Welcome to the Halloween edition of Trending Today! 

While this spooky season is often about tricks, treats, and eerie surprises, when it comes to investing, the real question is whether your choices lead to tricks or treasure. 

In this article, we’ll explore the allure of owning gold and precious metals in your portfolio — assets that can feel like treasure, but might hold some tricky surprises if you don’t fully understand them.

Over the past 12 months, gold has increased more than 38%, drawing more investors seeking protection from market volatility and inflation. But is it really the treasure your portfolio needs? Or could it be a tempting trick? Let’s talk about it!

Key Takeaways

• Gold has seen significant price increases in 2024, driven by inflation concerns, economic uncertainty, and market volatility.
• Gold is traditionally viewed as a safe haven during inflationary periods, helping to preserve purchasing power over time.
• Gold can act as a stabilizing asset, reducing overall portfolio risk by providing a counterbalance to other investments.
• Investors can invest in gold through various methods, including physical gold, gold ETFs, digital gold platforms, and gold mining stocks.
• Alternatively, the lack of income generation can be a turnoff for investors, as gold doesn’t produce dividends or interest like stocks or bonds. Investors rely solely on price appreciation for returns, which can limit growth during periods of low gold prices.

A Timeless Treasure

Gold’s appeal as a store of value dates back thousands of years, long before the invention of modern currencies or financial markets. 

Ancient civilizations used gold not only as a medium of exchange, but also as a symbol of wealth and power. As a tangible asset that cannot be printed or artificially produced, gold’s finite supply has helped it maintain its status as a trusted store of wealth throughout human history.

Beyond gold, precious metals like silver, platinum, and palladium have also played essential roles in both economies and industries. While gold is often seen as a safe haven during times of economic and political uncertainty, other metals have more specialized purposes. 

For example, silver’s value is driven by both its industrial applications and its use in jewelry, while platinum and palladium are crucial in automotive manufacturing, particularly in catalytic converters for reducing emissions.

The long-lasting appeal of these metals comes from their intrinsic value and scarcity, which can make them resilient against the devaluation of paper currencies and financial instability in the market.

Gold as a Hedge Against Inflation

Much of the allure of gold (aside from the allure of gold itself!) comes from the perception that gold is a powerful hedge against inflation. 

Inflation occurs when the cost of goods and services rises over time, eroding the purchasing power of money. A postage stamp today costs $0.73. It would have only cost you $0.10 to mail that same letter in 1974! 

For investors, inflation poses a significant risk because it can diminish the real value of the return on your portfolio, especially for assets like bonds or cash, which have fixed or low returns.

When inflation rates rise, the value of paper money tends to decline, but gold — a tangible asset — is believed to hold or increase in value. This is because gold’s supply is relatively limited, and its value is not tied to any particular currency or government policy. 

Thanks to gold’s relatively low, or even negative, correlation to other assets, gold tends to be a place to run for investors worried about maintaining the value of their portfolios.

Historically, during periods of high inflation, investors have flocked to gold to preserve their wealth. For instance, during the inflationary 1970s, gold prices in grams surged, providing refuge for those looking to protect their purchasing power.

Does this mean you should stockpile gold when inflation runs high?

Well, since the 1970’s, gold has been less effective as an inflation hedge. In some low inflation or even deflationary environments, gold may underperform, and has appeared to do so in recent years. 

Since 1972, the average ratio of gold’s price to the Consumer Price Index (CPI) was about 3.6. In 2024, that ratio is around 6.4, which tells us that gold’s value does not remain relatively constant compared to the CPI — as you would expect from a reliable inflation hedge.

As you can see from the chart above, the price of gold is not always stable against the rise in prices — or inflation.

This doesn’t entirely rule gold out, though! Some studies do suggest that gold can be an effective hedge against inflation over longer time horizons. This is why it is essential to consider gold as a complementary part of a broader, well-diversified investment strategy rather than a standalone solution.

Diversifying with Gold

While gold and other precious metals may not be the most effective safeguard against inflation in every scenario, they can have their place in a well-diversified portfolio.

Diversification is a cornerstone of sound investing. By allocating investments across different asset classes, investors can reduce the overall risk of their portfolio, helping to insulate against unexpected declines in any one particular asset class. Gold, and precious metals more broadly, play an important role in this context because of their low or negative correlation with traditional assets like stocks and bonds.

We’ve seen this in periods of economic stress or financial market downturns, when gold prices often move in the opposite direction of other assets. 

For example, during the global financial crisis of 2008, stock markets plummeted, but gold prices surged as investors sought safety in a reliable store of value. While you shouldn’t bet on gold to grow your portfolio, it can act as insurance to cushion your assets from inevitable changes in the market.

While gold will not provide you with dividend income — or any real economic use for that matter — it can potentially benefit your portfolio through price appreciation. As investors gravitate to gold in periods of economic uncertainty, the gold in your portfolio can become much more attractive. 

What About Gold Prices in 2024?

Gold prices in 2024 have experienced considerable growth. In fact, since the start of the year, gold prices in 2024 have gone up by a whopping 25%, breaking numerous price records in the process!

People have even been buying gold bars at Costco, causing them to fly off the shelf — WOW.

Many investors are interested in purchasing gold to cash in on the potential for higher prices in the future. With prices projected by some to continue growing into 2025, and gold’s history of being effective at storing value, gold is seen as an excellent shorter-term and longer-term investment for many investors right now. 

While individual investors are seeking gold investments to help protect their wealth and shield them from inflation, central banks globally are increasing their gold reserves, further driving demand for the precious metal.

This rise in its nominal price highlights gold’s reputation as a safe-haven asset, helping to solidify its place in a diversified investment strategy.

How Can I Add Gold to My Portfolio?

If you’re looking to add gold to your own portfolio, you have a few options as an investor, especially in the digital age.

Physical Gold

The most typical way to acquire gold is by buying the physical metal, or buying gold bars. Buying physical gold in the form of bullion, coins, or bars is the most direct way to invest. This provides tangible ownership and removes counterparty risk. 

You want to keep in mind that storing physical gold safely can be a challenge, and selling large amounts of gold may be difficult without the right buyer, so buying gold bars isn’t always the most practical choice for investors.

Gold ETFs (Exchange-Traded Funds)

For a simpler and more liquid investment, many investors turn to gold ETFs, with GLD and IAU being the two most popular. 

These exchange-traded funds track the price of gold and are traded like stocks, offering a low-cost way to invest in the metal without needing to store it. If you’re looking to start investing in gold, ETFs are convenient, but they come with management fees, and investors do not have direct ownership of the actual metal.

Gold Mining Stocks and Mutual Funds

Investors looking for exposure to gold often turn to mining stocks or mutual funds that invest in gold mining companies. These investments tend to move with the price of gold, but they also introduce additional risks, such as operational challenges or geopolitical factors affecting mining companies.

This approach can offer higher returns, but the volatility can also be higher, making it important to assess your risk tolerance before diving in. In the wrong environment, these stocks can feel more like a trick than a treasure, so you don’t want to start adding gold mining stocks to your portfolio without consulting a trusted financial advisor.

Digital Gold Platforms and Gold Options

Digital gold platforms offer a convenient way to invest in gold without physically holding it. Through online accounts, investors can buy, sell, and store fractional amounts of gold, making it accessible to a broader audience. 

These platforms provide flexibility, allowing users to trade gold at any time, and they typically include secure storage options. One key advantage is the ability to invest with smaller amounts of money compared to purchasing physical gold. 

If digital gold platforms seem like the way to go for you, you have to also consider fees for storage and transaction charges that may apply. Investors also must trust the platform’s solvency and security if they choose to invest this way. Despite these risks, however, digital gold is gaining popularity in today’s digital era.

You can also consider gold futures and options, which allow you to speculate on gold’s price without owning the physical metal.

Futures contracts involve agreeing to buy or sell gold at a set price on a future date, offering profit potential but also carrying high risk. Options contracts, on the other hand, give investors the right — but NOT the obligation — to buy or sell gold at a specific price, providing a less risky way to bet on price movements. 

Both strategies can generate significant returns but are complex, oftentimes speculative, and best suited for experienced investors who already understand gold market volatility.

Should I Invest in Gold?

While gold is very popular right now, and has historically been used as a hedge against market volatility and inflation, investing in gold comes down to your unique preferences and circumstances, and does not come without risks.

Risks of Buying Gold

Gold does not generate income, such as dividends or interest, which can make it less attractive during bull markets. Its value can also be volatile since it is influenced by factors like currency fluctuations, geopolitical events, and changes in supply and demand.

Over-allocating to gold can limit your portfolio’s growth potential, so a balanced approach is key. Investing in gold works best when it plays a supporting role in a broader, well-diversified investment strategy.

How Much Gold Should I Buy?

Some financial experts recommend that gold should make up around 5-10% of a well-diversified portfolio, as this allocation is typically enough to enjoy the benefits of diversification without overexposing your portfolio to the risks associated with precious metals. The right allocation mix for you is an important conversation that you should have with your financial advisor.

It is also advisable to rebalance your portfolio regularly. As the price of gold fluctuates, your portfolio’s allocation may drift from your target. Rebalancing ensures that you maintain the proper mix of assets and don’t allow your gold holdings to dominate the rest of your portfolio.

