priced, which is what I did many times in the past, the idea is to stay on the train and only get off the train when it gets so egregious."

Pabrai explained that he had made this mistake several times in the past, which was part of the reason why his strategy changed. He had sold good companies too early and moved on to other businesses that have not been so successful. This was one of his main lessons of 2020, he told his audience. But with "20 to 35 years" of life left in him, he added, it was not too late to change course.

[12/10/14] Mohnish Pabrai’s long-only equity fund has returned a cumulative 517% net to investors vs. 43% for the S&P 500 Index since inception in 2000.  That’s outperformance of 474 percentage points or 1103 percent.

Pabrai is a classic value investor in the tradition of Warren Buffett, Charlie Munger, Seth Klarman and Joel Greenblat.

Like Buffett, Pabrai looks at a stock not as a piece of paper but as the ownership of a business.  He has no interest in a company that looks ten percent undervalued.  He is angling to make five times his money in a few years.  If he doesn’t think the opportunity is blindingly obvious, he passes.  This requires him to apply his X-Ray vision to the fundamentals, and weigh the downside risk (the margin of safety) vs. the upside potential (the moat) at a given price.  His mantra: Heads I win, tails I don’t lose much.

Next, Pabrai practices patience.  He takes Charlie Munger’s admonition to heart that money is made not in the buying or selling but in the waiting.  As far as I am aware, he has not made a single new investment in 2013.  He says that if he can find a couple of investment ideas a year, that’s plenty.  His current preference is to keep a cash store of between 10%-20%.  This seems like a tremendous drag for a fund posting numbers like his, but he is really biding his time for a distressed situation to come along when he can deploy this trove at the valuation he wants.  During the next crisis, when everyone is jamming the exits, he will go all in.

Once you start purchasing stocks, Pabrai says the next  step is to closely examine every trade that doesn’t work, and figure out what went wrong.  Let me pause right here, because this is key to his whole method.

There is nothing more tempting that to sweep mistakes under the rug.  Denial is one of our top defense mechanisms.  If you are lucky, these trades come to haunt your sleep like Marley’s ghost.  If you are unlucky, you repress them forever.

Due to his background in engineering, Pabrai does not gloss over mistakes.  Investing is a field where you can have a high error rate (buying something you shouldn’t have, selling something you shouldn’t have, not buying something you should have, not selling something you should have) and still be successful.  He takes as a given that mistakes are inevitable.  The point is to learn from them so they are not repeated.  A major portion of his annual meeting is devoted to publicly analyzing investments where he lost money for his partners.  Lately these errors are becoming harder to find, so he has been reduced to talking about investments that didn’t fare as well as expected.

[Looking at dataroma, Pabrai has 8 stocks in his portfolio with over 99% in 4 stocks: ZINC, BAC, C, PKX.  Hmm.  Maybe I should buy more C?]

[11/28/14] "Forbes: So summing up in terms of what do you think do you bring to value investing that others perhaps don’t, that give you a unique edge?

Pabrai: I think the biggest edge would be attitude. So you know, Charlie Munger likes to say that you don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting. And so the biggest, the single biggest advantage a value investor has is not IQ; it’s patience and waiting. Waiting for the right pitch and waiting for many years for the right pitch.

FROM: Forbes Transcript: Mohnish Pabrai (Trades, Portfolio) 04/12/2010

Digital Federal Credit Union

Not that I needed another account, but I couldn't resist free money.  So I decided to open a Digital Federal Credit Union savings account.

Why?  Because they offer an interest rate of 6.17% APY.  On an investment of $1000.00, that would work out to $60 per year or $5 a month.  In comparison, Ally is currently offering 0.60%.  [Ally is currently my primary online savings account.]  So that's 10 times more than Ally.  And probably about 60 times more than your local bank.  (I believe I first heard about this account from Eddie Yoon on YouTube.)

The drawback is that interest rate applies only to the first $1000 in your account.  Any amount above that earns a more normal 0.25%.  But even that is higher than most savings accounts nowadays.

So anyway, I decided to go ahead Monday and attempt to open an account.  With the technology these days, how hard could it be?  Turned out, it wasn't that easy.

First I installed the app on my Android phone.

Got up to the step of scanning my driver's license for my identification information.  It kept failing after numerous attempts.  So I manually input the information.

I continued on and the app aborted (or something).

Then when I tried to go back in and continue, it said I was in the process.

Then I tried to request a password to log on, but nothing was being sent to my email.

So I phoned customer support at 1-800-328-8797.  They were busy helping other customers.  So I set up a callback rather than wait on the line.

They called back about an hour later.

I gave them my information (email address, SS#), then got put on hold as the guy had to look up something (or ask somebody).

I think he sent me an email I had to click on.  Then set up my password again.  Then finally I was able to log in.

"Congratulations your DCU membership and accounts have been established."

OK, success!

But then after I got off the phone, I couldn't log back in.

"The Member Number and/or Password you entered does not match our records. Try again."

Let me try to get a new password.

"The Member Number and/or Password you entered does not match our records. Try again."

Back on the phone.

Schedule another callback ("between 34 and 51 minutes")

Got the callback.

Apparently I was locked out.

They had me enter the last four digits of my SS# for the password.  And then I was in.

Looking around, I asked how to transfer money into the account.  The CR said I should do it from the (other) bank's side, rather than from the DFCU side.

But apparently you CAN transfer money out from the DFCU side.

So I went to Transfers / Payment Center Add/Manage, then tried to add my local bank.

[You need to enter your bank's routing number and your account number to fund the account initially.  But even though that was done successfully, it doesn't automatically add the bank for transfers from/to DCFU.]

After I entered my user name and password, I got the message "Retrieving Security Information".  Then after a long while, I got the message "We apologize, but there was a problem with your account authentication. Please try again or contact DCU."

Then I gave up.  I figured I would first wait until I see the money transferred from my bank to DFCU. 

When you open an account, the minimum deposit to open is $5.  If you don't already meet the normal qualifications to join, you can make a donation to a join a participating organization and become eligible that way.  I chose Reach Out for Schools because that was the cheapest membership at $10.  So it was set up to transfer $15 from my bank to DFCU.

When I checked my account before today, it had an available balance of -$5.00.  That's because you need an minimum of $5.00 to keep the account open.

Then when I checked this morning, it had an available balance of $10.  So that means the $15.00 got transferred from my bank to DFCU.

Then when I check now, I see an available balance of $0.00, as the $10.00 has been sent to Reach Out for Schools.

In the meantime, I managed to link my bank account to DFCU on the website.  I got the message again "Retrieving Security Info" and that took a while.  But it finally got to the next screen where it asked to send a security code to my phone.  Received the code. Entered it.  And it worked!

Now I wanted to see if I could transfer money using the app.  To do that, go to Pay, then Make a Payment.  I set it up to pay $100 from my bank to DCFCU as a first test.

