Permanent Value

Week In Review – 11/21/14

Bruce Doole
November 21st, 2014
Three Surprising Facts About Portfolio Taxes
1. You really do want to pay taxes.

Let’s be honest: No one likes to pay taxes. It’s not an enjoyable experience to have a portion of the wealth you’ve been creating extracted and sent to the government. But in the broad scheme of things, if you’re paying taxes on your investment portfolio, it’s good news. That’s because you pay taxes when your portfolio is up — when you’re making money.

While you should manage that tax impact to minimize any negative effects, the simple truth is that the more you’re paying in taxes, the more you’re creating in wealth. The single most effective way to avoid paying taxes is to lose money year after year, and you certainly don’t want to do that.

2. The benefits of tax loss harvesting are often overstated.

There is value in trying to manage tax exposure along the way, and one of the most popular ways of doing that is to harvest capital losses. Obviously, harvesting losses isn’t good news, ultimately, since it means you lost money on your investment (it’s like a consolation prize from the government for losing money). Nevertheless, investments go up and down and sometimes there are opportunities to take advantage of the declines.

The important thing to remember when you perform loss harvesting is that the technique results in a tax deferral, not a tax savings.

In a lot of situations, people believe that loss harvesting is creating wealth for them or saving them on taxes. Technically, that’s not the case, as every tax dollar you’re saving now will have to be paid back in the future when that investment recovers. That’s not to say that loss harvesting is worthless, but rather, that the opportunity it offers is tax deferral — that $3,000 in your pocket now (which you can invest and grow) in exchange for $3,000 paid in the future to Uncle Sam. So while there is value in tax loss harvesting, it is often exaggerated.

3. Sometimes it’s better to pay taxes early instead of deferring them.

While it’s often a good idea to defer taxes when you can, there are situations where the best thing you can do is actually pay the taxes earlier. This comes as a result of the 2013 changes in tax law which moved us from a historical two tax bracket system for capital gains — a low bracket of 5% or 0% for lower income Americans, and 15% for everyone else — to what is effectively a four bracket system today. Currently, we have 0%, 15%, 18.8% (for those also subject to the 3.8% Medicare surtax on investment income), and 23.8% (the 20% top capital gains rate combined with the 3.8% surtax).

The reason why a four bracket tax structure is so important is that if we do too good a job pushing our capital gains down the road, we could actually finish with less money. For example, imagine a portfolio that’s growing well at $50,000 a year in gains. You may think you don’t want to sell any of those gains right now, because you don’t want to pay the taxes. A $50,000 yearly gain is something you might be able to pay at the lower 15% rate, if you’re in a moderate tax bracket. However, if you push that down the road 10 years, you’ll no longer have individual $50,000 gains, but one massive $500,000 gain, which would bump you right up into the 23.8% bracket. As a result, you’ll actually pay more in taxes than you would have by simply paying at the lower rate each year.

This is a very important planning issue when you’re trying to manage portfolios on a tax efficient basis. When your income is high, then there’s little problem in deferring the taxes. But when your income is low, it may be more beneficial to harvest the gains and fill up those lower tax brackets so you can avoid being pushed into a higher tax bracket in the future.

- Michael Kitces, From The Corner Office


  • Canada Housing Starts for October were nearly 7% below their slightly weaker revised September reading, recording a seasonally adjusted annualized rate of 183,604 units.
  • China Industrial Production for October was up a less-than-expected 7.7% from a year ago.
  • China Retail Sales were up 11.5% in October, slightly below expectations of an 11.6% increase.
  • U.S. Jobless Claims were up 12,000 to 290,000 for the November 8 week, the highest reading in seven weeks.
  • Italy CPI rose an unrevised 0.1% on both the month and the year in the final report for October.
  • U.S. Retail Sales in October rebounded 0.3 percent after declining 0.3 percent in September.
  • U.S. Consumer Sentiment extended its recovery-best performance in October, coming in at a final 86.9 versus 86.4 at mid-month and September’s final reading of 84.6.
  • Italy GDP provisionally matched expectations for a 0.1 percent contraction versus the previous period, the thirteenth consecutive quarter in which total output has failed to expand.

- Source: Ivy Fund

Week In Review – 11/13/14

Bruce Doole
November 13th, 2014

5 tax breaks on Congress’s new agenda

The state-level sales-tax deductions are among tax provisions that expired early this year, which Congress will have to tackle soon, according to The Wall Street Journal. Internal Revenue Service Commissioner John Koskinen has warned of possible delayed refunds and tax-filing disruptions if Congress doesn’t act this year. Tax relief for mortgage-debt forgiveness, rollover of IRA asset donations to charity and breaks on educator expenses and tuition and fees are also highlighted. — The Wall Street Journal

The most-overlooked tax deductions

Many taxpayers pay more than what they’re supposed to pay in taxes every year because they tend to overlook some tax deductions, according to Kiplinger. Some of these tax deductions, which will allow them to save substantially, include state sales taxes, reinvested dividends, and out-of-the-pocket charitable deductions. Other tax deductions that can help taxpayers save are student-loan interest, job-hunting costs, and moving expenses as a result of a new job. — Kiplinger