The Future of Gold Prices

The future performance of gold and other precious metals will depend on a variety of factors. Rising interest rates could weigh on gold prices, while ongoing inflation concerns, geopolitical tensions, and central bank policies may continue to support the growing demand for gold as a hedge.

Meanwhile, advancements in technology and industrial demand for metals like silver, platinum, and palladium may drive long-term growth in these markets. 

Let’s Help You Decide!

Towerpoint Wealth is a leading fiduciary wealth management advisory firm located in Sacramento, CA. We help our clients develop a customized plan to make informed financial and investment decisions that align with their preferences, unique personal situations, and longer-term financial goals. 

We believe in helping you remove the hassle of properly coordinating all of your financial affairs, so you can live a happier life and enjoy retirement. 

If you’re considering adding gold to your investment strategy, or have any other questions regarding your wealth management, we encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us!

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity.

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Future-Proofing YOUR Wealth: TPW’s Key Takeaways from the FutureProof 2024 Wealth Management Festival!

At Towerpoint Wealth, a cornerstone of our firm’s philosophy is continued professional development, growth, and innovation, and keeping our professional saw sharp.

In that spirit, and in the interest of ensuring that we are delivering the highest level of counsel, planning, and service, we were excited to send our Partner, Wealth Advisor, Jonathan LaTurner, and our Director of Research and Operations, Nathan Billigmeier to this year’s 2024 FutureProof Festival in Huntington Beach, CA, the world’s LARGEST wealth management festival.

This event brings together leading voices in finance, investing, technology, creative arts, sustainability, and wealth management, offering a unique platform for innovation and collaboration amongst all attendees.

With 4,400+ attendees, 33,000 one-to-one “Breakthru” meetings, 100 peer group discussions, over 50 Breakthru Experiences, and an estimated $22 trillion in total assets under management by all attendees, FutureProof 2024 was truly one for the books!

Now that the festival has concluded and Jon and Nathan are back with us here in Sacramento, we’re excited to share the key takeaways and innovations they brought back and outline how TPW will be implementing certain ideas to help us improve not only the operations of our firm, but also the planning, counsel, service, and guidance we provide to you.

What is the FutureProof Festival?

The FutureProof Festival is a wealth management festival — yes, a wealth management FESTIVAL — the brainchild of Barry Ritholtz. FutureProof stands out from traditional financial conferences in many ways, setting a new standard for how wealth management professionals engage, learn, and network. 

FutureProof is a top-tier event…er…festival for wealth advisors, economists, and independent wealth management firms. Unlike stodgy conventional conferences that often consist of large formal presentations, buttoned-up panel discussions, and impersonal lectures, the FutureProof Festival emphasizes hands-on learning and dynamic interaction. The four-day festival was founded to:

1. Help advisors answer their most pressing questions about the future of wealth management.
2. Learn about innovative ideas focused on firm-building and operations, client collaboration, and investment and portfolio construction and management.
3. Leverage technology for better client service and outcomes: A significant theme was the integration of AI and other technologies to improve the client experience. Tools like Finny AI and other WealthTech solutions showcased how advisors can optimize their service offerings by streamlining client interactions, improving follow-ups, and personalizing advice based on real-time data.

As Ritholtz highlighted, the FutureProof Festival represents the future of financial conferences, with a focus on collaboration, hands-on learning, and real-time problem-solving over passive listening, making it a transformative experience for advisors looking to elevate their practice, and for principals to elevate their wealth management firms.

One of the most unique aspects was the inclusion of engaging exercises, such as “corporate speed-dating” called Breakthru meetings, where advisors had the opportunity to rub shoulders with industry experts and innovators in short, focused, one-on-one sessions. 

These Breakthru meetings are designed to foster more meaningful conversations, allowing participants to quickly exchange ideas, build relationships, and explore collaborations in an engaging and efficient manner.

Another standout feature was the festival’s “Level Up” series, a curated set of workshops designed to give advisors new skills and deepen their expertise. These sessions were interactive and practical, offering real-world applications that advisors could immediately implement in their practices. 

Whether learning about advanced financial planning techniques or honing client relationship strategies, attendees walked away with actionable insights to elevate their advisory services.

The broad array of speakers also set the FutureProof Festival apart from traditional events. The festival brought together thought leaders not only from the financial industry but also from technology, impact investing, and creative fields, creating a truly interdisciplinary experience: 

• Jill Schlesinger, Host, Jill on Money, CBS Mornings
• Saira Malik, Chief Investment Officer, Nuveen
• Ben Johnson, Head of Client Solutions, Asset Management, Morningstar
• Jeffrey Gundlach, CEO & CIO, DoubLine Capital
• Dominic Chu, Senior Markets Correspondent, CNBC

This diverse speaker lineup allowed for a broader perspective on wealth management, helping advisors to think outside the box and approach client challenges with fresh, innovative solutions. 

Hot Topics from FutureProof ‘24

Every interactive session at FutureProof 2024 delved into the most critical and pressing topics for the future of wealth management, each designed to equip attendees with insights and tools to better serve their clients and grow as a firm.

If you’re curious, here is the full agenda, and below are some of Jonathan and Nathan’s favorite sessions:

Future-Proofing Businesses

It’s in the name! One of the central focuses at FutureProof 2024 was ensuring that wealth management firms are truly “future-proof,” exploring what the wealth management firm of tomorrow will look like and how to lead the charge toward that future in this ever-evolving industry. 

Through the workshops and speaker sessions, attendees learned about the technologies and trends that are reshaping the financial landscape, including advancements in automation, data analytics, and client experience platforms. We also learned actionable steps to prepare for the future and stay competitive in the wealth management arena.

By staying ahead of these changes, at TPW we are better equipped to anticipate changes in client expectations and industry demands. The emphasis was on adopting innovative tools without losing sight of our core mission:  Helping you remove the hassle of properly coordinating all of your financial affairs, so you can live a happier life and enjoy retirement.

Harnessing AI: Maximizing Innovation, Minimizing Risk

Another spotlight was on the transformative potential of artificial intelligence (AI) in the world of wealth management.

The sessions on harnessing AI taught our advisors how this technology can enhance efficiency, improve decision-making, and offer more personalized services to clients. They explored practical applications like automating routine tasks, analyzing large amounts of financial data, leveraging ChatGPT, and creating customized investment strategies.

Above all, FutureProof also touched on the risks of over-reliance on AI tools, stressing the need for a balanced approach that combines technological innovation with the human element that is so crucial to personalized financial and wealth planning.

Innovative Portfolio Management

The future of portfolio management was also a hot topic, with advisors exploring emerging strategies designed to enhance portfolio performance, reduce risk, and minimize income taxes. 

With the financial markets constantly evolving, advisors must stay ahead of trends and consistently review and enhance their portfolio management strategies. The sessions underscored the need to consistently evaluate portfolios, ensuring they evolve with market conditions while staying aligned with client goals.

By incorporating these insights, Towerpoint Wealth can continue delivering diversified, top-tier advice to create portfolios that anticipate market shifts and exceed client expectations.

Driving Firm Culture and Leadership

Finally, the festival highlighted the importance of building and maintaining a strong firm culture as wealth management firms like Towerpoint Wealth grow with our clients.  

As firms grow, so does the need for strong leadership and a cohesive culture. FutureProof incorporated sessions focused on the transition from advisor to CEO, offering insights on how to lead a firm through growth while keeping the team motivated and aligned with the firm’s mission. Wealth advisors and principals left FutureProof 2024 with strategies for cultivating a forward-thinking, client-centered culture, even as the firm expands.

Through these diverse sessions, Jonathan and Nathan brought back invaluable knowledge that will not only benefit our firm, but also enhance the services we provide to you as our client. Each session provided fresh perspectives and actionable strategies, ensuring that we stay at the forefront of the wealth management industry.

How was FutureProof Festival 2024 Different from FutureProof 2023?

As you may know, Towerpoint Wealth was fortunate enough to attend FutureProof in 2023 last year, with our President, Joseph Eschleman, in attendance with Jonathan and Nathan. 

FutureProof 2024 stood out as a monumental year for the festival, with a 67% increase in attendance from 2023!

We feel that this year’s event fostered more opportunities for networking and organic growth than in previous years, allowing for an even MORE dynamic experience. This year’s iteration also offered many more insights on the development of technology in the wealth management industry that can help advisors to better achieve their growth initiatives and, more notably, serve their clients.

Our Top Takeaways from FutureProof Festival 2024

Though there have been many takeaways from this year’s FutureProof festival, we found that the most useful information gained from the conference was insight into RIA industry trends, the market landscape, and where the RIA industry is headed.

One standout presentation, from Michael Kitces, co-founder of CY Planning Network and Chief Financial Planning Nerd for Kitces.com, provided detailed information to help us understand how TPW measures up against other regional firms. 

We also enjoyed the sessions with SS&C about client relationship management (CRM) systems that help us provide better and more coordinated communication and service to our clients. Another standout meeting was T. Rowe Price’s meetings about current ETF trends, which provided insightful commentary on trends and their effect on client portfolios.

The interactive format made the session engaging and informative, offering valuable insights into the firm’s positioning within the industry. It was reassuring to see that TPW is taking all the right steps to ensure we’re equipped to meet our clients’ complex needs, positioning us as a leader in the competitive financial landscape.

