On Calling the Next Recession

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Earlier this year, fears of an economic recession became widespread, largely driven by investor wariness of what is termed an “inversion”in the yield curve.  A long-standing Wall Street rule of thumb holds that when the yields offered by long-term bonds give up the typical premium they hold over interest rates on shorter-term instruments, a recession is on the way.  And that narrowing of the premium happened.  The spread between the yields on 10-year treasury notes and 1-year treasury paper shrank during that time from 75 basis points (that is, seventy-five hundredths of one percentage point) to only 15 basis points (fifteen hundredths of one percentage point).  But before simply accepting this common perception, it pays to have a look at how reliable this yield curve signal has been in the past.  The results are mixed.

Inversions have given false signals on a number of occasions.  In 1995 the yields on 10-year treasuries suddenly lost the premium they had over 1-year treasuries.  That was six years before the 2001-02 recession, so we cannot count it as an early warning, especially because spreads widened again during the intervening period.  In 1998, the yield curve inverted for a few months, and for some weeks the 10-year treasury yield fell below the 1-year yield.  But then the “normal” upward sloping curve returned in 1999.  A clear recession signal had to wait until 2000, when for a number of months the 10-year yield fell more than 50 basis points below the 1-year yield before the mild 2001-02 recession took hold.

The first hint of an inversion in this century came in early 2006, and some might consider it a very early warning of the Great Recession (as it is now remembered) of 2008-09.  But that would be a stretch.  For one thing, the yield curve by the middle of 2006 had returned to its normal upward slope.  It then reverted to an inversion later in 2006 and early 2007, only to resume its upward slope later in 2007, and it continued to get steeper into 2008, when the 10-year yield stood fully 100 basis points above the 1-year yield.  That can hardly be called consistent signaling.  Indeed, using those statistics, observers relying on the yield curve signal would have been calling an “all clear” just before the 2008-09 great recession began.  And, indeed, some did.

The yield curve offered far clearer signals during the last two decades of the twentieth century.  Strong and persistent inversions predated the 1990-91 recession as well as recessions in 1980 and 1981-82.  But if we look further back, the record again becomes spotty.  Inversions in 1969 and 1973 did signal the recessions of respectively 1970-71 and 1974-75, but an inversion in 1966 saw no following recession.  Even if one were to make the dubious claim that it was a very early indicator of the recession that did develop four years later, it still would not explain why the yield curve assumed its normal upward slope in those intervening four years.

While this uneven history may offer evidence that yield curve inversions provide a worthy signal, the record also suggests that the investor use such signals with care.  Helpful here may be research by the Federal Reserve Bank (Fed) of St. Louis, which has looked back at some 60 years of economic cycles.  The Bank found guidance in its research for interpreting the yield curve.  It also uncovered other indicators to improve forecasting by offering a verification of the yield curve signal. Regarding the yield curve itself, the Bank found that inversions must persist if they are to give a clear signal, and that even when they do, a recession takes, on average, 10-18 months to develop.  For verification, the Fed researchers recommend three checks:

First is the number of building permits for new houses.  It can confirm a recessionary signal from yield curve inversions with the same average 10-18 month lead-time.  In the current environment, these data (despite the first quarter’s overall economic strength) seem to suggest at least a tentative conformation of a recessionary signal. Permits for new construction rose a slight 0.6% from March to April, the most recent month for which data are available, but the April figure is 5.0% lower than April a year ago.  However, permit requests are also up almost 3.8% from the lows of last August, which might indicate that the dip was less a cyclical sign than simply the inevitable fluctuation of building permits from month to month and quarter to quarter.

Second, the Fed’s economists identified employment in construction as another verifier of the yield curve’s recessionary signal.  But at the moment, the reading is hardly recessionary.  For April, the Labor Department reported that the U.S. employed 7,486,000 people in construction, up 3.5% from April 2018, and a steady, if slow, rise for 2019 so far.  This picture, however, does not entirely contradict recessionary readings, because, on average, this indicator lags some months after the yield curve inverts before offering a confirmation of coming economic trouble.  This same lag also is true with the third confirming indicator uncovered by the Fed analysts: manufacturing employment.  The Labor Department indicates 12,838,000 people working in manufacturing in April, up about 1.6% from April 2018, and this too at a steady if slow pace so far in 2019.  Here as well it is hard to make a call for a recession but from a strict reading of the averages, it is also impossible to dismiss a recession out of hand.

On these bases, one cannot dismiss the recent spate of recession forecasts. They do, however, seem premature. And even if –– despite the tentative evidence available so far –– the flattened yield curve really is giving a signal for recession, the averages indicate that the slide in real economic activity would only begin to emerge by the turn of the year at the earliest and would likely not gain force until summer 2020.  Though only a fool would bet on such a forecast at this stage, there are enough straws in the wind to make it worthwhile to watch the indicators offered by the St. Louis Fed carefully for a confirming sign.


Ethical Investing

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This is, of course, an ambiguous phrase.  It could refer to how diligently professional investors do their duty to clients, in which case it would mean staying within the guidelines imposed by the client while using every legal means to obtain the highest return for the least risk.  But these days, as in other times in the past, “ethical investing” means choosing investments that further some social or moral purpose, possibly forgoing returns to promote certain corporate or national policies or to punish undesirable behavior.  For instance, investors who disapprove of Israeli policies might exclude investments in that country from their portfolio.  Others, concerned about the fate of human civilization, might emphasize investments deemed to benefit the environment while excluding those they feel would harm it.  Millennials, especially, seem to favor such approaches, though they are not the only ones pursuing social and ethical investing.

Approaches to ethical investing have grown in recent years.  I won’t go through them here, nor will I judge them from either a moral or an investment perspective.  However, there are two investment implications that deserve attention here: one concerns portfolio distortions; the other, fiduciary considerations.


These require a recognition of the biases such investing will build into a portfolio and consequently into its performance.  Most investing, especially when done by professionals, measures success relative to an investment index that includes the relevant universe of assets available to an investor for purchase –– what professionals refer to as a “benchmark,” or “bogy.”  With American stocks, that benchmark is often the S&P 500 Stock Index, which includes the 500 largest corporations in the country, with representatives in just about every industry.  There are broader indexes for American stocks that include smaller companies, global indexes, indexes for other countries, and indexes for regions, say Europe or Asia or emerging markets. Investors can say they have added value to their portfolio if they can produce for their clients a higher return than the relevant index, “outperform” it, to use financial jargon.  When, for ethical reasons, an investor excludes certain stocks that are otherwise in the index, or chooses to emphasize others, the portfolio’s performance will deviate from the benchmark for reasons that have nothing to do with the stock’s possible gain or risk.

