Windsor Insights

As we approach the Thanksgiving holiday, I want to take a moment to express my sincere gratitude for your continued trust and business.

It’s an honor to work with you and help you achieve your financial goals.

I hope this Thanksgiving season brings you joy, good health and quality time with loved ones.

Today, we discuss:

• Key economic factors, including consumer spending, the October jobs report, inflation and interest rates.
• Your portfolio and our money moves.
• Year-end financial actions to take.

Consumer Spending

While consumer spending remains strong, it’s showing signs of slowing.

Overall, consumers are focused on value. They’re trading down (and have been for months), favoring value retailers like Walmart and Marshalls. Many consumers trading down are also buying smaller package sizes and reducing purchase frequency.

Heading into the holiday season, those with higher incomes are sailing right along, however, others with lower incomes are struggling to manage increased costs.

Although wages have risen, inflation has eroded much of the gains, leaving little room for increased purchasing power.

New Jobs Declined Sharply (However)

The Bureau of Labor Statistics reported 12,000 new jobs were added in October, a steep decline from September (223,000 new jobs).

However…

Acting Secretary of Labor Julie Su attributed the decline to “significant impacts from hurricanes and strike activity,” adding that the strike activity (Boeing) reduced employment growth by 41,000 jobs.

The strike disrupted Boeing’s production, which affected its supply chain and other industries. This led to a temporary decline in manufacturing jobs.

Also, many companies didn’t report their job numbers on time, adding to the decline.

Conversely, the unemployment rate held steady at 4.1% in October, unchanged from September. In general, whoever wants a job can find one.

Interest Rates & Inflation

The Fed lowered interest rates again in early November by 0.25%, marking the second rate cut this year. The initial cut of half a percentage point occurred in September.

Inflation is at 2.44%. Last month it was 3.36%. It peaked at 9.1% in June 2022. (The Fed aims for a 2% inflation rate.)

Overall, inflation has cooled. However, prices remain elevated since surging 20-30% over the past several years. The rate of increases has slowed, yet it’s unlikely we’ll return to pre-inflation pricing levels.

Related: Check out our post, Rising Prices: try these saving tips to free up cash.

Client Portfolios & Money Moves

Moderately allocated portfolios are up just over 20% for the past 12 months.

We’ve been taking profits on some investments appreciated by 35% or more, especially those held in tax-advantaged accounts like IRAs. This strategy also helps rebalance your portfolio.

Preparing for December

Many mutual funds distribute capital gains in December, creating a taxable event. Therefore, we may sell some of the mutual fund(s) to avoid capital gains taxes.

To minimize capital gains taxes, we prefer Exchange Traded Funds (ETFs).

ETFs are generally more tax-efficient than mutual funds.

Why? Because ETFs are created and redeemed in large blocks, minimizing the need for frequent trading and triggering capital gains distributions. In contrast, mutual funds often buy and sell securities to accommodate investor transactions, which can lead to higher tax bills.

We’re always striving for tax efficiency!

Related: We just published, A Disciplined, Research-Driven Approach to Investment Success. Key points include tax-smart investing and our daily monitoring and rebalancing of accounts. (We review 20-to-30 client accounts daily.)

Magnificent 7 (Mag 7) Causing Overweighting in Portfolios

We’re actively focused on ensuring portfolios are balanced and, therefore, keep a close eye on any overweighting within portfolios.

Many investment funds are concentrated in large cap stocks, like the Mag 7 (Apple, Microsoft, Amazon, Nvidia, Tesla, Alphabet (Google) and Meta (Facebook/Instagram/Threads).

These companies are massive!

Here are two examples:

#1—Amazon and Microsoft are worth as much as the entire German economy (the largest economy in Europe).

#2—The Mag 7 are almost worth as much as the entire European Union’s GDP.

Overweighting Example & Financial Risks:

The Mag 7 stocks currently account for about 30% of the S&P 500’s total weighting.

This can lead to concentration and high-valuation risks.

Specifically, a fund’s performance is heavily tied to a few stocks, increasing its sensitivity to their fluctuations. Also, the Mag 7 stocks have increased in value substantially, prompting the question:

Do we really want to pay this extreme value?

To help safeguard against these risks, we’re analyzing “equal-weighted funds,” (e.g., if an investment has 100 holdings, each holding is only 1% of the fund).

These funds have the potential for more diversification and outperformance. Historically, equal-weighted funds have sometimes outperformed market-cap-weighted funds, (e.g., Vanguard 500 Index Fund, VFIAX) especially during periods when smaller companies outperform larger ones.

Back to overweighting…

A major Wall Street concern about the Mag 7 and other large corporations is their massive AI investments. Specifically, will this spending erode earnings?

Only time will tell.

