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Investing in the Trump Presidency: How to Navigate Market Changes and Protect Your Portfolio

Navigating Market Volatility and Potential Tariffs in the U.S.

As Donald Trump takes his seat as the 47th President of the United States, investors are closely monitoring the potential impacts of his administration’s policies on the financial markets. Trump’s inauguration on January 20, 2025, marked the beginning of a term filled with significant priority and policy shifts, including the signing of numerous executive orders aimed at reshaping the economic landscape.

When it comes to investing, politics can be a powerful market driver. Whether it’s tax reform, trade policies, or industry (de)regulations, the decisions made in Washington often ripple through the economy and financial markets. As speculation grows about the possibility of a second Trump presidency, investors are left wondering how to navigate the potential changes ahead.

The Impact of Trump’s Policies on Markets

Donald Trump’s first term as president was marked by sweeping tax cuts, significant deregulation, and a trade war with China — policies that shaped market dynamics in both predictable and unexpected ways. While the stock market saw record highs under his leadership, periods of volatility were also common, as markets reacted to bold economic moves and controversial policies.

For investors, preparing for another Trump presidency means more than just analyzing historical market trends. It requires a forward-looking strategy that balances potential risks with opportunities. From navigating market volatility to optimizing tax strategies and adjusting portfolios to align with shifting economic priorities, proactive planning will be key.

In this article, we’ll discuss how investors can prepare for the uncertainties and opportunities of a Trump presidency. Whether you’re a seasoned investor or just beginning your financial journey, our goal is to help you build a resilient investment strategy that aligns with your longer-term goals.

Key Takeaways

  • The Trump presidency is expected to bring significant policy changes, including tax reform, deregulation, and tariffs, all of which can create ripple effects across financial markets.
  • Political uncertainty, trade tensions, and major policy announcements can lead to shorter-term market fluctuations, highlighting the importance of maintaining a steady hand and focusing on longer-term investment strategies.
  • Industrial sector stocks, including those in manufacturing and energy, and healthcare stocks, may benefit from pro-business policies, while undervalued assets and alternative investments can offer growth and diversification opportunities during periods of volatility.
  • Potential updates to corporate taxes, estate tax exemptions, and tax deductions could significantly affect portfolio returns, making tax-efficient strategies essential for investors.

Donald Trump’s Effect on the Economy and Markets

Donald Trump’s presidency will probably be remembered for bold economic policies and their sweeping influence on financial markets. As we look to the future, understanding the impact of these policies can help investors navigate potential changes and position their portfolios effectively.

Overview of Past Economic Policies

During his first term, Trump enacted many transformative economic initiatives that shaped both domestic and global markets. Some examples include:

  • Tax Cuts and Jobs Act (TCJA): This landmark tax overhaul significantly reduced corporate tax rates, boosting corporate profits and stock market returns. It created a favorable environment for investors, particularly in sectors with high corporate earnings potential.
  • Deregulation: Industries such as energy, financials, and manufacturing benefited from reduced regulatory burdens. This pro-business stance generally spurred economic growth, boosted domestic private investment, and contributed to investor confidence.
  • Trade Wars and Tariffs: Trump’s aggressive trade policies, particularly with China, created ripples across global markets. While tariffs in the U.S. were aimed at protecting key domestic industries, they also significantly escalated the trade war. Tariffs in China targeting key industries like technology and manufacturing led to disruptions in global supply chains, and increased costs for U.S. businesses.

Key Sectors Likely to Be Impacted

A future Trump presidency could once again focus on specific sectors, creating both risks and opportunities for investors. 

Domestic stocks in sectors like manufacturing and energy may reap the benefits of pro-business policies and deregulation, potentially leading to a resurgence in job creation and investment opportunities in these industries. Deregulation and cost-cutting measures could create growth opportunities for healthcare stocks, particularly in pharmaceuticals and medical technology.

Antitrust scrutiny, on the other hand, could drive technology stocks down, creating volatility but also potential opportunities for savvy investors.

Lessons Learned from Past Market Reactions

Trump’s presidency demonstrated how closely markets react to political rhetoric and policy announcements.

  • Historical Performance: The stock market experienced record highs during his first term, but it was also marked by volatility, especially during the pandemic, as well as trade disputes and geopolitical tensions.
  • Investor Sentiment: Bold policy moves often triggered immediate market reactions, highlighting the importance of maintaining a steady hand and focusing on longer-term strategies instead of drastic reactions to news headlines.

By analyzing the past, investors can better anticipate potential portfolio effects and adapt their strategies to align with the economic priorities of a Trump administration. From sector-specific opportunities to broader market trends, understanding these dynamics is crucial for navigating the complexities of the investing landscape.

Preparing for Market Volatility

Political uncertainty has long been a driver of market fluctuations, and this trend is likely to continue during a second Trump presidency. Policy shifts such as new tariffs, regulatory changes, or tax reform often create ripple effects across industries and sectors. 

For example, the imposition of tariffs during Trump’s first term disrupted global supply chains, raising questions about tariffs and inflation while sparking market turbulence, affecting industries from technology to agriculture.

Markets tend to react swiftly to major policy announcements, both positively and negatively. A tweet or statement from the president regarding trade, interest rates, or fiscal policy could lead to significant short-term volatility. This further underscores the importance of maintaining a steady hand and resisting the urge to make reactive investment decisions.

Strategies to Mitigate Risk

Investors don’t have to be at the mercy of market swings. Understanding how to prepare for tariffs and other economic factors can position investors to make more empowered decisions. Proactive planning and diversification are essential tools for weathering volatility:

  • Diversification Across Asset Classes and Sectors:
    Spreading investments across a mix of equities, bonds, real estate, and alternative assets helps cushion against downturns in any single sector. While it is possible that technology companies may face antitrust scrutiny, for example, energy or manufacturing sectors could benefit from deregulation under Trump’s policies.
  • Defensive Investments for Stability:
    In times of heightened volatility, assets like bonds, utilities, and consumer staples provide a level of safety. These investments typically perform well in uncertain markets due to their lower risk and consistent returns. Treasury Inflation-Protected Securities (TIPS) can also be a useful hedge against inflation.
  • Avoid Emotional Decisions:
    It’s easy to get caught up in market noise, especially during politically charged periods. However, research consistently shows that staying the course and focusing on longer-term goals yields better outcomes. Investors should avoid making drastic changes to their portfolios based on shorter-term political events.

Capitalizing on Opportunities

While market volatility can be unsettling, it also presents valuable opportunities for savvy investors. 

Certain industries may experience temporary setbacks due to political or economic shifts, creating attractive entry points for value investors. For example, tariffs or regulatory changes that temporarily depress stock prices can provide a chance to acquire high-quality assets at a discount. 

Beyond equities, alternative investments such as commodities, real estate investment trusts (REITs), or even gold offer diversification and protection against market turbulence. These assets are often less correlated with traditional equities, helping to stabilize a portfolio during periods of uncertainty. 

Rebalancing your portfolio in response to policy impacts can also be essential to maintaining alignment with your financial goals and risk tolerance. This proactive approach allows investors to lock in gains and strategically reinvest in areas poised for greater growth, turning market challenges into opportunities for longer-term success.

Tax Policies and Their Investment Implications

Tax policy changes are among the most impactful factors influencing investment strategies, especially under a Trump presidency. During his previous term, the Tax Cuts and Jobs Act (TCJA) lowered personal income tax rates for nearly all Americans, and lowered corporate tax rates from 35% to 21%, leading to increased corporate profitability and higher stock prices. If Trump continues to prioritize pro-business tax policies, investors may see an extension of the TCJA’s provisions, and/or further corporate tax reductions.

On the other hand, it is possible that there could be increased focus on eliminating specific deductions or credits to offset rising government spending. These adjustments could have significant implications for corporate earnings, dividend payouts, and investor returns. 

Understanding these potential changes is critical for positioning your portfolio to take full advantage of favorable tax conditions while mitigating potential downsides.

Tax-Efficient Investment Strategies

To navigate a changing tax landscape, investors may want to consider strategically incorporating tax-efficient strategies into their financial planning. Properly utilizing tax-advantaged accounts, such as IRAs and 401(k)s, can help shield your investments from immediate taxation, allowing your money to grow more effectively over time. Tax-loss harvesting is another powerful tool to offset capital gains by selling underperforming assets, which can help reduce your taxable income.

Estate Planning Considerations

Changes to estate tax exemptions could also be on the horizon. Under the current provisions of the TCJA, the federal estate tax exemption stands at $13.99 million per individual in 2025, but this amount could be reduced if the act sunsets as scheduled at the end of this year. However, at Towerpoint Wealth, we assign a relatively high probability that the TCJA will be extended this year, before it is set to expire on 12/31. 

Regardless, proactively reviewing your estate plan and considering strategies like gifting, creating trusts, or utilizing the current exemption limits can help preserve generational wealth. By working with financial and estate planning professionals, you can adapt to potential tax changes while ensuring your long-term legacy.

Positioning Your Portfolio for Economic Shifts

A well-balanced portfolio is the cornerstone of a sound investment strategy, especially during times of economic uncertainty. 

Growth-oriented investments, such as equities, can benefit from pro-business policies like deregulation and tax cuts. Industries like energy, manufacturing, and financials may see some renewed momentum under a Trump presidency, offering opportunities for investors to benefit from capital appreciation.

At the same time, stability is crucial to cushion against market downturns. Investments like bonds, cash reserves, and dividend-giving stocks can provide more predictable income and reduce overall portfolio risk. Striking the right balance between growth and stability helps to ensure your portfolio is positioned to weather economic shifts while pursuing longer-term gains.

Accounting for Inflation and Interest Rates

Inflation and interest rate trends are critical considerations when positioning your portfolio. If pro-growth policies lead to higher economic activity, inflation may rise, potentially eroding the purchasing power of your investments. Owning commodities, as well as Treasury Inflation-Protected Securities (TIPS) are an effective way to hedge against inflation, as they adjust with the Consumer Price Index (CPI) to maintain real (after-inflation) value.

Federal Reserve decisions on interest rates will play another significant role in shaping market conditions. Rising rates can impact bond prices and borrowing costs, while creating opportunities for income-focused investments. Adjusting your portfolio to account for these trends can help you maintain financial resilience in an evolving economic environment.

The Role of Global Investments

Increased trade tensions and tariffs could prompt volatility in global markets, but they may also open doors for investors willing to look beyond U.S. borders. International equities and bonds offer diversification and can serve as a hedge against U.S.-specific risks. 