Some years ago ethical investing excluded stocks of companies that did business in South Africa (as some investors do today with Israel), and the consequent distortions were huge.  These ethical portfolios could not buy any major oil company or any major auto manufacturer.  They could not own shares in most machinery or appliance producers, defense contractors, and many retailers –– the list was long.  Some portfolio managers bought smaller companies to maintain involvement with industries otherwise excluded, but investing in small companies to replace large ones introduced other distortions.  When some or all of these excluded stocks did well, the ethical portfolios trailed their respective benchmarks.  When these excluded stocks did poorly, the ethical portfolios outperformed their benchmarks.  But neither difference had anything to do with investment management abilities.  It was entirely an accident imposed by excluding South Africa.

Similar distortions are present in more contemporary ethical concerns.  For instance a preference for renewable energy or electric cars would render a portfolio extremely sensitive to fluctuations in oil prices –– perhaps even more so than one with an overweighting in major oil companies.  Though renewables and electric vehicles are an alternative to fossil fuels, their business prospects nonetheless rise when oil becomes more expensive and the public seeks alternatives, and fall just as dramatically when gasoline and fuel oil become more affordable.  Some investors, though eager to support renewables, feel uncomfortable with this exaggerated sensitivity to oil prices.  They might exclude oil companies from their holdings in order to blunt the volatility.  Such a decision might also fit with the ethical convictions built into the portfolio.  Whatever the individual tolerances for volatility or available investing offsets, investors wanting to pursue such ethical mandates need to know these implications.

Distortions can affect portfolios that exclude Israel or defense issues or timber production or any of a host of corporations that might bear, favorable or unfavorably, on ethical implications.  With each decision, investors must consider the potential effects on their portfolios and whether the proposed ethical stand is worth it to them.  The decision may involve soul searching about the extent of their conviction.  For those who invest on another’s behalf, especially professional investors, there is also a fiduciary consideration.

Fiduciary Concerns   

 Anyone who invests for others carries a measure of fiduciary responsibility to do the best they can at the least financial risk while also considering the preferences, tolerances, and objectives of those on whose behalf they are investing.  The law is explicit about who is a fiduciary, but the responsibility devolves to anyone thus involved.  This, too, involves ethics.  If you informally advise family and friends, your legal responsibility is limited, but your moral responsibility remains.  Your legal responsibility grows when you are paid for advice, and especially when arrangements empower you to buy and sell on another’s behalf.

If “clients” –– whether formal clients of a broker, or just friends and family to whom you’re giving advice –– have not brought up special ethical considerations, then it’s best to proceed without regard to your own personal convictions.  If they have expressed ethical considerations, have them state them as explicitly as possible:  Put them in writing.  This will protect you from blame or lawsuit if the “ethical portfolio” disappoints.  Having the client’s considerations in writing will also guide your professional investing decisions, keeping in mind that an ethical overlay on a portfolio is not in the professional investment manager’s area of expertise.  For example, if someone wants to punish Israel for its policies, find out if they want simply to avoid investing in Israel or if they want also to avoid corporations from other countries that do business in Israel.  If the client wants to buy “green” stocks, make sure the word “green” is well defined.  You don’t want to buy timber because it is a renewable energy source only to discover that your client wants nothing to do with any activity that cuts down trees. It would also be useful for you to brief the client on the possible distortions involved.  You should document that briefing as well.

A perfect example of the potential troubles surrounding ethical investing involves South Africa during its apartheid era, when the boycotts of that country in the 1980s led many U.S. foundations and municipalities to impose restrictions on their investment managers.  Because foundations usually have boards that are both in control of the foundations and responsible for their actions, the choice to boycott seldom caused trouble, except for managers who had failed to alert the foundations ahead of time of how the restrictions could affect their portfolios’ relative performance.

With the municipalities, however, matters were more complex.  The pools of money that municipal politicians and bureaucrats control are usually funds set up to support pensions obligations.  When those in control imposed the ethical restriction (whether from conviction or to get votes) they had neither an easy way (nor a desire) to consult the beneficiaries of the pension schemes.  If the ethically imposed distortions benefitted the portfolio and it performed well against its benchmark, there was seldom a complaint.  But when the portfolio underperformed its benchmark, participants in these pension schemes sued, sometimes individually but usually as a class.  In every case the courts found against the municipalities. However admirable the municipalities’ ethical commitment, it imposed a hardship on those who had no say in the decision but whom those decision-makers were legally bound to protect.  The courts ordered that the municipalities involved make up the difference.  Then, of course, the taxpayers suffered, though they could not sue for compensation.

A Last Word

 As is so often the case with investing, every move imposes a risk, a potential cost.  When such a move, in this case an ethical one, results in serendipitous advantages, no one complains.  But the story is almost always different when the decision imposes costs.  Those investing, for themselves or as agents for others, owe it to all involved, investors and their clients, to strive to become fully aware of the implications of their decisions.

So What Is This Recent Rally About?

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It is interesting, as media reports suggest, that markets have done so well this year even as concerns over a global economic slowdown have intensified. Even more interesting is that media discussion of the rally interprets it from an entirely different perspective than it employed when it interpreted the market retreat during the fourth quarter of 2018.  Then, the economy seemed to be doing reasonably well.  Media commentary took the decline in stock prices as a sign that an economic slowdown was coming.  But now, with stock prices up, the media says nothing about it as a sign of an economic pickup.  Rather, it expresses bewilderment about market strength in the face of economic weakness.  Could it be, as the media treatments seem to imply, that the market was forward-looking last year but this year has abandoned that practice?  That inconsistency seems unlikely.  The market is always forward looking.  Isn’t it more likely that, contrary to the media’s treatment, the market has maintained a consistent perspective and that this year’s rally is forecasting a pickup in economic fortunes later this year?