The earliest payment date I could enter was 11/13/20 (tomorrow).  When I tapped the "Add Payment" button, a message flashed on the screen and disappeared.  It flashed too quickly for me to read.  Try again.  Same thing.

Then I noticed a message saying "payment start date must be after 11/13/2020".  So I changed the payment date to 11/14/2020 and this time it was accepted.

Next I'll be checking to see how fast the payment will appear in the DCFU account.  I want to eventually ramp up my balance to $1000.  When I reach that balance, it'll take me two months to get back my $10 donation.  And another month after that to recover the "dead" $5 in the account.

*** Monday 11/16/20

Noticed the $100 appeared on my DFCU account this morning.

Next I want to link my Ally Bank account to DFCU because I envision xferring the interest gained above the $1000 mark to Ally.

OK, did it on the DFCU website.  Just had to log in to my Ally account, then enter the security code sent to my phone.

Next step is to xfer some money from Ally to DFCU.  We'll see how long this takes.  I'm doing this on the app at 10:26 AM.

OK, set up the "payment" (that's what they call transfers -- you can pay from or to the DFCU account).  The earliest date I could choose was 11/18/20.  We'll see when it arrives.

***  Tuesday 11/17/20

One thing I like about the app is that it supports the fingerprint recognition of my Google Pixel 3a XL.  No need to type in my password.

*** Wednesday 11/18/20

Checked the app early this morning and the payment came through.  My available balance is now $300.  So took less than 48 hours.

I notice that I am unable to make payments from DFCU to the linked banks.  Only the other way.  Not sure if that's the way it is.  Or if the money is being held for a number of days before being released for transfers out.

Now that it worked, I guess I'll transfer the rest from Ally (for simplicity -- I have other accounts that are paying less than Ally).

In the meantime, I think I want to link DFCU to my Wealthfront account.  I opened Wealthfront because it had a higher interested than Capital One and Ally at the time, but not the rate is below.  But I like it because I can see the balances of my linked accounts.  Let me see if I can link my regular credit union first.  Enter user name and password.  OK that worked (had to wait a few minutes).  Now for DFCU.  This time authentication needed.  It made a voice call to my phone.  And I entered the code. 
"We've hit a snag.  Linking stalled.  These accounts are experiencing technical difficulties. We’ll try to reconnect automatically."  OK, I guess I'll have to wait.  It does show the balance of my DFCU account, but says temporarily down.

I kind of want to see if I can transfer funds from my credit union to Wealthfront, then transfer from Wealthfront to DFCU.  Why not just use Ally?  Because supposedly you can make unlimited transfers with Wealthfront, whereas you can make only 6 transfers from Ally per month.  Right now, I don't see the option to transfer between Wealthfront and my credit union.  Maybe because I just connected them.

I think I want to link DFCU to Ally from the Ally side, since I have most of my accounts linked to Ally that way.  Let's see if I have better luck than with Wealthfront.  Instead of logging in, it asks to enter the routing number and the account number.  OK, that information is in Account Manager / Account Information.  Then you can verify instantly by logging in or verify with bank deposits.  Let's try instantly.  Let me log off DFCU first, so I can log back in.  Enter member number and password.  Verify.  Your bank requires more information.  Let me choose email this time instead of phone.  Enter access code from the email.  Account Verified.  "This account is now active and available for transfers."  OK better than Wealthfront.

Let's me try a transfer from Ally to DFCU now from the Ally side.  It allows me to choose tomorrow, 11/19/20.  OK, we'll see when it actually arrives.

*** Thursday 11/19/20 ***

The transfer from Ally to DFCU arrive this morning.  So it really was only one day.

Now to check if Wealthfront is linked OK with DFCU.  Seems to be.  Oddly they have the APY at 0.52% for some reason.  And the balance is from 20 hours ago so it's not updated.  They also have Capital One Performance at 0.82% which is also wrong.

Let me see if I can transfer from Wealthfront to DFCU.  Nope.  DFCU is not yet listed.  And actually I don't see my regular credit union listed either.  Maybe it doesn't work well with credit unions?  Well, I guess it's still useful to see the balance of all my bank accounts from Wealthfront.

Let me make another payment from Ally Bank to DFCU.  When I do it from the DFCU app, it stays payment start date must be after 10/20/20.  Let me do it from the Ally Bank side then.  Yeah it lets me do it for tomorrow (10/20/20).  I just have to be wary of the 6 withdrawals a month limit.

*** Friday 11/20/20 ***

OK, my available balance is now $1,000.00!  Now just have to wait for the interest to roll in 8)

Wealthfront is now reflecting the balance of $1,000.05 [I think that's supposed to be $1005.00].  Still can't transfer to/from Wealthfront though.

*** Tuesday 12/1/20 ***

We're in the money!

Got my first interest payment today.  $2.00 even!  It's actually categorized as a dividend.  So they pay interest on the first of the month.  Let it ride.  I'll be expecting $5.00 or a penny or two more on 1/1/21.

*** Friday 1/1/21 ***

$5.10 dividend added to my my account :)

Let it ride.

Schwab's outlook headed into the election

Outlook:

With Election Day finally arriving on Tuesday (11/3) the market indicators are all over the map, and the only thing that seems certain is lots of market movement. Don your volatility hat and buckle up tight; next week looks like it’s going to be a wild ride.

Bottom Line:

I can’t remember the last time there was such extreme and stark disagreement among the indicators. Of course this is all related to Election Day next Tuesday (11/3).

With no clear consensus and such a wide range of readings, the only logical outlook for next week is Volatile; at least in the first half of the week. Following the election, it is likely that equities will make a big move higher or continue their recent decline. Therefore the secondary outlook is Breakout, because it is impossible to know which direction it may move.

average investor's returns

What's the craziest statistic about personal finance?

One that’s mind blowing.

The average investor’s return on investments is about a 1/3 of the average return on investments. Yeah, I’ll give you a moment.

Investors today can trade on line for free. They have access to thousands of research reports. They can buy and sell instantly. They can tune into financial news 24/7.

Yet, the U.S. stock market has averaged around 9 – 10% return per year over the long haul. And during those same periods investors have averaged around 1/3 of that.

How can that possibly be?

It’s because the average investor chases performance. The stock market makes new highs and investors pour money in. Stock market crashes and investors bail out and wait until it makes new highs again.

Buying high and selling low. A fool proof formula for destroying wealth.

And many do the same thing with investments. A hot new investment screams towards the sky so they put everything into it. Then it crashes to earth incinerating.

So what’s the antidote?

Something the average investor simply isn’t wired to do. Do the opposite of what you instinctly feel and see most other investors doing.

Because if you do what everyone else is doing you’ll get what everyone else is getting.

As I’ve heard said, “Human nature is a failed investor.”

Think about it. When our ancestors were hunter gatherers they chased performance. They all congregated at the same place on the river where someone was catching fish. They all hunted in the same place where someone got game.

It’s how we’re wired. And it worked.

Except in investing. Because by the time a new investment is screaming up and popular it’s about to run out of fuel.

