Your Portfolio Allocation and Emotional Reactions: The Coronavirus and Portfolio Discipline

Here we go again – we’ve been down a similar road before, so none of this is news to those who have been with us through prior overreactions by market participants.

Volatility is part and parcel of participating in the market. When fear grips the market, selloffs by those who react to that fear provide portfolio opportunities for those who understand and adhere to a strategy. It is AIKAPA’s strategy to maintain your risk allocation and either ride out the volatile times or rebalance into them. Meaning that if you don’t need cash in the short-term, we buy when everyone else is selling.

As news of the Coronavirus (or other events outside of our control) stokes fear and uncertainty on a variety of fronts, it is only natural to wonder if we should make adjustments to your portfolio. If you are reacting to fear, then the answer is a resounding NO. On the other hand, if you are applying our strategy in combination with an understanding of the impact on business, then the answer is likely YES. When an adjustment is indicated we look for value and BUY while selling positions that are relatively over-valued. If the market continues to respond fearfully (without a change in value) then we will likely continue to buy equities and may sell bonds to fund those purchases. The only caveats to this strategy are that we must know that you don’t have short-term cash flow needs, that we stay within your risk tolerance, and that we are buying based on current value (keep in mind that value is based on facts not fear).

If you feel compelled to do something, then consider the following:

  1. Contact your mortgage broker and see if it makes sense to refinance (likely rates will drop soon after a significant market decline).
  2. Seriously examine the impact this has on your life today and let’s talk about changing your allocation once markets recover.
  3. Review the money you’ve set aside for emergencies and prepare for potential disruptions if these are likely.
  4. Business owners should consider the impact (if any) on their business, vendors and employees. Particularly important will be to maintain communication with all stake holders and retain a good cash flow to sustain the business if there is a possibility of disruptions.
  5. Regarding your portfolio, if you have cash/savings that you want to invest, this is a good time to transfer it to your account and have us buy into the market decline.

Market changes are a normal part of investing. Risk and return are linked. To earn the higher returns offered by investing in stocks, it is necessary to accept investment risk, which manifests itself through stock price volatility. Large downturns are a common feature of the stock market. Despite these downturns the stock market does tend to trend upwards over the long-term, driven by economics, inflation, and corporate profit growth. To earn the attractive long-term returns offered by stock market investing, one must stay invested for the long-term and resist the urge to jump in and out of the market. It has been proven many times that we can’t time stock market behavior consistently and must instead maintain portfolio discipline (if you want a historical overview of markets, see the “Market Uncertainty and You” video on our website

It is your long-term goals and risk tolerance that provide us with our guide to rebalancing and adjusting your portfolio, not short-term political, economic or market emotional reactions. In your globally diversified portfolio, we will take every opportunity to rebalance and capture value during portfolio gyrations. This IS the benefit of diversification and working with AIKAPA.

Edi Alvarez, CFP®

Tax Planning: Year-End Items to Consider

Tax planning consists of ensuring that tax liability is appropriate (given the tax code, family finances, and family goals) and that required actions are completed by the deadlines. At year-end, we identify relevant actions and relevant timeline.

Current Year actions …

  1. Estimate total earnings and total tax withholdings along with any tax-deferral that has or will be made for the current year. Use these and your deductions to estimate Federal and State tax liability.
  2. Ensure that expected tax liability has been paid either through payroll or through estimated tax payments. It is always best to pay taxes through payroll.
  3. For the self-employed, estimating taxes and ensuring that enough but not too much tax is paid throughout the year is part of tax planning. This is particularly important for businesses that have no payroll and pay their income tax and self-employment tax (i.e. Medicare and Social Security) simultaneously. Without tax planning, it is common for these businesses to underpay their Federal tax liability.
  4. Again, estimating profit from business entities (S Corp, C Corp, LLC, or sole proprietorship) allows business owners to adjust cash flow and meet tax deadlines. Business owners often create or contribute to various tax-deferral plans. The largest pre-tax contributions are for plans that have to be created prior to year-end.
  5. Any deductible contributions to H.S.A., Traditional IRAs or other accounts need to be made by their specific deadlines. These contributions might lower taxable income today (Traditional IRA, pension and 401K) or be tax free in the future (Roth) or both tax free now and in the future (H.S.A.).
  6. Year-end provides an opportunity to harvest investment accounts and therefore reduce or increase capital gain. Capital gain can be countered against capital losses to provide a net gain or loss which will either increase or decrease tax liability for any given year. We can reduce tax liability by adjusting what we buy/sell (i.e. the lot) at year-end depending on the overall tax burden. Keep in mind that tax rates differ based on taxable income. The federal tax rate for gain can be from zero to 23.8%.
  7. Estimating overall tax liability prior to year-end allows families to adjust deductions and employers to make needed capital purchases before year-end.