In an earlier post, I explained the inherent pitfalls in how the media discusses economic and financial events.  This latest inconsistency should illustrate some of the points I made earlier.  Though I can’t know what will happen or even whether the rally will last (nor can anyone else), here are three interpretations that might explain recent events in a less mysterious manner than they have received in the media:

  1. The slowdown reported in the media is hardly the stuff to significantly sway investors’ perceptions of the future. The media referred to comments from the Federal Reserve (Fed) and the International Monetary Fund (IMF) about downgrading their forecasts for economic growth in the coming quarters.  The Fed relied mostly on language rather than on statistics and it made no mention of recession or abrupt economic developments. The IMF announced it had lowered its 2019 forecast of global economic growth to 3.3 percent from 3.5 percent that it made last January and from 3.7 percent it made last October.  These revised forecasts, while definitely on the downside, are well within the usual error attached to forecasts.
  2. The timing of these downgrades in global economic fortunes also seems significant. The Fed made its comments during the market retreat last year.  In fact, many media reports referenced the Fed’s more cautious outlook as reason for the market’s retreat.  The IMF made most of its downgraded revision during the month of December.  It is likely that the market –– always forward looking –– adjusted prices to a less robust 2019 in reaction to those forecasts made in 2018’s final quarter.  So, having already adjusted prices down to account for the economic slowdown, the market would hardly need to do so again as the outlook to which it had already adjusted itself became a reality.
  3. It is more likely the market has continued to look forward and now expects forecast upgrades. Indeed, recent weeks have brought news of upturns from areas as disparate as the American consumer and China’s industrial output, not a boom in either case, but an improvement over how the situation looked at the end of 2018. Japan remains stagnant and so does most of Europe, but this is hardly a change from the world to which market prices had already adjusted when they fell late last year.  Now that the market has priced valuations into reasonable ranges with last year’s adjustment, it has built on this limited positive news by pushing prices upward.

Though these explanations may not exhaust all interpretations of recent events, they do treat the retreat of late 2018 and the rally of early 2019 consistently, which is more than the media treatment has done. Keep in mind that because the rally has already responded to the news of some economic improvement, the ever-forward-looking market will need to see additional economic improvement to sustain its upward momentum.



Pertinent Questions

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I met recently with a group of business students.  Not surprisingly, we talked mostly about their careers and how they could best position themselves for the jobs they covet.  Four questions came up that belong in this blog.

  1. How does one secure a good track record managing equities?

There are a number of ways to manage stocks: some lean toward value, some toward growth, some are purely quantitative, some rely exclusively on human judgment, and some blend these elements.

For growth, the aim is to ferret out companies that are growing rapidly or, better yet, are about to experience a growth spurt. You buy their stock to enjoy the price increases that emerge from the growing market enthusiasm about the firm’s success.  You must always remain on top of the firm’s prospects and its stock price, because there will come a time when the market’s enthusiasm for the company outstrips reality, at which point, even if the company continues to do well, its stock price will languish or fall.  You must have the insight to recognize this moment and sell quickly –– boldly –– and put the money to work elsewhere before suffering the losses, absolute or relative to the other buys you could make.  Your insight must distinguish between a fundamental turn and the inevitable pauses that occur even as a stock climbs.  Therefore, growth management styles involve much trading –– turnover, in financial jargon.

Quantitative techniques have limited value for the growth approach.  You could devise a computer-based algorithm to identify fast-growing companies from a universe of stocks and perhaps even to assess whether the stock prices have kept up with that rapid growth.  Otherwise the effort involves a lot of research about why the company is growing fast and judgment about management, competition, and product offerings to determine whether that growth will last.  For those who have the skill and diligence, it can be very rewarding.

Quantitative techniques can have a larger role in the value approach.  The object here is to find stocks where the market has pegged the firm’s stock price beneath the company’s fundamental value.  The presumption is that at some point the market will wake up to its pricing mistake and price the stock upward accordingly.  This approach might lead to buying slow-growing, unexciting companies the market has neglected.  It might also involve a fast-growing firm for which the market has yet to wake up to its potential.  All sorts of computer-based algorithms can test for such valuation mistakes in the market. When I managed money professionally, I used one that assessed the earnings prospects of hundreds of companies, using what is called an earnings discount model to estimate the price they should sell at –– what in market jargon is called a fair value price.  That algorithm then compared the fair-value estimate to the actual market price and ranked stocks from those with the largest positive gap between fair value and the actual price –– the undervalued stocks –– to the smallest or negative gap (the over-valued stocks). In building a diversified portfolio, I would focus my research and analysis on those the algorithm identified as most attractively priced.

Whichever approach you take, you must stick with it over time.  The market can overlook value and fail to respond to growth for longer than you might feel comfortable with.  One is never always right, but if there is worth in the approach, it will only tell in the long run.  If you cannot stay the course for at least five years, you do not belong in stocks.  Choose bonds or bank deposits.

  1. If you were to become a professional portfolio manager and had a need to make your mark in less than a year, what approach would you use then?

The best approach then is to pray for luck. Luck is always a big part of investment success, but if you must make your mark in stocks in less than a year, luck is all you have.

  1. What about Bitcoin or some other cyber-currency? Do you think it would be good to have a global currency?

There was a time when the world did have one: gold. It worked for a long time, but it could not do so today for a number of reasons.  In theory, a substitute for traditional, nationally based currencies has appeal.  Bitcoin and other cyber-currencies have, however, failed in this regard.  They don’t have the stability that, among other things, is essential in a successful currency.  Cyber-currencies values have swung wildly relative to all major currencies (dollars, euros, yen, yuan etc.) and, most importantly, against goods and services in general. To take the place of dollars or any other currency, cyber-currencies must show more stability than these currencies do, not less.

  1. If you cannot buy a cyber-currency, what can you do if you expect dollar inflation?

You don’t need a global currency to protect yourself from dollar inflation, though a viable one would be convenient.  You can buy real estate, art –– things that hold real value when the dollar is losing value.  If you want an asset that gets priced every day, then buy gold or commodities.  Their prices swing up and down but they usually keep up with general prices levels, especially when inflation is a problem. Copper or zinc will work, too. They have in the past.




Certificates of Deposit

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With short-term interest rates above their lows, the popularity of highly liquid, insured accounts has returned.  Bank savings accounts are an option.  An earlier post focused on these and their like.  Because banks and other financial institutions pay a higher rate the more money you are willing to commit and the longer you are willing to leave it, certificates of deposit, (CDs) present an attractive alternative.

CDs commit you to leave a set amount, for a set time, with the financial institution for an agreed interest rate.  Because the financial institution can better plan what to do with the money than with a savings account (where the institution cannot anticipate how much and when you may withdraw), it is willing to pay a higher interest rate.  Financial institutions sell CDs in amounts of $1,000, $5,000, $10,000, up to $100,000, and sometimes more.  Like bank accounts, the FDIC insures these up to $250,000.  Some brokers also offer CDs.  These are not FDIC insured, but often the issuers make insurance arrangements with a private insurance company.

If you decide to buy a CD, make sure you can leave the money for the entire term, because there’s usually a penalty for early withdrawal. Some banks offer “liquid CDs”  –– these allow the withdrawal of funds without penalty before the stipulated term, but they usually pay lower rates than conventional CDs.  If you buy your CD through a broker, you may have the option to sell it back before its term expires, but this almost always lowers the interest rate.  (That broker will then resell the CD on what is called the “secondary market.”)

