News & Insights

As 2024 draws to a close, it’s time to conduct a comprehensive review of your financial situation and set the stage for a prosperous new year. Here’s a detailed year-end financial planning checklist to help you wrap up 2024 on a strong note and prepare for 2025.

Personal Financial Inventory

First take stock of your current financial position. List all your assets, including emergency funds, bank accounts, retirement accounts, investment portfolios, real estate equity and valuable personal property. Next, catalog all debts, such as mortgages, car loans, student loans and credit card balances. Well done, you have created your own personal balance sheet, a picture of your overall financial health. This is also a great time to review your current credit report and check your credit utilization ratio. It’s recommended that you do this at least once per year. Your credit utilization refers to the ratio of your current credit balances to your credit limit. It is a key factor in determining your credit score. A lower ratio indicates that you are using a small portion of your available credit, which is favorable for your credit score.

After working part-time at Provident for a year and a half, I am thrilled to announce that I will now be transitioning to a full-time role with the team as a Financial Analyst. While I have met a few clients, I am eager to meet more as I become more involved in day-to-day activities.

As with most small companies, we at Provident wear many hats. Most of my time is spent on trading, marketing, and client service including helping clients evaluate Roth conversion opportunities, Social Security timing, and withdrawal strategies, among others.

Google searches are often entertaining. As I was thinking about a title for this column I typed “The Taxman Cometh?” into my browser, looking for information about the various tax proposals from our two presidential candidates. The first thing to pop up was a 1991 episode of the television show Murder She Wrote. In the episode, a close college friend of Detective Jessica Fletcher was the prime suspect in the murder of her husband as her store, Miss Edna’s Pies, was being investigated by the IRS. As always Jessica solves the crime, a clever embezzlement scheme by a mysterious employee. While the stakes we face are less than life or death, we all need to stay tuned to possible tax changes and their impact on our pocketbooks and investment accounts. 

Voter polls indicate that the economy is the number one issue in this presidential campaign. Tax policy has taken on an outsized importance as the individual tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Each candidate has put forth a dizzying array of proposed tax changes. By the time you read this column there may be more. Let’s examine how tax law would look if the TCJA expires plus the proposals from each candidate. This review is intended to be informative and analytical, not an endorsement of a candidate or any particular policies. 

From time to time, I like to provide a behind-the-scenes update from Provident. The focus this time will be on the steps we take to keep your data and money safe from theft. 

Cybersecurity is constantly on our minds. About two years ago, we enlisted Schwab’s help to assess our cybersecurity arrangements and identify opportunities for improvement. This was not in response to any known shortcomings and wasn’t intended to diminish the role of our technology vendor. Rather, it was meant to be a second source, particularly since the Schwab consultant is an expert in our industry and understands the regulatory structure we work under. This is an ongoing process as indicated by my last request of the consultant - to schedule an annual progress update, a process we will continue. 

The SECURE Act and SECURE 2.0 Act introduced a number of changes related to IRAs, some favorable and some unfavorable. One of the unfavorable changes was the introduction of the “10-year rule,” where traditional and Roth IRAs inherited by non-spouse beneficiaries (with certain exceptions for eligible designated beneficiaries) had to be emptied by the tenth calendar year following the IRA owner’s death. Previously, non-spouse beneficiaries could stretch out the distributions over their own life expectancies, resulting in smaller required payouts and greater potential for tax-advantaged growth. Congress felt this was too big of a break for beneficiaries and needed to offset the funds lost from delaying required minimum distributions (RMDs), which led to the rule change. Spouses, along with certain other eligible designated beneficiaries were able to continue taking distributions from inherited IRAs over their own life expectancies, but this change meant most beneficiaries were now forced to take distributions sooner.  