And by the time the stock market is bouncing off new lows and people are liquidating it’s getting ready to make a run up.

So how do you do this?

It’s tough and frankly at times gut wrenching. But accomplishing it is the key to long term wealth. And understanding it is the first step.

Though, people will think that’s crazy.

You can build wealth but only as you first understand what destroys it.

-- Doug Armey, September 29, Successful entrepreneur, investor and financial consultant

10 Golden Rules

Investing can often be broken down into a few simple rules that investors can follow to be successful. But success can be as much about what to do as it is what not to do. On top of that, our emotions throw a wrench into the whole process. While everyone knows you need to "buy low and sell high," our temperament often leads us to selling low and buying high.

So it's key to develop a set of "golden rules" to help guide you through the tough times. Anyone can make money when the market is rising. But when the market gets choppy, as it did in 2020, investors who succeed and thrive are those who have a long-term plan that works.

Here are 10 golden rules of investing to follow to make you a more successful - and hopefully wealthy - investor.

Rule No. 1 - Never lose money

Let's kick it off with some timeless advice from legendary investor Warren Buffett, who said "Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1." The Oracle of Omaha's advice stresses the importance of avoiding loss in your portfolio. When you have more money in your portfolio, you can make more money on it. So a loss hurts your future earning power.

Of course, it's easy to say not to lose money. What Buffett's rule essentially means is don't become enchanted with an investment's potential gains, but also look for its downsides. If you don't get enough upside for the risks you're taking, the investment may not be worth it. That's one reason many investors are avoiding long-term bonds now. Focus on the downside first, counsels Buffett.

Rule No. 2 - Think like an owner

"Think like an owner," says Chris Graff, co-chief investment officer at RMB Capital. "Remember that you are investing in businesses, not just stocks."

While many investors treat stocks like gambling, real businesses stand behind those stocks. Stocks are a fractional ownership interest in a business, and as the business performs well or poorly over time, the company's stock is likely to follow the direction of its profitability.

"Be aware of your motivation when investing," says Christopher Mizer, CEO of Vivaris Capital in La Jolla, California. "Are you investing or gambling? Investing involves an analysis of fundamentals, valuation, and an opinion about how the business will perform in the future."

"Make sure the management team is strong and aligned with the interests of shareholders, and that the company is in a strong financial and competitive position," says Graff.

Rule No. 3 - Stick to your process

"The best investors develop a process that is consistent and successful over many market cycles," says Sam Hendel, president of Levin Easterly Partners. "Don't deviate from the tried and true, even if there are short-term challenges that cause you to doubt yourself."

One of the best strategies for investors: a long-term buy-and-hold approach. You can buy stock funds regularly in a 401(k), for example, and then hold on for decades. But it can be easy when the market gets volatile - as it did in 2020 - to deviate from your plan because you're temporarily losing money. Don't do it.

Rule No. 4 - Buy when everyone is fearful

When the market is down, investors often sell or simply quit paying attention to it. But that's when the bargains are out in droves. It's true: the stock market is the only market where the goods go on sale and everyone is too afraid to buy. As Buffett has famously said, "Be fearful when others are greedy, and greedy when others are fearful."

The good news if you're a 401(k) investor is that once you set up your account you don't have to do anything else to continue buying in. This structure keeps your emotions out of the game.

Rule No. 5 - Keep your investing discipline

It's important that investors continue to save over time, in rough climates and good, even if they can put away only a little. By continuing to invest regularly, you'll get in the habit of living below your means even as you build up a nest egg of assets in your portfolio over time.

The 401(k) is an ideal vehicle for this discipline, because it takes money from your paycheck automatically without you having to decide to do so. It's also important to pick your investments skillfully - here's how to select your 401(k) investments.

Rule No. 6 - Stay diversified

Keeping your portfolio diversified is important for reducing risk. Having your portfolio in only one or two stocks is unsafe, no matter how well they've performed for you. So experts advise spreading your investments around in a diversified portfolio.

"If I had to choose one strategy to keep in mind when investing, it would be diversification," says Mindy Yu, director of investments at Stash. "Diversification can help you better weather the stock market's ups and downs."

The good news: diversification can be easy to achieve. An investment in a Standard & Poor's 500 Index fund, which holds hundreds of investments in America's top companies, provides immediate diversification for a portfolio. If you want to diversify more, you can add a bond fund or other choices such as a real estate fund that may perform differently in various economic climates.

Rule No. 7 - Avoid timing the market

Experts routinely advise clients to avoid trying to time the market, that is, trying to buy or sell at the right time, as is popularized in TV and films. Rather they routinely reference the saying "Time in the market is more important than timing the market." The idea here is that you need to stay invested to get strong returns and avoid jumping in and out of the market.

And that's what Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute recommends: "The best and worst days are typically close together and occur when markets are at their most volatile, during a bear market or economic recession. An investor would need expert precision to be in the market one day, out of the market the next day and back in the following day."

Experts typically advise buying regularly to take advantage of dollar-cost averaging.

Rule No. 8 - Understand everything you invest in

"Don’t invest in a product you don’t understand and ensure the risks have been clearly disclosed to you before investing," says Chris Rawley, founder and CEO at Harvest Returns, a fintech marketplace for investing in agriculture.

Whatever you're investing in, you need to understand how it works. If you're buying a stock, you need to know why it makes sense to do so and when the stock is likely to profit. If you're buying a fund, you want to understand its track record and costs, among other things. If you're buying an annuity, it's vital to understand how the annuity works and what your rights are.

Rule No. 9 - Review your investing plan regularly

While it can be a good idea to set up a solid investing plan and then only tinker with it, it's advisable to review your plan regularly to see if it still fits your needs. You could do this whenever you check your accounts for tax purposes.

"Remember, though, your first financial plan won’t be your last," says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in the Pensacola area. "You can take a look at your plan and should review it at least annually - particularly when you reach milestones like starting a family, moving, or changing jobs."

Rule No. 10 - Stay in the game, have an emergency fund

It's absolutely vital that you have an emergency fund, not only to tide you over during a tough time, but also so that you can stay invested long term.

"Keep 5 percent of your assets in cash, because challenges happen in life," says Craig Kirsner, president of retirement planning services at Stuart Estate Planning Wealth Advisors in Pompano Beach, Florida. He adds: "It makes sense to have at least six months of expenses in your savings account."

If you have to sell some of your investments during a rough spot, it's often likely to be when they are down. So with an emergency fund you're actually able to stay in the investing game longer. Money that you might need in the short term (less than three years) needs to stay in cash, ideally in an online savings account or perhaps in a CD, and shop around to get the best deal.

Bottom line

Investing well is about doing the right things as much as it is about avoiding the wrong things. And amid all of that, it's important to manage your temperament so that you're able to motivate yourself to do the right things even as they may feel risky or unsafe.

Trump and the stock market

Trump is currently fourth (out of 14) when comparing his first term (so far) to presidents since 1932.  So far the market (SPX) has gained 58.0% since election day.