Some CDs offer flexible rates that rise if market interest rates increase. Typically, these guarantee that the rate originally quoted to you will not be lowered. Some banks will also let you set the terms of your CD.  These so-called “designer CDs” can be useful for savings aimed at college tuition, for instance, or other expenses where you know the approximate date you will need the funds.  These, too, often pay a slightly lower rate than conventional CDs, though typically not as low as liquid CDs.   Note that these flexible and liquid CDs have become less common in recent years.

Shop around.  CDs vary considerably from one institution to another, and rates can differ by as much as a full percentage point. The Internet offers the saver a great tool for making such comparisons.  All bank websites have information on all their services, including the rates on CDs and the associated conditions on term, early withdrawal, and the like.  Be careful: marketing often make things look more attractive than they really are.  Here are a few points to consider:

  • The tease: Some CDs offer a relatively high interest rate up front but after time pay a much lower rate.  Know how long the higher “teaser” rate will last.
  • How the bank/broker treats maturity: Will you receive timely notice when your CD is about to reach term and can you then roll it over automatically into another, similar CD, or can you stop the process?  Be sure you understand the rate offered by such a “rollover.”
  • Calculation of interest: Know whether the interest rate quoted is simple or compounded.  The best you can do with a simple rate is what is quoted up front.  A compounded rate, However, will calculate the interest periodically and post the interest to your account.  Because each interest calculation will include the interest previously paid, you will effectively earn interest on the interest, as described in several earlier posts –– a far more attractive arrangement than receiving simple interest alone.  For instance, a one year a CD that compounds daily will pay you 0.15 percentage points more for each 1 percent of quoted interest.  When compounded that way, a one-year CD quoting, say, 1 percent would effectively pay 1.15 percent.  A CD quoting 2 percent would effectively pay you 2.31 percent.  Though it might not seem like a lot, a $50,000 CD quoting 2 percent interest, would earn an extra $155, enough to justify making sure you’re getting the compounded rate.


Pensions (Part Two)

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The last post describe the two basic sorts of pension plans, defined benefit (DB) and defined contribution (DC).  This second part digs down a bit into the DC area and the many different structures available there.  We start with the most widely used –– the 401(k) plan.

401(k) Plans

 Named for the 1980s law that established them, these plans take, for the purposes of investment, contributions from both employer and employee.  The law determines how  much can be put aside in this way.  Within limits, these plans also allow employees to add to them.  Some employers, in addition to their basic contribution, will match a portion of the additional savings that an employee elects to add.

One big appeal of these plans is their significant tax advantages.  The monies going into the plan on behalf of each employee do not count as taxable income.  What is more, the invested funds collect dividends, earn interest, and enjoy capital gains also free of tax.  When participants draw on the funds they will have to pay income tax on the withdrawals, but if they are already retired, the chances are they’ll have a lower tax rate then than when they were working.  These plans have a further tax advantage.  Normally, when a person sells a long-term holding, it has gained in price, creating a capital gains tax liability on the amount of that gain.  (For more on this subject, see this post.) But the monies in 401(k) plans are excused this tax when their contributors begin to liquidate their investments.

When employers set up such plans, they almost always do so with established investment firms where plan participants can choose from an array of investment products.  It is up to each participant to direct the investment of the funds, though many employers offer assistance in making these choices, as does this site. All plans give participants periodic opportunities to change their investment choices.

For all their advantages, 401(k) plans face a number of constraints. Participants must begin to draw down on the funds and pay taxes on those withdrawals no later than age 70½. Because they are meant for retirement, they impose a 10 percent tax penalty if the participant draws on the funds before age 59½.  There are, however, hardship exceptions to this rule.  The government will waive the 10 percent penalty if:

  • You have suffered a disability that makes it impossible for you to work;
  • You have significant medical expenses;
  • You face a court order to give the money to an ex-spouse or a dependent;
  • You take early retirement, but only after age 55;
  • You die and your beneficiaries collect the money.

Some plans will let you borrow against the value of what you have invested, but there are restrictions.  You can get help with specific questions from the 401(k) Help Center at www.401khelpcenter.com.

Individual Retirement Accounts (IRAs)

 If you are not in an employer-based retirement plan, you have the option of setting up a tax-advantaged individual retirement account for yourself.  (Actually, the law makes allowances for IRA contributions — though on a sliding scale –– even if you or your spouse participates in another pension plan.)  If you are married, you and your spouse can contribute to the same pool of investable money.  The law sets the maximum amount you and your spouse can put into the account.  These have the same benefits and restrictions as a 401(k) plan:

  • Every dollar put into the IRA reduces your taxable income.
  • You pay the taxes only when you begin to draw down on the funds in retirement, when, presumably, you will face a lower tax rate.
  • You pay no capital gains tax on your investments when you sell them.
  • You will pay a 10 percent tax penalty if you withdraw funds before age 59½ except under hardship conditions, as described earlier.
  • You must begin to draw down on the funds and pay taxes after age 70½.

Check with your accountant before setting up an IRA to find out exactly what restrictions apply to your particular circumstances.  The Internal Revenue Service offers help on its website, www.irs.gov.

You can open an IRA with any bank, broker, mutual fund company and many insurance firms.  The paperwork is simple and you have until April 15 (let’s say of 2020) to make the contribution for the previous year (that is, for 2019) –– although the IRA itself must be set up by Dec. 31 (of 2019).  Your investment choices are as wide as those offered to anyone doing business with the financial firm you choose.  If you were in a 401(k) plan at work and you lose your job or change employers, you can convert those 401(k) investments into an IRA, called an IRA rollover.  You set these up in the same way as a new IRA.

There is an alternative to these conventional IRA arrangements.  In 1997, Senator William Roth sponsored legislation establishing the Roth IRA.  Unlike a conventional IRA, a Roth offers no tax deduction for the funds you contribute.  To compensate, the Roth excuses tax on any monies you withdraw, including all investment income, interest, dividends, and capital gains.  As with a conventional IRA, there are limits on the amount you can set aside, but there is no 10 percent penalty if you withdraw funds early nor do you have to withdraw money after age 70½.  On the contrary, the law allows you to contribute to a Roth IRA forever and leave it there for your beneficiaries.

You can convert your conventional IRA to a Roth.  The firm handling your IRA can provide you with the necessary materials.  When you convert, you must pay tax on all the tax-deductible contributions you had previously made to the conventional IRA.  The same applies to IRA rollovers.  This tax liability can grow to significant size, especially if you have contributed to your conventional IRA for a long time.  See your accountant for how heavy this tax burden might be.