The sessions also included some valuable information about the ever-changing industry of financial technology, or FinTech. These sessions provided us with even more confidence in the TPW’s ability to source, vet, and implement technology-based solutions, allowing us to utilize the best available technology to operate our Firm and serve our clients.

Overall, FutureProof is a great event and continues to be a great conference to attend. We look forward to attending the years to come.

Final Thoughts

2024’s FutureProof Festival proved to be an educational, enlightening, and flat-out fun experience for Towerpoint Wealth!

From the innovative and engaging sessions at the festival, we were able to learn about groundbreaking advancements in AI, innovative portfolio strategies, leadership development, and firm culture. The festival offered actionable insights that we can’t wait to bring back to our clients.

The wealth management landscape is evolving and innovating, and we’re excited to evolve and innovate with it. With the knowledge gained at FutureProof, TPW is more prepared than ever to navigate the road ahead, always with your best interests in mind.

Our advisors didn’t just attend FutureProof to learn — they went to bring those insights back to you. By attending FutureProof 2024, our team at Towerpoint Wealth is returning energized and ready to implement these innovative strategies, ensuring that we continue to lead the way in the wealth management industry while staying laser-focused on what matters most — our clients.

We encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us!

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity.

We will happily donate $10 to it!

Follow TPW on LinkedIn

How the Change in Current Federal Interest Rates Could Affect YOU?

The impact of interest rates on stocks is significant!

Interest rate cuts can signal a shift in the financial and economic landscape. For investors, this change in the direction of interest rates on stocks can either be considered a cause for concern or an opportunity for significant wealth-building.

Interest rates play a crucial role in the economy, guiding everything from consumer spending and borrowing to corporate profits. When interest rate cuts occur, borrowing costs drop with them, and companies have access to “cheaper money.”. This can correlate to higher stock valuations, but also opens the door to potential risks, such as inflated asset bubbles or increased market volatility.

On Wednesday, Jerome Powell, the 16th chair of the U.S. Federal Reserve (or, “The Fed”), announced on behalf of the Federal Open Market Committee (FOMC) its first interest rate cut in four years (since COVID), reducing its benchmark “Fed Funds Rate” a half point, from a 23-year high of 5.50% to 5.00%. 

This cut in the current federal interest rates — also known as the Fed rate — represented a significant economic milestone in the central bank’s most aggressive inflation-fighting campaign since the 1980s, and for Americans struggling with rising living costs over the past two years. It also raises many questions for investors.

What is the impact of interest rates on stocks?

What stocks might perform better with lower interest rates?

Should I stay the course, or pull my money out of the stock market and invest elsewhere?

Whether you’re a seasoned investor, or just starting to build your portfolio, understanding the effect of interest rates on stocks will help you make informed decisions, stay ahead of the curve, and avoid making costly reactionary decisions.

In this newsletter, we will answer your questions about how a lower Fed Funds interest rate can affect YOU as an investor, and we’ll discuss some strategies to help you navigate this ever-changing environment.

Key Takeways

• The FOMC has gained “greater confidence” that inflation is moving steadily toward its 2.0% inflation target.
• Expectations for 50 bps (1/2 point) of further cuts before this year is through, likely 25 bps (1/4 point) at each of their two remaining meetings. 
• For 2025 & 2026, the Fed anticipates 100 bps (1 point) & 50 bps of cuts respectively.
• The money supply remains the most important indicator on the path forward. How M2 growth progresses from here will dictate if the Fed has room for further rate cuts or sees a re-acceleration of inflation as was seen when the Fed declared a premature victory on inflation back in the 1970’s.  If M2 growth remains modest, both inflation and economic growth will slow, but the Fed will have room to continue cuts.
• Interest rates and stock prices tend to have an inverse relationship, with higher interest rates making it more expensive for businesses to borrow capital and expand.
• Different sectors experience different effects from interest rate changes.
• It is imperative to be disciplined in following your long-term financial and investment plan and strategy, and work with a trusted fiduciary financial advisor before adjusting your portfolio positions or asset allocation.

What is the Impact of Interest Rates on Stocks?

Before we understand how interest rate cuts can alter your investment strategy, let’s take a look at the impact of interest rates on stocks as a whole. Understanding interest rates in investing is crucial for making informed decisions about your portfolio.

The relationship between interest rates and the stock market has been closely studied — when the Fed announces a change in interest rates, the market usually responds. Because of this link, the Fed has historically used interest rate cuts or hikes to either bolster or manage the growth of the economy and, some may argue, the financial markets. 

Stock Prices

Interest rates and stock prices typically have an inverse relationship. The higher interest rates are, the more expensive it is for businesses to borrow money, hindering their ability to finance new projects, expansions, or acquisitions. Higher interest rates also make it more difficult for consumers to borrow money, and can generally result in lower consumer spending, possibly leading to lower corporate revenues and weaker earnings.

Conversely, when the Fed enacts an interest rate cut, borrowing becomes cheaper, encouraging businesses and consumers to invest and spend. This can lead to higher corporate earnings and a greater demand for goods and services, which can boost stock prices. Investors generally see lower interest rates as a positive sign for the stock market, as companies benefit from more affordable credit, which can drive profitability and stock performance.

Investor Behavior

Federal interest rates also have a direct influence on investor behavior. In a lower-rate environment, fixed-income investments like bonds offer lower yields, prompting many investors to shift their focus to equities. 

Stocks tend to become more attractive compared to bonds when interest rates are lower because the income that bonds pay may not keep pace with inflation, especially when interest rates are below inflation rates, thus driving more demand for stocks and pushing prices higher.

Sectoral Impact

The impact of interest rates on stocks varies across different sectors and industries. Some are more sensitive to interest rate changes than others. 

For example, the financial sector, particularly banks, benefits from rising rates because they can charge higher interest on loans, improving their profit margins. As a result, bank stocks often perform well when the Fed raises rates.

In contrast, industries that are heavily reliant on borrowing, such as real estate and utilities, may face some challenges when rates rise. Higher borrowing costs increase expenses for companies in these sectors, which can, in turn, hurt profitability and lead to weaker stock performance.

Think of growth-oriented sectors like technology that can benefit from interest rate cuts. These companies typically have high valuations based on future earnings, and when rates rise, the present-day value of those future earnings diminishes. This can lead to declines in tech stocks as the Fed signals rate hikes.

Historical Results

The stock market has historically responded positively to federal interest rate cuts, especially when the economy is stable or improving. When the Fed cuts rates, it signals that it is taking measures to support economic growth, which investors often interpret as a bullish sign for stocks.

However, not all rate cuts lead to positive stock market performance. If the Fed cuts rates due to concerns about a weakening economy, the market may view this as a signal of trouble ahead, which can dampen investor confidence. Rate cuts in the face of an economic downturn — such as during the 2008 financial crisis or the COVID-19 pandemic — can lead to market volatility or declines, as investors grapple with broader economic uncertainties.

This is why it’s so critical to look at the “why” behind rate cuts. While they may appear to be a positive sign at first glance, the underlying economic factors that lead to the Fed rate cuts tell much more of the story.

What Should You Do if Interest Rates Drop?

Short answer: there is no “correct” answer.

When the Fed cuts interest rates, it often stirs feelings of anxiety or excitement among investors. You may feel tempted to make more immediate tactical decisions — like selling off certain assets or shifting portfolios entirely — in response to lower interest rates. However, knee-jerk reactions to Fed rate cuts can often lead to more harm than good. 

Rather than making impulsive moves, investors must understand and consider the bigger picture and approach their decisions with a longer-term strategy in mind. Here are some key principles investors should keep in mind when navigating a potential interest rate cut:

Avoid Reacting Too Quickly or Aggressively

The first and perhaps most important piece of advice is to avoid a knee-jerk reaction. A Fed rate cut can spark a flood of speculation and commentary from the media, leading to volatile market movements. While making immediate adjustments to your portfolio may be tempting, a more measured approach tends to be prudent in the long run.

Historically, stock market reactions to rate cuts have been mixed. Sometimes the market rallies, while other times it might face a period of turbulence. These fluctuations are normal, but if you react too quickly, you risk locking in losses or missing out on gains that may occur once the market stabilizes. 

Predicting the shorter-term movements of the stock market is next to impossible to do, and we encourage you to be humble about this fact.

Odds are, you’re investing for your longer-term goals and objectives. By being disciplined in following your longer-term strategy, you are more likely to weather shorter-term volatility and benefit from the general upward trend of the stock market over time.

Focus on Asset Allocation

Instead of drastically changing individual stock or investment positions, it’s smarter to revisit your overall asset allocation and diversification. Asset allocation is the distribution of your investments across different asset classes like stocks, bonds, alternatives, and cash, and it is one of the most important factors in determining your long-term returns.

In a low-interest-rate environment following a Fed cut, certain asset classes may perform better than others. For example, stocks may look more attractive relative to bonds, which offer lower yields in a rate-cut scenario. However, this doesn’t mean you should completely shift out of bonds or other safer assets. Bonds, even with lower yields, can provide diversification and help cushion your portfolio during periods of stock market volatility.

A balanced portfolio that includes a mix of equities, bonds, and possibly alternative assets like real estate or commodities can help you mitigate risk while still capturing potential upside. 

