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

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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

Different industries have their own top players, and in the tech industry, there’s a standout group of powerful high-performers in the sector, known as the Magnificent 7. These stocks have consistently proven their market dominance and innovative prowess, fueling a big advance in the value of their stocks over the past two years.

Nvidia, Alphabet (Google), Amazon, Apple, Meta, Microsoft, and Tesla.  These seven stocks make up the Magnificent 7, and are most commonly recognized for their innovation, impact on the market and consumer behavior, and recent market dominance. Accounting for a large portion of the U.S. stock market’s growth over the past few years, the Magnificent 7’s earnings have also proven to be… well, magnificent!

HOWEVER, this begs the question –  will the Magnificent 7’s earnings, and growth, remain magnificent?

Who are the Magnificent 7 stocks?

The Magnificent 7 are a group of high-performing stocks centered in the tech industry. Each of these seven companies makes up a massive portion of the market, with a total market cap of $16 trillion as of June 26, 2024.

The magnificent 7 stocks include Alphabet (GOOG and GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).  All of these stocks are part of the S&P 500 and are household name brands that have revolutionized the technology sector.

Given the name in 2023 by Bank of America’s chief investment strategist Michael Hartnett, these seven stocks have been star players for 2023. Altogether, the staggering 75.71% Magnificent 7 returns were responsible for almost 2/3 of the S&P 500’s growth in 2023 – true market champions for the year!

It’s easy to see why these stocks were given the name “The Magnificent 7” in 2023, but will they live up to that reputation in 2024?

 

 

Magnificent 7 returns– How is 2024 stacking up against 2023?

In 2023, all seven of the Magnificent 7 returns enjoyed positive growth for the year, ranging from “only” +48% (Apple) to +239% (Nvidia). As we’ve discussed, the growth of the Magnificent 7 earnings was responsible for much of the return of the overall S&P 500 index. Without the Magnificent 7 earnings in 2023, the S&P 500 would’ve returned 9.94%, as opposed to the 26.3% return it did see for the year.

Will these stocks continue to dominate in 2024? 

At Towerpoint Wealth, we don’t believe any of these stocks will become less innovative or important any time soon. The Magnificent 7 companies make the products we know and love. They have demonstrated their ability to adapt to economic changes and to drive innovation in the technology that we use on a daily basis.

With that being said, the high performance of the Magnificent 7 stocks in 2023 may not be an indicator of the growth that these stocks will see in the future. The Magnificent 7 are not all enjoying the same success as they had last year, which can be concerning for investors.

 

 

Let’s take a brief look at each of these seven stocks to see the differences in their 2024 and 2023 performance. 

Alphabet (GOOG and GOOGL)

Alphabet (formerly Google), is a global technology giant known for its dominance in internet-related services and products. The parent company of Google and its many former subsidiaries, Alphabet is one of the largest technology companies in the world and is what brings you Google searches, YouTube, and the Google Android operating system.

In 2023, Alphabet faced regulatory scrutiny and increased competition with AI. Despite these challenges, Alphabet stock managed to achieve a return of +58% for the year, enjoying solid revenue growth driven by AI advancements, the core Google services, and the company’s flourishing cloud business. 

As of July 5, 2024, Alphabet has seen a return of approximately +35%. Increased legal costs and investments in research and development have raised expenses for the company as a whole; however, Alphabet’s ability to innovate and adapt to these external pressures underscored its resilience and long-term growth potential.

Amazon (AMZN)

Amazon started as an online bookstore and has since evolved into the world’s largest e-commerce platform. It’s what brings you same-day delivery services, online streaming, and a wide range of on-demand cloud computing services.

Amazon stock experienced an +81% return for 2023. Amazon’s 2023 performance was attributed to its booming e-commerce and cloud computing services. Amazon Web Services (AWS) continued to dominate the cloud market, contributing significantly to the company’s overall profitability.

In 2024 Amazon has seen mixed results in its stock performance. Amazon’s e-commerce business – the service that allows you to have something at your door almost as quickly as you can hit “Buy Now”– faced increased competition and supply chain disruptions, which challenged its growth trajectory. However, AWS remained a powerhouse, driving substantial revenue and profit margins. This has allowed the company’s stock to increase 33% (as of July 5, 2024). 