The 10-year rule as initially outlined left some room for interpretation, and there was some confusion whether those who inherited an IRA must take minimum withdrawals each year or if they could wait until the final year to fully distribute the funds in the account. This topic was covered in a Viewpoint in 2022, as the IRS had proposed a rule requiring annual minimum distributions during the 10 years. Investors pushed back against this proposal, but the purpose of this Viewpoint is to highlight that the Internal Revenue Service recently issued long-awaited final regulations specifying the annual distribution requirement for many inherited IRAs. Even these final rules, however, may be impacted by public criticism of the rules and the outcome of the November elections. 

Almost all people value the utility which their children will get from consumption higher than they value their own. –Milton Friedman

Some people want the last check they ever write in their life to bounce. Spend all your money while you’re alive. Otherwise, it will be too late. It is hard to find fault with that concept, but the execution is tricky. If we live only for today, then eventually tomorrow catches up with us. On the other hand, if we only accumulate for its own sake then we risk missing out on life’s opportunities.

Wealthy people tend to be accumulators. Some are probably over-accumulators. The question of how much accumulation is optimal is a complex one.

A durable power of attorney (DPOA) along with a healthcare advance directive are important components of a comprehen­sive estate plan. These legal documents are for adults of any age, as unexpected events such as accidents and illnesses can happen to anyone. These documents authorize a trusted individual, referred to as the agent or attorney-in-fact, the right to act on behalf of the person granting the power (the principal) in all financial, legal and medical matters. The DPOA agent and the healthcare advance directive agent do not have to be the same individual. There are several strong arguments for why an individual should have a durable power of attorney and a healthcare advance directive.  

If the principal becomes incapacitated due to illness, injury or mental decline, these legal documents ensure that someone they trust can make decisions for them. These documents make the intent of the principal clear and help prevent arguments between family members over the actions that need to be taken. Without a DPOA and healthcare advance directive, the principal’s loved ones would have to go through a lengthy and expensive legal process in order to gain court approval to obtain the same powers. In this case, the court will appoint a guardian or conservator to make decisions for the principal, which may not align with their preferences and may create disputes within the family. 

Since the Pandemic, the Federal Reserve reminds me of a gymnast that utterly failed his Floor exercise but is trying desperately to stick the landing on the Uneven Bars. 

Hindsight is always 20-20, but as inflation was getting going in 2021 the Fed was far too slow to adjust its policy stance. Believing that increasing prices were primarily a function of broken supply chains, the Fed maintained its zero-interest rate policy and aggressive purchases of government and mortgage-backed bonds into early 2022, well after the economy began experiencing mid-to-upper single digit inflation starting in April 2021. While it is understandable why the Fed placed much of the blame on supply chains, a failure to appreciate the impact of the $5.2 trillion in fiscal stimulus related to the Pandemic, equivalent to about 25% of GDP, on the prices of scarce goods and services is confounding. The Fed blew the Floor exercise. 

It never dawned on me how uniquely American my job is until I came to the United Kingdom. I am working remotely from the middle of England for most of 2024. My wife Elizabeth is English. We want our kids to better understand this half of their heritage. We will come back to the US in August for the start of the new school year. Liz was granted leave from her job in Ann Arbor for about eight months. I’m writing this from the guest room, now the home office, of my in-laws’ rental property in the small town of Rothwell, Northamptonshire, keeping some late hours due to the time difference. 

Traveling reveals lots of interesting details about other cultures. This immersive, extended stay is teaching me some subtleties of English life I hadn’t observed during shorter visits in the past. You’re probably aware of our different definitions of “football”. In the US we drive on the right. In the UK it is optional. Beyond the big, obvious differences, I’ve found the schools here are generally a little stricter. Farms are smaller, which greatly affects the landscape. People socialize in pubs differently. 

According to the National Philanthropic Trust, the first donor-advised funds (DAFs) were created in the 1930s, though only recognized formally in the tax code in the Pension Protection Act of 2006. In 2022, DAF owners contributed over $85 billion in assets and granted over $52 billion to non-profit organizations using nearly 2 million DAF accounts. Prominent investment companies such as Schwab, Fidelity, and Vanguard sponsor their own DAFs, helping drive adoption. You can learn more at https://www.schwabcharitable.org. 

