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Happy Thanksgiving. Honestly, my favorite holiday. There’s no pressure! Maybe on the belt buckle. It’s always been about spending quality time with the people you love most, while eating an unhealthy amount of food and vegging around watching football.
Tradition is a beautiful concept that my family takes seriously. We’ve always had all the typical turkey day dishes like string bean casserole, mashed potatoes with gravy, sweet potatoes, dinner rolls, stuffing, cranberry sauce from the can, cranberry sauce from scratch (because everyone has an opinion), and of course, turkey. However, because we are Italian American, for whatever reason, we also have a gigantic antipasto, tortellini soup, escarole, and beans and pasta. I know. It makes no sense, but it is what it is.
In my very large (no pun intended) Italian-American family, I have countless relatives with diabetes and cholesterol issues. Likely due to food being the cornerstone of all get-togethers. Heck, my mother and father had a catering business. Francisco’s Catering. One Thanksgiving, about 10 years back, I tried to sneak plain Greek yogurt into my vodka sauce recipe instead of heavy cream. I thought I was doing everyone a favor. Not only did my grandmother notice instantly, but she also almost threw me out of the house! “You never cut corners on a holiday,” is what she said.
2023 has been the year of Ozempic, and I wonder how that will impact millions of American’s shopping and eating plans for the holiday. In early October, Walmart saw a change in food purchasing habits, and the CEO expressed his view that weight loss drugs were the culprit. Pretty interesting. Nestle and Pepsi stocks are negative on the year, and General Mills and Kraft are down big. Novo Nordisk, the maker of Ozempic and Wegovy, is up nearly 50% on the year, and Eli Lilly is up over 60% YTD after their weight loss drug was approved. This is sure to be a topic of conversation at the dinner table on Thursday. Even some thought leaders are forecasting a societal impact for years to come.
We had a common rule during holidays. NO POLITICS. However, the rule was broken from time to time; arguments did happen, but hugs and laughter always came after, and no one was canceled.
However, if you are backed into a corner and find yourself in a family finance discussion this Thanksgiving, the goal of this month’s newsletter is to give you some topics we think you should be talking about. I, for one, am thankful for less and less crypto conversations and the radio silence around NFTs. There’s no shame in conversations about getting wealthy slowly and responsibly.
1) Tax Loss Harvesting
Harvesting is coincidental terminology this time of year. This is the concept of selling positions at a loss to offset capital gains and avoid paying taxes. Disclaimer: this strategy is only valid in taxable accounts and thus not relevant for retirement accounts. This simple, yet neglected, strategy can help generate greater after-tax returns and save you significant money over the years.
The basic concept is that if you sell a position that you’ve held for longer than a year (long-term) for a gain of, say $50k, based on your income tax bracket, you can expect a bill of 15% or $7,500. If the position was held for less than a year, the tax rate goes up even higher (see chart below). However, by locating a position or several that have losses, you can sell them to offset the gain. Even if you don’t have realized taxable gains you can still sell out of losing positions, maintain your market exposure by investing the proceeds in a highly correlated position and you can carry losses forward indefinitely. This gives you the ability to offset future gains as well.
Consider: Mutual funds and ETFs are not the most tax-efficient vehicles. Direct Indexing tracks the same benchmarks as passive ETFs/mutual funds and allows you to hold all the individual constituents inside your account. This structure makes tax management much easier and can generate an additional 1.5-2% annually in tax alpha. That’s a staggering number when compounded over the long term.
Long-Term Capital Gains Tax Rates for 2023
Source: Smart Assets
Short-Term Capital Gains Tax Rates for 2023
Source: Smart Assets
2) Opportunity in Bonds
Core Fixed income yields are near 15-year highs and are delivering north of 6% in income. The taxable equivalent yield on Municipal bonds is north of 7%. Now, consider that Central banks are at the end of their tightening cycle and most economists are forecasting a rate cut in mid to late 2024. Remember, there are two ways to make money in fixed income: interest, and capital appreciation. As rates come down, the value of the bonds you hold will increase.
Consider: By laddering individual bonds, investors can capture these elevated yields, potential capital appreciation, and protection/preservation.
3) Only Owning Treasury Bills is Not a Long-term Solution
We’ve been hearing quite frequently, “I can allocate my entire portfolio to a 10-year Treasury and make 4.6%. I’m good with that return.” However, the same way the FED hiked interest rates, they can cut interest rates. These elevated yields are not going to be around forever, and the expectation is that rates are going to come down in the coming year.
In addition, on average, the US equity market has outperformed the treasury bond market by more than 4-5% annually. If fear is pushing you to make an emotional decision to hold most of your portfolio in T-bills and cash, this can have an extremely negative impact on short and long-term returns. If investors want to someday leave money to their children, an all-treasury or CD portfolio is not the appropriate allocation.
Consider: Diversification has proven to be a better game plan than simply hiding out in treasuries, CDs, and cash.
Hopefully, the dinner conversations center around reminiscing with family and friends and chatting about all that there is to be thankful for, but if it takes an unexpected pivot to finance…..here you go.
We want to wish everyone a very happy Thanksgiving. Remember not to use plain Greek yogurt; use the heavy cream. Enjoy!
Disclosures:
The information contained in this newsletter is provided for informational purposes only, and should not be construed as investment advice or a recommendation to purchase or sell a security. Investing involves the risk of loss that clients must be prepared to bear. This document contains forward-looking statements of opinion, belief, and expectation about the future. Actual results could differ materially from such statements and our opinions are subject to change without notice.