While the company’s growth hasn’t quite lived up to its 2023 glory, it doesn’t look like Amazon is going to be giving up its market dominance in the near future.

Apple (AAPL)

Apple is renowned for its innovative consumer electronics, software, and services. The company is best known for its iconic products like the iPhone, iPad, Mac computers, and Apple Watch. Odds are, you may be reading this on one of their products.

The technology manufacturer had a profitable 2023, with over half its fiscal 2023 revenue coming from the iPhone. Apple stock saw a return of +48% for the year, though its sales slightly decreased from 2022 to 2023.

Apple has been able to stand out thanks to its product development and continued support. It doesn’t appear that this is going to change in 2024, with another new round of product and service offerings announced in June, but AAPL stock has NOT seen the same returns it saw last year. Unlike most of the rest of the Magnificent 7 stocks, Apple’s returns are trailing the S&P 500 so far in 2024. 

Despite this, Apple is still a major player in the industry and has the potential to bolster its performance with its new expansion into the AI industry. Unsurprisingly, AAPL will be worth keeping a close eye on throughout this year.

Meta (META)

Meta (formerly Facebook), operates some of the world’s most popular social media platforms, including Facebook, Instagram, and WhatsApp. It has been increasing its investment in the development of its virtual reality space, called the Metaverse, and is hoping to revolutionize the way we interact online.

Meta had its fair share of challenges in 2023, with privacy concerns and regulatory pressures; however, it was still able to achieve a whopping +194% return for the year! 

In 2024, Meta benefited from increasing ad revenue per user and advances in AI technology. The company’s strategic focus on growth and innovation in the online world has proven to be profitable. Meta has been able to earn a 54% return through the end of the second quarter and has a positive outlook for the rest of the year. 

Microsoft (MSFT)

Microsoft is a leading technology company known for its software products like the Windows operating system, Office productivity suite, and Azure cloud services. The company has also enjoyed success in gaming services and consoles, as well as enterprise solutions like LinkedIn.

Microsoft’s performance in 2023, and the first half of 2024, was excellent. In 2023, Microsoft benefitted from the success of its cloud computing division, Azure, and robust demand for its Office 365 suite. The stock earned a +57% return for 2023, and many believe that this is due to the company’s relationship with OpenAI and its investment in AI technology services. 

For 2024, MSFT stock has grown  +25% as of July 5, 2024. Microsoft has demonstrated its commitment to investing in innovation for all of its offerings and continues to outperform the S&P 500 for the first half of the year. 

Nvidia (NVDA)

Now it’s time for the BIG breadwinner for 2023 and 2024 alike – Nvidia. Nvidia, a leading player in the graphics processing industry, has seen massive growth in recent years.  The company’s GPUs are widely used in AI and machine learning applications, making Nvidia a key player in the technology industry’s artificial intelligence advancements.

Last year, Nvidia’s stock grew by +239%!

This year, the stock has already grown  +156% through the end of the second quarter. Part of the recent growth has been due to the company’s data center and AI investments, and NVDA’s solid financial performance has continued to underpin the growth of its stock value.

The stock is absolutely one of the hottest tech stocks in the game right now.

Tesla (TSLA)

Tesla is a company specializing in electric vehicles (EVs) and sustainable energy solutions, known for its electric cars, battery energy storage systems, and solar products. Tesla vehicles probably catch your attention when you see them out on the road due to their innovative designs.

In 2023, Tesla earned a whopping +102% return. Advancements in the company’s electric vehicles and strategic price-slashing proved to be beneficial for Tesla throughout the year. 2024, on the other hand, is looking drastically different for Tesla.

Tesla is the biggest underperformer for the Magnificent 7 so far in 2024, with a 20% negative return at the end of the second quarter. There are a few variables to blame for this, including increased competition in the electric vehicle market and underperformance in the company’s autonomous vehicles.

 

 

Our thoughts on the Magnificent 7 in 2024

What does all of this mean for you as an investor? Should you incorporate the Magnificent 7 in your portfolio, or run the other way? 