If you’ve already established a long-term asset allocation plan, now is the time to ensure that it still aligns with your financial goals and risk tolerance, rather than making impulsive shifts based on short-term events like a rate cut. 

Don’t have a custom asset allocation plan yet? Schedule a 20-minute “Ask Anything” call to discuss how we can help you create a customized strategy tailored to your long-term goals!

Assess Growth vs. Value

When interest rate cuts occur, certain sectors and types of stocks may outperform others. As we’ve discussed, growth stocks — typically companies that are expanding rapidly and reinvesting profits to fuel further growth — often benefit in lower-rate environments. Lower borrowing costs allow these companies to finance their expansion more easily, and the discount rate applied to their future earnings decreases, boosting present-day valuations.

On the other hand, value stocks, which are generally more established companies trading at lower price-to-earnings ratios, may not respond as positively to rate cuts. This doesn’t mean, however, that value stocks should be discarded. There are times when value stocks can outperform even in a low-rate environment, particularly if economic conditions improve and lead to rising corporate earnings.

As an investor, you should consider maintaining a diversified portfolio that includes both growth and value stocks. Trying to time the market by switching entirely to growth or value stocks based on rate movements is notoriously difficult and can lead to missed opportunities.

Instead, ensure that your portfolio reflects your long-term investment goals while allowing room for both growth and value-based assets.

Keep an Eye on Inflation

A Fed interest rate cut may also affect inflation, especially if the economy is already showing signs of overheating. While lower interest rates can stimulate economic growth, they can also lead to rising inflation if demand outpaces supply. Inflation erodes purchasing power, which can have a detrimental effect on fixed-income investments and the value of certain stocks.

If you are worried about protecting your portfolio from potential inflationary pressures, consider adding inflation-hedging assets like Treasury Inflation-Protected Securities (TIPS), commodities, or real estate. These assets tend to perform well when inflation is rising, helping to offset the negative effects on other parts of your portfolio. 

Keep in mind, however, that inflationary pressures following a rate cut are not guaranteed. It’s important to monitor economic indicators and adjust accordingly, rather than making sweeping changes in anticipation of inflation that may not even materialize.

Don’t Lose Sight of the Big Picture

One of the most important things for investors to remember is that the impact of interest rates on stocks, and Fed interest rate cuts, are just one piece of the broader economic puzzle. 

While lower rates can stimulate the economy and affect stock prices, they are not the sole determinant of market performance. Factors like corporate earnings, global economic trends, and geopolitical risks can all have a significant impact on the stock market.

For instance, a rate cut may boost stock prices in the short term, but if corporate earnings are declining or geopolitical tensions are escalating, the stock market could still face headwinds. As an investor, you must look beyond the headlines and focus on the bigger picture. Maintain a diversified portfolio, avoid making emotional decisions, and keep your long-term financial goals in mind.

Final Thoughts

Subsequent to Wednesday’s Federal Reserve interest rate cut, understanding how these rate cuts affect the stock market and why the Fed adjusts these rates is essential for investors. 

While an interest rate cut can create opportunities, it’s important to recognize that the stock market’s reaction is not always straightforward. Interest rate cuts can stimulate economic growth and boost stock prices, but they are also a response to broader economic challenges. These complexities mean that relying on a single metric — such as the Fed’s decision on rates — is not enough to guide sound investment decisions.

Navigating a potential interest rate cut involves more than simply reacting to headlines. The key takeaway for you, as an investor, is to avoid making knee-jerk portfolio changes based on shorter-term market fluctuations. Instead, focus on maintaining a well-diversified portfolio that aligns with your longer-term goals. By staying disciplined with your financial plan, you can position yourself to benefit from potential opportunities while mitigating risk.

If you aren’t feeling confident in your financial plan and its ability to withstand economic conditions, we urge you to meet with a trusted financial advisor to monitor and adjust (if necessary) your financial plan. 

At Towerpoint Wealth, we are committed to helping you remove the hassle of coordinating all of your financial affairs, so you can live a happier life and enjoy retirement. 

If you are concerned about how interest rate cuts may affect your portfolio, we encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us!

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity.

We will happily donate $10 to it!

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Calling all entrepreneurs! Transform your small business into a wealth-building machine by leveraging the best small business retirement plan designed to benefit both you and your employees!

Choosing the right retirement plan is a pivotal decision for self-employed individuals and small business owners. With a wide variety of options available, each with its own set of benefits and requirements, choosing the right option for you and your business can seem overwhelming. Your retirement planning decisions directly affect your long-term financial security and ability to maximize tax advantages. 

The small business retirement plan landscape offers a wide variety of options to you as an entrepreneur  — each tailored to meet the diverse needs and goals of self-employed individuals and small business owners — but understanding which aligns best with your unique business and personal financial goals is paramount to successful retirement planning and your longer-term economic well-being. Implementing the right plan can help you effectively save for retirement while also optimizing your current cash flow and future wealth-building opportunities.

This article will break down the most popular retirement account options for self-employed individuals and small business owners, offering insights into how each plan works, its advantages, and potential drawbacks. Whether you’re aiming for simplicity, tax benefits, or maximized savings and wealth-building, this guide will help you navigate your choices to find a small business retirement plan that best suits your business and personal retirement objectives.

Self-Employed and Small Business Retirement Plan Options

Choosing the right retirement plan for your business can be daunting with so many different options available. In this section, we’ll simplify each plan by exploring the details, benefits, and drawbacks, making it easier for you to consider the right one for your unique needs.

Traditional and Roth IRAs

There are two popular Individual Retirement Account (IRA) options: Traditional and Roth. As a small business owner or self-employed individual, IRAs can be attractive because, as an individual, you do not have to have an employer-employee relationship involved to contribute to the plan. 

Traditional IRA

A Traditional IRA allows you to contribute (and deduct) pre-tax dollars, reducing your taxable income for the tax year that you make your contribution. Earnings in a Traditional IRA grow tax-deferred until you withdraw them in retirement, at which point they are taxed as ordinary income. 

This account may be ideal for you if you expect to be in a lower tax bracket during retirement than you are now or are in need of a current income tax deduction. However, required minimum distributions (RMDs) start at age 73, which can impact your retirement planning if not part of your existing withdrawal plan.

Pros:

• Immediate tax deduction on contributions.
• Tax-deferred growth.
• Potential for lower tax rate upon withdrawals (if you are in a lower bracket during retirement).
• No income limitations for contributions.
• Spousal IRA contributions are allowable, even for a non-working spouse.

Cons:

• Tax deductibility is limited based on your modified adjusted gross income (MAGI), and whether you are eligible for a retirement plan through your employer.
• Taxes are due on withdrawals.
• Lower contribution limits ($7,000, or $8,000 if you’re age 50 or older).
• RMDs are mandatory at age 73.
• Early withdrawal penalties before age 59 ½.

Roth IRA

Different from Traditional IRAs, Roth IRA contributions are made with after-tax dollars. While you don’t get a tax deduction on your contributions, withdrawals — including earnings on your contributions — are tax-free! This can be beneficial if you believe you may be in a higher tax bracket during retirement. 

Unlike Traditional IRAs, Roth IRAs do not require RMDs, which means your money can grow for as long as you wish.

Pros:

• Tax-free withdrawals of both contributions and earnings.
• Tax-free growth of contributions.
• No RMDs during the account holder’s lifetime.
• Flexible contributions.

Cons:

• Contributions are not tax-deductible.
• Income limits may restrict eligibility ($228,000 if filing a joint return or qualifying widow(er), $146,000 for all other individuals).
• Lower contribution limits ($7,000, or $8,000 if you’re age 50 or older).
• Early withdrawal penalties before age 59 ½ applied to any growth in the account.

SEP IRAs

The Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners, offering higher contribution limits than Traditional or Roth IRAs. Contributions are fully tax-deductible, and SEP-IRA accounts grow tax-deferred until funds are eventually withdrawn. This plan is particularly beneficial if you have fluctuating income, or want to make more substantial contributions in more profitable years.

With a SEP-IRA, business owners can contribute to their own and to their employees’ retirement plans. It is important to note that these plans are fully employer-funded, unlike a 401(k) plan. Usually, a SEP-IRA is best for a sole proprietor or contractor.

Pros:

• High contribution limits (the lesser of 25% of compensation or $69,000 in 2024).
• Fully tax-deductible employer contributions.
• Flexible contribution amounts based on business income.
• Ability to manage investment portfolio without tax liability.
• Low administrative responsibilities.

Cons:

• Employer contributions only (no employee contributions).
• Contributions must be made for all eligible employees if applicable.
• Early withdrawal penalties before age 59 ½.

Individual/Solo 401(k)s

An Individual 401(k), also known as a Solo 401(k), is a retirement savings plan designed for self-employed individuals or small business owners with no employees (excluding a spouse). It works much like a standard 401(k), but is tailored for businesses with only one participant (or two, if your spouse is included).

This plan is designed to allow individuals to take advantage of the higher contribution limits and flexibility of a 401(k) plan, even if you don’t have a traditional employer.

Traditional Solo 401(k)

The traditional Solo 401(k) allows for both employee and employer contributions, which can provide a higher maximum contribution limit. Contributions to a Traditional Solo 401(k) are tax-deductible, and the account grows tax-deferred. This plan may be a good option for you if you are self-employed with no employees (other than a spouse), maximizing your retirement savings potential.