First is FDR at 137.2%.  Second is Eisenhower at 91.0%.  Third is Clinton at 70.1%.

There have been 25 terms since 1932.  Also topping Trump's 58.0% are Reagan's second term at 61.5% and Clinton's second term at 100.5%.  So Trump is currently sixth out of 25 terms.  Pretty good, but not the best.

Eyeballing the chart, I would say Clinton did that best at 70.1% and 100.5%.  And Bush (W) did the worst at -21.0% and -11.0%.  Bush was coming off the tech bubble in 2000 (Clinton's second term) and hit the financial crisis in 2008.

There were only two other negative terms: -35.0% (Roosevelt's second term) and -28.7% (Nixon's second term).

From the article,

As you can see, as of the close on Thursday (10/1) President Trump is solidly in 4th place overall versus every first-term president since 1932. At the last market top (9/2/20) he was in 4th place and has never been above 4th place when comparing him for the entire first term. He would need a gain of more than 12 percentage points over the next 32 days to move into 3rd place, and it would take a decline of more than 5 percentage points for him to fall to 5th place.

I notice that the chart uses Election Day to start counting.  I wonder how much of a difference it would make if they chose Inauguration Day as the starting point.  Especially since this year we likely won't even know the results on Electrion Day.

The next 20 years?

"Looking at current 10-year returns gives me a sinking feeling in the pit of my stomach which I have experienced twice before, during the tech bubble and the financial crisis. Is there any data regarding significantly higher 10-year returns being negatively correlated with lower subsequent 10-year returns (like the tech boom followed by the 'lost decade')?"

My initial answer is that there is a loose inverse relationship between past and future 10-year returns, but so loose that one cannot make money off that information. This column provides the figures to defend--or refute--that assertion. In addition to showing the results of 10-year returns, I also examine five- and 20-year periods.

...

One could not hope for a clearer picture than what occurs with the 20-year chart. When blue is up, red is down, and the converse. There are only brief stretches when the two lines appear on the same side of the median, and in those instances the returns are close to normal, so the signal doesn’t flash brightly. The graph looks so clean that one suspects that its author erred. (The thought did initially cross my mind.)

This portrait is dominated by five events:

1. The depression/war years (weak results)
2. The 1950s/1960s (strong)
3. The 1970s oil crisis (weak)
4. The 1980s/1990s (strong)
5. The 2000s (weak, in fact considerably worse than the 1930s)

Consequently, these results not only lack statistical significance, because the 648 monthly observations so thoroughly overlap, but they also fail common sense. That buoyant economies generate optimistic stock valuations, which eventually decline as the economic news worsens, makes sense. But that such events have occurred on a seemingly regular cycle is surely accidental. The pattern’s apparent inevitability is a mirage, based on a tiny sample size. 

That said, I suspect the 20-year numbers offer a fair guide to the future, if not as accurately as their negative 0.84 correlation suggests. (Now that’s a correlation!) Secular economic changes do tend to occur gradually, and investor emotions can overshoot the mark. Although the letter of this finding need not be observed, its spirit deserves some respect.

Which implies good news for the U.S. stock market, as entering 2020 the real 20-year return on equities was a modest 3.85%, well below the historic norm. These days, it has become commonplace to bemoan high stock prices. Perhaps the skeptics will prove to be correct. But 20-year return measure foresees a happier outcome.

-- John Rekenthaler

Election game plan

As if this year hasn't created enough uncertainty for investors, they must now prepare for a presidential election. While the candidates are familiar, the limited debates have prevented the average investor from getting clarity on polices that would affect the market.

The election will dictate where money flows for the next four to possibly eight years. While we can't predict the outcome of the election, it's worthwhile to go over scenarios and expectations so we can position our portfolios accordingly.

To properly prepare - you need to remove your bias!!!

Let's face it, this is a divisive atmosphere and a heated election. To properly approach this topic, we must remove any bias and focus on the markets.

Below I discuss what we should expect before, during and after the election and how to invest and profit in the weeks and months ahead.

The Weeks Before the Election (October 12th-30th)

The three weeks leading up to the election should be a time of caution. Some will be positioning themselves for what they expect might happen, but there will be a lot of investors who will not want to be exposed to the election results. This group would rather sit back and wait and see what happens, rather than taking potentially significant risk this election year.

The 2016 election saw a sell-off in the last two weeks of October before election week. During this time, the S&P shed about 2.5% and volatility spiked, with the VIX moving higher by over 20%. While the betting markets predicted an easy Clinton win, the options markets prepared for uncertainty anyway.

The Day and Night of the Election (November 3rd)

The calm before the storm will come on Monday November 2nd, when traders back away from the action and await the results. Volumes will decrease into Tuesday when we will see rumors start to move the market up and down.

As official results come in, the stock market will be closed and the futures market will be responding to the headlines. The 2016 election result was a shock when Trump won and the news sent the S&P futures into a tailspin. However, it didn't take long for investors to decide they liked Trump, and a big upwards reversal came the next morning.

If Trump wins: Expect a move higher in the futures and into the next day. The market will like Trump's market friendly approach we have seen over the last four years.

If Biden wins: Look for a move lower overnight and the next day as the possibility of higher taxes will be a perceived negative. However, the market might shrug off a Biden win as a massive infrastructure bill would be appealing for short-term growth.

The Days and Weeks After (November and December)

The smart money will position themselves for the next couple years in the weeks that follow the election. In 2016, the S&P moved higher by over 6% from November into the end of the year.

After the election, investors should focus on the stocks that will benefit from winning candidate. Regardless of what the overall market does, favorable sectors will outperform based on that candidate's policies.

If Trump wins: Market continues to rally, but volatility remains high as conflict with China remains.

If Biden wins: Energy and Wall Street struggle, while eco-friendly and tech thrive. Watch for gold to go higher as spending increases.

Wildcard

This election will be close and if there is no clear winner, the market will react negatively. I would expect the VIX to stay elevated as the winner is sorted out and the market to sell off until there is clarity.

In Summary

Investors have seen a lot of uncertainty and volatility this year, so an unpredictable election seems to fit in perfectly. While certain areas of the market might struggle under Biden or Trump, both candidates should be viewed as market friendly. Investors have a win/win scenario with some short-term risks with Biden that would be cancelled out with the volatility of Trump.

Whatever the result, there will be money to be made. Investors should ready themselves and plan for the possibility of both candidates.

-- Jeremy Mullin, Weekend Wisdom, Zacks

Trump vs. Biden: a sector outlook

The election is fast approaching and investors need to ready themselves for some volatility in their portfolios. Biden and Trump have very different views on how the next four years should look for this country. Because of that, certain sectors of the market will respond to a victory from each candidate differently.

While there are positives and negatives for each candidate for the overall market, individual industries will be affected more directly. Below I discuss exactly what to expect from some selected sectors, and how to profit in either situation. But first let's talk about how the markets perceive each candidate.

Who Does the Market Favor?