The tax code allows every individual to deduct nearly $15,000 and every married couple to deduct nearly $30,000 from their income before taxes start to apply, the “standard deduction.” Charita­ble contribu­tions are considered deductible but only earn any practical value to the extent that they help drive a taxpayer’s total deductions over and above the standard deduction threshold. This incentivizes taxpayers to lump multiple years’ worth of charitable giving into a single tax year. Most years the taxpayers receive the standard deduction, but occasionally get a larger benefit during a higher giving year. 

“When I was 17 I went to get a Limp Bizkit tattoo and when they wouldn’t let me because I didn’t have a guardian’s approval, I cried and punched a lamp post. 3 months later I was allowed to take on $119,000 in loans to go to art school.”

@BillDixonish

A recent study estimates that the average listed cost, including tuition and living expenses, for private universities at $54,840 per year.[1] Facing numbers so huge, it absolutely falls on applicants and their parents to become educated consumers. Beware, because colleges love money, the stakes are high, and the rules of the game are just as peculiar and special as the college experience itself. 

I like this time of year. While I’m not a fan of the start of winter in Michigan, I do enjoy celebrating Thanksgiving and Christmas. Plus, it gives me some time to reflect on the year that was and think about ways I can make 2024 better.

 The past three years have been unique, to say the least. 2023 felt much better as the COVID pandemic turned into an endemic, the phase where we learn to live with this virus and resume normal living. I’m hopeful that 2024 will continue to put COVID in the rear-view mirror.

Like most years, I make my New Year’s resolutions during December, jotting down thoughts as I go through the holidays with the idea that I’ll pick two or three to work on, the more realistic the better. Here are some ideas from my checklist that you might put on yours as you think about your New Year’s resolutions, both in your life and of the financial variety.

Buyer beware!  Annuity salespeople are out in droves. They are conscious that volatility in the stock market over the last couple of years has made some investors approaching retirement reluctant to stomach the ups and downs of their investment portfolios. The allure of a lifetime stream of income to combat investment uncertainties is very tempting, but it comes at a steep price.

As some wise person once said, “Annuities are sold, not bought.” The insurance salesperson or financial advisor will earn a lucrative commission for selling you this product. If you get past the salesperson’s self-interest before buying an annuity, you first need to realize what it is. An annuity is a complicated insurance product. Therefore, the buyer must be familiar with the contract to avoid any potentially unpleasant future surprises.

We have a great team here at Provident, and I’m proud of the work each of them does. Our clients see the trades we make in their portfolios, and they read Investment Comments, Viewpoint, and quarterly letters authored by our portfolio managers. But there is a broader team behind the scenes. I’d like to share a bit about each of them so clients can see how our company functions.

I recall a television advertisement years ago featuring legendary investor Peter Lynch. Lynch helped popularize the “growth at a reasonable price” (GARP) strategy that Provident largely follows today, registering a sterling track record as the manager of the Magellan Fund at Fidelity between 1977-1990. This advertisement probably aired toward the end of his tenure with the Magellan Fund. In it he emphasized the link between earnings growth and market performance, saying something along the lines of “earnings drive the market.” As an impressionable youth with an interest in the investment business, this message stuck with me. It is something I think most investors generally understand, but the breakdown in short-term correlation between earnings growth and market performance sometimes obscures the tie between the two.

For example, look at what has happened in markets over the past year and a half. In 2022, earnings for the S&P 500 grew 5%, while the market fell 18%. The story in 2023 has been just the opposite, as earnings for the S&P 500 through the second quarter were down while the market advanced nearly 16%. This is not how celebrated market wizard Peter Lynch told us things work! I’m being facetious because what Lynch implied in the advertisement was that while the link between earnings and the market can be tenuous over any shorter period, it generally holds over the longer-term.