Actions based on next year’s rules …

Since we don’t yet know the tax rules that will apply in 2018, it will be especially difficult to fulfill the second part the year-end tax planning (where we either act or defer actions this year based on comparing the tax code in both the current and coming years).
Based on the two tax proposals (House and Senate versions) we consider acting prior to year-end if there is a high probability that a tax advantage will be lost in the new year and it plays a significant role in the person’s finances.

Though neither proposal appears to “simplify” taxes, both bills make significant changes to current tax rules and may, in fact, make it ideal to take some actions before the end of 2017 (taking advantage of current rules), while delaying those that benefit from the rules in the new year.

It will now be the job of the legislative committee to reconcile the differences without inserting any new provisions which will then need to go to the House and Senate for final approval. It is still too early to take action according to one or the other proposal but exploring the impact in light of individual tax circumstances makes sense.

  1. It may be worth considering accelerating itemized deductions into 2017 that are targeted for elimination. For example State income tax is scheduled to disappear in both proposals. Nevertheless, consideration must be given to unique situations, particularly regarding AMT (Alternative Minimum Tax).
  2. Consider recognizing tax losses prior to year-end (which is a normal annual year-end tax action) but the ability to select tax lots may disappear in 2018. The new rules may require that sales “first-in-first-out” (FIFO) which results in higher tax liability as it recognize higher gains on the sale of a security. We are hoping FIFO will not survive the reconciliation process but if it does we’ll have to act quickly before Dec 31.
  3. If you are planning to transfer very large assets between family members you would be well advised to wait until 2018 when there is an increased tax exemption. This doesn’t change the annual gifting which is currently at $14K in 2017 (and will be $15K in 2018).

Though we all want to contribute our share of taxes to sustain our communities and our way of life, it is always prudent to annually evaluate and implement the best way to handle tax liability considering current and future implications.

Edi Alvarez, CFP®

2016 Presidential Election and the Markets

No matter the results, this is certainly turning out to be an “interesting” election. One of the things I find intriguing, is the willingness of financial “experts” and pundits to make predictions about the economic and financial ramifications of electing either candidate. Predicting the markets is fraught with difficulties at the best of times. Predicting lasting market behavior based on campaign promises and fluid party platforms is impossible.

The summary of pundit prognostications below does NOT reflect my views, but it does reflect the sort of noise I hear daily from market timers and day traders (a high proportion traditionally lean toward the Republican Party).

On a Clinton Victory
What reaction can we expect: Mild relief, to include a rally in stocks and bonds, but nothing particularly bullish though we expect to regain at least our September 30th gains. Expect little change in oil/gold and, similarly, little change in the value of the US dollar by year-end.

Perceived winners: Hospitals (no Obamacare repeal or replacement, maybe some small tweaks); small businesses (new tax breaks); alternative energy (continued investment in alternative energy programs).

Perceived losers: Biotech/pharma (fears of regulation/price ceilings); energy & coal (increased environmental regulation reducing coal and fossil fuel production); private prisons (Clinton wants to shut them down).

On a Trump Victory
What reaction can we expect: Stocks: a selloff lasting into the New Year. Bonds: Treasuries lower in the near term, but not a large change. Dollar: lower as markets take in the cancellation or renegotiation of major trade deals. Gold/Oil: both up on uncertainty.

Perceived winners: Coal (anticipating reduced regulation on coal production and sales); overall energy sector (in a relaxed regulatory environment); pharma/biotech (little or no risk of price controls or ceilings); banks (potentially higher rates, rollback of certain Dodd-Frank regulations).

Perceived losers: Hospitals (changes to healthcare law, including repeal of Obamacare); alternative energy (less funding and support for alternative programs and a return to energy reliance on oil/coal).

For what it’s worth, at the time this goes to press [October 31] online betting sites show a 70% probability that the Democrats will win the Senate and Hillary Clinton a 75% chance of winning the presidency. The media, on the other hand, suggests that there are ways for Donald Trump to garner enough Electoral College votes for an upset victory. This additional uncertainty will have potential market consequences until the end of election day.