The market would prefer Trump to any Democratic candidate because of the threat of higher taxes. While Biden is a net negative for investors, he is perceived as less harmful than Bernie Sanders would have been.

Because of Biden's time as Vice President, the market knows what it is getting, which would be similar polices to the Obama Administration. This creates some clarity and calm with investors as opposed to Trump, who has created volatility in the past with his aggression towards China.

At the moment, the polls and betting markets give the edge to Biden. When he moved ahead of Trump, the stock market didn't react negatively. This is a sign that the investors don't have a major preference between the two outcomes. So, while the market might favor Trump slightly, there isn't major favoritism as there would have been with other Democratic nominees.

Sector Outlook: Trump

Let's look at a few sectors likely to perform well if Trump keeps his seat in the Oval Office.

Infrastructure- Materials and industrials will benefit with a stimulus bill on infrastructure. A big deal has been promised for years, but after COVID-19, we are likely to see finally some movement after the election. Trump has been eyeing an $1 trillion infrastructure package that would target roads, bridges and public transport as well as 5G network infrastructure. The stocks that build and supply the materials for these projects with directly benefit.

Energy- Trump would be friendly to the traditional oil companies, encouraging fossil fuel production with less regulation. Big oil could see a big rally in shares with any threat of a Green New Deal off the table.

Financials- Wall Street will benefit with lower taxes and less regulations. While banks have struggled with low interest rates, the market volatility has been good for trading. Assuming the economy comes back and interest rates can tick higher, a second Trump term could be very bullish for the banks.

Consumer Discretionary- A Trump win would mean taxes stay low – and they could possibly even go lower if Trump gets his desired middle-class tax cut of 10%. A cut of that size would put more income in people's pockets, which would be good for the consumer staples and discretionary sectors. Think retail and discount retail stores as beneficiaries that would thrive with more cash in the pockets of the American consumer.

Sector Outlook: Biden

Now, let's explore sectors likely to benefit from a Biden victory in November.

Infrastructure- Biden has even bigger ambitions on stimulus than Trump, aiming for $2 trillion of investment in his first term. Roads and bridges are of course on the agenda, but Biden will also focus on green spaces, water systems, electricity grids and broadband. A Biden presidency would have a focus on climate change, which brings us to our next sector.

Energy- Big oil is in trouble with a Biden win. Energy would see more regulations and a movement towards greener industries to modernize the economy to combat climate change. Think solar power under Biden.

Tech- The Trump admiration has been talking about rolling back protections for big tech. Additionally, Trump has had issues with tech platforms control of content, which has caused a conflict that could be an issue for big companies like Amazon, Facebook and Twitter.

While a Biden win might throw a wrench in the tech momentum due to tax concerns, the break-up threat wouldn't be there. Additionally, improved relationship with China could help tech companies that have exposure to Chinese markets.

Gold- The amount of spending that is likely to come under Biden will bring the gold bugs out like never before. Not only will we get a big infrastructure bill, but the pandemic has set a precedent for the government to spend.

How to Capitalize

The next president will have a lot on his plate with an economy trying to recover in the midst of a pandemic. Both Biden and Trump have different views on key economic issues, especially tax policy and energy. The one thing they agree on is infrastructure; it's just how much we need to spend that is the difference.

Investors should map out a clear path and strategy to put in place the days and weeks after the election. The next president's plans will shift trillions of dollars around the economy and certain stocks will reward investors that get in early.

-- advertising email from Zacks

***

What about health care?

(successful) value investing

Value investing strategies can become unpopular during bull markets. Rising valuations and optimistic forecasts can cause some investors to switch to growth strategies that place less emphasis on buying stocks at low prices.

However, in my view, value investing is a logical long-term approach to use when allocating your capital. It can help you to avoid excessive risks and generate high returns through buying quality companies when they trade at low prices.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio)'s track record highlights the potential success of a value investing approach. His patient attitude and simple strategy could be key reasons for Berkshire's 20% compounded returns in the past 55 years.

Focusing on fundamentals

It is tempting to follow the lead of other investors in a bull market or in a bear market. For example, some investors may now find themselves becoming more optimistic about the prospects for stock prices after the market's 50% gain since March. Likewise, investors may become pessimistic about the S&P 500's prospects during a bear market because stock prices have experienced a decline.

However, avoiding bullish and bearish sentiment could be crucial for anyone seeking to become a successful value investor. Ignoring your emotions makes it easier to judge investment opportunities based on facts and figures, rather than the prevailing mood among your peers. This could improve the efficiency of your capital allocation and allow you to take a contrarian view when it is advantageous.

Buffett has sought to maintain an even temperament throughout his career. As he once said, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."

Using a patient approach

Rising stock prices over recent months may mean there are fewer companies trading at a discount to their intrinsic values. It is tempting to buy stocks that are overvalued in this situation, rather than holding cash due to low interest rates. However, using a patient approach that waits for more attractive risk/reward opportunities to appear could be more effective.

In my opinion, the ability to turn down unattractive investment opportunities could be an important trait of successful value investors. A selective approach may mean that you sometimes miss out on stocks that go on to generate high returns. However, it will also help you to avoid unnecessary risks that may be present in the current bull market.

As Buffett once said, "The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch."

Adopting a simple strategy

Value investing is a simple means of allocating capital. At its core, it is a long-term strategy that focuses on buying quality businesses when they trade at prices below their intrinsic values. They are then held until there are more attractive places that offer superior risk/reward opportunities available elsewhere.

Therefore, successful value investors do not need to use complicated formulas or complex methodologies when managing their portfolios. Complexity may be far less important than consistency and self-discipline when using the market's cycles to your advantage.

Despite being one of the wealthiest investors of all time, Buffett's approach to managing Berkshire's capital has always been very simple. As he once said, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

-- Robert Stephens, CFA

Chuck Feeney

Charles “Chuck” Feeney, 89, who cofounded airport retailer Duty Free Shoppers with Robert Miller in 1960, amassed billions while living a life of monklike frugality. As a philanthropist, he pioneered the idea of Giving While Living—spending most of your fortune on big, hands-on charity bets instead of funding a foundation upon death. Since you can't take it with you—why not give it all away, have control of where it goes and see the results with your own eyes? 

“We learned a lot. We would do some things differently, but I am very satisfied. I feel very good about completing this on my watch,” Feeney tells Forbes. “My thanks to all who joined us on this journey. And to those wondering about Giving While Living: Try it, you'll like it.”

Over the last four decades, Feeney has donated more than $8 billion to charities, universities and foundations worldwide through his foundation, the Atlantic Philanthropies. When I first met him in 2012, he estimated he had set aside about $2 million for his and his wife's retirement. In other words, he's given away 375,000% more money than his current net worth. And he gave it away anonymously. While many wealthy philanthropists enlist an army of publicists to trumpet their donations, Feeney went to great lengths to keep his gifts secret. Because of his clandestine, globe-trotting philanthropy campaign, Forbes called him the  James Bond of Philanthropy. 