Simplified Employees Pension (SEP) Plans, Simple IRAs, and Keogh Plans

 There are three other options for tax-advantaged pension plans.  All are similar to 401(k)s and IRAs, but they are meant for the self-employed, for small firms, and for partnerships that otherwise might be unable to use a 401(k).  They are also much simpler to administer.

SEP arrangements are available to any self-employed person with a business that employs 25 people or less.  Unlike other plans, you can set up a SEP without setting up a corporation or LLC or any other corporate structure. If you qualify, you can contribute up to one-quarter of your salary, up to a stipulated amount, though the IRS might change these requirements from time to time.  These plans are similar to 401(k)s but have much lighter administration and reporting requirements.

The Simple IRA aims at firms with 100 employees or less.  Participants must earn a certain minimum salary, a figure that the IRS changes occasionally.  They can set aside a certain portion of their pay, which the IRS also reassesses these amounts from time to time.  This money is excused from taxable income.  Employers have two choices when setting up a simple IRA: (1) They can match the contributions made by participating employees up to 3 percent of their compensation, or (2) they can contribute for each employee, whether they agree to participate or not, up 2 percent of their compensation.  Otherwise, the rules are much like conventional 401(k) arrangements, except the penalty for early withdrawal is more onerous and presently stands at 25 percent.

Keogh arrangements aim at the self-employed and their business partners, whether part time or full time.  Even if you have a 401(k) for a salaried position elsewhere, you can establish a Keogh for that portion of your income that comes from self-employment.  A Keogh allows you to put aside up to a quarter of your income each year, up to a maximum that the IRS adjusts from time to time.  Generally, a Keogh allows larger contributions than either a conventional 401(k), an IRA, a simple IRA, or a SEP.  Otherwise, the rules are much like those of a conventional 401(k).

Financial institutions that work with conventional 401(k)s can make arrangements for any of these other plans.  The employer and the participants benefit if the employer sponsoring the Keogh pays the fees involved separately from the plan.  That way the plan avoids the burden and the cost counts as a tax-deductible business expense to the employer.

The 529 Funds for Education

 Though not strictly a pension, the 529 shares similar characteristics with other plans discussed here.  Named for the section of the tax code that covers the matter, the 529 allows for a tax-advantaged saving/investment plan for educational expenses.

529s are governed by each state, so rules and benefits may vary quite a bit. In general, you can set up a 529 with any financial firm, probably a mutual fund.  It will have custody of the funds and administer them together with the investments when the money is put to work.  Unlike most retirement schemes, the money put into 529s is not tax deductible when it comes to federal taxes, because the IRS treats the proceeds from a 529 as a gift.  Some states, however, allow a deduction of contributions on their (state) income taxes. However, investment earnings and capital gains are excused from all federal and state taxes.

To secure these advantages, the funds must be used for what the IRS calls “qualified” educational expenses.  These include tuition, room and board, books, fees, supplies, computer software and hardware.  Though established under state auspices, few states, if any, have strictures against using the funds for out-of-state schools.  Nor do they make distinctions between public and private institutions.  You should compare all plans available to you because their differences may suit one person more than another.  Make sure that the school chosen qualifies as a recipient of these funds.

If you start a 529 for your child at birth, invest mostly, or entirely, in stocks. The 18 or so years until the child will draw on the money is ample time for the assets to recover from the inevitable, though temporary, setbacks that stocks suffer.  As your child approaches within five years of college age, your investment focus should change.  Because short time spans constrain the period for stock values to recover from a setback, shift the fund’s investments to bonds and more stable stocks.  (See this post for more detail.)


Pension Plans

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Pension plans offer investors great advantages.  The plans collect funds, invest them, and administer the payments to participants when they retire.  They almost always possess tax advantages.  Pension funds fall into two distinct types: defined benefit (DB) arrangements, those that promise participants specific benefits in retirement, and  defined contribution (DC) arrangements, those that make no such promise but allow participants advantageous ways to accumulate funds and invest them for retirement.  Within these two basic structures, funds can vary greatly.

Because there is much to say, I will use this post and the next to examine the topic.  In this post I take up DB plans and the generalities of DC plans.  The next post will go through the complexities of DC plans, which will include 401(k) plans and IRAs.

Defined Benefit Plans

 DB plans are what most people think of as pensions.  Social Security is a DB plan.  In a DB, an employer or government entity promises to pay retirees a certain amount until they die.  Plans might include cost-of-living escalators, and they might also include medical and death benefits and/or provisions for continued payments to a surviving spouse or partner. Provisions vary from plan to plan.

The “sponsor,” who sets up the plan, pools employee contributions into a fund, and invests those monies prudently to fulfill the plan’s promises. Sometimes the sponsor makes contributions from its own resources, sometimes it collects them from participants, and sometimes it relies on contributions from both sources. The administration and investment decisions are entirely the sponsor’s — participants have no say, because it is the sponsor, not the participants who has the obligation to pay.  If the fund falls short, the sponsor must make good its obligations.  If the sponsor is a corporation, that burden then falls on the shareholders.  If the sponsor is a government entity, the burden falls on the taxpayer.

All these plans are exempt from investment taxes, though participants pay income taxes on the distributions made when they have retired.

Here are the three best-known examples of defined benefit plans:

  1. Social Securityis funded from the payroll taxes paid equally by employers and employees. Its payments include an escalator tied to the rate of inflation and benefits paid to surviving spouses, referred to as “spousal benefits.”  To some extent Social Security is interwoven with disability and Medicare, both of which are supported from the same sources that fund Social Security.  When these funds are invested, it is solely in U.S. Treasury bonds.
  2. State and Local Government Plans include a variety of retirement plans for government employees. All are funded in varying degrees by the sponsoring government entity –– that is, by taxpayers.  Some plans also rely on contributions from participants during their employment.  Many have escalators to accommodate rising living costs, and many offer medical benefits, though the specifics vary greatly.  All count on investments in stocks, bonds, and other assets to sustain the funds necessary to meet the plan’s obligations.
  3. Corporate Plans are usually offered by larger, well-established companies. All get most of their funding from the corporate sponsor –– that is, from the shareholders.  Many also rely on contributions from employee-participants. Most include cost-of-living escalators and survivor benefits. Here too, some offer medical benefits.  All invest in stocks, bonds, and other assets to sustain and grow the funds.