As investors, as Americans simply trying to decide how to manage our finances, what do we surmise from all this prognostication? Basically, don’t lose perspective. Our thinking should change very little since our long-term goals have not changed. In 2012, the S&P 500 dropped 7% ahead of and after the election. The level of fear so far indicates that in 2016 we may see a similar drop which will provide another buying opportunity. Personally, though I understand why these predictions are being made I do not believe it is possible to predict market direction in the long-term. Storms come and go and staying the course is safest until the facts are in. Throughout, we remain true to our goals – rebalance as necessary and stick to a well-diversified portfolio.

Edi Alvarez, CFP®

SEC charges former CalPers CEO in Agent Fee Scheme

SEC Charges Former CalPERS CEO and Friend With Falsifying Letters in $20 Million Placement Agent Fee Scheme

According to website Buenrostro (former CalPers CEO) directed placement agent fees to Villalobos through falsification of documents with CalPers logo.  The placement fees paid were at least $20 million dollars.

The letter was a new requirement by this fund company for fees paid to placement agents that assisted in raising funds.

There seems to be no end of leading executives who continue to cross ethical lines to enrich themselves and their friends.  Kudos to the SEC for identifying this action and hopefully, if found guilty, will apply a sufficient deterrence to discourage others from crossing over this very clear ethical line.

Edi Alvarez, CFP®

2012 -0213 Obama’s budget today

Obama’s budget announcement today – not a surprise

Proposed 2013 budget would reduce dividend tax break, impose new rules, and raise top marginal rate to almost 40%

The $3.8 trillion budget that President Barack Obama proposed today for 2013 would generate $1.4 trillion in new taxes for the wealthy.

Perhaps the only surprising element of the proposal puts dividends paid by high-income Americans at ordinary income, boosting the rate paid to 39.6% from a current rate of 15%.

The higher rates would apply to couples making $250,000 or more and individuals making $200,000 or more IF they earn significant income from dividends.

Originally, the president had supported continuing to tax dividends at a favorable rate, but administration officials said Mr. Obama decided the nation couldn’t afford it.

“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said today in a speech at Northern Virginia Community College.

This is not news, in 2003, dividends were taxed as ordinary income.

Not surprisingly, Republicans in Congress immediately criticized the president’s budget and predicted failure for the tax increases wanted by the White House. .

The change in dividend taxation would raise $206.4 billion over a decade, according to the administration, which has said the wealthy need to pay more to help the nation control its deficit and spur economic growth.

The president’s proposal would end the Bush era tax cuts and limit tax deductions to 28% for wealthy Americans, again defined as those couples earning $250,000 and individuals making at least $200,000.  Limits them to 28% but does not eliminate them. These high-income earners already were set to take a hit in next year when a provision of the 2010 health care law kicks in that will tax their unearned income at 3.8%.

The administration’s proposed budget also would boost the top capital gains tax rate to 20% from today’s top rate of 15% and the income tax rate would max out at 39.6% in 2013 (increased from 35%). As expected, the plan also would tax private-equity managers’ profits-based compensation at ordinary income rates (which it is) instead of the 15% current capital gains rate.

The president’s budget also sets a new rule called the “Buffett rule,” that would set a 30% minimum tax for individuals with $1 million or more of annual income, a proposal that’s been discussed since last year after billionaire Warren E. Buffett said the wealthy weren’t paying enough in taxes. That tax would replace the alternative minimum tax (AMT), which the White House contends hits the middle class instead of its goal of keeping the richest Americans from paying too little.  It is great if it replaces AMT.

Republicans do control the House and wield significant influence in the Senate so it’s unlikely that Obama’s budget will make it out of Congress but only time will tell.

Edi Alvarez, CFP®

Shapiro on Small Business and our Economy

Excerpt from Chair Mary Schapiro’s Nov 17, 2011 Review on how the SEC works to Support Small Businesses – U.S. S.E.C

As you know, studies suggest that small businesses have created 60-to-80 percent of net new American jobs over the last ten years.

But there is a footnote to that statistic: the most vigorous small business job creation comes from small businesses determined to get much larger. Job growth comes from emerging enterprises trying to grow out of their warehouse space and into a corporate campus or to jump from single downtown location into retail sites nationwide. It comes from companies that need access to capital to make that jump.

Today’s focus is on creating an environment in which those small businesses have that access, one in which they can compete successfully for a share of our country’s investment capital.

Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and we believe that companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations.

As we examine ways that the regulatory structure might better facilitate small business capital formation, though, it’s important to keep in mind another critical facet of the SEC’s mission: investor protection. We must balance the instinct to ease the rules governing capital access with our obligation to protect investors and markets.

This can be a challenge. Even necessary regulation can impose burdens that are disproportionately large for small businesses with limited resources.

As the daughter of a small businessperson, I am familiar with the unique challenges small businesses face. I know that instead of planning year-to-year or quarter-to-quarter, that sometimes it’s day-to-day. And I recognize that challenges that a larger business would barely even notice can be significant drains on resources and time to an enterprise that needs to focus everything on making its place in a competitive market.

It’s also important to note that investor protection shouldn’t just be a priority for investors and their advocates. Confidence in the fairness and honesty of our markets is critical to capital formation. Investors who understand that financial market participants are honest, that disclosures are accurate, and that markets offer a fair chance to earn a reasonable return are more likely to make needed capital available, and demand less in return for doing so.

And so, in this forum and through other efforts, the SEC is seeking strategies for meeting regulatory goals while reducing the weight borne by small businesses.

That is why I have instructed our staff to take a fresh look at some of our offering rules, and to develop ideas for the Commission to consider that would — in a manner consistent with investor protection — reduce undue regulatory constraints on small business capital formation. Among the issues that we are considering are:

  • The restrictions on communications in initial public offerings;
  • Whether the general solicitation ban should be revisited in light of current technologies, and capital-raising trends;
  • The number of shareholders that trigger public reporting, including questions surrounding the use of special purpose vehicles that hold securities for groups of investors; and
  • The regulatory questions posed by new capital raising strategies, including crowdfunding.

In conducting this review, we are gathering data and seeking input from many sources, including small businesses, investor groups and the public at large.

In addition, two weeks ago, we convened the first meeting of the SEC’s new Advisory Committee on Small and Emerging Companies. This initial meeting has produced a number of insights on these and other relevant issues, from committee members representing businesses, investors, academia and regulators.

The re-examination of existing regulations is also of a piece with a goal I set when I returned to the SEC as Chairman: to make sure that the agency was up to date, that the regulations we enforce reflect the current realities of the financial markets.

For 77 years, the SEC has contributed to small business growth by supporting a capital marketplace in which confident investors invested money in growing businesses. We worked to create a culture of compliance that supported transparent markets marked by high liquidity, strong secondary market trading and investor protection.

Full transcript at

Edi Alvarez, CFP®

Judge Criticized SEC and Rejects Citi’s Mortgage Settlement

Judge Calls SEC on Allowing Settlements that do NOT address liability

— Content from Bloomberg and SEC websites

At question was Citigroup Inc.’s $285 million settlement with the U.S. Securities and Exchange Commission over mortgage-backed securities.  The federal judge rejected on grounds that he does not have enough facts.

U.S. District Judge Jed Rakoff in Manhattan rejected the settlement – he criticized the SEC’s practice of letting financial institutions such as Citigroup settle without admitting or denying liability.

The SEC claimed that Citigroup misled investors in a $1 billion fund that included assets the bank had projected would lose money. At the same time it was selling the fund to investors, Citigroup took a short position in many of the underlying assets, according to the agency.

Citigroup, the third-biggest U.S. lender, agreed last month to settle a claim by the SEC that it misled investors in a $1 billion CDO linked to subprime residential mortgage securities. Investors lost about $700 million, according to the agency. A trial could establish conclusions that investors could use against Citigroup.

“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,” Rakoff wrote in the opinion. The proposed settlement is “neither fair, nor reasonable, nor adequate, nor in the public interest,” he said.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment pending a review of the decision. SEC spokesman John Nester declined to comment immediately on the ruling.

Rakoff today consolidated the case with another SEC suit involving former Citigroup employee Brian Stoker and scheduled the combined case for trial on July 16, 2012.

Citigroup doesn’t want to formally admit liability because of the bad publicity that would follow and because an admission would give a powerful tool to investors suing the bank.

Allowing a bank to pay a fine without admitting liability allows the SEC to avoid the uncertainty of a trial and preserves resources that can be used to pursue other securities law violators.

He rejected the SEC argument that he should defer to the agency’s determination that the settlement is fair, particularly as it asked him to issue an order requiring Citigroup not to violate the securities laws in the future.

