Trends – Roth&Co

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Nobel prize winning economist Richard Thaler tells of a meeting he had with a CEO and the department managers of a large company in which they discussed risk and decision-making. Thaler asked each of the 25 managers to consider a risky investment opportunity for their department. The risky option had a 50% chance of losing half the capital under their control or conversely, a chance to double the amount of capital they controlled by 50%. Not one of the executives were willing to take the gamble. Thaler then turned to the CEO for feedback. Without hesitation, the CEO stated that he wished his executives would all have opted to try for the investment opportunities.

For the CEO this made perfect sense. He had a broad view of all the possibilities and risks. From that prospective, he realized that considering all the investments pooled together, the risk profile was much more attractive, and it was likely that the company would make a significant profit on the combination of transactions. While the CEO’s decision may seem obvious when we view it from his perspective, this simple example shows how organizations and their employees can become risk-averse. When businesses become too risk-averse in their decision-making, they can squander real opportunities for growth.

What we know about risk aversion can be attributed to a combination of two well-documented behavioral biases. The first is ‘loss aversion,’ a phenomenon where decision makers fear losses more than they enjoy equivalent gains. Some studies have shown that experiencing losses can even be twice as psychologically impactful as gains (as illustrated by the example above). The second bias is ‘narrow framing,’ where people tend to see a single investment or outcome —like flipping a coin only once— without viewing them in the context of the overall set of outcomes – like flipping 25 coins. Both of these biases are sourced from another Nobel laureate, Daniel Kahneman.

These biases are more than just academic theory. Recent studies from a Harvard Business Review article present a picture of business executives that are not “the risk-takers we hear so much of in industrial folklore. They portray decision-makers quite unwilling to take what, for the company, would seem to be rather attractive risks.” Business leaders often struggle to see individual investments or opportunities as just one of many opportunities they will have over the course of a month, a year or a career. That is why managers and executives have a tendency to favor projects that require smaller investments over those that require larger investments but have a more profitable outcome. So, how does a business reduce unnecessary risk aversion?

Push to develop proposals for high-risk-high-reward projects and explore innovative ideas beyond your comfort level. Compare your high-risk projects alongside proposals for safer projects with lower returns. Be sure to remember how loss aversion and narrow framing biases can influence you and your employees’ decision-making.

Evaluate performance based on portfolios of outcomes, not on single projects. No investment is perfect and even the best opportunities do not always pan out. When evaluating projects or your employees, base the grade on overall performance, rather than on individual project outcomes. By making risk less personal, you and your employees can evaluate future decisions with less bias.

Companies should understand whether a particular success or failure was controllable. Eliminate the role of luck – good or bad – in rewarding employees for a project. Remember that even well-executed projects will fail due to factors outside of your control. Outcomes can be influenced by competitors, regulators, natural disasters, commodity price spikes and the economic cycle. There is a strong element of chance in any investment and that needs to be taken into consideration.

Unless a failed investment would trigger financial distress or bankruptcy, sometimes the riskier but more profitable opportunity might be the right choice. Remember Thaler’s story and do not let profitable opportunities pass you by because of loss aversion. Don’t be afraid to see each investment as part of your business’s larger picture. It is almost never clear which investment is best, but by acknowledging our biases, business leaders can be more confident that they are not missing potentially valuable opportunities.

Looking forward to being a part of your success.

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“History doesn’t repeat itself, but it often rhymes,” asserted Mark Twain two centuries ago. And it seems that as time goes on, the more rhymes we add, creating what is now a long and complex poem.

Stock market bubbles are one of these rhyming moments.

In March of 2020, we were all forced into isolation in our homes. There were no live sports, no casinos and no live entertainment. As a result, millions of people turned to the stock market for their gambling and entertainment. The bonus income supplied by federal stimulus checks bolstered this trend as many people used those funds to speculate in the stock market.

Social media “influencers” also jumped onboard and used the opportunity to create a buzz among their followers. The happy result of all the flux was that many people who weren’t really familiar with the stock market, managed to make a lot of money.

The illustrious Dave Portnoy, chairman of the sports-betting site Barstool Sports, turned stock trader, preached to his millions of followers on his daily videos that “stocks only go up.” If you’ve lived the stock market for more than a year, you know just how preposterous that statement is. And to be honest, it’s a dangerous attitude. Stocks don’t only go up, and Dave Portnoy knows that. He’s just playing on people’s emotions to get more clicks.

But more concerning to us here at Equinum is the amount of calls and comments we’ve received over the past few weeks:

“You can’t not make money by trading stocks.”

“Only 100% over two years? That’s so slow!”

“My friends make more than $5,000 a week trading stocks. I’m working so hard for a paycheck. Do you think I should leave my job?”

This is only a short list of the outrageous things we’ve heard.