6 tips for smart year-end tax planning

Investors could effectively manage their taxes by year-end by making tax-advantaged savings plan contributions and keeping withholding tax close to their actual tax liability, according to Forbes. Tax-loss harvesting and charitable contributions could also lessen tax liabilities. Further tax deductions could be received by spending their annual gift tax exemption and advancing tax payments. — Forbes

Top five most costly investment mistakes

Excessive cash and payments for investment fees are among the most expensive mistakes investors could do to their investments, according to Forbes. Spending too much time on investment decisions, lacking savings and disregarding tax loss harvesting could also be detrimental to investment performance. — Forbes

- Ralph R. Ortega, Financial Planning


  • ISM manufacturing index showed outstanding growth, rising to 59.0 from 56.6 in September.
  • International trade deficit for September expanded to $43.0 billion from $40.0 billion in August.
  • Jobless claims fell 10,000 in the Nov. 1 week to 278,000; the four-week average is down to 279,000, a 14-year low.
  • Payroll jobs (nonfarm) advanced 214,000 in October, below expectations, after gaining 256,000 in September.
  • Unemployment rate dipped to 5.8% in October from 5.9% in September.
  • Japan PMI manufacturing index improved in October to 52.4 from 51.7 in September and represents the highest reading since March.
  • China PMI composite, which covers manufacturing and services, was 51.7 for October, down from 52.3 in September.
  • France PMI composite for October was 48.2, slightly lower than its September reading of 48.4.
  • Italy consumer prices were stronger than expected with a provisional 0.1% rise in October.

– Source: Ivy Fund

Week In Review – 11/7/14

Bruce Doole
November 7th, 2014
Schwab’s Sonders: Bull Market Still in Optimism Phase
Liz Ann Sonders began her presentation at the Schwab Impact preconference Tuesday in Denver by quoting Sir John Templeton on bull markets, which the famed investor said “are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

This current bull market remains in the optimism phase, Schwab’s chief market strategist said, and positing that “we’re nowhere near the euphoria we see at market tops.” In a wide-ranging talk on the markets and economy, Sonders said saw a lot to like, but warned that “volatility is here to stay.”

Among the good news for the markets and economy: the risk of recession is low; average payrolls are growing (which she suggested may have helped spur the Federal Reserve’s move to end quantitative easing); the U.S. had a record deficit drop in 2013; private-sector deleveraging “has come a long way”; the spread between private-sector and government spending is narrowing, helped by increased federal government spending since the sequestration; and the U.S. is now the world’s largest oil producer.

With the oil/gas sector’s capital expenditures accounting for only 8.2% of total U.S. capital expenditures, “decreasing energy prices may not take such a bite” out of the economy, Sonders said.

The Fed’s inflation benchmark, the personal consumption exenditures index (PCE), is “sitting well below the 2% threshold,” she said.

In her trademark “on-the-one-hand, on-the-other-hand” approach, Sonders did point out some of the less-than-good news. For example, consumer spending, which she calls the “big whammy” that accounts for two-thirds of U.S. economic growth, decreased during the third quarter of 2014. That record deficit drop in 2013 won’t be matched this year, and the debt remains at 100% of GDP.

The International Monetary Fund last month projected U.S. GDP growth of 2.2% in 2014 and 3.1% in 2015, but Sonders said “the IMF stinks on forecasting.”

Continuing her litany on Tuesday, Sonders said the velocity of money “remains depressed” and that there remains a “big gap” between banks’ assets and their lending, which decoupled beginning in 2008.

What about the rise in the dollar? While it might seem like a rapid rise, “the spike in the dollar barely registers on a longer-term chart,” she pointed out. Moreover, the dollar is “going up for the right reasons.”

On inflation, she said the “market likes this zone of inflation” of between 1% and 2%. Margin debt is near its record highs, but she attributes that to institutions, not individuals.

However, she does detect a “pervasive sense of skepticism” among consumers, particularly in the equity markets, citing a Gallup poll that showed the lowest levels of individual stock ownership (even in mutual funds or 401(k)s) in nearly 30 years. “I don’t think,” she said in the Wednesday interview, that investor sentiment is “anywhere near the frothy levels” that existed in the mid-1990s “excess.”

Sonders’ conclusion? The fourth quarter of the year “seasonably bodes well for the S&P 500,” while the markets’ “valuation is not a problem.”

- James J. Green, Think Advisor


  • Durable goods decreased 1.3% in September after dropping 18.3% in August and spiking 22.5% in July.
  • Consumer confidence hit a post-recovery high of 94.5, up from a revised 89.0 in September and surpassing the previous recovery high of 93.4 in August.
  • GDP growth estimate for third quarter posted at a moderately healthy 3.5% annualized, following a 4.6% boost in the second quarter.
  • Jobless claims rose 3,000 in the Oct. 25 week to 287,000 but the 4-week average edged slightly lower to 281,000 for the 7th straight decline and the lowest level since May 2000.
  • Japan industrial production umped a greater-than-expected 2.7% from the previous month after sliding 1.9% in August.
  • Great Britain nationwide house pricing index posted a stronger-than-expected 0.9% increase in October, slipping from September’s 9.4% to 9.0%.
  • Italian consumer price index proved stronger than expected with a provisional 0.1% monthly rise.
  • German retail sales slumped in September with a 3.2% drop, reversing August’s 1.5% increase.

- Source: Ivy Fund