Well, as always, that depends on your preferences, investment philosophy, and risk tolerance. 

The Magnificent 7 stocks are seven huge companies in the tech industry– and massive contributors to the growth of the overall stock market. All seven of these companies have demonstrated their ability to adapt, grow, innovate, and lead the market’s advancements. 

Much of the technology that we use every day comes from one of the Magnificent 7, whether that be the physical product you’re using or the software you access on your devices, and we don’t see that changing any time soon. These companies have been able to continue to grow and innovate, leaning into market and consumer preferences for the development of new products and services.

With that being said, even the Magnificent 7 have periods of underperformance. Overall, the Magnificent 7 haven’t all been able to maintain the performance they saw last year, and, like with any other stock, there is no promise of outsized returns at the end of each year.

Many believe that the Magnificent 7 does not live up to the title anymore– replaced by the “Magnificent One” (with Nvidia being the only major outperformer in 2024), or even the “Fantastic Four” or “Super Six”.

 

 

Should YOU invest in the Magnificent 7 in 2024?

It would be a serious breach of our fiduciary duty here at Towerpoint Wealth to suggest or recommend investing in any stock or group of stocks to a wide audience. Instead, discuss your investment decisions with your financial advisor, have a plan, and be disciplined in sticking to it. Your advisor can help you decide how much risk is tolerable for your portfolio, the appropriateness (or lack thereof) of any individual stock or investment, and help you make the right investment decision for your unique circumstances. 

The bottom line is…

2023 was an amazing year for the Magnificent 7 stocks. Each of these seven high-performing tech stocks experienced outstanding growth in 2023 and earn their spot in this group, and while some have underperformed the S&P 500 for the first half of 2024, we still believe that the Magnificent 7 stocks are pretty magnificent!

Prefer to watch? Check out our YouTube channel!

 

 

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 

 

Are you terrified? If you’ve been paying attention to the world’s economic landscape right now, you might be. With unprecedented inflation throughout the years, coupled with the political uncertainty surrounding the upcoming 2024 U.S. presidential election, it’s hard not to feel some paralysis when considering your financial decisions.  If you are feeling more than a bit unsettled, you’re not alone. Inflation and the economy are at the top of voters’ minds, and it can feel like we’re all just waiting around for something to save us.

 

 

Aside from the dwindling effects on your hard-earned dollars, inflation is affecting the REAL return you’re getting on your investments. When general prices increase, the amount of growth you need on your investments to maintain your standard of living and to hopefully retire comfortably also increases. We call this the “hidden tax”, sticking its hands in our already shrinking pockets. 

The bad news is that at Towerpoint Wealth, we believe inflation isn’t going anywhere, while understanding the inflation rate does vary over time. Inflation over the last 3 years is not necessarily a predictor of inflation over the next 3 years.

The good news is that, with some understanding of how inflation plays a role in your investment strategy and some strategic decision-making, you can learn to better manage this hidden tax, and increase the probability you can retire comfortably and live a happier life.

Inflation…what is the “hidden tax”?

We all generally understand that inflation reflects the gradual increase in prices of goods and services over time. This is influenced by monetary policies, supply and demand, production costs, etc. As prices increase, the buying power of each dollar you have starts to diminish. Just think: A postage stamp cost $0.37 just 20 years ago, and today is virtually double the price ($0.73) for the same service!

 

 

We call inflation the “hidden tax” because it reduces your ability to spend. Unlike direct taxes, which are visibly deducted from your income or levied on your purchases, inflation subtly, but insidiously, reduces the value of your savings and investments over time.

When prices rise, the same amount of money buys less in goods and services, effectively reducing your standard of living. This loss of purchasing power acts as a “tax” on your financial resources, minimizing the real value of your income and savings.

Inflation doesn’t stop at driving up the price of the goods and services you pay for on a daily basis, as it can create a massive risk to investors if they don’t play their cards right.

So, how does inflation affect my investments?

While a moderate level of inflation is generally seen as a sign of a growing economy – the Federal Reserve aims to keep the inflation rate at a healthy 2% – too much inflation (or hyperinflation) can eat away at the current value of your investments. In other words, the money you’re pouring into your investment accounts has to work harder to maintain the same level of growth in buying power.

