WHAT YOUR MONTHLY STATEMENT WILL REVEAL

WHAT YOUR MONTHLY STATEMENT WILL REVEAL

| April 01, 2020
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Very soon you will be notified that your first quarter statement is available or you will receive your statement via the mail.  What are you going to do?   Are you going to open it or just file it in the drawer?

I have had several clients tell me that they have not even looked at their account balance during the past month.  That is fine because I look at your account balance every day determining if any trades or rebalancing needs to be done.  This has always gone on from the good times in 2019 to the bad times we are in now.

So, if you do open your statement what will you see?

A lower balance than the quarter before.  Everything is down YTD except for bonds:  Large Cap stocks -20%  , Mid Cap stocks -30% , Small Cap stocks -30%, International -23%  , Bonds +2%

In a taxable account, you will see Realized Losses in your account.  We took the opportunity last month to do Tax Loss Harvesting.  We sold “harvested” losses in your account to help reduce your tax expense.  For example, if a Vanguard S&P 500 ETF was bought for $60,000 a few years ago and was trading around $40,000 in the middle of March, we sold to recognize the loss of -$20,000.  At the same time, we purchased Schwab Large Cap ETF to keep our equity exposure the same.  We are not allowed to buy the Vanguard (or a similar S&P 500 fund) since it can’t be an identical purchase per the IRS Wash Sales rule.  (The classic example is to sell Coca-Cola and by Pepsi.)  We just did it with different indexes.

Now we have a -$20,000 long term loss that can help reduce your 2020 taxes.  If we sell a Mid Cap index in December for a +$15,000 long term gain in the account, we can match that gain (+$15,000)  against our long term losses (-$20,000) and pay no capital gain taxes and still have -$5,000 in losses yet to use.  That offset saved us $2,250 in Federal capital gains tax ($15,000 x 15%).  We can then use $3,000 of our loss to reduce our income for 2020 and then carry over -$2,000 to be used in 2021.  Even if we did not do an offset in 2020, long term capital gain losses can be carried over year after year until fully used.

I just went through a lot of math there, but bottom line is the down turn in March created some opportunities to reduce your taxes.  This was not a time to just sit and wait for the market to come back.  If you did you missed some tax savings.

Another opportunity to become more tax efficient was to sell mutual funds (mainly American Funds) and purchase Exchange Traded Funds (ETFs like Vanguard, iShares, Schwab).  We did this because our clients had transferred to their Charles Schwab account mutual funds from their previous broker that had taxable gains.  We were now able to sell those funds at breakeven or even a loss and reinvest into lower cost ETFs.   The added benefit of ETFs is that they typically do not pay out a capital gains distribution each December like mutual funds do.  So, we lowered the expense and the taxes for our clients.

You will also see rebalancing trades in your accounts.  We sold fixed income (bonds) and purchased stocks to keep us at our target allocation.  So, if a portfolio was at 60% Equities/40% Bonds prior to the down turn, it had turned to 53%/47% when stocks fell.  Your portfolio became more conservative.  We do not know if we have reached the low on stocks prices.  We do know that stocks were off their highs by 30%, so that is what prompted us to start buying back into equities.  So, we sold what was expensive (bonds) and bought back into cheaper investments (stocks).

So, if you are a client of Oldfather Financial, you will see a lot of activity in your statements for this past month.  If you are not a client, hopefully your advisor was able to take advantage of this opportunity.

As always, please contact us if you have any questions.

P.S.  As a follow up to the CARES Act Stimulus email, please go to our website for a link to a calculator to show much you can expect in your checking account in the new few weeks.

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