Pros:

• Immediate tax deduction on contributions.
• High contribution limits:
  • Elective Deferrals: Up to 100% of compensation, up to $23,000 in 2024.
  • Employer Nonelective Contributions: 25% of compensation as defined by the plan as long as total contributions to a participant account are not more than $69,000 for 2024.
• Catch-up contributions are available (if age 50 or older).

Cons:

• Administrative responsibilities (you will have to make annual IRS tax filings once you hit $250,000 or more in assets)
• Contributions are subject to income limits (The maximum compensation that can be considered when calculating your contribution is $345,000 in 2024).
• Contributions must be made by the tax filing deadline.
• Early withdrawal penalties before age 59 ½.

Roth Solo 401(k)

A Roth Solo 401(k) combines the high contribution limits of a Traditional Solo 401(k) with the tax-free withdrawals of a Roth. Your contributions are made with after-tax dollars (read: no current income tax deduction), but withdrawals — contributions and earnings — are tax-free in retirement. This could be an option worth considering if you expect to have higher tax rates upon retirement.

Pros:

• Tax-free withdrawals in retirement.
• High contribution limits (same as Traditional Solo 401(k) plans).
• Flexible annual contributions.
• Unlike Roth IRAs, there are no income limitations.

Cons:

• Administrative responsibilities (you will have to make annual IRS tax filings once you hit $250,000 or more in assets).
• Contributions are subject to income limits (same as Traditional Solo 401(k) plans).
• Contributions must be made by the tax filing deadline.
• Early withdrawal penalties before age 59 ½.

SIMPLE IRAs

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another great option for small business owners with up to 100 employees. It offers a low-cost path to provide retirement benefits to employees with lower contribution limits compared to a SEP IRA or Solo 401(k). Both employers and employees can contribute, with the employer required to match employee contributions up to a certain percentage.

Pros:

• Easy to set up and administer.
• All employer and employee contributions are tax-deductible.
• Lower administrative costs and responsibilities.

Cons:

• Somewhat lower contribution limits (Up to $16,000 in 2024).
• Required employer-matching contributions (up to 3% of employee contributions).
• Early withdrawal penalties before age 59 ½.

401(k) Plans

A 401(k) plan can be a powerful retirement savings vehicle, allowing for contributions from both employers and employees. Traditional 401(k) plans are commonly offered by larger employers, but can also be established by small business owners. Not only do they offer a tax-efficient way to save for retirement, but they also provide an attractive benefit to help recruit and retain employees.

Traditional 401(k)

With a Traditional 401(k) plan, employee contributions are made pre-tax, meaning employee taxable income is reduced dollar-for-dollar on any contributions made to the account. Contributions and earnings grow tax-deferred, but withdrawals are taxed in retirement.

Pros:

• Higher contribution limits ($23,000 in 2024).
• Employee contributions act as a tax deduction, reducing taxable income dollar-for-dollar.
• Employers may match employee contributions.

Cons:

• IRS tax filing requirements for employers.
• Required minimum distributions.

Roth 401(k)

The Roth 401(k) offers the same high contribution limits as the Traditional 401(k), but allows for after-tax contributions. This means that withdrawals occur tax-free — that is if the account has been held for at least five years and you are at least 59½. This option could be ideal for those expecting to be in a higher tax bracket in retirement.

Pros:

• Tax-free withdrawals in retirement.
• Higher contribution limits ($23,000 in 2024).
• Employers may match contributions.

Cons:

• Contributions are made with after-tax dollars – no immediate income tax deduction.
• Early withdrawal penalties before age 59 ½ applied to any growth in the account.

Profit-Sharing Plans

Traditional Profit-Sharing Plan

A Profit Sharing Plan allows businesses to make discretionary contributions to employees’ retirement accounts. Contributions are made by the employer and can be based on a percentage of profits, giving flexibility to adjust contributions based on the company’s financial performance.

Pros:

• Flexible contribution amounts.
• Tax-deductible contributions for the business and tax-deferred growth for participants.
• Can be paired with other retirement plans.
• Can help attract and retain employees.

Cons:

• Contribution amounts can vary annually (which can make retirement planning more difficult).
• Requires annual IRS tax filings and administrative duties.
• Early withdrawal penalties before age 59 ½.

New Comparability Profit-Sharing Plan

The New Comparability Plan is a type of profit-sharing plan that allows for different contribution rates based on employee classification. This can be advantageous for business owners who want to allocate more significant contributions to older, more highly compensated employees.

Pros:

• Ability to target higher contributions to key employees.
• Flexible contribution options.
• Tax-deductible contributions for the business and tax-deferred growth for participants.

Cons:

• IRS tax filings and administration and compliance requirements.
• Contribution amounts can vary annually (which can make retirement planning more difficult).

Defined Benefit Plans

Traditional Defined Benefit Plan

Traditional defined benefit plans offer a predetermined benefit amount based on a formula that will adjust contributions to reach a desired retirement income. These plans are more common in larger businesses but can be a powerful retirement savings tool for small business owners. They allow for higher contributions, making them an attractive option for business owners looking to save for retirement more aggressively.

Traditional defined benefit plans are typically known as pension plans, where employees receive a guaranteed monthly benefit starting at retirement. These plans are largely funded by employers, making them an attractive benefit for employees.

Pros:

• Guaranteed retirement income.
• High contribution limits (the lesser of 100% of the employee’s average compensation over 3 calendar years or $275,000 for 2024).
• Beneficial for business owners who want predictable retirement income.
• Can help attract and retain employees.
• Employer contributions are generally tax-deductible.

Cons:

• High administrative costs and IRS tax filing requirements.
• Less flexibility in contribution amounts.

Cash Balance Plan

A cash balance plan is a type of defined benefit plan that defines the employee benefit in terms of a stated account balance. It combines features of defined contribution plans with those of traditional pensions, allowing for more predictable contributions and benefits.

Like traditional defined benefit plans, cash balance plans are typically employer-sponsored; however, these plans do not guarantee a specific monthly balance. Instead, cash balance plans offer a guaranteed cash balance at retirement.

Pros:

• Predictable retirement benefits.
• High contribution limits.
• Can be combined with other retirement plans.
• Can help attract and retain employees.
• Employer contributions are generally tax-deductible, and grow tax-deferred.

Cons:

• Higher administrative and actuarial costs.
• Taxes are due on withdrawals.
• Requires more complex plan management.

What’s the Right Choice for You?

Choosing the best retirement plan means you need to carefully weigh your business’s financial landscape, your personal retirement aspirations, and the needs of your employees. Each retirement option offers its own unique set of features, benefits, and drawbacks, so it’s essential to align your choice with your broader personal and business financial goals.

By thoroughly understanding the strengths and limitations of these retirement accounts, you can confidently select a plan that not only meets your retirement planning goals but also maximizes your savings potential. 

It can feel overwhelming to weigh all of these options. Choosing the right account (or combination of accounts) for you and your business could make a drastic impact on your retirement savings — so how do you decide what’s best for you? 

If you want to feel confident in your retirement planning decisions, reach out to us and schedule a 20-minute “Ask Anything” call – we are confident it will be time well spent!

At Towerpoint Wealth, we help you remove the hassle of properly coordinating all of your financial affairs, so you can live a happier life and enjoy retirement. If you are worried about how the 2024 election could affect your financial future, we welcome talking further with you about your personal situation.

Worried about whether you have enough set aside to retire? Check out our “Retiring with 2 Million Dollars” guide to learn five specific steps you can take immediately to work to grow your net worth!

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity.

We will happily donate $10 to it!

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Harris vs. Trump: 2024’s Election TAX Impact on You!

With only two and a half months separating us from the result of the upcoming 2024 US presidential election, it has become an exceedingly unnerving time for some investors. Proposed tax law changes and market sentiment related to the election can considerably impact the financial landscape, making investors anxious as November 5th approaches.

The effect that elections can have on investors is undeniable. Changes in tax policy can alter your financial, investment, and tax planning, particularly when considering changes in the proposed tax on capital gains, dividend taxation, and estates. As candidates finish up their campaigning, it’s important that you, as an investor, understand how a win on either side could affect your portfolio and overall net worth position.

How might the policies of a Democratic or Republican administration reshape your financial and personal economic position? And, with the political environment more polarized than ever, how likely are these proposed changes to stick?

In this article, we’re going to discuss key tax proposals from both Kamala Harris and Donald Trump and the effects that these policy changes could have on you and your assets.

Why does tax policy matter for investors?

Tax policy isn’t just a hot talking point for politicians – it’s oftentimes a critical factor for voters that can have a major impact on your bottom line. Whether you’re managing your personal investments, planning for retirement down the line, running a business, or making arrangements for your estate, the taxes that you pay on capital gains, dividends, and other income can significantly impact the growth of your nest egg and portfolio.

A higher capital gains tax could erode your profits from selling stocks, which would, in turn, alter the amount of money you need to have set aside to offset this tax increase, and/or the timeline of your eventual withdrawals. Changes in dividend taxation could make income-generating assets more or less attractive. Estate taxes could dramatically impact how much wealth you can pass on to future generations, and how you establish and coordinate your estate. 