In 2019, I worked with the Atlantic Philanthropies on a report titled Zero Is the Hero, which summarized Feeney’s decades of go-for-broke giving. While it contains hundreds of numbers, stats and data points, Feeney summarized his mission in a few sentences. “I see little reason to delay giving when so much good can be achieved through supporting worthwhile causes. Besides, it’s a lot more fun to give while you live than give while you're dead.”

On September 14, 2020, Feeney completed his four-decade mission and signed the documents to shutter the Atlantic Philanthropies. The ceremony, which happened over Zoom with the Atlantic Philanthropies’ board, included video messages from Bill Gates and former California Gov. Jerry Brown. Speaker of the House Nancy Pelosi sent an official letter from the U.S. Congress thanking Feeney for his work. 

-- Steven Bertoni, Forbes

Six investment mistakes to avoid

Summary

The market has been particularly volatile in 2020, making it treacherous for all types of investors.

The pandemic has created tailwinds and headwinds across all industries, and analysts of all kinds are insisting a crash is upon us every day.

In this context, it can be extremely difficult to know what to do, keep your emotions in check, and avoid common investing pitfalls.

That's why today, I want to cover six investment mistakes to avoid, particularly in a frothy market like the current one.

You may have made some or all of these mistakes in the recent months, without realizing it. 

Great investing is not simply about selecting the right investment ideas. The main factor in the success of your investing journey is about avoiding common behavioral mistakes that we all make at one point or another in our lives.

Morgan Housel just released his book The Psychology Of Money, in which I particularly enjoyed a quote that borrows from Napoleon and his definition of a military genius:

"A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy."

The average investor has underperformed almost all investable asset class returns over time, as illustrated below by the data from Richard Bernstein Advisors.

The main cause behind this is behavior and temperament. Most investors are hardwired to get in the way of their portfolio's success over time.

The S&P 500 (SPY) and the Nasdaq (QQQ) both fell around 30% earlier this year before rebounding to new highs in a record time. The volatile time we are all going through since the beginning of the COVID-19 pandemic has a particularly pernicious effect on investor behavior. Volatility has its ways to compel the most counter-intuitive decisions when it comes to portfolio management.

Today, I want to discuss six common investment mistakes you are most likely to make (or have already made) in a frothy market like this year.

Let's review!

1) Trading too much

Great long-term investing is 1% buying, 99% waiting. But most investors feel that they're lazy if they don't tinker with their portfolio regularly one way or another.

A disciplined investor should look beyond the short-term concerns and focus on the long-term growth potential of the market. Looking at the performance of the MSCI World Index in the past 50 years can help gain some perspective. One dollar invested in 1970 would have grown to $68 by 2018. And the journey to get there was filled with financial crisis, wars, terrorist attacks and bear markets of all kinds. None of these disasters have changed the fact that the best course of action over the years was to remain invested through thick and thin and to stay the course.

Despite history telling us that trading in and out of stocks is a weapon of alpha destruction, some investors can't help themselves.

Investment turnover is another symptom that is similar. Many investors can't help but cash in on their gains as soon as a stock is up 20%, 50% or 100%. They might buy back the shares at the same price or higher several months later when they realize their mistake. But the damage has already been done if they are trading in a taxable account. Or worse, they refuse to invest again in great companies they have previously sold at lower prices and leave a long-term compounder such as Amazon (AMZN), Netflix (NFLX), or Salesforce (CRM) out of their portfolio forever.

2) Relying on your emotions

Many biases are at play when we make an investment decision. I've covered previously the common behavioral biases that can adversely affect your temperament, and I've offered strategies to counter them.

Relying on your emotions is a common investment mistake in a volatile market. And unless you are willing to identify it and address it, chances are your emotions will eventually get in the way. We are influenced by our own fear and greed, often better described as fear of joining in or fear of missing out (another topic I've covered more in depth here).

3) Chasing returns

Performance chasing refers to selling a poorly performing investment to buy one that has recently delivered strong returns.

Chasing returns is the practice of taking excessive risk by selling what you own in order to concentrate heavily your portfolio into what everyone else is buying.

4) Staying all in cash

When the market is volatile, it can feel much safer to watch it from the sidelines. And that's generally a mistake.

Cash itself is a depreciating asset, but it's also an essential tool to buy other assets. Finding the right balance of cash in an investment portfolio can be a challenge, particularly for those who are not generating new income or savings to add to their investment portfolio. Warren Buffett has been known for keeping a huge cash allocation in his portfolio at Berkshire Hathaway (BRK.A) (BRK.B). At the end of Q2, Berkshire had $147 billion in cash. But that cash allocation that so many point out to as excessive represents less than 40% of its equity portfolio. And Warren is in the insurance business, which requires large cash allocations for unforeseen events. If you have more than 50% of your liquid assets in cash, you are likely permanently damaging your long-term returns.

If you are a new investor, waiting too long to start is one of the most crucial mistakes a young investor can make. Albert Einstein famously called compound interest the eighth wonder of the world. Thomas Phelps, author of the book 100 to 1 in the Stock Market has provided valuable lessons to better understand the power of compounding.

5) Concentrating too much in risky bets

Seeking alpha is a noble cause (and a great name for a crowd-sourced content service for financial markets), but that doesn't mean you should be actively trying to beat the market.

Beating the market should be a result of your investing habits, not a goal.

If you invest thinking the market averages are not enough, you are likely to go over-board and heavily concentrate into risky investments.

There is always room for risky companies in a portfolio. But your appetite for market-beating returns should never overshadow the importance of position sizing and proper portfolio allocation based on your risk profile.

6) Not understanding what you're doing

As explained by Adam Smith in The Money Game:

"If you don't know who you are, [the stock market] is an expensive place to find out."

Having a clear strategy is probably the most essential aspect of investing, in both bull and bear markets. If you haven't spent the time to think about your goals, time horizon, risk appetite and understanding what you are trying to achieve, you probably need a little bit of soul-searching.

Understanding why you invest is the very first step, one that comes before learning how you want to invest or in what specific opportunities.

Your next question should not be "should I buy this stock now?" Instead, you should ask yourself if you have built a system that makes room for mistakes, unforeseen failures, or simply bad luck. When the tide turns, you'll be prepared to face the consequences and will be far more likely to stay in the game. Investing should be a rewarding and enjoyable journey, not a source of stress and sleepless nights.

15 books that can change your life

-- From Facebook, Howtomotivation, 1/23/18

more books

The best financial move

What is the single best financial move you have ever made in your life?

To become a minimalist

In 2017, I found out that my business surpassed 7-figures of revenue in a 12 month period.

This translates to multiple six figures in profit personally, however, I still live like someone earning only $50,000 a year.

I own one car (a stick shift sedan), live in the same apartment I’ve lived in for the past 3 years, wear inexpensive clothes, fly coach, and generally keep my purchases and possessions very minimal.

I focus almost all of my time, money, and resources on creating new experiences and improving relationships… Not things.

And this has TRANSFORMED my financial life forever.