Defined Contribution Plans

 Though these so-called DC plans make none of the promises of DB plans, they have one great appeal over the DB variety: participants in DC plans own the assets accumulated with the contributions made in their name, and they can direct them as they see fit.  All DC plans rely on fixed contributions made by the sponsor on behalf of the participants.  The firms and government entities that establish them also make contributions on behalf of individual participants.  All also accept additional contributions from individual participants. Some firms, states, and local governments rely on defined contribution plans to supplement their defined benefit offerings.  Some only offer DC plans.

Because the DC assets belong to the individual participant, they follow the employee into the next job, into retirement, and should participants die before the participant’s assets are exhausted, to their designated beneficiaries.  In financial jargon, these assets are said to be portable. The funds available for retirement depend entirely on the contributions and their relative investment success over the years. More on these varied structures in the next post, including their tax advantages.



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As February has now rolled into March and we begin to focus on the April 15 tax deadline, it’s a good time to look into the role of taxes in investing.  Though only your accountant or lawyer can properly assess the tax consequences of your financial decisions, still, every investor should have a general understanding of how the government taxes investments and should also be aware of which investment strategies have tax advantages beyond those provided by pension funds.  Here are some basic considerations.

Income Tax

 Generally, all income generated from investments –– dividends and interest –– are taxed.  The tax rate, however, can differ considerably from what you pay on ordinary income from wages.  Here are how these rates vary and why:

Interest Payments 

You pay standard income tax rates on almost all interest received from investments, including interest on deposits at banks and other financial institutions and on interest from short-term bills bought and sold on financial markets.  Taxable as well are payments you receive from corporate bonds and from bonds issued by foreign entities (corporations and governments), including interest paid on U.S. Treasury bonds.  Interest paid on Treasury savings bonds is, however, free of state and local income tax.

Tax-Free Bonds

I posted earlier that taxes are excused on payments from municipal bonds (also called muni bonds).  But there are exceptions: income from bonds that support private, profit-making activities is taxed.  This should be clear in the bond’s prospectus and any broker/dealer should so inform you.

Because of their tax advantages, municipal bonds pay a lower yield than equivalent taxable bonds.  In recent years, about a 28 percent personal income tax rate is where the lower yield paid by the average municipal bond balances the advantages of the tax savings on the bond.  Professionals call this the break-even point.  If your income tax rate is higher, the muni bond becomes attractive, because your tax savings will be more than the bond’s lower interest yield. If your personal tax rate is lower than 28 percent, muni bonds become unattractive, because you would be giving up more in yield than what you save in taxes.

Dividend Income

Most dividend income qualifies for a reduced tax rate. This lower rate is usually the same as capital gains tax rates (of which more below).   As of this writing, the top tax rate on capital gains and qualified dividends is roughly half the top rate on ordinary income. To get this tax break, you must have held the stock for at least 60 days and the dividends must be issued from either a U.S. corporation, a company incorporated in the United States or one of its possessions, or a foreign corporation whose stock readily trades on a major U.S. exchange.  Even when dividends meet these criteria, they do not qualify when, among other things, they reflect dividend distributions connected with capital gains realized by the corporation itself, are paid on bank deposits, or are paid by tax-exempt corporations.

The reasoning behind giving dividends a reduced tax rate, as well as for the exceptions to it, is that corporations already pay a separate income tax before paying dividends.  Because that expense counts against –– that is, it’s paid before –– shareholder income, the argument goes, a tax rate on dividend income equal to the tax rate on ordinary income would effectively tax shareholders twice.  Applying a lower rate on dividends tops up the rate already paid at the corporate level to the full individual rate on ordinary income.

Capital Gains Tax

Generally, you are taxed when you realize any gains, the difference between the price you received when you sold the investment and the price you paid when you first bought it.  The tax rate on capital gains is usually lower than the rate on ordinary income. However, the lower rate only applies when you have held the asset for a year or more. Such profits are designated as long-term gains; if less than a year, the gains are considered short-term and are taxed at the rate applied to ordinary income.

Here is a useful strategy to help you minimize your capital gains taxes. Because the law allows taxpayers to write capital losses against capital gains before calculating your tax bill, review all your holdings for securities that have lost value each time you sell one for a profit.  By selling both, you can subtract the realized losses from the gains and pay tax only on the net figure.  This strategy works for both short-term and long-term gains and losses.

If, for sound investment reasons, you want to continue holding the securities sold at a loss, simply buy them back, though IRS rules dictate that you must wait 30 days before repurchasing the securities.  Keep in mind that the clock determining long- and short-term gains on those repurchased assets then resets to the new purchase date.  If these securities then gain in value and you want to sell, you would have to wait a full year for them to qualify for the long-term capital tax gains rate.  Though this strategy increases transactions costs, usually the tax savings more than justify this expense.

Note 1: Never take losses this way that are greater than the gains.  For tax purposes, wait from realizing the losses until you have gains elsewhere to counterbalance with the tax losses.

Note 2: When executing this strategy, be careful to match short-term losses against short-term gains and long-term losses against long-term gains.  To realize the tax advantages, never use short-term losses to offset long-term gains, though it sometimes pays to use long-term losses to offset short-term gains.

Recent Tax Proposals

Periodically, Washington or various state capitals float ideas about new taxes on investments and investment income.  A perennial favorite is the financial transactions tax.  Another, just introduced by Senator and presidential hopeful Elizabeth Warren of Massachusetts, is a federal wealth tax. I offer a word or two on each, taking the most recent proposal first.

The wealth tax would seem to have a dubious future.  It would burden in particular the many who hold wealth that does not produce ready income, and they especially would resist it.  It is also problematic because it would conflict with real estate taxes, which are a form of wealth tax relied on for revenue by states and particularly towns and cities.  It also poses constitutional questions.  Note that the country had to pass a constitutional amendment to enable the federal government to levy income taxes.  (It used such taxes during the emergency of the Civil War, but by the early twentieth century it became apparent that Washington would need, permanently, additional sources of income; thus the Sixteenth amendment, passed in 1913.)  But the amendment’s text speaks only in terms of income, not wealth.  If it took an amendment to enable the federal government to levy income tax, a wealth tax may well require the high hurdle of another amendment.

The idea of a financial transactions tax has arisen periodically in Washington and, obviously, in New York City–home to Wall Street.  Transaction taxes come in all flavors, but generally they are taxes investors pay whenever they buy or sell a stock or bond (usually a small percentage of the value of the transaction).