Emerging markets with growing economies may present attractive growth opportunities, while developed markets can provide stability and steady returns. By diversifying globally, you reduce your reliance on the performance of the U.S. economy, ensuring that your portfolio remains resilient in the face of domestic economic challenges.

Working With a Financial Advisor to Navigate Political Transitions

Navigating the complexities of a Trump presidency requires more than just understanding the headlines — it demands a deep knowledge of tax laws, market dynamics, and regulatory changes. A seasoned financial advisor can help you interpret how these factors affect your portfolio, and develop strategies tailored to your unique personal and financial goals and risk tolerance.

Financial markets are inherently dynamic, and political transitions only add to this complexity. A proactive advisor will work with you to regularly review and rebalance your portfolio, ensuring that it aligns with evolving economic conditions and your personal objectives. They can also help you anticipate and adapt to regulatory changes, keeping your investments on track despite shifting market conditions.

Perhaps the greatest benefit of working with a fiduciary financial advisor is the peace of mind it provides. By delegating the complexities of financial planning and investment management to an expert, you can focus on your longer-term goals while enjoying the benefits of a well-crafted strategy.

Final Thoughts

The relationship between politics and investing is complex, especially under a Trump presidency, where policies can create both opportunities and challenges for investors. By understanding the potential impacts of economic shifts, tax changes, and market volatility, you can position your portfolio to thrive in a dynamic environment.

At Towerpoint Wealth, we specialize in helping clients navigate these uncertainties with tailored investment strategies that balance growth, stability, and tax efficiency. Whether you’re preparing for market fluctuations, optimizing your retirement plan, or exploring global diversification, our team is here to guide you every step of the way.If you’re ready to build a resilient financial plan that aligns with your unique goals and priorities, we invite you to schedule a 20-minute “Ask Anything” conversation today. Together, we’ll help you navigate the complexities of investing in this new presidency and beyond.

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Stress-Free SPENDING in Retirement!

How Retirement Income Planning for Retirement Can Give You the Confidence to Spend

After dedicating a good portion of your life to earning and saving, the idea of spending in retirement can feel like you’re doing something wrong and depleting your savings.

Data Sources: Bureau of Labor Statistics, Boldin, Canvas Annuity, Alliance for Lifetime Income, Western and Southern Financial Group. Chart by Author.

According to Retirable.com, only 41% of near-retirees are confident in their month-to-month spending in their current state and moving into retirement! It’s not uncommon for retirees to wonder, “Am I doing enough to make my savings last?” or “How much can I spend in retirement?” While these feelings are natural, they often create hesitation and prevent retirees from fully enjoying the financial freedom they’ve worked so hard to achieve.

The reality is that transitioning from saving to spending is more than just a financial adjustment — it’s an emotional one. Fear of running out of money, uncertainty about future market performance, and even a lifetime of frugality can make it difficult to shift gears and embrace the freedom retirement brings.

At Towerpoint Wealth, we see this all the time: retirees who are so used to building their nest egg that they struggle to feel confident in spending it, even when their financial plan suggests they can. But here’s the good news: with the right income planning for retirement, you can face these challenges head-on and gain the confidence to live the retirement you’ve envisioned.

In this article, we’ll explore why spending in retirement can feel so hard, the importance of a sustainable retirement income plan, and practical strategies to align your spending with your goals. Whether you’re just entering retirement or are already in it, the key is finding the right balance between financial security and enjoying the life you’ve earned.

Key Takeaways

  • Spending in retirement requires a strategy for overcoming emotional barriers and personalized income planning for retirement.
  • A sustainable retirement income plan ensures financial security while allowing you to enjoy the lifestyle you’ve earned.
  • Balancing growth investments like equities with less risky investments like bonds and cash can help protect your portfolio from market volatility.
  • Working with a seasoned financial advisor helps address retirement fears, optimize investments, and align spending with your longer-term goals.

Why Does Spending in Retirement Feel So Difficult?

While we typically think of retirement and the significant shift in lifestyle, retirement also marks a new direction in your financial habits. For decades, you’ve been focused on building your savings, diligently setting aside a portion of your income to secure your future, and following your financial plan. Transitioning to spending that hard-earned nest egg can feel like stepping into uncharted territory, and for many retirees, it’s an emotional hurdle as much as a financial one.

Psychological Barriers to Retirement Spending

One of the biggest challenges retirees face as they approach their golden years is overcoming the fear of running out of money.

This concern is rooted in uncertainty — both about how long retirement will last and whether your savings can sustain unexpected expenses like healthcare or market downturns. For some, the thought of depleting savings can feel like losing a safety net they’ve spent years building.

There’s also typically a mindset barrier when transitioning from saving to spending. For many, saving is associated with responsibility and prudence, while spending can feel indulgent or even reckless. These deeply ingrained habits and beliefs can make retirees hesitant to enjoy the wealth they’ve worked so hard to accumulate.

Longevity and Uncertainty

We’re living longer than ever, which is both a blessing and a challenge when it comes to retirement planning.

The prospect of living to 95 or even 100 means retirees must plan for decades of expenses, often leading to overly conservative spending habits. Questions about potential economic downturns and outliving money can create anxiety and cause retirees to underspend, even when their financial plan shows they can afford to enjoy more.

Because of these concerns, studies consistently show that retirees tend to withdraw far less from their savings than they safely could. While many financial advisors recommend a 4% withdrawal rate to sustain retirement income, research shows that the average retiree withdraws only 2.1% annually. This cautious approach often leaves money on the table, money that could have been spent on meaningful experiences like travel, hobbies, or family.

At Towerpoint Wealth, we understand these concerns and help our clients address them head-on by creating a defined and sustainable retirement income plan and showing them exactly how much they can spend without feeling guilty or anxious.

The Importance of Income Planning for Retirement

The key to overcoming fears about spending in retirement lies in preparation. Retirement income planning isn’t just about figuring out a retirement budget — it’s about creating a strategy that gives you confidence in your financial future and helps you align your spending with your goals.

A well-thought-out retirement income plan, along with making sure you have enough set aside to retire, ensures you can enjoy the lifestyle you’ve worked so hard to build without worrying about running out of money.

Want to make sure you have enough to retire? Check out our free white paper, ‘Is $2 Million Enough to Retire?‘, which provides an in-depth look at how to evaluate your savings and determine whether your financial plan aligns with your goals.

What Is Retirement Income Planning?

Retirement income planning is a key component of financial planning for retirees, helping with the transition from saving to spending with a sustainable strategy for managing your nest egg. It considers all of your sources of income, anticipated expenses, and longer-term goals to ensure you can maintain financial security throughout retirement.

Unlike your working years, when income typically comes from a steady paycheck, retirement income often comes from multiple sources, including Social Security, pensions, investment accounts, and annuities. Balancing these sources while accounting for important factors like taxes, inflation, and market volatility, is critical to making your money last.

Key Components of a Sustainable Retirement Income Plan

Assess Your Expenses:

Start by breaking down your retirement budget into essential expenses (e.g., housing, healthcare, utilities) and discretionary expenses (e.g., travel, hobbies, gifts). Knowing how much you need to cover your fixed costs provides a baseline for how much income you’ll need to cover necessities while accounting for discretionary spending lets you enjoy retirement to the fullest.

Determine a Withdrawal Strategy:

Establish a reasonable withdrawal rate, using techniques such as the 4% rule, as a starting point. This rule has historically allowed retirees to sustain their savings over a 30 or even 40-year retirement. Alternatively, you may want to consider guardrails or dynamic withdrawal strategies that adjust based on market conditions and your personal needs.

Incorporate Guaranteed Income Sources:

Cover essential expenses with predictable income streams like Social Security, pensions, or annuities. Studies show that retirees with guaranteed income are more likely to spend confidently, since they know their basic needs are secure.

Account for Inflation and Taxes:

Over time, the cost of living rises, and your income plan must account for inflation if you want to preserve your purchasing power. Taxes on withdrawals from retirement accounts such as traditional IRAs or 401(k)s must also be factored into your spending plan.

The Benefits of Income Planning for Retirement

With a clear income plan in place, you can move beyond the uncertainty of retirement spending and focus on what matters most: enjoying this new phase of your life. Income planning not only provides peace of mind but also empowers you to spend in ways that align with your priorities, whether that’s traveling, pursuing hobbies, or spending time with family.

It’s important that you work with a trusted financial advisor to create an income plan that suits you and your preferences.

At Towerpoint Wealth, we specialize in helping retirees design personalized income plans that balance financial security with the freedom to live fully. By addressing your unique needs and goals, we work with you to create a roadmap for retirement spending that feels both sustainable and fulfilling.

Overcoming Retirement Fears

For many retirees, fear is the biggest barrier to fully enjoying their savings. Concerns about running out of money, unexpected expenses, or leaving a legacy often lead to overly cautious spending. While these fears are valid, they don’t have to define your entire retirement experience.

Common Fears

  • Longevity Risk: The fear of outliving savings can cause retirees to underspend, even when they have a solid financial plan.
  • Uncertainty: Healthcare costs, market fluctuations, and emergencies can create anxiety about financial stability.
  • Identity Shifts: Decades of frugality can make spending feel irresponsible, even when it’s aligned with personal goals.

Retirement is the time to enjoy the life you’ve built. By focusing on what brings you joy — whether it’s travel, hobbies, or family – you can align your spending with your values and move past hesitation.

Shifting Your Mindset

Overcoming these fears often starts with reframing how you think about money and retirement.

Saving is a virtue, but spending in alignment with your values is just as important. Retirement is the time to enjoy the life you’ve built – traveling, pursuing hobbies, or creating memories with loved ones.

Ask yourself:

  • What do I value most in this stage of my life?
  • What experiences or goals would bring me the most joy and fulfillment?

Answering these questions can help you identity areas where spending aligns with your priorities, making it easier to let go of fear and embrace purposeful spending.

Practical Strategies for Spending in Retirement

Transitioning from saving to spending in retirement requires more than just a mindset shift; it also calls for practical strategies to ensure your spending aligns with your financial goals. By implementing a thoughtful approach, you can enjoy your wealth without fear of outliving it.

Build a Flexible Budget

Establish a retirement budget that sets a clear distinction between essential and discretionary expenses. This allows you to cover necessities like housing, healthcare, and utilities with

guaranteed income sources such as Social Security or pensions, and allocate savings or investments toward discretionary items like travel, hobbies, or gifts.

Segment Your Savings

Dividing your retirement savings into purpose-driven buckets can make spending feel more manageable and intentional. You can set aside funds for travel and experiences in one account and allocate money for emergencies or healthcare in another. This approach provides clarity and helps you feel more confident about using your savings for specific goals.