If your investment growth does not keep pace with the inflation rate, the real (or “nominal” value of those investments declines.

Say your investment portfolio grows by 4%, but the inflation rate is 5%. While the actual dollar amount of your investments went up, your money has less spending power, meaning the REAL value of your investments has actually decreased.

For investors, inflation’s hidden tax poses a unique challenge to navigate. At Towerpoint Wealth, we urge you to have strategies in place to ensure your investments work harder than inflation in the long run.

What can I do to protect my investments from inflation?

Don’t let your emotions dictate your decision-making.

It’s easy to get scared by painful (but almost always, temporary) declines in the value of your portfolio, and give in to the temptation to panic and sell. Jumping out of a sinking ship makes sense, doesn’t it? While the waves can and will get rough, at Towerpoint Wealth we believe that rough conditions like these, while oftentimes unpleasant, are almost always temporary, and that selling when prices are low, while your investments aren’t performing the way you want them to, is a poor recipe and philosophy, not to mention a sure way to realize the loss.

So, our first bit of advice is to breathe. Many investment strategies can help you in times of high inflation to ensure your investments are set up to protect you from financial distress. As Warren Buffett said:

 

 

Rebalance your portfolio

We recommend you be disciplined in systematically rebalancing your portfolio (preferably semi-annually). This allows you to maintain your portfolio diversification, capitalize on gains, and re-examine the valuation of assets that may be over or undervalued. 

Treasury Inflation-Protected Securities

Investing in Treasury Inflation-Protected Securities (TIPS) is one of the most direct ways you can help protect your portfolio against the negative effects of inflation. TIPS are government bonds whose principal and interest payments are tied to the Consumer Price Index (CPI). This means that as inflation rises, the value of TIPS increase with it, helping to maintain your purchasing power over time. 

Although TIPS tend to offer lower returns compared to other investments, their inflation-adjusted returns provide a reliable hedge against rising prices and inflation throughout the years.

Invest in the right equities

Investing in stocks, or equities, provides the potential for the growth your portfolio assuredly needs over the longer term. However, you have to remember that not all equity investments are created equal, especially in an inflationary environment.

Income-generating stocks

Equities that provide income, in the form of dividends, can be a good hedge against inflation and hyperinflation. Dividend stocks tend to perform better than other types of stocks in times of high inflation; however, dividends are never guaranteed. 

You might want to consider stocks of companies that have been successful in prioritizing dividends over long periods of time, as they are usually financially stable, have strong cash flows, and sustainable business models to maintain growth of the dividends being paid.

Dividend income is typically paid in cash, which ensures a tangible return regardless of market conditions, helping to create a natural inflation hedge. Additionally, dividend-paying stocks can still appreciate in value like other stocks, as companies that consistently increase dividends attract investors seeking stable income, which can drive up stock prices.

Price makers, not price takers?

Other equities that may be good options for investors in times of high inflation are companies that are able to pass on price increases to their customers without dramatically affecting the demand for their products. These tend to be companies that have a long-standing history of high performance. 

Companies that can increase their prices along with inflation have the ability to maintain their margins and profits, and increase real value for shareholders.

You may want to consider the stocks of larger companies, since they can demonstrate an ability to weather the storm in different economic conditions, including inflation throughout the years. They have the resources to absorb higher input and financing costs, and the ability to pass some of these higher costs onto their customers, making them a generally more stable investment.

Diversify, diversify, diversify

To help preserve the real value of your investments during inflation, we recommend building a diversified portfolio that includes a mix of major asset classes such as equities, bonds, real estate, alternatives, and even commodities. 

Diversification helps protect you from having all of your eggs (or assets) in one basket when a huge problem or market pullback arises. It helps spread risk across different investment asset classes, reducing the impact of any one of them underperforming. And it helps to smooth out the curve when looking at the returns of your portfolio.

Real assets like commodities and real estate often perform well during inflationary periods. Commodities, in particular, have historically been a reliable hedge against inflation because they are directly tied to the prices of goods and services. By incorporating these into your portfolio, you can better position yourself to withstand the impact of rising prices.