All of this is to say that tax policy changes aren’t just numbers and talking points that politicians exchange views on – they will affect the material dollars in YOUR pocket. 

How have previous elections affected investors?

Historically, we can see how previous elections and the tax policy changes created by elected officials have shaped the way investments are taxed now. For example, in 2017, the Tax Cuts and Jobs Act (TCJA) signed by President Donald Trump slashed corporate tax rates and provided corporations with bonus depreciation opportunities following an advancing stock market. This, in turn, boosted corporate investment and economic growth.

Similarly, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) signed by President George W. Bush made significant changes to overall tax rates and retirement planning. This Act placed new limits on estate taxes, allowed for higher IRA contributions, and created new employer-sponsored retirement plans. These changes greatly altered retirement planning in subsequent years, and its results are still being experienced today. 

Democratic Party Tax Proposals 2024

Each party running for office has its own set of policy proposals that can have a long-term impact on you as an investor.

When it comes to the 2024 Election, The Democratic Party as a whole appears to support the movement to increase taxes on corporations and the rich. The party has also boasted its plans to support workers’ rights and support the middle class. 

The Democratic Party Nominee

The Democratic nominee for president is Kamala Harris, currently the Vice President of the United States under President Joe Biden. Harris built her platform on her firm stances on reproductive rights, climate concerns, and border reform. 

As a Senator, Harris proposed tax legislation – the LIFT (Livable Incomes for Families Today) the Middle Class Act – that would provide a $3,000 per person ($6,000 per couple) refundable tax credit, or economic boost, for most middle and working-class Americans. This legislation would have cost taxpayers approximately $3 trillion over a decade, which the Act intended to offset by repealing the aforementioned TCJA provisions that tended to benefit those earning over $100,000 a year. 

How would a Harris win affect investors and the overall economy?

When it comes to changes in economic policy we can expect if Harris wins in November, there are a few significant policy proposals that are worth keeping your eye on. In her economic agenda, Harris outlines her plans for affordable housing, relieving medical debt, lowering the cost of prescription drugs, lowering grocery costs, and cutting taxes for middle-class families with children. 

By increasing the child tax credit (CTC) and following through with her many other tax-related proposals, many middle-class families would expect to see reduced tax liabilities. According to the non-partisan Tax Foundation, this plan would have a minimal impact on GDP; however, it appears that corporations and wealthy individuals may be footing the bill.

According to the NY Times, Vice President Kamala Harris has endorsed a comprehensive tax policy aimed at raising nearly $5 trillion in revenue over the next decade, primarily targeting the wealthiest Americans and large corporations. Her proposal includes:

• Increasing the corporate tax rate from 21% to 28%
• Raising the minimum tax on corporations’ reported income to 21%
• Doubling the global minimum tax on multinational companies to 21%. 
• Increasing the top marginal federal tax rate from 37% to 39.6%.
• Raising the current preferential tax rate on capital gains and dividends, for those with annual income exceeding $1MM for couples, $500K for single filers.
• Increasing the Medicare surtax from 3.8% to 5% for Americans making more than $400,000.

These proposals build on the Biden administration’s recent budget plan, emphasizing a commitment to addressing wealth inequality and generating revenue to fund government initiatives. 

Despite the ambitious nature of these proposals, they may face significant hurdles in Congress; however, these proposals demonstrate the initiatives of the Harris campaign when it comes to tax policies.Despite the ambitious nature of these proposals, they may face significant hurdles in Congress; however, these proposals demonstrate the initiatives of the Harris campaign when it comes to tax policies.

Harris has also announced that she intends to fight corporate price-gouging for groceries and prescription medications. While this could help to make these products more affordable for middle-class Americans, it would also make it more difficult for corporations to invest in growth initiatives and remain competitive against other businesses. 

Overall, these policies aim to shift toward a greater income distribution but could have a significant impact on the overall economy. 

Under these policies, the wealthiest investors could see a substantial increase in their tax liabilities, particularly those who rely heavily on growth in their investment portfolios, i.e. capital gains. While the middle class might not see as dramatic an impact on their taxes, some believe that higher corporate taxes could lead to lower stock market returns, which could, in turn, affect retirement account balances and mutual funds. 

Your retirement planning could look a bit different as an effect of potential income tax changes and slower stock market growth. The increased income for middle and lower-class workers could allow for more capital to be allocated to retirement savings; however, higher earners would have less disposable income to contribute to their retirement plans.

Republican Party Proposed Tax Changes 2024

For the 2024 Election, the Republican Party has expressed its intentions to boost the US economy by investing in all forms of energy production, championing innovation, and reducing illegal immigration.

The Republican Party Presidential Nominee

The Republican nominee for president is former President Donald Trump. Trump served as the 45th United States President after winning the electoral vote in the 2016 Presidential Election and ran again against Biden in the 2020 Election. 

President Trump has built his platform on supporting corporations, tightening border security, and increasing military budgets. 

How would a Trump win affect investors and the overall economy?

If Trump wins the role of United States President in November, he appears to have intentions to lower even further the corporate tax rate, from 21% to 20%, and extend the effects of the TCJA. Trump also has announced his intention to eliminate income taxes on tips.

Trump also suggests imposing large tariffs on United States imports from China and imposing a universal baseline tariff on all imports. 

Under these policies, US corporate profits may grow, potentially resulting in higher stock prices and increased dividends for shareholders. Extending the TCJA could continue to benefit higher-income investors by maintaining lower tax rates on income – which could encourage continued investment in equities. 

However, Trump’s proposed tariffs on imports could have more complex effects on the overall economy and investments. While these tariffs are aimed at protecting domestic industries from foreign competition, they could also lead to higher costs for businesses that rely on these imported goods. Many also believe that these tariffs could lead to a tariff war, resulting in other countries imposing tariffs on U.S. exports. 

Some advisors suggest that their clients look at sector rotation, as some believe that Trump’s plans may negatively impact multinational corporations and those who depend on the global supply chain to operate.

It appears that while Trump’s policies may provide short-term gains for certain investors and workers, the long-term effects could cause increased economic volatility and uncertainty. 

The catch – nothing is set in stone!

As you are likely well aware, today’s political climate seems more polarized than ever. This polarization can make it incredibly difficult for candidates (from either side) to implement their policies effectively. With both parties deeply entrenched in their own ideals, it can be tricky to attain bipartisan cooperation on policies. This can lead to frequent changes in laws as power shifts between parties. 

Many of these policies proposed by either party could be rejected or altered in order to pass through Congress. Keep in mind that these proposed policies are also not set in stone once a candidate wins in the polls in November.

It’s also worth mentioning that candidates don’t always deliver on their campaign promises. Whether there is a blockage coming from Congress creating a disagreement on how to handle a certain issue or implement proposed legislation, or a change resulting from policy negotiations, nothing is official until it is signed into law.

Our final thoughts

As the 2024 Election looms, investors need to be aware of the implications that a win from either side could mean for them and their portfolios. By staying vigilant and informed, you can better prepare for political changes and adapt your investment strategy as needed.

In the face of potential political changes, it can be tempting for investors to make drastic decisions to try to avoid a loss. You may be tempted to avoid investing in the stock market, steer clear of certain sectors, or even panic-sell your assets; however, if history has shown us anything, it’s that reacting impulsively to short-term shifts often does more harm than good, and that good, well-run, profitable companies will probably stay good, well-run, and profitable, regardless of whether Harris or Trump wins in November. 

While the proposed policies by each candidate may seem significant, these proposals often undergo considerable modification or can even be shut down before becoming law. Political discourse, Congressional negotiations, and unforeseen events (like a global pandemic or disruptions in supply chains) can drastically alter the political and economic climate. 

Investors can’t see the future, which is why you must continue to diversify your portfolio and systematically invest, regardless of who wins the upcoming election. The stock market has proven itself resilient time and time again – so you don’t want to miss out on long-term financial gains due to short-term political predictions.

If you’re worried about how a win for either Democrats or Republicans could affect your portfolio, seek guidance from a trusted financial advisor. Having the insights of an expert, and the support and counsel of an experienced advisor who is a legal fiduciary to you, can help provide clarity and confidence in your financial plan, helping to balance out some of the emotions that can drive hasty decision-making. 

By maintaining a diversified portfolio and consulting with your financial professional, you can better position yourself to weather potential challenges, while capitalizing on opportunities that may arise from political policy changes. 

At Towerpoint Wealth, we help you remove the hassle of properly coordinating all of your financial affairs, so you can live a happier life and enjoy retirement. If you are worried about how the 2024 election could affect your financial future, we welcome talking further with you about your personal situation.Worried about increased taxes as a high earner? Check out our “Minimizing “The Necessary Evils” of Investing” Guide, with strategies for high-income earners that will help you reduce your taxes and investment expenses.

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity. We will happily donate $10 to it!

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If you have been paying attention to finance and politics over the past two years, you are probably aware that ESG (environmental, social, governance) investing has found itself in the political crosshairs, with debates intensifying over its impact on corporate governance and economic performance. Policymakers and stakeholders are scrutinizing the balance between ethical considerations and financial returns, making ESG a hot-button issue in the investment world.

 

 

While profitability will always be paramount, and crucial for growth and building shareholder value, higher profitability also can provide the financial resources needed for companies to invest in ESG initiatives. Balancing profit with environmental, social, and governance goals can drive long-term value and positive societal impact. These same concepts oftentimes also apply to individual investors.