Calling Citigroup “a recidivist,” Rakoff said the SEC hasn’t tried to enforce such an order against a financial institution in the past 10 years.

Bloomberg News and SEC response at

Edi Alvarez, CFP®

Who benefits most from our Tax Code?

Business Corporations and Taxes

Warren E. Buffett and Bill Gates stated clearly that too many wealthy individuals pay unusually low taxes to the federal government. I’d like to share the information gathered so far on  Corporate America so that we might be able to understand our current tax code.

Recently a review showed that 280 of the biggest publicly traded American companies faced federal income tax bills equal to 18.5 percent of their profits during the last three years — just a bit over half the official corporate rate of 35 percent and lower than their competitors in many industrialized countries.

Mr. Buffett, said that the tax code is unfair, he paid just 17% in federal taxes last year, about half the percentage his secretary paid.  I want to know how much his secretary earns to pay 34% in effective federal taxes – this seems a bit high but his point is still valid.  Business owners are not treated the same by the tax code as employees – should they be?

This corporate review, examined the regulatory filings of these companies to compute each year’s current federal taxes. The study does understate tax payments because it omits deferred taxes that they may pay in future years. Since it did not analyze actual tax returns but used publicly available corporate regulatory filings many companies dispute it.

If 17-8% is the going Corporate average rate then we must look more closely at the 70 companies (a quarter of the 280 corporations) which owed less than 10 percent of profits in federal income taxes and the 30 companies that had no federal tax liability for the entire three-year period.

Why is this currently important?The Congressional super-committee will report on November 23rd how we’ll cut the budget deficit and is considering revamping our tax system.  The goal would be to simplify corporate structure and reduce corporate taxes. Corporations claim that the current system puts American companies at a disadvantage with competitors abroad and encourages them to shift jobs and investments overseas.  Is this real or a bargaining chip?

My view is that the current tax system rewards companies that aggressively avoid taxes. A quarter of the companies in the study had a federal tax bill of 35 percent of their profits, while a similar number had an effective rate of less than 10 percent.  Therefore not all corporations are equally sharing in the tax burden.  Maybe the solution is to close the loopholes & force a  minimum tax burden on profits for all corporations instead of lowering the rate.

Among the companies that the study said escaped a liability for all three years were Boeing and Ryder System, which benefited from the additional depreciation intended to stimulate the economy. Boeing officials countered that they had paid some federal taxes, but would not say how much. They said that their lower rate was from tax breaks intended to encourage hiring. Boeing claims to have hired 9,000 workers this year as a result of their tax credits.

Other companies include General Electric and Wells Fargo who claim respectively that new job creation and the Wachovia right downs where their reasons for reduced tax liability.

The fact is that corporations are paying a smaller share of taxes than in previous decades. According to the IRS they paid a total of $191 billion in federal income taxes in 2010, which is about 1.3 percent of the nation’s gross domestic product (GDP). That is down from about 6 percent during the 1950s.

Despite this decline the Americans for Tax Reform, said that the United States system was not competitive because it taxed income earned around the world, instead of just in this country. On the other hand Citizens for Tax Justice countered that about two-thirds of  the American companies with significant profits overseas actually paid more in taxes to foreign governments than they did in the United States.

But should we not consider the total tax?  The bottom line for a company is not how much they pay one country but how much they pay overall.

On the other hand, I can agree with the Citizens for Tax Justice’s request that the federal government end the subsidies and shelters that favor companies that game the system.

How can the supper-committee come up with real budget saving unless the loopholes are closed?

What do you think?

Edi Alvarez, CFP®

Remembrance Day and the Poppy

In Flanders Fields

In Flanders fields the poppies blow
Between the crosses, row on row
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

— John McCrae (1872 – 1918)

The American Moira Michael from Georgia, was the first person to wear a poppy in remembrance. In reply to McCrae’s poem, she wrote a poem entitled ‘We shall keep the faith’ which includes the lines:

And now the Torch and Poppy Red
We wear in honor of our dead.

Many two-minute silences are followed by a lone bugler playing The Last Post, reminiscent of times of war when trumpets were as much a part of battle as bayonets. A poem called ‘For the Fallen’ is often read aloud on the occasion; the most famous stanza of which reads:

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning
We will remember them.

Fourth stanza of ‘For the Fallen’ by Laurence Binyon (1869 – 1943)


Edi Alvarez, CFP®