Artificial Intelligence has burst on the scene in 2023, paced by OpenAI, L.P.’s release of ChatGPT (Chat Generative Pre-trained Transformer) last November and Microsoft’s further $10 billion investment in OpenAI that will support incorporating Artificial Intelligence (AI) into current and future products. Investor enthusiasm has been somewhat bubble-like as companies viewed to be on the cutting edge of AI have been rewarded with rich valuations that will only be justified if AI produces profits. It seems that every company has jumped on the AI bandwagon. I can hardly get through the first few minutes of company quarterly earnings or conference presentations without hearing about how they use AI or plan to do so in the future.

For non-investors, I’ve seen and read several articles and blogs speculating that ChatGPT and its further development will eventually lead to Skynet, the fictional conscious-mind AI from the Terminator movies that launched a global nuclear holocaust to destroy its enemy, humanity.

Clients often ask whether Provident can manage the assets in their 401(k) or 403(b) employer-sponsored retirement plans. Until recently, our answer was “no” because we could not trade client accounts custodied outside of Schwab. Assets left behind in a previous employer’s plan could potentially be rolled over into an IRA at Schwab which we could manage. However, with respect to assets in the current employer’s plan the best we could do was to evaluate options and offer a complimentary recommendation for the client to consider. Whether the client acted on those recommendations or revisited the problem in the future as life circumstances changed was beyond our control.

A new technology provider, Pontera, now allows us to trade accounts in employer plans, turning that “no” into a “yes”. Pontera integrates with our reporting system, Tamarac, and allows us to show you a combined portfolio report, including current holdings and historical performance for assets custodied at Schwab alongside those in your employer plan.

Most of you do not know me, but I have been behind the scenes at Provident for almost 25 years. Scott Horsburgh asked me to share my observations with clients following my retirement on June 30th.

When I joined Provident Investment Man­agement in October of 1998, the company was Seger-Elvekrog, named after its founders. I interviewed with Ralph Seger, Maury Elvekrog, and Scott. Ralph was pleasant with his wonderful reassuring smile, and it was apparent his mission was to share his gift of successful investing. Maury was eloquent, easy to talk to, and then presented me with a psychological multiple-choice test with his charming smile.

I recently became an uncle. Meeting my nephew was a great experience. After I held the little guy for as long as he would let me, his parents put him to bed and we talked about newborn things – how he was eating and sleeping, where daycare costs and college savings fit in the budget, etc. I asked my brother if he had increased his life insurance coverage with the new dependent. I was happy to hear that yes, he took care of this a while ago and hadn’t thought much about it since. That’s how it should go. The sooner you set it and forget it, the lower the cost to you. But it’s important to periodically review your life insurance policy as your life progresses.

Life insurance is not the kind of thing we think about every day. There are no news programs dedicated to daily moves in policy rates or conversion options. For most people, life insurance serves to replace income when one passes away. The risk of losing your life in any particular year is low, but the financial severity of the loss is high, larger than the accidental loss of your home or automobile. For risks with those characteristics it’s smart to transfer the risk to a third party. Customers pay the life insurance company a premium to assume that risk.

A new chapter in the history of American bank regulation began the night of Wednesday, March 8. That’s when Silicon Valley Bank revealed that the need to raise cash to meet customer withdrawals forced it to book $2 billion in losses on the sale of securities, leading it to look for more capital. Less than 48 hours later, regulators shut down the bank as it lacked sufficient liquidity to satisfy withdrawal demands. An incredible 96% of its deposits exceeded the FDIC insurance limit of $250,000 per depositor. Shockwaves rippled through the bank system. Clients asked us whether their banks were safe, even behemoth Chase.

Over the past 40 years, we’ve had the “Latin American debt crisis” in the mid-1980s, the “savings and loan crisis” in the late 1980s-early 1990s, the Global Financial Crisis in 2008-2009, and now this mini-crisis. Regulatory changes are made after each one, but we always end up back in the soup!  Many blame this crisis on changes to bank regulations in 2019, but in fact there is plenty of blame to go around.