Engage in Meaningful Activities

Retirement offers the perfect opportunity to explore passions, stay socially connected, and give back. Consider:

  • Pursuing hobbies like gardening, art, or learning a new skill.
  • Volunteering or mentoring to create purpose and contribute to your community.
  • Spending quality time with loved ones, such as family gatherings or trips with grandchildren.

If you’re not ready to fully step away from work, you can also consider part-time roles or consulting in your field to provide both intellectual engagement and financial benefits in retirement.

Revisit Your Plan Regularly

Your retirement isn’t going to be static – market conditions, inflation, and your personal goals may change. Regularly review your spending and income plan with your financial advisor to ensure it stays aligned with your needs and adapts to any new circumstances.

Embrace Small Luxuries

Allow yourself to enjoy the little things that bring you joy. Whether it’s an upgraded vacation or treating yourself to a new hobby, spending on what matters to you can enhance your retirement experience while staying within your plan.

The Role of Investing in Retirement

Even in retirement, your investment strategy remains a critical component of financial security.

While the focus often shifts from growing wealth to preserving it, knowing how to invest in retirement and maintaining a balanced approach to investing ensures your savings continue to support your lifestyle and long-term goals.

Balancing Growth and Stability

In retirement, it’s essential to strike a balance between growth and stability. While you want to protect your nest egg, some exposure to growth-oriented investments – such as equities and dividend-paying stocks — may help your portfolio keep pace with inflation and avoid the risk of outliving your savings.

On the other hand, stability investments, including bonds, Treasury Inflation-Protected Securities (TIPS), and other fixed-income assets, offer lower risk and predictable returns, helping to cushion against market volatility.

Adjusting Asset Allocation

Your asset allocation is a core aspect of financial planning for retirees, ensuring your mix of stocks, bonds, and other investments aligns with your income needs and risk tolerance. Your financial advisor can help you periodically reassess your allocation to ensure it aligns with your current situation and future goals.

Generating Retirement Income

Investments can serve as an important source of income in retirement, complementing Social Security and pensions. Consider strategies like investing in dividend-paying stocks and creating a plan for systematic withdrawals to help you draw from your portfolio without compromising its longevity.

Tax-Efficient Investing

Retirees must also consider the tax implications of their investments. Using strategies like Roth conversions, tax-loss harvesting, and proper asset location (placing tax-efficient investments in taxable accounts and tax-inefficient ones in retirement accounts) can potentially help reduce your overall tax burden.

Planning for Market Volatility

While market fluctuations are inevitable, having a diversified portfolio and a flexible withdrawal strategy can help minimize their impact on your financial plan. Staying focused on your long-term goals is a key practice to help weather short-term volatility.

The Bottom Line

Retirement is a time to celebrate your accomplishments and embrace the freedom to live life on your terms. While transitioning from saving to spending can feel challenging, having a sustainable income plan and clear financial strategy can replace your retirement fears with confidence.

Whether it’s prioritizing meaningful activities, managing investments, or aligning spending with your values, the key is to create a retirement that is both secure and fulfilling. With the right guidance, you can focus on what matters most — enjoying the life you’ve earned.

At Towerpoint Wealth, we specialize in helping retirees like you navigate this transition with personalized strategies and ongoing support. If you’re ready to take the next step toward a confident and purposeful retirement, we invite you to schedule a consultation with our team today.

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The US National Debt Burden | US Debt-to-GDP | What It Means for the Dollar and YOUR Investments

Understanding The National Debt, the US Debt-to-GDP, and Why It Matters for Investors

The U.S. national debt has soared to an unprecedented $35 trillion, growing by an alarming $2 trillion every year! 

The US National Debt from 1993 to 2024

The growth of the federal debt regularly dominates the headlines, raising questions about the nation’s fiscal health and the debt’s potential impact on our economic stability. For investors, this escalating debt isn’t just a number in the news — it’s a factor that can shape market conditions, interest rates, and portfolio performance.

While the sheer size of the debt is concerning, it’s important to keep a focus on its sustainability. The key lies in understanding how the cost of servicing this debt — measured as a percentage of Gross Domestic Product (GDP) — can affect government policy, economic growth, and market stability. 

Historically, low interest rates have shielded policymakers from feeling the full impact of rising debt, enabling expansive spending with limited fiscal restraint, but those days seem to be over. With interest burdens now returning to levels last seen in the 1990s, the U.S. faces a critical turning point.

As the global leader and issuer of the world’s reserve currency, the United States holds significant economic advantages. However, these advantages depend on responsible debt management and maintaining confidence in the dollar’s strength. The erosion of this confidence could have profound implications for global markets, economies, and investment strategies.

In this article, we’ll break down the current state of the U.S. national debt burden, examine how it impacts the value and role of the U.S. dollar in the global economy, and provide insights into what this might mean for your portfolio. By staying up-to-date and practicing proactive planning, you can navigate these challenges and position your investments for long-term success.

Key Takeaways

  • The U.S. national debt has surpassed $35 trillion in 2024, with a debt-to-GDP ratio exceeding 123%, signaling rising fiscal pressures that influence market dynamics and investment strategies.
  • Higher interest rates and inflation, driven by the growing debt, can impact bond yields, the stock market, and purchasing power, requiring proactive portfolio adjustments.
  • Investing in global markets and inflation-protected investments can offer opportunities to hedge against domestic economic uncertainties and capitalize on broader growth trends.
  • Diversification, tax-efficient strategies, and a longer-term perspective are essential for navigating the challenges of the U.S. national debt while positioning your portfolio for resilience and success.

Understanding the Current State of the U.S. Debt Burden

The best way to understand the U.S. national debt isn’t just by looking at the massive top-line figure, but by focusing on the U.S. debt-to-GDP ratio — a measure of how the federal debt compares to the size of its economy. Currently, the U.S. debt-to-GDP ratio is 123%, indicating that the country owes more than its entire annual economic output. 

For context, this ratio has grown steadily over decades, fueled by government spending, tax cuts, and historically low interest rates. The Congressional Budget Office (CBO) predicts that the federal government debt will continue to outpace the nation’s economic growth.

Breaking Down the National Debt: What Investors Need to Know

The U.S. debt is divided into two main categories:

  • Debt Held by the Public: This includes Treasury securities and bonds owned by individuals, corporations, state and local governments, and foreign governments. It represents the debt that directly influences markets and interest rates. Most of the domestically held public debt is owned by the Federal Reserve.
  • Intragovernmental Debt: Debt held by government trust funds, like Social Security and Medicare, which reflects the government’s internal financial obligations.

For you, as an investor, public debt is especially important because it impacts everything from interest rates to inflation to fiscal policy — all of which shape broader market conditions, and can affect your portfolio’s performance.

The Rising Cost of Borrowing

For years, low interest rates helped keep borrowing costs manageable, even as the debt grew; however, that is no longer the case. In fiscal year 2023, net interest payments on the national debt rose to 2.4% of GDP, and projections suggest future interest payments could reach 3.0% in 2024 — the highest levels since the late 1990s. This spike in the debt limit, or debt ceiling, limits the government’s ability to invest in other priorities, potentially creating ripple effects across the economy.

For investors, rising interest rates can mean higher yields on bonds, but they also signal potential challenges for equity markets and economic growth. Understanding interest rates and how they affect the stock market is crucial for investors to optimize their portfolios to efficiently navigate the market — and it is equally important for policymakers to understand the role of interest rates in their policy decisions.

Why the Federal Debt Matters

The U.S. national debt isn’t just a government issue, it’s an economic reality that can affect everything from the value of the U.S. dollar to the performance of investments. As debt levels climb, so does the cost of servicing it, which poses challenges for fiscal policy and financial markets alike.

The Debt-to-GDP Ratio: A Benchmark of Fiscal Health

Think of the debt-to-GDP ratio as a metric similar to the nation’s “credit score.” A high ratio signals that debt is growing faster than the economy, which can erode confidence in the government’s ability to manage its obligations. While the U.S. is not at the level of an economic fallout (like that of Argentina), this rising ratio seems to underpin our need for sustainable fiscal policies.

For investors, a high debt-to-GDP ratio can have real-world implications:

  • Rising Interest Rates: As debt levels grow, so does the cost of servicing that debt. This puts upward pressure on interest rates, which affects everything from bond yields to borrowing costs for businesses and consumers.
  • Reduced Fiscal Flexibility: Higher interest payments consume a larger portion of the federal budget, limiting the government’s ability to invest in growth-driving initiatives like infrastructure, research, and education.

The U.S. Dollar and Global Confidence

The U.S. dollar’s status as the world’s reserve currency is a cornerstone of its economic power. Since World War II, this privileged position has allowed the U.S. to borrow at lower costs and maintain a dominant role in global trade and finance. However, the rising national debt poses risks to this standing.

As debt levels grow and the debt-to-GDP ratio climbs, global confidence in the dollar could weaken. If investors or foreign governments begin to question the U.S.’s ability to manage its fiscal responsibilities, demand for the dollar could decline, potentially leading to currency depreciation, reducing purchasing power and making imported goods more expensive, and higher borrowing costs, further increasing the cost of debt.

Impacts on Economic Growth

Growing national debt, as seen through historical trends in U.S. debt by the year, also has broader implications for economic growth. When the government borrows heavily, it competes with businesses and individuals for available capital. This can drive up interest rates and reduce private-sector investment, which is critical for innovation and job creation. 

Persistent deficits and high debt levels can also contribute to inflation, eroding the real value of investments and reducing the purchasing power of households like yours.

Why This Matters to Investors

The federal debt directly influences market dynamics and portfolio performance. Rising interest rates, inflation, and economic uncertainty all affect asset values and investment returns. Understanding these factors can help you make informed decisions about how to allocate and diversify your investments, manage risk, and position your portfolio for resilience.

By staying proactive and working with a trusted financial advisor, you can navigate the challenges posed by the national debt and identify opportunities that align with your financial goals. At Towerpoint Wealth, we examine a myriad of market factors to help our clients navigate volatility and make informed decisions that align their investment strategies with their unique risk tolerance and financial goals.

Implications of National Debt for Investors

The growing national debt has far-reaching consequences that extend beyond the federal budget and the U.S. dollar. As discussed, when it comes to investors, the national debt directly impacts market dynamics, investment returns, and portfolio strategies. Understanding these implications can help you navigate the challenges and opportunities presented by today’s fiscal environment.

Rising Interest Rates and Bond Yields

As the government’s borrowing needs grow, it often raises interest rates to attract buyers for its debt. Higher interest rates can have a dual impact on your portfolio:

  • Bond Markets: Rising rates typically lead to lower bond prices, which can negatively affect existing fixed-income investments. However, new bonds offer higher yields, creating investment opportunities for income-focused investors.
  • Equity Markets: Higher interest rates increase borrowing costs for businesses, potentially slowing growth and reducing profitability, which may weigh on stock valuations.