Reminder: Year-End Financial Actions

Finally, just a reminder to revisit the following financial items by December 31:

• Retirement Plan Contributions
• Charitable Contributions, Including Qualified Charitable Distributions (QCDs)
• Required Minimum Distributions (RMDs)
• Health Savings Account (HSA) (Ideal for tax-free growth.)
• Converting Employee-Sponsored 401(k)s to a Roth 401(k)
• Partial or Full Roth Conversion (Helps minimize lifetime taxes.)
• Defer Compensation for High Earners (If you’re preparing to retire, deferring income to the years immediately following retirement may help spread out your income and reduce taxes.)

See our Key Financial Data 2024 spreadsheet for retirement plan contribution limits, catch-ups, etc. For more information describing the above action items, read our post Essential Year-End Financial Action Items.

–David Bunker, Financial Advisor & Licensed Fiduciary

Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.

As the leaves change and the days grow shorter, it’s the perfect time to take a fresh look at your financial goals and refresh financial plans before the year closes.

Today, let’s consider the following 4 financial actions:

#1—Revisit Your Retirement Plan Contributions (see example)

#2—Identify Recent Life Changes and Tax Implications

#3—Prepare for Year-End Charitable Donations

#4—Utilize Household Improvement and Energy Tax Credits

Deep Dive: For a detailed look at U.S. and global economic trends, read Capital Group’s Economic Indicators.

#1—Revisit Retirement Plan Contributions

Maximizing contributions to your company’s retirement plan can have a significant impact on your future quality of life.

Plus, if your employer offers matching contributions, that’s essentially free money!

And let’s not forget the power of compound interest—it can play a major role in shaping your retirement lifestyle.

Simple Example:

Imagine you’re planning to retire in five years.

After reading this, you decide to increase your retirement plan contributions by $300 per month.

Over five years, with an annual return of 7% compounded annually, that extra $300 a month could grow to almost $21,000 (i.e., a new roof, two luxury two-week European vacations, or 210 dining-out meals for a couple, according to Gemini AI).

And, the above numbers don’t include your employer’s contributions.

Here’s the compound interest calculator we used.

Another Consideration: Many employers offer Roth 401(k)s and IRAs, in addition to traditional retirement plans. If you’re currently contributing to a traditional plan and have access to a Roth option, let’s discuss whether switching might be beneficial for you.

Finally, don’t forget to max out your health savings account (HSA) if you have a high-deductible health plan. HSAs are tax-deductible, ultimately reducing your taxable income and possibly placing you in a lower tax bracket. Remember, qualified withdrawals are tax-free.

#2—Identify Life Changes and Tax Implications

If you’ve recently experienced the following, please contact us as soon as possible.

Employment Changes—New job or raise? Let’s revisit your retirement income plan to address potential changes in benefits, income or life insurance.

Family Dynamics—Divorce, marriage, adoption, parent needing caregiving or a child with special needs? With changes, you’ll likely need to re-optimize your financial and estate strategies.

Health Concerns—Serious illness or nearing 65? Let’s discuss Medicare and your spending options.

Large Expenses or Inheritance—Planning a big purchase, sale or received an inheritance? Let’s prepare for the tax implications.

Many of the above events can trigger a need to revisit your tax withholdings to help ensure you’re on target for 2024.

Here’s a detailed chart (on our website) reflecting the 2024 tax rate schedule, standard deductions, retirement plan contribution limits and more.

Key Resource: Download our Prolonging Retirement Income Checklist. It’s packed with important questions to ponder.

#3—Prepare for Year-End Charitable Donations

It’s best to start planning your year-end charitable donations early, particularly if you’re planning to donate stocks or other appreciated assets.

Considerations Include:

Matching Gifts: Maximize your charitable giving with matching gifts from your employer. Consider suggesting a cause you’re passionate about. Reach out to your HR department to inquire about this option.

Volunteer Your Time: In addition to financial donations, volunteering can make a significant impact. Many employers offer paid time off for volunteer activities. Have you used your hours?

[Related Article]: Help others, help yourself? Why volunteering can be good for you.

Donate Appreciated Assets: Giving appreciated assets like stocks or bonds to a charity can provide a significant tax benefit. You can deduct the fair market value of the asset, avoiding capital gains tax.

Donor-Advised Funds: These funds allow you to make a tax-deductible donation now and distribute the funds to charities over time.

Qualified Charitable Distributions (QCDs): If you’re over 70½, you can make a direct contribution from your IRA to a qualified charity, reducing your required minimum distribution (RMD).

#4—Utilize Household Improvement & Energy Tax Credits

There’s an abundance of improvements you can make to your primary residence and receive potential tax credits, including energy-efficient doors, windows, insulation, roofs, furnaces, water heaters and more.

Here’s a detailed list by the IRS describing what qualifies: Energy Efficient Home Improvement Credit.

Also, Massachusetts offers several energy rebates and incentives as well as New Hampshire; and be sure to check with your respective energy providers for their unique incentive programs.

Tip: Before you pay to recycle an old dehumidifier, refrigerator or similar, check to see if your energy provider offers free pick-up and a rebate. Many do.

Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.