Transactions taxes have come and gone.  In the United States, the Revenue Act of 1914 imposed a 0.2 percent tax on stock trading.  Washington doubled it to 0.4 percent in 1932 during the Great Depression and kept it there until it was repealed in 1966.  At present thee are no transaction taxes in the U.S., except for a very small percentage on large futures trades. (More on these in this post.  At last count, some 40 countries have transaction taxes, including Belgium, Finland, France, Greece, India, Italy, Japan, Singapore, Sweden, Switzerland, Taiwan, and the United Kingdom.  Their rationale for these taxes — and for when such taxes are proposed in the U.S . –– includes:

  • The taxes supposedly dampen market volatility by discouraging trading.
  • They curb speculation for the same reason.
  • They offer a fairer and more equitable way to collect taxes.
  • They have little susceptibility to evasion.

Seldom mentioned but nonetheless prominent is that transactions taxes would offer a great source of revenue to government.

Attempts to re-impose the tax in the U.S, whether locally or nationally, have foundered on fears that it could prompt trading to move away from the jurisdiction imposing the tax.  The stock exchange has threatened to leave New York City, for instance, whenever the mayor or the governor in Albany has proposed such a tax.  It would take many jobs and much income with it.  Especially in an electronic age, such a move would face little difficulty.  The same argument has forestalled efforts to impose such a tax at the federal level. So much business has already gone offshore in the so-called inversions in which American firms to secure lower tax rates have incorporated in Ireland and other low-tax jurisdictionsthe politicians fear the same for securities dealing and trading. Still, the proposals return from time to time and every investor should keep informed on the issue..

















The National Debt

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Several readers have asked why the market and just about everyone in authority in government and in business seem so unperturbed by the announcement that the federal government is now some $22 trillion in debt.  One reader, who describes himself as “just another working slob with credit card debt,” adds a little humor and sarcasm to the question:

“For my entire adult life I’ve been listening to Republicans and ‘brilliant’ business mavens warning us: THE NATIONAL DEBT! THE NATIONAL DEBT!  Now they are as silent as mice behind the national wallboard.  I myself lose sleep if my Amex bill is one day late. And here’s the market, climbing to historic highs, as if the national debt was nothing more than some spilled Saltine crumbs on the floor.  What gives???!!!

Good question!   Actually, he asks two questions: one about the hypocrisy of politicians and business people who complain inconsistently about the evils of debt; the other about the size of the debt outstanding and implicitly what it might mean for the economy and its financial markets.

As to the first question, it is only fair to note that the hypocrisy goes beyond Republicans and business people.  It is all but universal.  Republicans and business people say little about the national debt when the latest additions to it come from their own policies –– in this case tax cuts.  In the past, Democrats have decried Republican-based debt, even as they have ignored their own contributions to it.  The only reason Democrats are not pointing at the red ink this time is because their agenda would likewise involve huge additions to debt.  This time, they are arguing not against debt per se but that the increase in debt is in service of the wrong cause.  Republicans and Democrats, always and ever, have sought to further their own interest –– or rather those of their constituents.  Each has used the outcry over debt to discredit the other.

Having pointed this out, it would be useful now to gain some perspective on this huge number.  Twenty-two trillion dollars would certainly make for a daunting Amex bill. It’s a sum that goes beyond what any individual could comprehend, much less deal with.  But, of course, the $22 trillion debt does not belong to any one individual.  It belongs to the entire nation, and our nation has considerable resources.  The $22 trillion differs only a little from the income the United States produces every year.  The country’s gross domestic product (GDP) in 2019 seems set to come in at a little over $21 trillion.  The federal government seems set to take in revenues this year of $3.4 trillion. Theoretically, then, the U.S. –– meaning all of us as a nation (but not the government coffers)––could just about pay off the entire $22 trillion debt in one year if we directed our entire income—the gross national product — to that one purpose.  Similarly, Washington — the U.S. Treasury — would take about 6.5 years to pay it down if it spent the money on nothing else.

Of course, neither the nation nor its government would do such a thing.  Each has other obligations.   But the size of the resources against which the $22 trillion debt stands does take some of the fear out of that otherwise immense figure.  To make it more personal, it might help to think of these relationships as a family that carries a mortgage on its home equal to 5 to 6 times the family’s annual income.  The household can’t dedicate all its income to pay down the debt quickly, much as it would like to, because it has to eat and clothe itself, among other things. But the circumstance of a mortgage of that relative size is hardly uncommon and hardly draws squeals of outrage when it becomes known.

In one respect, the $22 trillion is even less outrageous than the family with the heavy mortgage.  Unlike the family, the government never has to pay off its debt. As individuals who have obligated themselves to pay off the mortgage approach the end of their lifespan, creditors will refuse to lend them money, and they will have to pay down the debt they already have.  But presumably, the country never dies.  As debt comes due, the government can borrow anew and use the new funds to pay off the maturing debt.  It has been doing this for decades, centuries actually.  Because the U.S. keeps growing and thereby expanding the resources available to its government, Washington can always get credit to retire old debt and even expand the amount outstanding.  The huge debts run up to fight World War II, for instance, amounted to 130 percent of the country’s GDP at the close of hostilities, relatively a lot higher than today’s figure.  It all came due in the 20 to 30 years after the war’s end.  Washington paid it off with newly borrowed funds.  It could get the funds because its lenders, mostly the American public and a few foreign governments, could envision America’s continuing economic growth generating the resources necessary to shoulder the new debt.

Problems arise when the growth of debt outstrips the perceived expansion of the resources behind it.  In this situation, creditors would become reluctant to lend, and Washington, instead of continuing to “roll the debt forward,” would then have to repay it.  This is similar to the different borrowing power and inclinations of companies that are growing fast or slowing down. Lenders eagerly line up for a company that is growing at, say, 10 percent a year or better, concluding that such growth makes it easier for management to pay off the debt.  Because the borrowing presumably enables the company to invest the borrowed funds and thus secure continued rapid growth, it makes sense for management to borrow — indeed, a reluctance to borrow would run counter to the company’s interests.  But the opposite is true for a company that is growing slowly.

This is hardly a complete picture of what is an indisputably complex matter, and it in no way suggests that debt is a good thing.  But it may help explain why the market and so many others have resisted the hysteria in the headlines.  They believe — rightly or wrongly — that the tax cuts that have added to the national debt will sustain the country’s necessary growth.



Keeping Track

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A reader asks: How to keep track of all the accounts, taxes due; how to measure progress in meeting financial objectives. I hate administrative tasks myself, so I sympathize with this correspondent’s anxieties.  Here is a walk through a typical year with my advice on what to do when, and what information to have on hand when you are obligated to undertake certain actions.  Some dates on what follows are dictated by federal, state, and local governments. Other dates are arbitrary.  For instance, I suggest calculating your net worth every January.  You could do it at any time, but do it at least once a year.