Inflation and Purchasing Power

A growing debt burden, coupled with high inflation, erodes purchasing power. This can impact your portfolio by reducing the real value of investment gains, particularly for fixed-income assets. It can also affect inflation-sensitive sectors. While energy and commodities may see higher demand, others, such as consumer goods, may struggle with rising input costs.

Market Volatility

The growing national debt and its economic implications often contribute to heightened market volatility. As government borrowing increases and fiscal policies evolve, investors may experience more frequent and pronounced market swings. While this uncertainty can be unsettling, it also creates opportunities for those who are prepared.

To manage market volatility, it’s important to remember two key cornerstones of sound financial planning:

  • Diversification: Spreading investments across asset classes and geographies to reduce risk.
  • Long-Term Perspective: Staying focused on financial goals despite short-term fluctuations.

Opportunities in Global Markets

A rising U.S. national debt and the potential weakening of the dollar can create opportunities for investors to diversify internationally. When the dollar depreciates, foreign investments often gain value when converted back into U.S. dollars, enhancing overall returns. Additionally, global markets, particularly in emerging economies, may offer higher growth potential compared to the more mature U.S. market.

Key Strategies for Global Investing

  • International Equities: Ask your financial advisor about established companies in developed markets or high-growth industries in emerging economies.
  • Foreign Bonds: Consider diversifying fixed-income holdings with bonds from stable or growing foreign markets.
  • Global ETFs and Mutual Funds: Look into simplified international investing with funds that offer broad exposure to global opportunities.

Proactive Strategies for Navigating the National Debt

As we have discussed, the growing U.S. national debt presents a complex challenge for the economy and financial markets. With the right strategies, however, investors can mitigate potential risks while capitalizing on new opportunities. Proactive planning, diversification, and informed decision-making are essential for navigating this evolving landscape. 

Here’s what that may look like for investors like you:

Diversify Across Asset Classes and Geographies

Diversification remains one of the most effective ways to reduce portfolio risk, particularly in an environment of economic uncertainty driven by rising debt. 

By allocating investments across various asset classes — such as equities, bonds, real estate, and alternatives — you can minimize the impact of market volatility on your overall portfolio. Diversifying globally can also provide exposure to international markets, which may benefit from a weaker U.S. dollar and offer higher growth potential in emerging economies.

Prepare for Inflation

High national debt levels often contribute to inflationary pressures, which can erode purchasing power and reduce real returns on investments. To protect your portfolio from inflation:

  • Consider Investing in Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) and commodities, such as gold, can provide a hedge against rising prices.
  • Consider Real Assets: Investments in real estate, commodities, and infrastructure often perform well in inflationary environments, offering both present income and potential appreciation in the future.

Optimize Fixed-Income Investments

Rising interest rates — a common consequence of increasing debt — can negatively affect existing bond prices; however, it can also create opportunities for new fixed-income investments. Investing in shorter-duration bonds, for example, can provide stability, as these are less sensitive to rate changes. Newly issued higher-yield bonds are another way to increase your income while balancing risk

Leverage Tax-Efficient Strategies

As the government addresses its debt, tax policy changes may follow, making tax efficiency a critical component of your financial plan. Some strategies to consider are:

  • Maximize Tax-Advantaged Accounts: Contributions to IRAs, 401(k)s, and Health Savings Accounts (HSAs) defer or eliminate taxes on investment growth.
  • Implement Tax-Loss Harvesting: Offset capital gains by strategically selling underperforming assets, reducing your taxable income.

Stay Focused on Your Longer-Term Goals

Short-term volatility caused by debt-related market fluctuations can be unsettling, but maintaining a disciplined, long-term perspective is the key to long-term wealth. Performing regular portfolio reviews with your financial advisor can help make sure you periodically reassess your asset allocation and risk tolerance to stay in alignment with your plan and with your goals.

Final Thoughts

The rising U.S. national debt is a complex issue, with historical data on U.S. debt by the year providing critical insights into its accelerating growth. 

This increasing debt has significant implications for the economy, markets, and your investments. While challenges like inflation, rising interest rates, and market volatility may feel daunting, they also present opportunities for proactive and informed investors.

By diversifying globally, protecting against inflation, leveraging tax-efficient strategies, and staying focused on long-term goals, you can position your portfolio for resilience and growth in an uncertain economic landscape.

At Towerpoint Wealth, we’re here to help you navigate these complexities with personalized strategies tailored to your risk tolerance and financial objectives. If you’re ready to take control of your financial future in the face of today’s challenges, we invite you to schedule a consultation with our team. Together, we can build a plan that helps you thrive, regardless of what the future holds.

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Unlock 6 New Tax Moves to Prepare You for 2025

Year-end tax moves to position you for success!

As the holiday season fills the air with giving and gratitude, it’s also the perfect time to give yourself the gift of proactive financial planning and minimizing your tax obligation to Uncle Sam. With 2025 on the horizon, the tax landscape may see significant shifts that could impact your financial goals. But the good news? There are things you can do today that can set you up for a more effortless, and less costly, tax season next year.

Learn our 6 smart year-end tax moves to reduce your tax burden and prepare for 2025. Maximize your tax savings with strategies tailored to your financial goals

At Towerpoint Wealth, we believe the best gifts are the ones that keep giving, like a well-structured financial plan tailored to help you minimize your taxes and maximize wealth-building and wealth-protecting opportunities. That’s why this holiday season, we’re sharing six powerful year-end tax moves that you can consider to help you be better prepared for 2025. 

So, as you enjoy the festivities and reflect on the year ahead, take a moment to unwrap these valuable insights and talk with your tax and financial advisor about ways that you can minimize your tax liability as you prepare for the new year.

Key Takeaways

  • Proactive tax planning is essential, as small adjustments made now can help reduce your tax burden and set the stage for long-term financial success.
  • With the Tax Cuts and Jobs Act (TCJA) set to potentially expire, preparing for potential higher tax rates and a reduced standard deduction may be a critical step in maintaining financial stability.
  • Strategies like Roth conversions and tax-loss harvesting offer effective ways to minimize taxes and increase financial flexibility for the future.
  • Optimizing “asset location” by placing tax-inefficient investments in the most tax-efficient accounts can significantly reduce tax drag and enhance portfolio growth over time.
  • Reviewing your estate plan now allows you to take advantage of the current estate tax exemption before potential reductions occur in 2025.

Manage Capital Gains Distributions

Capital gains distributions can be an unwelcome surprise during tax season, particularly for investors holding mutual funds in taxable accounts. These distributions happen when fund managers sell securities within a fund at a profit and pass those taxable gains to investors, even if you haven’t sold a single share. 

The result? A potentially unexpected tax bill that can feel especially frustrating in years when you haven’t sold anything, and/or the market or your portfolio is down.

At Towerpoint Wealth, we see this as an opportunity to take proactive steps that reduce the “tax drag” on your portfolio. By shifting investments prone to capital gains distributions into tax-advantaged accounts like IRAs or 401(k)s, you can defer taxes and keep more of your money growing. Another approach is to favor tax-efficient investments like ETFs or tax-managed mutual funds,which are designed to generate fewer taxable events, in your non-retirement, “regular” investment accounts. 

This is why we regularly review client portfolios to identify and address these hidden tax inefficiencies. By making thoughtful adjustments, we ensure that investments are not just growing, but doing so as tax efficiently as possible. Managing capital gains distributions isn’t just about avoiding surprises right now, but also optimizing your strategy to support your longer-term goals.

Prepare for the TCJA Expiration

The Tax Cuts and Jobs Act (TCJA) introduced in 2017, brought major changes to the U.S. tax code, including lower tax brackets, a doubled standard deduction, and an expanded Child Tax Credit. However, many of these provisions are set to expire at the end of 2025, potentially resulting in higher taxes for individuals and families.

For investors, this potential expiration represents a critical window of opportunity. Strategies such as accelerating income to take advantage of today’s current lower tax rates, or making larger charitable contributions in the future (when tax rates may be higher), can help mitigate the impact of future changes. It’s also a good time to review all of your available tax deductions, like those for medical expenses or state and local taxes, to maximize the benefits before thresholds potentially shift, or after!

Being mindful of how these changes could affect your tax liability is key to staying on course with your financial goals. With the clock potentially ticking on the TCJA, thoughtful adjustments today can make all the difference in reducing your tax burden and keeping your plan aligned with the future.

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Consider Roth IRA Conversions: Lock in Lower Tax Rates Now

Roth IRA conversions are a powerful strategy for managing taxes — both now and in retirement. By converting funds from a traditional IRA to a Roth IRA, you pay taxes on the converted amount today, but your future withdrawals, including earnings, are tax-free. This can be particularly advantageous if you expect tax rates to rise after the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025.

For many investors, partial Roth conversions — spreading the tax impact of a Roth conversion strategy over several years — offer a balanced approach. This strategy allows you to manage the tax impact of any Roth conversions on a year-by-year basis, while taking advantage of today’s lower tax rates. Plus, it gives you more flexibility to structure your retirement income in a way that minimizes your lifetime tax burden.

As with any financial decision, a Roth conversion certainly isn’t one-size-fits-all. To get the best result, you want to work with your tax and financial advisor to weigh factors like your current tax bracket, retirement timeline, and overall personal and financial goals to determine whether this move is the best option for your strategy. 

By planning now, you can use the next few years to lock in tax savings and position yourself for greater financial flexibility in retirement.

Review Your Estate Plan

The Tax Cuts and Jobs Act (TCJA) didn’t just affect income taxes — it also significantly increased the federal estate tax exemption, allowing individuals to transfer up to $13.61 million to heirs, tax-free, in 2024. However, if the TCJA sunsets at the end of 2025 as scheduled, this exemption could be cut in half, exposing more estates to taxes.

For families looking to preserve generational wealth, now is the time to revisit your estate plan. Considering gifting assets to heirs while the exemption is higher can lock in today’s favorable limits. Alternatively, certain types of trusts can be a powerful tool for efficiently transferring wealth while protecting assets from unnecessary taxation.

Even if you don’t expect to exceed the current or reduced estate tax exemption limits, reviewing your estate plan every five or six years helps to ensure that it reflects your financial goals and family’s needs is an excellent idea. 

Proper estate planning isn’t just about minimizing taxes; it’s about creating a lasting financial legacy that provides economic security for the next generation. Taking action now can help you make the most of the opportunities available to you before they potentially change.