I no longer have to worry about money.

I don’t stress about my income or bills because I don’t spend money on material items that don’t bring me real happiness, freedom and peace of mind.

And you know what?

I’m the happiest that I’ve ever been in my life.

When you spend your money on things that bring joy into your life like healthy foods, fun experiences, travel, personal growth and time with people that you love, I can guarantee that you will be happier (and richer) than when you spent money on the latest phones, TVs, clothes and cars.

Stay Grounded,

Andrew

Learn more about my work and mission by visiting my Quora profile here [from my log 1/23/18]

The 2020 Presidential election

Key takeaways

• Expect short-term stock market volatility as the election heats up. But longer term, economic fundamentals are likely more important drivers for stocks than who wins the White House.
• A Biden presidency could mean more economic stimulus than a Trump second term, but also higher taxes on businesses, higher income people, and capital gains.
• While President Trump has focused on deregulation, a Biden administration would likely re-regulate certain industries. Among the possible targets: Fossil fuels, financial services, health care, and big tech.
• Stock buybacks have been a significant source of returns for stock investors over the past decade. Democrats could move to limit them, while Republicans would likely support the status quo.

Elections matter to all of us, as citizens and as investors. US presidential election results drive policies that help shape our economy, the markets, and our lives. So it’s important to think about what the outcome could mean to your wallet.

And it's not just the presidential election that matters. Since much of a president's agenda requires congressional approval, the outcome of the congressional races is also key. Indeed, this time around, control of the Senate may be the key to enacting the next president's agenda.

The political outlook

At this early stage in the 2020 campaign, there is plenty of time for surprises to alter the course of history—particularly given the fact that this election is taking place in the midst of a global pandemic that has hit America hard. Still, it's worth considering a range of possible election outcomes. Here we look at 3 of the most likely scenarios—and the potential financial implications of each.

President Trump wins a second term and Congress remains split between a Democratic House and a Republican Senate

The Democrats sweep the White House and Congress

Former Vice President Joe Biden wins the presidency, but the Republicans hold the Senate

Scenario 1 is a continuation of the status quo. Scenario 2 likely brings re-regulation of some industries, higher taxes on corporations, upper-income individuals, and investors and more fiscal stimulus than in Scenario 1. In scenario 3, changes to tax and spending policy are likely muted by a GOP Senate.

Let's dig into some details.

The economy

No matter who is elected next year, the economy will likely still be recovering from recession and hardly at full throttle. So fiscal policy—federal taxes and spending—is likely to be key to economic growth.

"The 2020 multi-trillion-dollar fiscal spending package has been a major factor that's kept this economic environment from getting worse, along with the Fed's monetary stimulus," says Dirk Hofschire, Fidelity senior vice president of asset allocation. "But there is a risk, as we go forward, if the economy is not gaining significant traction and you still have large parts of the economy operating at limited capacity, that we're still going to need a lot of fiscal support."

Biden has proposed a combination of more federal spending and a redistribution of the tax burden from middle income taxpayers to corporations, high-income taxpayers, and investors. Hofschire says that's likely to mean more short-term fiscal stimulus under a Democratic presidency than a Republican one, particularly in a Democratic sweep.

"The tone of the Democratic fiscal plan would also be more likely to try to address growing income inequality and provide more spending and/or tax breaks geared to lower- and middle-income households," says Hofschire. "Because lower-income households tend to spend most of their income gains, this might be helpful consumer stimulus if the economic recovery is still struggling to regain traction."

But Hofschire speculates that a Biden tax plan, all other things being equal, would probably be "somewhat worse for the corporate profit outlook" than a Trump second term, and could fuel inflation longer term.

Taxes

During the Trump administration, federal tax rates on corporate and individual income and capital gains came down dramatically. The president has spoken of further cuts in a second term, but with a Democratic House that could be difficult to achieve. A more likely scenario is a continuation of current tax rates.

By contrast, Biden has proposed increasing the top tax rate for corporations to 28% from 21%, and for individuals to 39.6% from 37% while treating capital gains and dividends, now taxed at a top rate of 20%, as ordinary income.

Increases in corporate tax rates would be a hit to earnings, which are one driver of stock prices (though not the only one). But historically, rising corporate and individual tax rates have not meant falling stock prices, Fidelity sector strategist and market historian Denise Chisholm notes. In the 13 previous instances of tax increases since 1950, the S&P 500, the stock index that tracks most of the major companies in the US, has shown higher average returns, and higher odds of an advance, in times when taxes are increasing, according to Chisholm's research.*

This holds true even when you drill down into key sectors of the S&P 500. "Economically sensitive sectors, like consumer discretionary, oddly have done better on average during years taxes increase. These counterintuitive odds suggest something else is going on—the market either discounts it in advance or the economy has received stimulus to offset it," says Chisholm.

Of course, if you are facing rising individual rates, you will want to consider strategies to minimize the impact on your bottom line. In addition to higher federal tax rates on income and investment gains, Fidelity's head of government relations and public policy Jim Febeo notes that the Biden campaign has talked about rethinking retirement savings tax incentives to promote more equality among different income levels. That could include reduction in the tax deduction for IRAs and 401(k)s, at least for upper-income people.

"With the fiscal situation where it is, all sources of potential revenue could be on the table," says Febeo.

It's always a good idea to take advantage of tax-preferred retirement savings opportunities, but that may be particularly true this year, given the potential focus on tax increases under a Democratic regime. Other strategies to consider if you are concerned about tax rates rising: taking some capital gains, or converting a portion of your traditional 401(k) or IRA savings to a Roth.

Stocks

For the overall stock market, there are pluses and minuses under all 3 election scenarios. With Biden, you'd likely have more fiscal stimulus but higher taxes on corporations and higher earners. That could include higher taxes on capital gains and disincentives for share buybacks, which have helped drive stock valuations higher in the US than other countries. With Trump, you'd likely see lower taxes but less stimulus and a more confrontational approach to US-China relations, which has unsettled markets in the past.

That makes it difficult to say which administration would be better for stocks. Says Jurrien Timmer, Fidelity's director of global macro: "It's my personal sense that the 2020 election will have less impact on the markets than some suggest. Ultimately, it's the long wave of economic fundamentals that drives the markets beyond any one election or any one party."

Still, in the near term, there would likely be different winners and losers under a Republican versus a Democratic regime, due to very different regulatory approaches.

The Trump administration ushered in a period of deregulation. One major winner was the oil and gas industry, which benefited from less stringent environmental regulations. "The Biden administration would likely go in the exact opposite direction, rolling many of those executive orders back and pushing for more clean energy," says Hofschire.

Other sectors that could come under heightened scrutiny in a Democratic administration include health care, financial services, and big tech. Says Timmer: "The 5 FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are 20% of the US stock market and are actually pulling the market higher right now. If they stop pulling, the market may stop going up, so that's yet another dimension to the puzzle."

Trade

On the trade front, the differences between the candidates may be more stylistic than substantive. "The tactics and tone of the US-China relationship might change," says Hofschire.