Programs like Johnson & Johnson’s renewable energy commitment, or Pfizer’s Global Health Innovation Grants program, along with countless others, result from corporations investing in socially responsible initiatives, recognizing their responsibility is to not only be profitable but also to take action to make the world a better place.

Socially responsible investors (also known as ESG investors) have also recognized the importance of using their resources to create a positive impact on the world. Environmental, social, and governance (ESG) investing allows investors to consider factors outside of traditional financial metrics when making their investment decisions. These metrics include carbon emissions and pollution, human rights, employee diversity, executive pay, political contributions, and so on.

Some believe that ESG investors enjoy a dual benefit: contributing to creating a global impact with their assets and investments and reaping the financial and investment benefits of making informed ESG decisions that can boost their portfolios. 

By focusing on investments that prioritize environmental responsibility, social conscientiousness, and strong governance, some investors believe they can mitigate risks that come with regulatory penalties, environmental degradation, and social unrest.

In this article, we are going to discuss ESG investing, specifically examining five key trends in ESG investing that socially responsible investors should be aware of when making investment decisions with their advisors.

The Risks and Opportunities of Artificial Intelligence

Artificial intelligence (AI) has taken the world by storm in recent years. It has transformed the way we communicate, work, learn, and make decisions. Developments in AI have provided society with more access to information and improved data-processing capabilities… and its effects continue to be COLOSSAL. 

AI has enabled society to automate, innovate, and overcome barriers more effectively than ever before; however, this progress also brings increased risk and uncertainty. Regulators have faced challenges in keeping pace with the complexity and rapid advancements of AI, leading to privacy concerns, significant political pressure, and public scrutiny of its developers.
Though AI has struggled from a regulatory perspective, from an ESG investing standpoint it has enhanced the ability to analyze and interpret data relating to ESG criteria. With an increased focus on creating a positive impact through using ESG criteria, it’s equally important to focus on the validity of the data being reported.

 

 

Using AI, leaders can use algorithms that validate and enhance the quality of the data being reported to ensure that companies are effectively meeting their ESG-responsible initiatives. AI tools also allow companies to monitor and report their ESG criteria to shareholders more efficiently and cost-effectively.

How does this affect you as an investor?

With more accurate and timely data, you, as an investor, can better understand the steps that companies in your portfolio are taking to be socially and environmentally responsible. Artificial intelligence allows investors to process and assess ESG data from companies to formulate more intelligent investment decisions. 

As an investor, however, you also must recognize that while AI plays an increasingly significant role in making investment decisions based on ESG metrics, it isn’t always entirely reliable or transparent. Regulations are fighting to keep pace with technological advancements, making assessing the accuracy of the information provided by AI challenging.

AI poses both opportunities and risks for ESG investing, so it will be worth it for investors to keep a close eye on these ever-changing developments in the technology, and how it can be properly leveraged when making ESG-specific investment decisions.

Regulatory Changes on ESG Transparency

Regulatory changes have a profound influence on market direction and the shape of future trends. When it comes to ESG investing, regulations in recent years have appeared to lean toward holding companies accountable for their ESG reporting to allow for better transparency to shareholders.

In March 2024, the SEC adopted new rules to enhance and standardize climate-related disclosures. In their related press release, the SEC states that this new rule is in response to the demand from investors for more comparable, consistent, and reliable information about the financial effects of climate-related risks on businesses’ operations.

This is excellent news for YOU as an investor. 

Improved transparency arms investors with more accurate and understandable financial information about climate-related risks, which allows you to make more informed investment decisions. This improved transparency affords you (and your financial advisor) the ability to better assess the potential impacts of climate change on your portfolio, allowing for more strategic and sustainable investment choices. 

This increased accountability from businesses ensures that they are more diligently reporting and managing their environmental impact, fostering a fairer and more transparent investment environment. The adoption of this rule not only benefits investors by providing them with reliable data, but also encourages businesses to adopt more sustainable practices, contributing to the overall integrity of the market.

Green Finance is Growing!

Green finance is an increasingly popular phenomenon in finance that refers to businesses allocating capital to prioritize environmental sustainability and supporting efforts to mitigate climate change. This includes investments in renewable energy, sustainable agricultural practices, and other environmentally-sound practices. 

The goal of green finance is to channel capital towards projects and businesses that have a positive environmental impact, thereby promoting a transition to a more sustainable economy.

 

 

Green financing has experienced a significant surge of interest and traction in 2024. This trend is accompanied by a growing recognition of the need to address climate change and increased awareness among investors about the environmental impact of their financial decisions.

Green finance has its own set of financial products such as green bonds, green loans, green mortgages, green banks, etc. These green financial products are designed to finance projects that deliver environmental benefits such as renewable energy, energy efficiency, and pollution prevention.

Green bonds are a particularly popular green financial product. Green bonds are issued to fund projects that have a positive impact on the environment, with increased interest from municipalities and major corporations alike, and can be used for projects like renewable energy installations, energy efficiency improvements, sustainable waste management, and conservation initiatives. 

These bonds are particularly appealing because they allow investors to achieve their financial goals and receive a return on their investment, all while supporting projects that support ESG objectives. The transparency that comes with green bonds, thanks to the rigorous reporting and third-party verification of environmental impact, makes them a more attractive option for ESG investors.

Climate Risk as a Financial Metric

When you think of financial metrics, you probably think of things like operating margins, return on equity, earnings per share… typical profitability measurement tools. However, in recent years, there’s a new metric that has been accelerating for environmentally and socially responsible investors – climate risk.

Financial institutions, CEOs, and investment decision-makers have been progressively considering climate-related risks as financial metrics when making investment decisions, following the previously discussed regulatory and technological developments in ESG investing.

This change highlights the increasing awareness of how climate-related risks—such as severe weather, rising sea levels, and evolving regulations—can affect financial performance and long-term sustainability. More and more investors believe that climate change can pose material risks to their portfolios, so it’s no wonder that 2024 has seen a growing trend of quantifying and analyzing these risks for stakeholders.

The growing focus on climate risk as a financial metric is also shaping investor preferences and market dynamics. ESG investors are increasingly prioritizing assets from companies that demonstrate strong climate risk management practices and align with sustainability goals, driving demand for green and sustainable investments and influencing businesses’ behaviors.

ESG investors believe that climate change can disrupt supply chains, damage physical assets, and alter market dynamics, which in turn affects the profitability and stability of investments. By factoring in climate risk, ESG investors can make more informed decisions and work to safeguard their portfolios.

Biodiversity and Natural Capital

Another key trend for ESG investors in 2024 is the focus on biodiversity. Biodiversity is a term for the diversity of life on Earth and how living things interact with each other and their environment. For environmentally-conscious investors, preserving biodiversity and natural capital are fundamental objectives of long-term sustainability in their portfolios.

The variety of life forms on Earth, including plants, animals, fungi, and microorganisms, contributes to ecosystem services that are crucial for survival. These services include pollination of crops, purification of air and water, regulation of climate, and decomposition of waste. Without biodiversity, these natural processes could be disrupted, leading to negative impacts on food security, clean water availability, and overall human well-being.

The increasing recognition of biodiversity’s role in maintaining ecological balance and supporting economic stability has led ESG investors to incorporate biodiversity considerations into their investment strategies.

A potent incentive for ESG investors is the preservation of natural capital, which includes things like air, geology, soil, living organisms, etc. Think of natural capital as the assets that are derived organically from the earth. These resources are paramount for the financial sustainability of businesses, as it’s estimated that over half of the world’s GDP is moderately or highly dependent on these natural resources.

It’s because of the gravity of biodiversity’s role in the ecological balance that ESG investors care now, more than ever, about the sustainability of the companies they invest in. Given these financial and environmental considerations, ESG-focused investors are now factoring in biodiversity when assessing investment risks, selecting new opportunities, and evaluating a corporation’s performance and values.

Key Takeaways on ESG Investing Trends

With these environmental, social, and governance factors affecting the way that ESG investors view the long-term sustainability of investment opportunities, it’s important to stay aware of these factors and how they adapt over time.

Recent trends indicate that the market is becoming increasingly aware of ESG factors when making investment decisions, considering corporate values and missions, and allocating resources.

 

 

Does this mean you should drastically reallocate your assets to reflect more ESG-conscious options? Maybe!

As an investor, your portfolio is based on your unique values, risk tolerance, and preferences that you establish with your financial advisor. Your unique personal and financial circumstances should always be primary when making important decisions about the future of your portfolio, and any crucial decisions should be made with a trusted professional. 

ESG investing may or may not be important to you, and that is certainly OK, but either way, having a customized and comprehensive plan to properly coordinate all of your financial affairs applies to all investors.
At Towerpoint Wealth, we support our clients who keep ESG impact top of mind. From considering sustainable investment funds to charitable giving and philanthropic planning, we welcome supporting you if you want to align your investment decisions with your personal values.

As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to contact us at any time, or call or email us (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an unsettled and complicated place, and we are here to help you properly plan for and make sense of it.

 

 

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity. We will happily donate $10 to it!

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If you had the option between a guaranteed $100 and a coin toss for $200, what would you pick?