  • Calculate a personal statement of your net worth. By the third week of January you should have obtained statements from the financial institutions holding any of your savings and investment accounts.  Add the value of these to the value of your other assets, large pre-paid items such as college tuition and the value of your house and car, if you own them.  The total figure is your assets.  Do the same for your liabilities — large expected bills, the amount remaining on the house’s mortgage, and other outstanding debts, including credit card debt.  The difference between your assets and your liabilities is your “net worth.”
  • Review your financial goals. Revisit the plan described in this post.  Write down how your efforts in the previous year have advanced it and then how you will advance it further in the coming year.
  • Create folders for all the financial and tax information you will receive over the coming year so that you will have easy access to this material when you need it, especially at tax time. In particular, you will want to file receipts for business expenses to write off against your taxes. The Internal Revenue Service (IRS) website provides guidance on what expenses do and do not qualify as deductions. irs.gov.
  • Pay off as much credit card debt from the holidays as you can, starting with the card that charges the highest interest rate. You should do this even if it means delaying other purchases, and even if it means interrupting your saving schedule, because no investment offers a rate of gain equal to the interest cost on a credit card.
  • January 15 is a tax date, the last of four for estimated taxes due on income from the previous year. If your employer withholds taxes from your paycheck, you will not need to do much.  But if you run your own business or do freelance employment, you will need to make a payment to avoid an IRS penalty.  Consult an accountant on how much you must pay.
  • Take advantage of post-holiday sales to shop for next year. 


  • Contact any bank or financial institution that has failed to send you statements, because you will need them to file your taxes based on the previous year’s income.
  • Make an appointment with your accountant.  Taxes are due April 15, but having this conversation in February will avoid scrambling at the last minute for needed material.
  • If you expect a tax refund, file early and use the money to pay down credit card or other debt, or put it to work in your savings and investment accounts.
  • February 15 is a tax date. If your child works but will not earn enough to owe any tax, this is the latest date when you can file an IRS form W-4 with his or her employer token that employer from withholding taxes.


  • Finish preparing your tax return (if you did not file in February).
  • Confirm that all colleges and other schools have received your financial aid forms. The deadline for federal student aid varies from school to school, but earlier is always better.
  • Review your property tax bill. Deadlines to challenge it vary depending on where you live, but most allow appeals in early spring.  About half those who appeal win reductions –– on average some 10 percent.  The National Taxpayers Union website, ntu.org, offers guidance here.


  • April 15 is a tax date. Filing on income for the previous year is due to the IRS and to those states that impose state income taxes.
  • April 15 is also when you have to pay the first installment of your quarterly estimated taxes if you are self-employed or if your employer is not withholding at all or is not withholding enough. You should pay these estimated taxes equal to at least 90 percent of what you will eventually owe.  Your February conversation with your accountant should inform this calculation.
  • The 15th of April is also the last date on which you can take care of some previous tax-related business (of which more in an upcoming post) from the year before, for example:
    • funding your Individual Retirement Account (IRA);
    • funding your Keogh or Simplified Employee’s Pension (SEP) plan, if you have self-employment income;
    • paying your IRA fees. (Use a separate check, since this expense is tax deductible.);
    • filing for an extension. (If you and your accountant have failed to get your return in order on time, you are entitled to a six-month extension, which brings you to October 15th.  That is an extension for filing, not for the payment of tax.  You will have to pay estimated taxes together with an extension for filing your return.)
  • If you’re planning to move, try to do so in April.  Moving costs are some 50 percent higher between May and October than between November and April.  Save all receipts if the move is job related.  Many moving expenses are deductible.  For guidance, visit the IRS website, irs.gov.


  • Contact the IRS if by month’s end you have not received any refund due you. Use the refund to pay down credit cards or to invest.
  • Book your summer vacation. This is usually the last month to get reduced rates for early reservations.
  • Because this is otherwise a light month for financial tasks, May might be a good time to take an inventory of your household items and check your insurance coverage.Take pictures of any valuable items.


  • June 15 is a tax date.  If you are self-employed or your employer is not withholding enough, the second installment of your quarterly estimated taxes will be due.
  • June 30 is a filing date.  It marks the deadline to file with the U.S. Treasury if you have a bank or other financial account in a foreign country worth more than $10,000.
  • Meet with your financial advisor to review your investments.  Beginning investors will have little need for such meetings, but for others, this is a good time to review.
  • Have a yard sale to raise more investable cash.  Donate to charity whatever you fail to sell.  Get a receipt from the charity to use as a write-off on your taxes. Guidance on what applies is available on the IRS website, irs.gov.
  • Pay off your credit card so it has room for you to charge items on summer vacation.


  • This is a good month to sell your old car.  Seasonal pricing patterns show that now is a likely time to get a better price.
  • Enjoy a month of financial leisure.


  • Provide children and grandchildren who are going off to college with information on managing their checking account, credit cards, and budgeting.
  • Travel that combines with work may have tax-deductible elements. Keep receipts.  Check with your accountant and/or consult the IRS website, irs.gov.


  • September 15 is a tax date.  It marks the due date for the third installment of your quarterly estimated taxesif you are self-employed or if your employer is not withholding enough.
  • Calculate what your child earned on a summer job and ask your accountant whether your offspring needs to file a return. Again, you can get guidance from the IRS website, irs.gov.


  • October 15 is a filing date for your previous year’s tax return if you received an extension the previous April.
  • October 15 also is the last day to make a Keogh or SEP contribution, if you received an extension last April.
  • With little else pending, this is a good month to review your will.


  • A good month to buy a car.  Dealers have to clear their lots for next year’s models and are inclined to offer good deals.
  • If you have a flexible spending account with your employer, plan to use it now, before the end of the year, because if you don’t use it, it will revert to your employer.
  • Check your credit score and correct any irregularities. You are entitled to do so free once a year.


  • December 31 marks the last day you can set up a Keogh plan for the following year. You have until April 15 to fund it, but you must do the paperwork by Dec. 31.
  • Though you can wait until January 15 to make estimated income tax payments to state governments, you can deduct all or a portion of them from this year’s federal tax if you pay by December 31.
  • You can make cash gifts to individuals, up to $15,000 each without them having to pay a gift tax or suffer any complications on your future estate taxes.
  • Make all charitable contributions before December’s end to receive write-offs on the current year’s taxes. For gifts over $500, the IRS recommends that you receive a letter of acknowledgment from the charity.
  • Arrange, if possible, to push income and bonuses into January to keep them off the current year’s tax liability. You will eventually have to pay taxes on the income, but this way you get the earning power in your investment account for a whole year before you have to pay the tax.