"Trump often takes a confrontational tone on social media. Biden is probably a much more conventional politician in regard to trade and foreign policy and would be more likely to build multilateral coalitions to try to influence China. However, there is a broad, bipartisan consensus to get tough on China, so any future policies are likely to continue to ramp up export controls, restrictions on investment, and other decoupling activities that deepen deglobalization pressures," Hofschire says. Among them: Incentives to bring back key links in the industrial supply chain to the US or at least diversify out of China.

Interest rates

Regardless of the election, interest rates are likely to stay low for a long time—so it's a good time for borrowers. Says Beau Coash, institutional portfolio manager in the fixed income division: "Given that the Fed is going to keep buying and supporting the bond market, it's hard to see interest rates going up anytime soon—probably not before we get back to a fully open economy."

If you are considering buying a home or refinancing, now is a great time to comparison shop. If you have a large portion of your portfolio in cash or low-yielding bonds, it might be a good time to meet with an advisor to discuss a long-term investment strategy with a combination of stocks for growth potential and high-quality bonds for wealth preservation.

Health care

Trump is opposed to the Affordable Care Act, the health care system put in place under the Obama administration. The Trump administration has brought a lawsuit against it all the way to the Supreme Court. Meanwhile, Biden has talked about enhancing the Affordable Care Act. So far, however, the details of their future plans are faint. So, we will need to wait and see how those plans take shape.

Biden has also spoken about extending Medicare eligibility to unemployed people 60 and over. If enacted, this may offer an interesting opportunity for people considering early retirement—or forced into it. Since health care costs are often a key reason people can't afford to retire early, Medicare could help solve that problem, and potentially enable people to postpone Social Security to their full retirement age or later, capturing higher monthly benefits.

What's ahead?

Given the pandemic, passions surrounding this election, and uncertainty about how and when the election results may be resolved, it would not be surprising if markets got volatile.

"There's a reasonable probability that we won't know the outcome of the election for at least a few days and maybe a few weeks after the election," says Hofschire. "The pandemic is creating huge logistical challenges for the electoral process, making in-person voting more difficult and causing delays in counting due to the high volume of mail-in ballots. Unfortunately, the highly polarized partisan atmosphere isn't making this situation any better. The futures markets are pricing in rising stock-market volatility moving into the elections, and I expect a messy or prolonged aftermath could extend that volatility into December and maybe even January."

*** [posted 8/30/20] ***

On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.

He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found.

Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.

Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation.

Currently, the long-term capital gains tax rate is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly) in 2020.

how is the market up?

Despite a global pandemic and double-digit unemployment in the United States, the S&P 500 stock index reached a new high yesterday.

We asked Andrew Ross Sorkin, a business columnist and founder of The Times’s DealBook newsletter, to help us understand how the market could be doing so well amid economic devastation.

As irrational as it might seem, here’s the way investors rationalize the bullish stock market to themselves (we’ll only find out whether they are right or wrong in the future):

1. The stock market is forward-looking: Investors are betting on what the world and the economy look like in 12 to 18 months from now, not what they look like today, tomorrow or this fall.

2. The big get bigger: Much of the stock market’s success has been the result of a run-up in value for a few big technology companies — including Apple, Amazon and Microsoft — that make up a large share of the index. And retailers like Walmart and Home Depot are growing in part because small businesses have closed, allowing the bigger companies to take even more market share.

3. Betting on a vaccine: Given the daily headlines about the potential for a vaccine, investors want to be invested in the market when the news comes that there is a genuine vaccine, on the assumption that it will send stocks even higher.

4. The only game in town: With the Federal Reserve planning to print money for the foreseeable future, investors don’t want to be in cash or bonds, which are steadily losing value. So where else can they put their money? The stock market has become a default.

5. Help from Washington: As dysfunctional as Congress has proved to be, investors are betting that Republicans and Democrats will find a way to keep plying the economy with stimulus. (Anecdotal stories suggest some Americans have even taken their $600 unemployment checks and invested them in the stock market.)

Of course, all of these rationalizations don’t take into account the possibility of a terrible second or third coronavirus wave, a delay in the discovery of a vaccine, a constitutional crisis come the election in November, runaway inflation, the prospect of higher taxes to pay for the stimulus, a more significant trade war with China, or the dozens of other risks that seem to be bubbling just below — and in some cases on — the surface.

In the meantime, happy trading!

-- New York Times, 8/19/20

Black Turkeys

The circumstances of the 2020 market crash might be unique to the coronavirus pandemic, but they lead investors to wonder: Are such drops normal for equity markets, or is this different?

During the global financial crisis of 2007–09, some observers described the events that unfolded as a “black swan,” meaning a unique negative event that couldn’t be foreseen because nothing similar had happened before. But the data I’d seen from Ibbotson Associates, a firm that specialized in collecting historical market returns (and which Morningstar acquired in 2006 and merged into Morningstar Investment Management LLC in 2016), demonstrated a long history of market crashes. Some ended up being part of a larger financial crisis.

So, if these “black swan events” happen somewhat regularly—too frequently to render them true black swan events—then what are they? They’re more like “black turkeys,” according to Laurence B. Siegel, the first employee of Ibbotson Associates and now director of research for the CFA Institute Research Foundation. In a 2010 article for the Financial Analysts Journal, he described a black turkey as “an event that is everywhere in the data—it happens all the time—but to which one is willfully blind.”

Here, I take a look at past market declines to see how the coronavirus-caused market crisis compares.

Shilling says...

Stocks could be poised for a big drop similar to the market’s decline during the Great Depression, according to financial analyst Gary Shilling.

In a CNBC interview, Shilling said the stock market could plunge between 30-40% over the next year as investors realize the economic recovery from the coronavirus recession could take longer than expected.

“I think we’ve got a second leg down and that’s very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it’s going to take to recover,” he said.

The S&P 500 plunged in February and early March as the coronavirus pandemic spread across the U.S., forcing businesses to shut down and lay off workers. Since mid-March, the index has rebounded roughly 40% as investors have become optimistic about the gradual reopening of the economy and policymakers have injected trillions of dollars of economic stimulus into the financial system.

Early economic data has bolstered the case for a V-shaped recovery, where the economy bounces back quickly from a steep downturn, yet some investors are still cautious as the number of coronaviruses cases in the U.S. continues to rise. Many Americans have missed out on the recent market rally, with record-high levels of cash sitting on the sidelines.

Shilling said the S&P 500′s comeback resembles its rebound in 1929, when stocks rallied after an initial crash. He warned history could repeat itself with the S&P 500 poised to tumble again like it did in the early 1930s after the severity of the Great Depression became clear.

“Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy,” he said.

Shilling, who is the author of several books including “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation,” said the coronavirus pandemic will force consumers to remain more cautious about spending in the coming years.

“I think we’re going to see downward pressure on prices and that works to the advantage of Treasury bonds, which have been my favorite since 1981,” he said.