What’s happening today may not be a repeat of history, but it’s definitely part of the rhyme:

In 1999, when the Internet was a new phenomenon, investors bought into dot-com companies with a vengeance. Daily water-cooler conversations revolved around “How much did you make today?” People were quitting their jobs and diving into the game, and we all know how that ended. (Badly!)

Let’s take a look at today’s poem:

Back in the late nineties, over a quick time span of less than three years, the Nasdaq was up more than 467%.

Individual names like Amazon, Qualcomm, and Cisco were on an even crazier ride:

This data isn’t even taking into account the bogus companies who weren’t doing real business and were barely more than an internet façade, like Pets.com, Webvan and Boo.com.

With people trading these names and making thousands, many left their jobs and opted to sit by their E-Trade accounts and trade. Well, that didn’t end well. The Nasdaq plummeted by 78% and some of the individual hot names declined by more than 90% or went out of business completely.

At the time, many traders thought they would hang in there till prices descended, and then make a quick exit. Alas, this is easier said than done. Stocks don’t go up – or down – in a straight line. There are no obvious signs indicating that the top has been hit and that it’s time to sell. There are many “fake-outs” on the way up where it looks like the climb is over, and many dead-cat bounces on the way down where it looks like the bad times are done. The market ebbs and flows.

Let’s take a look at how the market rose during those years:

As you can see, on the way up, there were quite a few large drops, and at least four additional 10% drops. And with each drop, the market “bears” were all over financial media calling an end to this rise.

Now let’s look at the downward market:

Same story. There were a nice number of quick rises in stock prices, and every time that happened, the market “bulls” were all over the media touting that stocks were back!

The point that we’re getting at is that very few people can actually buy and sell the highs and lows in real time.

We’re not saying that investors shouldn’t trade the market at all. We’re just saying that you need to understand what the market risks are. While you may have a friend who’s really good at the game now, if history serves as any guide, we can assume that the nature of today’s game is temporary. Leaving a steady income to get involved in speculation is a risky (read: bad) idea. If you want to take a small portion of your invested assets and speculate, it may well be worthwhile. But the bulk of your assets should be properly invested with a long-term approach in a well-diversified portfolio.

Please don’t read between the lines and conclude that we believe that the market is in a bubble. Some parts of the market may well be in a bubble. The Robinhood trends, Reddit forums and SPACs are definitely in a wild situation. But will this spill over to the larger markets? We’ll have to wait and see.

Feel free to reach out to us at info@equinum.com to discuss your portfolio.

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People sometimes keep assets hidden, not revealing their location, or even their existence, to family members. Similarly, they may own life insurance policies that no one is aware of. Here’s why we recommend full disclosure of your assets to your family and loved ones.

George was a successful entrepreneur. He accumulated significant wealth during his lifetime, including several real estate parcels, a wide array of securities, retirement plan accounts and IRAs, and various collectibles, in addition to the home he owned jointly with his wife, Theresa. He also took out several life insurance policies on his life.

In his will, George designated Theresa as the beneficiary of most of the assets but divided up some of the other property between his two children. George named his wife and children as equal beneficiaries on the life insurance policies. Sadly, George died late last year.

The problem: George had hidden some of his assets without disclosing their location to anyone in his family. His loved ones had no information about account numbers or passwords. And neither Theresa nor the children even knew of the existence of one of the life insurance policies and two of the IRAs.

What happens now? It will take considerable time and effort for George’s family to track down all the assets and it’s not certain that they’ll be completely successful. And the family will likely never collect on the life insurance policy or find the IRAs they were never made aware of. By being secretive, George made things more difficult for his loved ones and actually cost them money.

Don’t make the same mistake. Have an open discussion with all relevant parties about your possessions. List all the assets you own and provide locations, account numbers and passwords. Arrange for this information to be stored in a secure place. In the event you become incapacitated or suddenly pass away, your family won’t have the added stress of not having access to your assets. Contact us for help in compiling your list of assets and all other relevant information.

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The events of the past year have taught business owners many important lessons. One of them is that, when a crisis hits, customers turn on their computers and look to their phones. According to one analysis of U.S. Department of Commerce data, consumers spent $347.26 billion online with U.S. retailers in the first half of 2020 — that’s a 30.1% increase from the same period in 2019.

Although online spending moderated a bit as the year went on, the fact remains that people’s expectations of most companies’ websites have soared. In fact, a June 2020 report by software giant Adobe indicated that the pandemic has markedly accelerated the growth of e-commerce — quite possibly by years, not just months.

Whether you sell directly to the buying public or engage primarily in B2B transactions, building customers’ trust in your website is more important than ever.

Identify yourself

Among the simplest ways to establish trust with customers and prospects is to convey to them that you’re a bona fide business staffed by actual human beings.

