Emotional investing can be costly
Emotional investing can be costly
Emotional investing is inferior to evidence-based investing. It’s a belief of ours that comes up in the very first conversation we have with a prospective client and one we repeat often. Recent times reinforce our belief.
In many ways, it has been a rough couple of years. There has been plenty to fret about. Along the way we have emphasized the importance of staying true to our approach of remaining diversified, patient and disciplined – to be investors not speculators.
The issue isn’t whether it is okay to get nervous or otherwise be emotional. Emotional reactions are a natural part of the human experience and make life interesting. The problem comes when we allow what we feel in the moment to trigger actions that can destroy a sound plan.
The problem comes when we allow what we feel in the moment to trigger actions that can destroy a sound plan.
Emotional investing is something many people battle. A recent survey of 1,116 U.S. consumers with investment accounts conducted by MagnifyMoney sheds light on how pervasive the emotional investing challenge can be: 37% of investors have lost sleep worrying about the stock market, 2 of 3 surveyed have made an impulsive or emotionally charged investing decision they later regretted, 30% have cried over investing, and 32% of those surveyed admitted to having traded while drunk.
In early 2020, the biggest emotional investing risk was allowing the fear of market decline to cause clients to abandon sound, long term holdings. Today, along with the usual fear of loss, we are seeing signs of the fear of missing out. With more people worth more than ever, interest in trying something new is increasing. Whether its chasing returns of what’s been hot lately, dabbling in direct owned real estate, buying new companies developing new technologies, trading actively or overweighting types of assets to hedge inflation, we see too many people shrinking their time frame and getting too tactical.
We employ many tactical maneuvers for clients but seek to execute these in the context of each client’s unique financial plan. By contrast, the tactical moves we just described have a long history of providing an inferior result to most who employ them. Placing large bets can be devastating if they do not pay off adequately or fail. But even small bets can be dangerous because if they succeed, the temptation to bet again with more money gets stronger.
It is easy to get sucked into these forms of emotional investing. It feels like it is using “house money” and is therefore lower risk. It is ironic that the less tactical, less speculative approach is what produces the higher wealth amounts which create the urge to be more tactical and speculative. Regardless of whether it’s based more on fear or greed, don’t succumb to emotional investing. Stay diversified, patient and disciplined. Invest, don’t speculate.
News & Notes
Social Security Scams continue to proliferate: In November, the Social Security Administration (SSA) put out yet another bulletin warning of scams. The SSA wants you to know that ALL OF THE BELOW ARE SCAMS!
Any communication that:
- Threatens to freeze your Social Security payments or number, even if they have part or all of your Social Security number
- Warns of arrest or legal action
- Demands or requests direct deposit or banking information
- Requires payment by gift card, prepaid debit card, internet currency, or by mailing cash
- Pressures you for personal information
- Requests secrecy
- Threatens to seize your bank account
- Promises to increase your Social Security benefit
- Tries to gain your trust by providing fake “documentation,” false “evidence,” or the name of a real government official
If you receive any form of the above communications, try to stay calm. Government employees will not threaten you, demand immediate payment, or try to gain your trust by sending you pictures or documents. The best thing to do if you receive a suspicious call, text, or email is hang up or do not respond. Do not provide anyone with money or personal information when you feel pressured, threatened, or scared. Then, report it to the SSA Office of the Inspector General (OIG). Do not be embarrassed if you shared personal information or suffered a financial loss.
Congratulations Casandra, Ryan, & Paula: In the fall of 2021, Casandra Garrett, CFP ®, Ryan Osborne, CFP ® and Paula Rocha all became Enrolled Agents (EA). EAs are licensed by the Internal Revenue Service to represent taxpayers before the agency. Two of our core values are a Passion for Excellence and Lifelong Learning. As such, we invest in our professional development. We congratulate Cassandra, Ryan, and Paula on earning this license. Our tax team now consists of seven people who can handle IRS matters for our clients.
Upcoming Important Dates
February 15 – Form W-4 filing deadline for taxpayers who claimed an exemption from income tax withholding for the prior year to continue their exemption in the current year
March 15 –
- Income tax return (Form 1120S) filing and payment deadline for calendar year S-corporations
- Income tax return (Form 1065 or 1065-B) filing and payment deadline for calendar year multi-member partnerships and multi-member LLCs (default)
- K-1 issuance deadline
- Request for automatic six-month extension (Form 7004) filing deadline to extend filing Form 1120S, 1065, and 1065-B
- S-corporation election (Form 2553) filing deadline to be treated as an S-corporation in the current year
March 31 – End of Medicare General Enrollment Period
April 1 – “Required Beginning Date” which is the deadline to complete the first Required Minimum Distribution (RMD) from an IRA or retirement account for anyone who turned 72 in 2021. (2022 RMD due date is December 31, 2022)
April 18 –
- Income tax return (Form 1040) filing and payment deadline
- Gift tax return (Form 709) filing and payment deadline
- Request for automatic six-month extension (Form 4868) filing deadline to extend filing Form 1040 and 709
- Q1 estimated payment deadline
- Deadline to contribute to an IRA or HSA for prior tax year
- Income tax return (Form 1040) filing and payment deadline for sole proprietorships and single-member LLCs
- Income tax return (Form 1120) filing and payment deadline for calendar year C-Corporations and multi-member LLCs that elect to be classified as a corporation
- Request for automatic six-month extension (Form 7004) filing deadline to extend filing Form 1120
- Q1 estimated payment deadline for sole proprietorships, single-member LLCs, C-corporations, and multi-member LLCs that elect to be treated as a corporation
2022 Retirement Plan Limits, Tax Rates, Tax Brackets, and Standard Deductions
The Internal Revenue Service (IRS) has announced cost-of-living adjustments for 2021. Here are a few highlights:
- 401(k) Deferral Limit – Increases to $20,500 from $19,500
- 401(k) Catch-up Deferral Limit – No change. Limit stays at $6,500
- Defined Contribution Plan Maximum Annual Additions – Increases to $61,000 from $58,000 (or $67,500 with catch-up)
- IRA/Roth IRA Contribution Limit – No change. Remains $6,000
- IRA/Roth IRA Catch-up Contribution Limit – No change. Remains $1,000
- Lifetime estate and gift tax exclusion – Increases to $12,060,000 per person from $11,700,000
- Annual exclusion for tax free non-charitable gifts – Increases to $16,000 from $15,000
The IRS also released the 2022 Tax Tables and Brackets. The rates have not changed but the brackets have been adjusted for cost-of-living increases. The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900 up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400.
Marginal tax brackets for tax year 2021
For tax year 2022, the top tax rate remains 37% for individual single taxpayers with taxable income (income after deductions) greater than $539,900 ($647,850 for married couples filing jointly).
The other rates are:
35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
32% for incomes over $170,050 ($340,100 for married couples filing jointly);
24% for incomes over $89,075 ($178,150 for married couples filing jointly);
22% for incomes over $41,775 ($83,550 for married couples filing jointly);
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.