Utilize Tax Loss Harvesting

Tax-loss harvesting is a popular and particularly effective strategy for managing your tax liability and optimizing your portfolio. 

By selling investments that have declined in value, you can use the losses to offset taxable gains from other investments. If your total realized losses exceed your total realized gains, you can even offset up to $3,000 of ordinary income annually, and also carry forward any additional losses to use in future tax years.

This strategy can be particularly impactful when markets are volatile; however, timing is key. Many investors wait until the end of the year to harvest losses, only to find fewer opportunities or risk violating the wash-sale rule, which prevents you from repurchasing the same or a substantially identical investment within 30 days. A year-round approach to tax-loss harvesting makes sure that you’re capturing opportunities as they arise throughout the year, rather than scrambling to “loss harvest” only in December.

By integrating tax-loss harvesting into your overall financial plan, you can not only reduce your tax burden, but also keep your portfolio aligned with your investment goals. It’s a smart way to turn market challenges into advantages while staying proactive in managing your wealth. 

Optimize Your Asset Location

Not all investments are created equal when it comes to taxes, and the type of account in which you hold them can significantly impact your overall returns. This is where asset location comes into play — a strategy that involves placing investments in accounts that offer the most favorable tax treatment for each asset class. 

By aligning assets with the appropriate account types — taxable, tax-deferred, or tax-exempt — you can increase your after-tax returns, reduce tax liabilities, and support your portfolio’s longer-term financial growth. 

For example, interest income from many bonds is typically taxed at ordinary income rates, while qualified dividends and long-term capital gains benefit from lower tax rates. Strategically positioning investments based on their tax characteristics allows you to optimize portfolio tax efficiency, and minimize the drag of taxes on your overall wealth. 

Strategies for Effective Asset Location

  • Tax-Advantaged Accounts: Hold tax-inefficient investments, such as taxable bonds and real estate investment trusts (REITs) in tax-deferred accounts like traditional IRAs or 401(k)s. This approach allows interest and dividends to grow without immediate tax implications.
  • Taxable Accounts: Allocate tax-efficient investments, such as index funds and municipal bonds, to taxable accounts. These assets typically generate income that is taxed at lower rates or may be tax-exempt, reducing the overall tax burden.

Asset location can be an effective strategy when used correctly; however, it requires a thorough understanding of your financial profile, tax situation, and investment time horizon. Regular portfolio reviews and adjustments with your tax and financial advisor are essential to ensure that your asset location strategy remains aligned with your financial goals and changing tax laws.

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Final Thoughts

As the year winds down and the promise of 2025 comes into view, now is the perfect time to take a proactive approach to your financial future. Taxes are an inevitable part of life and a “necessary evil,” but they don’t have to derail your plans. 

By leveraging strategies like managing capital gains distributions, preparing for the TCJA expiration, considering Roth conversions, reviewing your estate plan, utilizing tax-loss harvesting, and optimizing asset location, you can reduce unnecessary tax burdens and position yourself for success in the year ahead.

The key to effective tax planning is preparation and thoughtful strategy. Small, intentional adjustments today can have a material impact on your longer-term financial health. Whether you’re focused on your portfolio’s tax efficiency, reassessing your retirement goals, or ensuring your legacy is protected for future generations, each move you make today is a step toward building greater stability in your retirement.

If navigating the complexities of these strategies feels overwhelming, remember that our counsel, care, and expertise are always within reach. At Towerpoint Wealth, we work with our clients year-round to optimize their portfolios for both their financial goals and tax considerations.
This holiday season, consider giving yourself the ultimate gift: economic peace of mind and a disciplined plan for the year ahead. If you want to make sure you’re covered for 2025 — and beyond — we encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us.

Sacramento Financial Advisor Wealth Management
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Don’t Let Taxes Take the Gains: Year-End Strategies for Smart Investors

Managing Capital Gains Distributions from Mutual Funds and ETFs

As the end of the year approaches, many investors may find themselves surprised by an unwelcome addition to their year-end taxes: year-end capital gains distributions from mutual funds and certain ETFs. 

capital gains distributions mutual funds

These distributions, typically caused by fund managers selling securities within the fund throughout the calendar year, can create significant tax liabilities — even if you didn’t sell a single share of any of your investments. For investors in taxable accounts, this can feel like paying taxes on gains you didn’t directly benefit from, and can erode your net returns and decelerate your financial goals.

Understanding the impact of year-end taxes and capital gains distributions is essential for managing your tax burden and preserving as much of your portfolio’s value as possible. By being proactive and taking advantage of tax-efficient strategies, you can stay ahead of these unwanted surprises, and keep more of your hard-earned money invested for longer-term growth.

This is why a core wealth-building and wealth-protection philosophy here at Towerpoint Wealth emphasizes tax efficiency as a cornerstone of portfolio management. Tax-efficient investing isn’t just about minimizing taxes — it’s about strategically maximizing the longer-term potential of your wealth. 

In this article, we’ll explore the challenges of year-end taxes and capital gains distributions, and provide actionable strategies to help you mitigate their impact. Let’s dive into how you can turn this tax hurdle into an opportunity to boost your investment outcomes.

Key Takeaways

  • Year-end capital gains distributions from mutual funds and some ETFs can create unexpected tax liabilities for investors, even if they didn’t actively sell their shares.
  • These distributions are taxed as either short-term capital gains (ordinary income rates) or long-term capital gains (usually lower than ordinary income rates).
  • Mutual funds are more prone to capital gain distributions than ETFs due to structural differences in how they manage redemptions and internal trading.
  • To reduce the impact of these taxes, investors can:
    – Time investments carefully, avoiding purchases just before year-end distributions.
    – Prioritize tax-advantaged accounts for holding mutual funds that trade more frequently.
    – Generally, utilize ETFs in lieu of “regular” open-end mutual funds.
    – Choose tax-efficient investments.
    – Use tax-loss harvesting to offset capital gains and reduce taxable income.
  • Regular portfolio reviews and proactive communication with a financial advisor can help you stay ahead of potential tax issues.

What Are Year-End Capital Gains Distributions?

Let’s start by discussing what year-end capital gains distributions are and how they affect your portfolio.

Year-end capital gains distributions are a common, but often misunderstood, part of investing in mutual funds and certain ETFs. They result from fund managers selling securities within the fund to rebalance the portfolio, manage risks, or fulfill investor redemptions. By law, the gains from these sales are passed along to shareholders as taxable distributions, even if you didn’t sell any of your shares in the fund.

year end taxes 2024

For many investors, this creates a confusing and frustrating tax situation; though you may not have sold a single share, you’re still responsible for paying taxes on the fund’s realized gains. These distributions typically happen in the fourth quarter of the year, leading to an unwelcome surprise when next year’s tax season rolls around.

Mutual Funds vs. ETFs: Why Are Mutual Funds More Affected?

Mutual funds are more prone to year-end capital gains distributions than ETFs due to differences in their structure. When mutual fund investors redeem their shares, fund managers often need to sell securities within the fund to raise cash to meet the redemption. This creates taxable gains, which legally are required to be distributed proportionally to all investors in the fund.

On the other hand, ETFs use an “in-kind” redemption process that involves exchanging securities with market makers, instead of selling them directly. This process minimizes the taxable gains that are passed on to ETF shareholders, making ETFs generally more tax-efficient. 

However, it’s important to note that certain ETFs can still distribute capital gains under specific circumstances, particularly those that trade less liquid or complex securities.

Why Year-End Capital Gains Distributions Matter

Year-end distributions can have a significant impact on your financial situation, especially if you hold mutual funds in a non-retirement “taxable” account. These distributions are reported on your 1099, and are taxed as either short-term or long-term capital gains, depending on how long the fund held the securities before selling them.

For investors, this creates two main issues:

  1. Unexpected Tax Bills: If you’re not anticipating a distribution, it can upend your financial plans, forcing you to pay taxes you didn’t account for.
  2. Reduced Returns: Taxes on distributions eat into your investment gains, reducing your portfolio’s net overall performance.

This problem is worsened for those who invest in a mutual fund late in the year. Even if you’ve only held the fund for a few weeks, you could still be on the hook for the entire year’s distribution. That’s why understanding a fund’s distribution schedule and structure is crucial when investing.

Year-end capital gains distributions are more than just a tax nuisance — they can erode your portfolio’s overall efficiency over time. However, by knowing how they work and why they happen, you can take steps toward mitigating their impact and aligning your investments with your long-term financial goals.

How Capital Gains Distributions Impact Investors

Year-end capital gains distributions may seem like a routine part of investing, but they can have significant implications for both your portfolio’s performance and your year-end taxes and tax bill. For many investors, the effects of these distributions can feel out of their control, which is why understanding the potential impact is crucial for making informed decisions about how and where you invest.

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The Tax Consequences of Capital Gains Distributions

As mentioned, when mutual funds or ETFs distribute capital gains, they are taxed as either short-term capital gains, which are taxed at your ordinary income rate, or long-term capital gains, which are taxed at lower rates depending on your income level.

Regardless of the type, these taxes can quickly add up and reduce the overall value of your investments. For example, if a mutual fund distributes $10,000 in capital gains and you’re in a 20% long-term capital gains tax bracket, you owe $2,000 in taxes, even if you didn’t sell any shares.

This tax liability is particularly burdensome for investors who hold mutual funds in taxable accounts. While tax-advantaged accounts like IRAs or 401(k)s shield you from immediate taxes, distributions in taxable accounts directly impact your finances today.

Erosion of Returns Over Time

Year-end capital gains distributions don’t just result in a one-time tax hit — they can have a lasting effect on your portfolio’s growth. Taxes paid on distributions reduce the amount of money you have available to reinvest, which limits the power of compounding over time.

year end tax Impact of taxes investment return

Let’s consider two investors: one who consistently reinvests distributions without tax implications (in a tax-advantaged account) and another who pays taxes on distributions in a taxable account. Over decades, the investor in the tax-advantaged account will likely see significantly higher growth because their funds remain fully invested.

Unexpected Timing and Financial Strain

One of the most frustrating aspects of year-end capital gains distributions is their timing. Investors who buy into a mutual fund late in the year may still be responsible for the entire year’s gains. This means you could owe taxes on profits realized by the fund before you even invested.

If you purchase shares in a mutual fund on December 1, and the fund makes a large distribution on December 15. Even though you’ve held the fund for less than a month, you’ll owe taxes on your portion of the distribution, which could significantly impact your expected returns.

Why It Matters

The financial and emotional toll of capital gains distributions can be substantial. Unexpected tax bills and reduced returns can affect your overall financial plans, forcing you to adjust your budget or sell assets to cover the tax burden — and creating a significant amount of stress in the meantime. This is why proactive planning and strategic portfolio management are critical for minimizing these impacts.