Don’t discount bonds!

As mentioned above, when you think of a well-diversified portfolio, it includes many different types of assets like bonds, stocks, real estate, etc. 

Fixed-income securities, or bonds such as corporate, municipal, and government bonds, and even CDs, provide you with a set percentage of interest income over a stated period of time. The rate at which your bond pays this interest stays the same for the life of the investment, so that rate will not go up or down when the rate of inflation increases (excluding TIPS, as mentioned above!). 

For this reason, many people avoid investing in bonds altogether when there is high inflation; however, with strategic thinking and planning involved, bonds can still be a great part of your investment strategy when inflation is high. 

Although recent increases in interest rates can lead to lower bond prices, you also have the ability to reinvest matured bonds at a higher interest rate and potentially generate more income. It’s important that you don’t rule out bonds in an inflationary environment, as the relative stability, and consistent interest income, are important parts of any properly-diversified investment portfolio.

Work with your trusted financial professional

There is no such thing as a “one-size-fits-all” strategy when developing, implementing, and managing a well-structured and properly diversified portfolio, as everyone has unique personal and financial needs, goals, and circumstances. Here at Towerpoint Wealth, we believe that working with a financial advisor who is a fiduciary, and who understands you and your “unique story,” is the best way to get the coordinated results you’re looking for in the long term. 

When it comes to managing your investment portfolio in times of high inflation, you want to meet with your advisor to avoid making emotional decisions, come up with a solid strategy, decide on your asset allocation, and create a plan for your retirement and withdrawal strategy. You also want to have regular comprehensive review meetings to see when things need adjustment so you can monitor and rebalance when necessary.

Working with someone who takes the time to understand your values and create a personalized plan that is built to weather storms in the long term is paramount. You want to have someone with the expertise to help you make informed decisions and protect your assets no matter what the economic conditions are.

We at Towerpoint Wealth, a Sacramento Investment Advisor Firm, work with clients to create a disciplined plan and strategy in times of stability, to ensure we remain disciplined during times of instability.

The bottom line is…

Navigating the complexities of high inflation, or hyperinflation, can be a daunting task. You don’t want to lose all of your buying power over time, but may feel fearful about pouring your money into the market during unsettled times. We get it, and we’re here to provide you with the right strategies and advice to help you safeguard your assets and maintain financial stability, no matter what lies ahead.

To learn more about inflation and its effects on your investments, check out our YouTube channel!

For more financial advice, check out our blog “Retiring with 2 Million Dollars“ to learn about strategies you can implement to prepare for retirement.

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Back in 2013, during an interview with Helaine Olen, University of Chicago social scientist Harold Pollack said, “The best financial advice for most people would fit on an index card.” He then elaborated, stating, “If you’re paying someone for advice, you’re likely getting the wrong advice because the right advice is so straightforward.”

After comments on his blog asked for the real index card with the advice, Pollack jotted down nine special money rules on a 4” x 6” index card, and took a photo of it. The photo and the special money rules immediately went viral, and we believe for good reason!

Whether or not you believe that mastering personal finance can be simplified to just one index card listing nine special money rules, the post went viral for a reason. These guidelines offered clear, actionable steps to manage and grow your wealth, with each money rule encapsulating a critical aspect of financial health, making complex financial concepts accessible and easy to follow.

1. Max your 401(k) or equivalent employee contribution.

This money rule is #1 for a reason – you have to pay yourself first to secure a robust financial future. Contributing the maximum allowable amount to your company-sponsored retirement plan leverages employer matching funds, which essentially provides free money toward your retirement. Additionally, these contributions often come with tax advantages, reducing your taxable income and allowing your investments to grow tax-deferred. By consistently maxing out your contributions, you harness the power of compound interest, significantly boosting your retirement savings over time. Prioritizing this strategy ensures you’re making the most of available benefits, setting a strong foundation for financial independence in your later years.