Our bet is you’d pick the surefire cash, although the mathematical expectation is about the same either way ($100). The fear of potentially losing the guaranteed $100 outweighs the allure of possibly winning an additional $100, even though the expected value is the same.

This demonstrates a phenomenon known as loss aversion, describing our brain’s tendency to bias avoiding losses over securing equivalent gains. It’s not your fault that you fall into this trap – as human beings, we’re all wired this way! And even though our brains are hard-wired to avoid loss to PROTECT ourselves, it doesn’t mean we’re in a powerless position against our natural tendencies to avoid loss at the expense of a potential gain.

Loss aversion bias, a cornerstone concept in the field of behavioral finance, plays an important role in how many investors make financial decisions. It’s extremely important to understand the emotional side of investing and to be mindful of how it influences your investment preferences so that you can take steps to mitigate the negative effects of these inherent human biases and predisposed behaviors we all have.

Suboptimal investment decisions can be made if these built-in financial biases, such as the loss aversion bias, are not addressed. However, by better understanding your emotional predispositions, you can adopt a more objective, balanced, and rational approach to managing your portfolio and wealth. Having this understanding can improve your ability to achieve your longer-term financial goals, while giving you greater confidence and composure in your investment strategy.

What is the loss aversion bias, and why do we have it?

The loss aversion bias was first described by psychologists Daniel Kahneman and Amos Tversky in their development of the prospect theory. Prospect theory is a behavioral finance theory that describes how people make decisions when faced with risk. 

In their experiments, Kahneman and Tversky determined that individuals consistently showed a preference for avoiding losses over acquiring gains… even when the potential gains far outweighed the risks.

 

 

Your brain does this for a reason. If you were out in the wild, surviving danger over seeking gains makes sense! Our brains, through evolution, have adapted a preference for safety and survival over acquiring gains, stemming from back when we were hunters and gatherers. This mechanism was formed to protect you.

Today, the loss aversion bias is not only shaped by individual psychology but also influenced by cultural and social factors. Culturally, societies often place a premium on security and stability, which adds to our pressure to avoid losses. There is a negative connotation associated with losing money, associating negative emotions and social reactions with risking loss. In many cultures, financial loss is even viewed as a personal failure.

Historical economic downturns also contribute to our instilled fear of financial loss. For instance, the Great Depression in the 1930s left a deep imprint on the following generations, creating a culture of risk aversion. More recent events like the 2008 financial crisis further elevated awareness of economic volatility and reinforced these tendencies.

With all of these factors at play in our brains, it’s no wonder we tend to prefer playing it safe!

How does the loss aversion bias affect investment decisions?

The loss aversion bias – the psychological phenomenon that makes us prefer avoiding loss over acquiring a gain – works the same way for investments. The pain of owning an investment that is (sometimes temporarily) declining in value is stronger than the desire to achieve a gain. 

This bias can have profound implications for investors by affecting their risk tolerance, influencing objectivity in their decision-making processes, and negatively influencing their overall portfolio management choices. 

One way the loss aversion bias manifests itself in investment behavior is by causing investors to stick to conservative investments as opposed to higher-growth but potentially riskier alternatives. This, in turn, can make investor portfolios tilt more toward capital preservation over growth.

Another way loss aversion can affect investors is by making them reluctant to realize losses on their investments that have decreased in value. This causes the disposition effect, making investors hold onto losing investments in hopes of recovering their return and avoiding the loss. 

 

The disposition effect leads investors to leave their investments tied up in underperforming assets for too long of a period instead of reallocating them to potentially more appropriate or higher-performing options.

Loss aversion also influences decision-making during market downturns or periods of volatility. The heightened emotional response to losses can cause investors to make irrational decisions when markets are facing difficulty, such as panic-selling or abandoning their disciplined investment strategy altogether. This reactive behavior often results in selling investment assets at lower prices to “stop the bleeding,” and locking in losses.

Beyond that, the loss aversion bias can deter investors from taking calculated risks in their investment decisions that could yield higher returns. This can decrease portfolio diversification and cause investors to lean toward options with lower, but more stable, returns.

 

 

How do we lessen the effects of the loss aversion bias?

For investors looking to make rational, objective, and effective investment decisions, understanding how to mitigate the negative effects of the loss aversion bias is essential. There are a few strategies that can help investors navigate their decisions with this psychological tendency in mind:

1. Self-awareness! By learning about the loss aversion bias – like you’re doing right now – and better understanding how it affects your investment decisions, you can recognize when you’re being driven by fear. Learning about and recognizing these financial behaviors can empower you to make your decisions based on disciplined and rational analysis.
2. Adopt a longer-term perspective to investing. Shifting your focus from the short-term gains and losses to the results in the longer-term can help you resist the urge to make impulsive investment decisions when things are unsettled, or aren’t performing to your expectations.
3. Diversify your portfolio. Diversification across different asset classes, industries, and regions can help mitigate the impact of individual losses on your overall portfolio. Spreading the risk across different investments helps to balance out the potentially temporary underperformance of certain assets, and helps investors feel more secure and avoid reactive decision-making.
4. Have a risk management strategy. Creating a strategy with your advisor that aligns with your risk tolerance, and that includes clear guidelines for reallocation and rebalancing can minimize emotional decision-making in your investments. Partnering with your advisor to develop such a strategy promotes disciplined and rational investment practices.
5. Consult with your trusted advisor. Having conversations and building your investment strategies with a financial advisor who understands behavioral finance, and can provide a disciplined and objective direction, can be a vital tool in balancing your emotions with your investment strategy. 

How can a financial advisor help you navigate the loss aversion bias?

Having a trusted financial advisor to help you manage the emotions behind your financial decisions can give you a powerful advantage against your brain’s hard-wired tendencies. Financial advisors who are legal fiduciaries, and who have the expertise in objective analysis and behavioral finance can help steer clients away from making investment mistakes due to their loss aversion bias. 

 

 

Strategic guidance and personalized planning

By offering strategic guidance, advisors work to ensure that investment decisions are based on rational evaluation, rather than fear-induced reactions. Armed with the experience of a trusted professional, you can create a structured approach to your investments that leaves no room for your emotions to take the wheel.

Advisors who are legally bound to the fiduciary standard are there to make decisions that are 100% in your best interest. Their advice, counsel, planning, and decisions must be aimed solely at enhancing your financial well-being, a commitment that adds extra security to your financial strategies and peace of mind. Knowing that your advisor is legally and ethically bound to ensure your best interests can add enormous confidence, which aids in your battles with fears and cognitive biases.

Educating on emotions

Another way financial advisors can help you combat your loss aversion bias and its effect on your investment decisions is by educating you on how your emotions are at play. You don’t just go to your advisor to have someone execute a trade for you; you’re there for objective counsel, planning, and advice, even if it makes you uncomfortable. A trusted advisor can help walk you through your decision-making process with a firm understanding of what’s going on behind the scenes, empowering you to fight back and remain disciplined. 

Regular review

When you work with a financial advisor in a longer-term capacity, they likely don’t have a set-it-and-forget-it approach. Your life, and the economy and financial markets, are certainly not static, and investment plans are much more successful when your advisor is consistently monitoring and strategically rebalancing your portfolio. Advisors conduct periodic reviews of portfolio performance and market conditions to ensure that investment plans remain aligned with your evolving goals and risk profiles.  

This proactive management helps mitigate the impact of the loss aversion bias by keeping the focus on long-term financial goals. Advisors provide the necessary support and reassurance during inevitable but almost always temporary market downturns, encouraging clients to stay disciplined and avoid panic-driven decisions that could lead to substantial losses.

Buffer for your bias

Finally, financial advisors can help you manage your loss aversion bias and minimize the negative effects of the loss aversion bias on your portfolio by acting as a buffer between you and your reactive decisions. It’s much easier to make poor investment decisions out of fear without the added level of accountability and support that a trusted advisor can provide. 

Regular consultations, conversations, and check-ins with your trusted advisor can ensure that you remain committed to your financial plans and stay on track to meet your goals.

Don’t pay the price of panic

Loss aversion, a key behavioral finance concept, is a powerful psychological bias that can significantly impact investment decisions and financial outcomes. Your brain is programmed through evolution to value avoiding loss over acquiring equivalent gains. This, in turn, affects how you make investment decisions.

Thanks to this cognitive bias, investors are more likely to stick with conservative options over investments with more growth potential. Over time, this can significantly reduce the return you get from your assets. 

The loss aversion bias can also lead to panic-selling in times of economic and market uncertainty (realizing losses that may have the potential to recover) or, conversely, to hold on to underperforming investments to avoid realizing losses.

However, you are not powerless against this bias as an investor. Being aware of your brain’s tendencies is the first step to controlling its effect on you. By understanding the underlying factors that drive loss aversion, and using strategies to mitigate its effects, investors can opt for more rational and informed choices. 

Want to learn more about financial planning and stay up to date on what’s happening in the wealth management world? Check out our YouTube Channel for educational content on all things finance!

 

 

 

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity. We will happily donate $10 to it!

Click HERE to follow TPW on LinkedIn
Click HERE to follow TPW on YouTube
Click HERE to follow TPW on Facebook
Click HERE to follow TPW on Instagram
Click HERE to follow TPW on X
Click HERE to follow TPW Podcast : A Wealth of Knowledge