Strategies to Manage and Prevent Capital Gains Tax Complications

While year-end capital gains distributions can create unexpected tax liabilities, there are strategies you can implement to mitigate or even prevent their impact. By taking a proactive approach to your investments, you can minimize taxes and keep more of your money working toward your financial goals.

Time Your Investments Carefully

One of the simplest ways to avoid unexpected capital gains taxes is to be mindful of when you invest in mutual funds. Before purchasing shares, especially late in the year, check the fund’s distribution schedule. Buying into a mutual fund just before it makes a distribution could result in an immediate tax bill on gains you didn’t benefit from.

To avoid this, you can review the fund’s website or contact the fund company to find out when distributions are expected. You can then delay your purchase until after the distribution if you’re investing in a taxable account. This strategy ensures you’re not inadvertently inheriting an unexpected tax liability when making new investments.

Make the Most of Tax-Advantaged Accounts

Placing mutual funds in tax-advantaged accounts like IRAs, 401(k)s, or Health Savings Accounts (HSAs) can help shield you from immediate taxes on capital gains distributions. Because these accounts defer or eliminate taxes on growth, they are an excellent choice for holding investments that are prone to taxable events.

For example, a Traditional IRA allows you to defer taxes on distributions until you withdraw the funds in retirement. A Roth IRA, on the other hand, allows your investments to grow tax-free, meaning you won’t owe taxes on distributions or withdrawals (as long as certain conditions are met). 

By prioritizing tax-advantaged accounts for funds that frequently distribute capital gains, you can reduce your overall tax liability and maximize your portfolio’s growth potential.

Choose Tax-Efficient Investments

Not all funds are created equal when it comes to tax efficiency. Certain types of funds, like index funds and some ETFs, tend to generate fewer taxable events than actively managed mutual funds.

Index funds, for example, track a market index and require less trading, which results in fewer realized capital gains. Exchange-traded funds (ETFs), on the other hand, are designed with a unique structure that minimizes taxable events, making them an ideal choice for taxable accounts.

Another option to consider is tax-managed funds. These funds are specifically designed to minimize taxable distributions by implementing strategies like loss harvesting and low-turnover trading.

Take Advantage of Tax-Loss Harvesting

Tax-loss harvesting can be an effective strategy for reducing taxable gains by using losses from underperforming investments to offset them. This works by selling investments that have declined in value to combat the capital gains from distributions or other profitable sales. 

tax loss harvesting

For example, if a mutual fund distributes $5,000 in capital gains, you could sell a stock or another investment with a $5,000 loss to eliminate the taxable income. If your losses exceed your gains, you can offset up to $3,000 of ordinary income annually, with any additional losses carried forward to future tax years. 

By proactively managing your portfolio throughout the year, tax-loss harvesting can help you minimize your tax burden and support your overall financial plan.

Work With a Financial Advisor

Navigating the complexities of capital gains distributions and tax-efficient investing can be overwhelming, especially as year-end deadlines approach. A financial advisor can help by providing personalized guidance tailored to your unique financial situation, goals, and preferences.

Advisors can help you identify funds that are prone to distributions and recommend alternatives. They can also help you optimize your portfolio by placing the right assets in the right accounts and using tax-loss harvesting strategies to minimize your tax liability.

At Towerpoint Wealth, we make decisions with the understanding that minimizing taxes is a crucial part of helping our clients achieve their long-term financial goals, which is why tax efficiency is a focus for all of our investment strategies. 

By working with a financial advisor to optimize your investments for tax considerations, you can work to get the most out of your assets and preserve your nest egg for long-term growth.

Proactive Communication and Planning

Our last, but critical strategy for managing capital gains tax complications is proactive communication and planning. By regularly reviewing your portfolio and staying informed about upcoming distributions, you can make more strategic decisions about your investments and avoid costly surprises.

Closely monitoring the funds in your portfolio can help you to stay aware of your upcoming tax liabilities. Many mutual funds and ETFs provide distribution estimates in the fourth quarter, which can give you a clear picture of potential tax liabilities. 

Reviewing these estimates with your financial advisor or on your own can help you determine how they might impact your overall tax situation and act accordingly. If a fund is planning a significant distribution, you may want to take action, such as selling your shares before the distribution in a taxable account, to avoid inheriting a tax liability.

It’s also important to think ahead about your overall financial goals. Do you need liquidity in the near future? Are you planning to rebalance your portfolio or make new investments before the end of the year? By aligning these objectives with your tax strategy, you can make more efficient decisions that support your broader financial plan. Keeping open communication with your advisor and planning your objectives beforehand is key in mitigating unnecessary tax complications.

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Final Thoughts

As we have discussed, year-end capital gains distributions can pose a significant challenge for investors, creating unexpected tax liabilities and reducing the portfolio’s overall returns. However, with the right strategies — such as careful timing, using tax-advantaged accounts, opting for tax-efficient investments, and implementing strategies like tax-loss harvesting — you can take control of your tax situation and minimize the impact of these distributions.

Proactive planning and regular portfolio reviews are essential to ensuring your investments remain aligned with your financial goals. At Towerpoint Wealth, we focus on tax efficiency as a cornerstone of our investment approach, helping our clients maximize their wealth and keep more of their returns working toward their future. 

If you want to learn how we can help you build a tax-efficient portfolio that supports your long-term goals, we welcome speaking with you.

By staying informed and working with experienced professionals, you can turn the stress of year-end capital gains distributions into an opportunity to strengthen your financial plan and feel confident in your future. 

Sacramento Financial Advisor Wealth Management

Joseph Eschleman, CIMA®
President

Jonathan W. LaTurner
Partner, Wealth Advisor

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

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

Isabelle Orozco
Office Coordin
ator

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New Chips on the Block: Nvidia’s Dow Debut

What It Means for Investors and the Future of the Dow Jones Industrial Average Index

The Dow Jones Industrial Average (DJIA), or “The Dow,” is a popular and widely-followed stock market index, a core benchmark of investor sentiment and economic health. Understanding this 30-stock index is not static, each Dow Jones update reflects shifts in the U.S. economy, as well as the overall market and investment landscape. 

Recently, the Dow has taken a step forward to add an innovative and fast-growing company, attempting to be a more accurate gauge of current market and economic trends. 

Dow Jones Index current

The DJIA has long acted as a barometer for market sentiment, reflecting the confidence, concerns, and trends driving investor decisions and the overall U.S. economic outlook. Recently, it was announced that Nvidia, a powerhouse in the A.I. and technology industry, will replace Intel in this index. This recent Dow Jones update marks a major shift in the Dow, reflecting the growing influence of AI and semiconductor technologies.

Nvidia stock forecast

As Nvidia steps into and Intel steps out of the Dow, many investors are left wondering how this change will affect their portfolios. In this article, we are going to analyze The Dow and its historical role in the stock market, and the effect that Nvidia’s inclusion may have on the index.

Key Takeaways

  • Nvidia has replaced Intel in the Dow Jones Industrial Average, reflecting the rising influence of AI and semiconductors. 
  • The Dow regularly updates its lineup to mirror market and economic shifts, helping it stay relevant as a benchmark index.
  • Nvidia’s inclusion may drive new interest and demand in the stock, possibly impacting its stock value.
  • Nvidia’s presence may enhance the Dow’s performance, especially given tech and AI’s growing role in the economy.
  • This Dow Jones update highlights the importance of emerging tech sectors, potentially attracting new investors.

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average, first introduced in 1896 by Charles Dow, is one of the oldest and most influential stock market indices. It was created to offer a snapshot of the industrial sector’s health by tracking a group of prominent U.S. companies. 

Over time, however, the index has evolved, representing a broader host of industries to better reflect the diverse U.S. economy. Today, the Dow consists of 30 leading companies across sectors such as technology, healthcare, finance, and consumer goods.

Unlike other indices that are market capitalization-weighted, the Dow is price-weighted. This means that companies with higher stock prices influence the index more than those with lower prices. For example, a large movement in the price of a high-priced stock, like UnitedHealth or Goldman Sachs, will have a more significant effect on the DJIA than a comparable move in a lower-priced stock.

The index is maintained by S&P Dow Jones Indices, and its components are selected by a committee. Companies are included based on their economic significance, stability, and representation of critical U.S. economic sectors. Importantly, the index is not static; it is periodically reviewed to ensure it accurately reflects shifts in the economy. Companies may be added or removed based on their performance, relevance, and role in the market. This adaptability is essential for maintaining the Dow’s position as an accurate measure of U.S. economic health.

Recent Changes in the Dow

Before Nvidia’s addition to the Dow, the most recent rearrangement took place in February, when Amazon replaced Walgreens (WBA). Walgreens had been struggling for some time, and its underperformance led the Dow to seek more exposure to the consumer retail sector. 

Prior to that, the Dow made significant changes, removing ExxonMobil, Pfizer, and Raytheon Technologies (formerly Raytheon) in favor of Salesforce, Amgen, and Honeywell in 2020. These new additions have generally outperformed the broader market, with the notable exception of Exxon, whose stock struggled due to the pandemic’s impact on oil prices. 

Dow Jones updates

These shifts in the DJIA index underscore the Dow’s role in adapting to changing industries and economic forces. Companies are regularly removed when they no longer are deemed a “good” representation of the current market landscape, with many of them seeing initial declines in their stock prices after being ousted. 

Nvidia Joins the Dow

The decision to add Nvidia, a leader in graphics processing units (GPUs), artificial intelligence, and data processing, reflects the tech sector’s rapid evolution and the shift towards AI-driven industries. 

Nvidia has been instrumental in powering industries from gaming to machine learning, and its advanced chips are the foundation of AI innovation. The company’s relevance to the modern economy — and the tech sector’s future — made it an ideal addition to the Dow.

Notably, this switch is more symbolic than material, as the Dow is just one index that is used to measure the health and success of the market. As Nvidia joins the Dow Jones Index’s current lineup, its presence signals the stock market’s commitment to AI, automation, and digital innovation, influencing both Nvidia stock forecasts and investor interest in the tech sector. Investors are likely to view this change as a signal that these areas continue to be central to U.S. economic growth, and that the companies behind them may be among the strongest players in the market. 

As Nvidia enters the DJIA index, investors might want to watch Nvidia’s stock forecast closely, assessing its growth potential in AI-driven sectors.

Nvidia’s Background and Historical Stock Performance

Founded in 1993, Nvidia (NVDA) started as a gaming chip manufacturer but quickly evolved into a leader in high-performance computing. Its GPUs became essential to gaming, but Nvidia soon saw the potential for its technology to drive other innovative industries, including data centers, AI, and autonomous vehicles. 