2. Buy inexpensive, well-diversified mutual funds (such as Vanguard Target 20XX funds).

Investing in inexpensive, well-diversified mutual funds is essential for building a solid investment portfolio. These funds offer broad market exposure at a low cost, reducing the impact of fees on your returns. By spreading investments across various asset classes and sectors, they minimize risk and enhance potential for relatively steady growth. Target date funds such as the Vanguard Target 20XX series automatically adjust their asset allocation as your retirement date approaches, aligning with your changing risk tolerance. This hands-off approach simplifies investing, making it easier to stay on track with your long-term financial goals while benefiting from professional management and strategic diversification.

3. Never buy or sell an individual security. The person on the other side of the table knows more than you do about this stuff.

Avoiding the purchase or sale of individual securities is a key principle in prudent investing. When trading individual stocks or bonds, you’re often up against professionals with more resources, expertise, and information. This imbalance puts you at a significant disadvantage, increasing the risk of poor investment decisions. Instead, opting for diversified investment vehicles like mutual funds or exchange-traded funds (ETFs) spreads risk across a wide array of assets, providing exposure to the market’s overall performance rather than the fate of a single security or company. This strategy mitigates the impact of any one stock’s downturn, promoting steadier growth and protecting your portfolio from the volatility and uncertainties of individual stock movements. By recognizing and respecting the expertise of professional investors, you position yourself for more consistent and reliable financial gains.

Click on the image and read more.

4. Save 20% of your money.

Paying yourself first is a cornerstone of financial stability and long-term wealth building. This disciplined approach ensures you consistently set aside funds for future needs, whether for emergencies, major life goals, or retirement. By prioritizing savings, you create a safety net that can absorb financial shocks, reducing the need for high-interest debt in times of crisis. Moreover, consistently saving 20% allows you to take advantage of compound interest, significantly enhancing your wealth over time. This habit instills financial discipline, encouraging mindful spending and better budgeting, ultimately leading to greater financial security and the ability to achieve your long-term aspirations.

5. Pay your credit card balance in full every month.

Paying your credit card balance in full every month is essential for maintaining financial health and avoiding unnecessary debt. By clearing your balance each month, you eliminate interest charges that can quickly accumulate and lead to significant financial strain. This practice not only saves you money but also helps improve your credit score, as timely payments are a key factor in creditworthiness. Moreover, consistently paying off your balance demonstrates financial discipline and responsibility, fostering better money management habits. It ensures that you live within your means, allowing you to allocate more of your income towards savings and investments, rather than servicing debt.

6. Maximize tax-advantaged savings vehicles like Roth, SEP and 529 accounts.

Maximizing tax-advantaged savings vehicles and accounts offers significant tax benefits that enhance your saving and wealth-building potential. Contributions to Roth IRAs grow tax-free, and qualified withdrawals are also tax-free, providing substantial tax savings in retirement. SEP-IRAs allow self-employed individuals to contribute large amounts pre-tax, reducing current taxable income while building retirement funds. 529 plans, designed for education savings, grow tax-free and withdrawals for qualified educational expenses are also tax-free, easing the financial burden of education costs. By fully utilizing these vehicles, you optimize your tax situation, accelerate your savings growth, and secure your financial future.

7. Pay attention to fees. Avoid actively managed funds.

Paying attention to investment fees and avoiding actively managed funds is essential for maximizing your investment returns. High fees and expenses can erode your gains over time, significantly impacting your overall portfolio performance. Actively managed funds typically charge higher fees due to frequent trading and management costs, yet they often fail to outperform low-cost, passively managed index funds. By choosing low-cost investment options, such as index funds or ETFs, you retain more of your investment growth. This cost-conscious approach enhances your returns through the power of compounding, ensuring more of your money works for you rather than being lost to fees. Prioritizing low-fee investments is a smart strategy for achieving long-term financial success.

8. Make financial advisors commit to the fiduciary standard.

Ensuring your financial advisor commits to the fiduciary standard is crucial for safeguarding your financial interests. Advisors adhering to this standard are legally obligated to act in your best interest, providing advice and recommendations that prioritize your financial well-being over their own profits. This commitment minimizes conflicts of interest, ensuring that investment strategies and financial plans are tailored to your unique goals and circumstances rather than driven by commissions or incentives. By choosing a fiduciary advisor, you gain a trusted partner dedicated to helping you achieve financial success with transparency and integrity, ultimately fostering greater confidence and security in your financial decisions.

Click on the image and read more.

9. Promote social insurance programs to help people when things go wrong.

Social insurance programs play a vital role in providing essential support and security to individuals and families during challenging times. These programs, such as unemployment insurance, disability benefits, and Social Security, act as safety nets that mitigate the financial impact of unforeseen events like job loss, illness, or retirement. By offering income assistance and healthcare coverage, social insurance programs help prevent individuals from falling into poverty or financial distress during periods of hardship. They promote social and economic stability by ensuring that basic needs are met, allowing people to focus on recovery and rebuilding without facing overwhelming financial burdens. Moreover, these programs contribute to a more equitable society, where access to essential resources and services is not solely contingent upon one’s financial circumstances, fostering resilience and collective well-being.

Would you like to discuss these money rules, your own situation further with us, or learn more about our wealth management philosophy and how we help clients build and protect their wealth? Curious how we utilize and integrate digital assets for some of our clients as part of a properly-diversified investment portfolio?

We encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us, as we welcome beginning to get to know you and learning more about your unique personal and financial circumstances.

Click the Wealth Management Philosophy banner image below to learn more about how we help our clients grow and protect their net worth.

2^nd Annual TPW Spring Professional Social Mixer

A fun and prominent group of Sacramento-area financial advisors, professional fiduciaries, CPAs, EAs, mortgage brokers, real estate agents, wealth managers, bankers, and attorneys gathered last Thursday Towerpoint Wealth’s 2^nd annual TPW Spring Social Mixer.

The event, held at The Sutter Club, provided an opportunity for business networking, and engaged a spirit of cooperation and collaboration among attendees, who discussed, yes, banking, real estate, and financial services, but also hobbies, families, and of course, the pleasures of wine.

Click the image below for a quick recap!

What is happening with the Towerpoint Wealth family? Click the banner below to find out!

What Makes Towerpoint Wealth Different?

Click the thumbnail image below to find out exactly what we are doing differently, to help you remove the hassle of properly coordinating all of your financial affairs, so you can live a happier life and enjoy retirement!

We are hopeful you will enjoy this educational video and encourage you to share it with any colleagues or friends who would benefit from watching it.

Click the image below to browse our robust library of other wealth-building and wealth-protecting educational videos.

The CA Taxpayer Protection and Government Accountability Act

In the upcoming weeks, the California Supreme Court will deliberate on whether to remove a measure from the November ballot that aims to impose stricter requirements for tax increases. This case involves a conflict between Democratic leaders and unions on one side and business and taxpayer groups on the other.

The CA Supreme Court faces a deadline of June 27^th to finalize the November election ballot, prompting a timely decision on the fate of the proposed measure.

Learn more by reading this well-written Kiplinger article, as well as the Cal Matters article linked in image below!

State Income Tax Rates

California is known for its relatively high state taxes, which can be perceived as onerous by some residents and businesses. The state imposes progressive income tax rates that can reach up to 13.3% for the highest income earners, making it one of the highest state income tax rates in the nation. While these taxes fund important public services and initiatives, the perceived weight of California’s tax system can sometimes be a point of contention among taxpayers and businesses alike, influencing decisions about residency, investment, and economic activity in the state.

Thanks to the Tax Foundation for the illustration!

In light of how unsettled the economy and markets are, are you concerned or worried about the overall level of risk in your portfolio?

Message us to discuss your circumstances.

While the global 24/7 news cycle churns, twists, and turns, here are a number of fun, local trending events of note:

• May 18 – Boyz II Men – Thunder Valley Resort and Casino
• May 18 – Bike Fest – William B. Pond Park
• May 22 – Paints and Pints – Family Friendly Painting – Porchlight Brewing
• May 24 – Candlelight: A Tribute to Adele – CA State Railroad Museum
• May 23 – 27 – Sacramento County Fair – Cal Expo
• May 27 – Memorial Day Community Event – Sacramento Memorial Auditorium

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

We enjoy social media, and are actively growing our online community!

Follow us on any of these platforms, message us there and let us know your favorite charity.
We will happily donate $10 to it!