NVDA’s growth has been fueled by its focus on research and development (R&D), and the development of powerful, versatile chips. Nvidia’s stock performance also reflects this growth. Over the past decade, Nvidia’s shares have risen dramatically, driven by strong revenue and earnings growth, driven by increasing demand for its technology. Nvidia’s stock grew by 239% in 2023 alone!

Nvidia is also part of the “Magnificent 7” group of stocks, a group of tech giants driving much of the S&P 500’s gains in recent years. Its inclusion with these Magnificent 7 stocks showcases Nvidia’s standing among the elite companies shaping the future of technology.

Intel’s Role in the Dow

Intel (INTC), a pioneering force in computer processors, was added to the Dow in 1999, during a time when personal computing was rapidly expanding. 

Intel played a central role in the growth of personal computing and the Internet, and its processors became recognized for high-quality computing power. However, in recent years, Intel has struggled with competition and shifting demands. While it remains a leader in the semiconductor industry, Intel has faced pressure from companies like AMD and Nvidia, especially in high-performance computing and AI applications.

The decision to remove Intel from the Dow is largely due to its recent struggles to keep up with industry changes. Although Intel still has a significant market share, its slower adoption of new technologies and recent challenges have diminished its appeal, compared to Nvidia, whose growth trajectory and market leadership align it better with the Dow’s representation of industry leaders.

Wealth Management Philosophy page on Towerpoint Wealth

Implications for the Dow and Investors

Thinking about investing in Nvidia? Here’s what you should know.

Nvidia’s addition to the Dow is a strong statement about the prominence of AI and data processing in the modern economy. Nvidia brings a fresh, high-growth tech component to the Dow that Intel, despite its achievements, could no longer offer. This shift also highlights the broader trend of high-tech, AI-driven industries becoming more integral to the U.S. economy. 

As the Dow’s current lineup becomes increasingly tech-centric, Nvidia’s stock forecast will be of interest to investors looking for AI-driven growth.

For Nvidia investors, this Dow Jones update serves as an endorsement of the company’s AI-driven growth potential, with many closely watching Nvidia stock forecasts to forecast future performance. Nvidia’s stock could see increased demand due to the index’s broader market exposure, potentially driving up its price further as institutional investors who track the Dow may begin to allocate more capital to Nvidia.

For new investors, Nvidia’s inclusion could signal a strategic opportunity. As a tech leader and a key player in the future of AI, the stock offers long-term growth potential. However, it’s essential to keep in mind that Nvidia’s price may already reflect much of this growth, meaning any short-term gains could be tempered by market fluctuations. 

Before allocating investments in response to this event, investors should consider whether Nvidia fits within their long-term portfolio goals, especially since tech stocks are often more volatile than those in other sectors.

The Dow itself stands to benefit from Nvidia’s inclusion. As a leader in the semiconductor industry and a key player in the AI sector, Nvidia represents the growing influence of technology on the broader economy. The inclusion of such a forward-looking company emphasizes the Dow’s adaptability and commitment to staying relevant in the face of rapidly changing market and economic trends. This shift may also attract more interest from investors focused on technology and innovation, potentially increasing the overall performance of the index over time.

Ultimately, as with any major market change, it’s important for you, as an investor, to consult with your financial advisor before making any decisions about adjusting your portfolio. While Nvidia’s inclusion in the Dow is an exciting development for tech and AI enthusiasts, every investment decision should align with your longer-term financial goals, risk tolerance, and investment strategy. 

Working with an advisor can provide valuable insights into how such changes may impact your portfolio and help you navigate market trends effectively.

Towerpoint Wealth Of Knowledge

Final Thoughts

As Nvidia replaced Intel in the index, the growing importance of sectors like AI and semiconductors is becoming much more apparent to investors. 

This shift in the Dow Jones index’s current lineup highlights the Dow’s adaptability to economic trends and could shape future Nvidia stock forecasts, reinforcing the index’s role as a vital measure of market sentiment and the U.S. economy. For Nvidia investors, this inclusion could increase stock demand, while new investors may see it as a long-term growth opportunity.

If you’re considering making significant changes to your portfolio following this news, we recommend that you meet and consult with a trusted financial advisor. Each decision that you make should be in line with your preferences, goals, and time horizon — NOT as a knee-jerk reaction to recent trends in the market.

At Towerpoint Wealth, a Sacramento Investment Advisor Firm, we work intimately with our clients to create a disciplined plan and strategy that aligns with their shorter and longer-term personal and economic goals. If you want to talk with an experienced advisor to decide if you should adjust your investment strategy, we welcome speaking with you.

Investing in individual stocks involves significant risks that investors should carefully consider. These risks include, but are not limited to: Market Volatility: The value of individual stocks can fluctuate widely due to market conditions, economic events, geopolitical developments, or company-specific news. Business-Specific Risk: Individual companies face unique risks such as declining revenues, management changes, operational challenges, or financial instability. Poor performance or bankruptcy of a company could result in a total loss of your investment. Concentration Risk: Investing in a single stock or a small number of stocks increases exposure to the risks of those particular companies, reducing diversification benefits and potentially amplifying losses. Lack of Liquidity: Some stocks, especially smaller-cap or less-traded ones, may have low liquidity, making it difficult to buy or sell shares at a desired price. Time Commitment: Properly researching and monitoring individual stocks requires time, effort, and expertise to stay informed about the company’s performance, industry trends, and market conditions. Unpredictable Events:
Natural disasters, regulatory changes, litigation, or unforeseen crises can adversely affect individual stocks, regardless of their previous performance. Emotional Decision-Making: Investors may react emotionally to short-term market fluctuations, leading to poor decisions such as panic-selling or overbuying.

Important Reminder: Past performance of a stock is not indicative of future results. Investing in individual stocks carries no guarantees, and investors should be prepared for the possibility of losing some or all of their principal investment.

Recommendation: Diversification and consultation with a qualified financial advisor can help mitigate these risks. Ensure any investment decisions align with your financial goals, risk tolerance, and time horizon.

This newsletter is for informational purposes only and should not be construed as personalized investment advice.

Sacramento Financial Advisor Wealth Management

Joseph Eschleman, CIMA®
President

Jonathan W. LaTurner
Partner, Wealth Advisor

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

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

Isabelle Orozco
Office Coordin
ator

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A Looming Tax Problem Ahead: Are You Prepared?

Preparing for the Tax Cuts and Jobs Act (TCJA) Expiration at the end of 2025 and Its Impact on Taxes

The clock is ticking on one of the most significant tax overhauls in recent history. As the sun is “set to set” on the Tax Cuts and Jobs Act (TCJA) at the end of 2025, millions of Americans are now wondering, “What might my 2026 tax bill look like?”

tax cuts and jobs act expiration

The TCJA of 2017 brought sweeping changes to the U.S. tax code, impacting everything from individual income tax rates and the standard deduction, to estate tax exemptions, mortgage interest, and charitable donation deductions. 

For many Americans, these changes have meant lower taxes and simplified filing processes, but these benefits were not written nor legally allowed to last forever. Many of the key provisions that were introduced under the TCJA are set to expire, or “sunset” at the end of 2025, creating a significant possible shift in the tax landscape that could affect millions of taxpayers if the legislation is not extended.

The TCJA expiration could mean a higher tax bill for you, fewer deductions, and a possible shift in how you plan for your financial future. Whether you’re concerned about your income tax rate, the standard deduction, or tax credits that benefit your family, it’s crucial to understand how these changes could impact your bottom line and what steps you can take to prepare.

In this article, we’ll explore what you can expect ahead of a possible TCJA expiration, and considerations on how you can proactively adjust your financial strategy to stay ahead of these potential tax changes.

Key Takeaways

  • Many Tax Cuts and Jobs Act (TCJA) provisions are set to expire, or “sunset,” at the end of 2025, potentially leading to higher tax bills and fewer deductions for many taxpayers.
  • Key provisions at risk of expiration include the increased standard deduction, lower income tax rates, the Child Tax Credit, state and local tax (SALT) deductions and more.
  • If the TCJA expires, the standard deduction will decrease significantly, making itemized deductions more relevant again, impacting how taxpayers calculate their taxable income.
  • The 20% deduction for qualified business income will no longer be available for small business owners, increasing their tax liability.
  • It is uncertain if Congress will extend the expiring tax provisions.
  • Consulting with a financial advisor can help you develop strategies to mitigate these potential tax impacts, and optimize your financial planning ahead of the potential changes.

What is the Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) of 2017 was a landmark reform of the U.S. tax code, bringing about significant changes for both individuals and businesses. Passed by Congress and signed into law by President Donald Trump, the act aimed to stimulate economic growth by reducing taxes for individuals and businesses. 

Thanks to the TCJA, many individuals enjoyed lower tax rates, a bigger standard deduction, and improved tax credits — like the Child Tax Credit — that put more money back in their pockets. On the corporate side, it significantly reduced the corporate tax rate, from 35% to 21%, and introduced incentives for businesses to invest in the U.S.

While many of the TCJA’s changes were permanent, several key provisions for individuals, like lower tax brackets and the higher standard deduction, were temporary and are set to expire at the end of 2025. 

Key Expiring Tax Provisions in 2025

As the TCJA nears its expiration date at the end of next year, several major provisions are set to sunset, significantly impacting individual taxpayers. Understanding these key changes can help you anticipate how your tax situation may shift and what adjustments may be necessary for your financial planning.

Standard Deduction and Personal Exemption

One of the most widely felt changes under the TCJA was the near doubling of the standard deduction, which simplified tax filing and created significant tax savings for millions of Americans. For 2026, the standard deduction for married couples filing jointly would be roughly $30,600 without a TCJA expiration, while single filers would enjoy a deduction of $15,350. 

However, if the TCJA expires as scheduled, the standard deduction will drop dramatically. Come 2026, married couples filing jointly could see it shrink to around $16,600, while single filers might only get about $8,300.

Additionally, the TCJA eliminated personal exemptions, which used to provide tax relief for dependents. When the act expires, personal exemptions will return, with each exemption set to be around $5,275. While the return of personal exemptions might offset the lower standard deduction for some families, the overall impact could be a much more complex tax filing process and higher taxable income for others.

Individual Income Tax Rates

Another major change under the TCJA was the reduction of marginal income tax rates across the board. For example, the top marginal tax rate fell from 39.6% to 37%, while the rates for lower tax brackets also saw impactful reductions. If the TCJA expiration happens, these rates are expected to revert to their pre-2017 levels, meaning higher income tax rates for virtually all taxpayers.

Here’s a brief look at how some of the tax brackets will change for single filers if the TCJA expires:

  • The 12% bracket will revert to 15%.
  • The 22% bracket will revert to 25%.
  • The 24% bracket will revert to 28%.
  • The 32% bracket will revert to 33%.
  • The 37% bracket will revert to 39.6%.

This hike in tax rates could mean heavier tax bills for many, and may require adjustments to tax-saving strategies like retirement contributions or charitable giving.

State and Local Tax (SALT) Deduction

The TCJA placed a $10,000 cap on the state and local tax (SALT) deduction, which primarily affected high-income earners in states with high property and/or income taxes. If the Act expires, the SALT deduction cap will be removed, allowing taxpayers to deduct the full amount of their state and local taxes. This change will disproportionately benefit taxpayers in high-tax states — such as California, New York, and New Jersey.

For individuals in these states, the restoration of the full SALT deduction could result in significant tax savings. However, it’s important to note that while this may benefit some taxpayers, the loss of other TCJA provisions could offset these savings.

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Child Tax Credit

The TCJA increased the Child Tax Credit (CTC) from $1,000 to $2,000 per child under age 17, creating a substantial tax benefit for families. It also raised the income thresholds at which the credit phases out, allowing more middle and upper-income families to also take advantage of the credit. For 2024, the refundable portion of the credit is set at $1,700.

Should the TCJA expire, families could see the Child Tax Credit drop back to just $1,000 per child, which, when adjusted for inflation, would be about 25% less than its 2017 value. This reduction would place a heavier tax burden on families, particularly those with multiple children, and could necessitate adjustments in budgeting or saving for future expenses.

20% Deduction for Qualified Business Income (Section 199A)

Small business owners and individuals with pass-through income — such as sole proprietors, partners, and S-corporation owners — benefited from the TCJA’s 20% deduction for qualified business income (QBI). This deduction allowed eligible taxpayers to reduce their taxable income by up to 20%, resulting in substantial tax savings for many small business owners.

If the TCJA expires, this deduction will no longer be available, meaning that small business owners could face higher tax bills. This change may prompt business owners to explore other tax-saving strategies or restructure their operations to minimize the impact.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was designed to ensure that high-income taxpayers pay a minimum amount of tax, regardless of how many deductions or credits they claim. The TCJA raised both the exemption amounts and the income thresholds at which the AMT applies, reducing the number of taxpayers subject to the AMT.

In the event of the Tax Cuts and Jobs Act Expiration, the AMT exemption will drop significantly — from approximately $140,300 for married couples filing jointly in 2024 to around $110,075 in 2026. This could mean that more taxpayers, particularly high earners, may find themselves subject to the AMT again, potentially resulting in higher tax liabilities.

Estate Tax Exemption

For individuals concerned about estate planning, the TCJA also doubled the estate tax exemption, providing significant tax relief for wealthy families. Under the TCJA estate tax exemption, this exemption would be $28.6 million for married couples in 2026, meaning only estates valued above this amount are subject to the federal estate tax.

However, if the TCJA expires, the estate tax exemption will fall to approximately $14.3 million for married couples. This reduction could expose more estates to federal estate taxes, and may require estate planning strategies, such as gifting or the creation of trusts, to minimize the tax burden on heirs.

Will the TCJA be Extended?

As we approach 2025, many individuals and businesses are left wondering: will the Tax Cuts and Jobs Act (TCJA) be extended? 

The reality is that the future of these provisions remains uncertain. While some political leaders advocate for extending favorable tax measures, including lower tax rates and increased deductions, there is no definitive answer yet.

As part of his campaign for the 2024 Presidential Election, former President Donald Trump has expressed a desire to extend all expiring provisions, signaling support for maintaining the benefits that many taxpayers have enjoyed since the TCJA was enacted.  

Vice President Kamala Harris, on the other hand, has indicated that any discussions around tax increases should avoid impacting those earning less than $400,000, suggesting that certain provisions may be preserved for middle-income earners.

Ultimately, the decision lies in the hands of Congress and our new President, and their actions leading up to the expiration deadline will be crucial. Given the uncertain political landscape and the varying opinions on taxation, it’s conceivable that lawmakers might step in to extend at least some of these temporary provisions. 

However, until a resolution is reached, there is still uncertainty as to what may happen next. It’s wise for individuals and businesses alike to remain vigilant and consult their financial advisors to navigate the evolving tax landscape effectively.

Wealth Management Philosophy page on Towerpoint Wealth

How Can I Prepare for These Expirations?

With the potential expiration of key provisions of the Tax Cuts and Jobs Act (TCJA) looming, individuals and businesses should take proactive steps to assess how these changes could affect their finances. Financial advisors can be key partners in helping you navigate this transition and minimize any negative impacts on your income and overall financial situation.

For individuals, your advisor can review your income, deductions, and credits to understand how expiring provisions like the lower tax rates, increased standard deduction, and enhanced child tax credit will affect your tax liability. They can also recommend tax-efficient strategies — such as accelerating income or charitable giving before any potential tax changes take effect — or maximizing retirement contributions to reduce taxable income.

Businesses, on the other hand, can benefit from working closely with their financial advisor to review the potential loss of the 20% deduction for qualified business income and other favorable provisions for pass-through entities. 

Advisors can also help business owners reassess their corporate structure, and determine whether it makes sense to make changes ahead of the tax shift, ensuring that you’re well-positioned to handle a potentially higher tax environment.

Ultimately, planning ahead with your financial advisor can help you avoid surprises in the next two years,and create strategies that better protect your financial future if the TCJA provisions do expire.

Final Thoughts

As the expiration of the Tax Cuts and Jobs Act (TCJA) approaches at the end of 2025, individuals and businesses need to stay informed about the potential changes to key tax provisions. 

A significant reduction in the standard deduction, a return to higher individual income tax rates, and the elimination of the 20% deduction for qualified business income could all impact financial situations substantially. The reinstatement of personal exemptions and the removal of the SALT deduction cap may also alter how taxes are calculated, especially for those in high-tax states.

Given the uncertainty surrounding whether Congress will extend these expiring tax provisions in 2025, it’s imperative that you consult with your financial advisor to proactively assess your tax strategy. They can help you navigate these changes, optimize your financial planning, and prepare for possible shifts in tax liability. 

At Towerpoint Wealth, we know that staying ahead of the curve now can ensure you’re better positioned to handle the implications of the TCJA’s expiration, allowing you to make informed decisions that support your financial goals. If you’re worried about how expiring provisions of the TCJA could affect your tax bill, we invite you to schedule an initial 20-minute “Ask Anything” discovery call with us to see how our wealth advisors can help you navigate your financial planning.

Want to learn more about proposed tax policies ahead of the 2024 election? Check it out here!

Sacramento Financial Advisor Wealth Management

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

Isabella Orozco,
Office Coordin
ator

 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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Trick or Treat? Can GOLD Be Beat in 2024?

Welcome to the Halloween edition of Trending Today

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

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

buying gold bars 2024

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

gold prices in grams 2024 line graph

Key Takeaways

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

A Timeless Treasure

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

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

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

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

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

Gold as a Hedge Against Inflation

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

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

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

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

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

gold prices S&P 500 Index 2024 line graph

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

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

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

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

gold prices in grams 2024 bar graph

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

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

Diversifying with Gold

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

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

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

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

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

What About Gold Prices in 2024?

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

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

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

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

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

Wealth Management Philosophy page on Towerpoint Wealth

How Can I Add Gold to My Portfolio?

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

Physical Gold

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

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

Gold ETFs (Exchange-Traded Funds)

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

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

Gold Mining Stocks and Mutual Funds

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

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

Steve Pitchford, CPA, CFP® Director of Tax and Certified Financial Planning

Digital Gold Platforms and Gold Options

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

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

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

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

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

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

Should I Invest in Gold?

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

Risks of Buying Gold

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

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

How Much Gold Should I Buy?

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

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

The Future of Gold Prices

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

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

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Let’s Help You Decide!

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

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

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

Sacramento Financial Advisor Towerpoint Wealth Team

Joseph Eschleman
Certified Investment Management Analyst, CIMA®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

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

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What You Missed at Future Proof 2024: Innovative New Financial Trends

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

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

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

A Wealth Management Festival! TPW at FutureProof ‘24

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

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

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

What is the FutureProof Festival?

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

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

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

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

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

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

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

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

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

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

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Hot Topics from FutureProof ‘24

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

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

Future-Proofing Businesses

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

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

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

Harnessing AI: Maximizing Innovation, Minimizing Risk

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

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

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

Innovative Portfolio Management

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

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

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

Driving Firm Culture and Leadership

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

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

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

How was FutureProof Festival 2024 Different from FutureProof 2023?

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

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

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

Our Top Takeaways from FutureProof Festival 2024

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

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

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

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

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

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

Final Thoughts

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

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

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

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

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

Sacramento Wealth Mission Statement | Towerpoint Wealth

Joseph Eschleman
Certified Investment Management Analyst, CIMA®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

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

We will happily donate $10 to it!

Follow TPW on LinkedIn

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How do Interest Rates Affect the Stock Market?

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

The impact of interest rates on stocks is significant!

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

how do interest rates affect the stock market?

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

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

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

What is the impact of interest rates on stocks?

What stocks might perform better with lower interest rates?

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

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

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

Key Takeways

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

What is the Impact of Interest Rates on Stocks?

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

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

Stock Prices

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

Interest rates and the stock market

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

Investor Behavior

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

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

Sectoral Impact

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

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

Interest Rates on stocks

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

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

Historical Results

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

Interest rates cut stock market

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

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

What Should You Do if Interest Rates Drop?

Short answer: there is no “correct” answer.

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

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

Avoid Reacting Too Quickly or Aggressively

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

Interest rates investing

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

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

Sacramento Wealth Mission Statement | Towerpoint Wealth

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

Interest rates stock market

Focus on Asset Allocation

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

Interest rates investing long term returns

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

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

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

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

Assess Growth vs. Value

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

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

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

Interest rates investing growth vs value investing

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

Keep an Eye on Inflation

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

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

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

Don’t Lose Sight of the Big Picture

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

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

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

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Final Thoughts

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

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

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

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

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

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

Sacramento Financial Advisor Towerpoint Wealth Team

Joseph Eschleman
Certified Investment Management Analyst, CIMA®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

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

We will happily donate $10 to it!

Follow TPW on LinkedIn
Follow TPW on YouTube
Follow TPW on Facebook
Follow TPW on Instagram
Follow TPW on X
Follow TPW Podcast