Include an “About Us” page with the names, photos and short bios of the owner(s), executives and key staff members. Doing so will help make the site friendlier and more relatable. You don’t want to look anonymous — it makes customers suspicious and less likely to buy.

Beyond that, be sure to clearly provide contact info. This includes a phone number and email address, hours of operation (including time zone), and your mailing address. If you’re a small business, use a street address if possible. Some companies won’t deliver to a P.O. box, and some customers won’t buy if you use one.

Keep contact links easy to find. No one wants to search all over a site looking for a way to get in touch with someone at the business. Include at least one contact link on every page.

Add trust elements

Another increasingly critical feature of business websites is “trust elements.” Examples include:

Icons of widely used payment security providers such as PayPal, Verisign and Visa,
A variety of payment alternatives, as well as free shipping or lower shipping costs for certain orders, and
Professionally coded, aesthetically pleasing and up-to-date layout and graphics.

Check and double-check the spelling and grammar used on your site. Remember, one of the hallmarks of many Internet scams is sloppy or nonsensical use of language.

Also, regularly check all links. Nothing sends a customer off to a competitor more quickly than the frustration of encountering nonfunctioning links. Such problems may also lead visitors to think they’ve been hacked.

Abide by the fundamentals

Of course, the cybersecurity of any business website begins (and some would say ends) with fundamental elements such as a responsible provider, firewalls, encryption software and proper password use. Nonetheless, how you design, maintain and update your site will likely have a substantial effect on your company’s profitability. Contact us for help measuring and assessing the impact of e-commerce on your business.

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To gift or not to gift? It’s a deceptively complex question. The temporary doubling of the federal gift and estate tax exemption — to an inflation-adjusted $11.7 million in 2021 — is viewed by some people as a “use it or lose it” proposition. In other words, you should make gifts now to take advantage of the exemption before it sunsets at the end of 2025 (or sooner if lawmakers decide to reduce it earlier).

But giving away wealth now isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate. Here are some of the factors to consider.

Lifetime gifts vs. bequests at death

The primary advantage of making lifetime gifts is that, by removing assets from your estate, you shield future appreciation from estate taxes. But there’s a tradeoff: The recipient receives a “carryover” tax basis — that is, he or she assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.

An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)?

The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon — that is, how long you expect the recipient to hold the asset after receiving it.

Also, be aware that President Biden proposed eliminating the stepped-up basis benefit during his campaign.

Hedging your bets

Determining the right time to transfer wealth can be difficult, because so much depends on what happens to the gift and estate tax regime in the future. It may be possible to reduce the impact of this uncertainty with carefully designed trusts.

Let’s say you believe the gift and estate tax exemption will be reduced dramatically in the near future. To take advantage of the current exemption, you transfer appreciated assets to an irrevocable trust, avoiding gift tax and shielding future appreciation from estate tax. Your beneficiaries receive a carryover basis in the assets, so they’ll be subject to capital gains taxes when they sell them.

Now suppose that, when you die, the exemption amount hasn’t dropped, but instead has stayed the same or increased. To hedge against this possibility, the trust gives the trustee certain powers that, if exercised, cause the assets to be included in your estate. Your beneficiaries enjoy a stepped-up basis and the higher exemption shields all or most of the asset’s appreciation from estate taxes.

Work with us to monitor legislative developments and adjust your estate plan accordingly.

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Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

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Over the past year, we’ve all come to understand the importance of leadership at every level of a business. When crisis hits, it creates a ‘stress test’ not only for business owners and executives, but also for department supervisors and work groups. Can your company’s supervisors communicate well enough to keep employees reassured, focused and motivated during good times and bad? One factor in their ability to do so is the age of the employees with whom they’re interacting.

Encourage a flexible management style

Right now, there may be four different generations in your workplace: 1) Baby Boomers, born following World War II through the mid-1960s, 2) Generation X, born from the mid-1960s through the late 1970s, 3) Millennials, born from the late 1970s through the mid-1990s, and 4) Generation Z, born in the mid-1990s and beyond. (Birth dates for each generation may vary depending on the source.)

Supervisors need to develop a flexible style when dealing with multiple generations. Millennial and Generation Z employees tend to have different needs and expectations than Baby Boomers and those in Generation X.

For example, Millennials and Gen Z employees generally like to receive more regular feedback about their performances, as well as more frequent public recognition when they’ve done well. Baby Boomers and Gen Xers also enjoy positive performance feedback, but they may expect praise less often and derive personal satisfaction from a job well done without needing to share it with co-workers quite as often.

Employees from different generations also tend to have differing views on company loyalty. Many younger employees harbor greater allegiance to their principles and co-workers than their employers, while many older employees feel a greater sense of fidelity to the business itself. Train your supervisors to keep these and other differences in mind when managing employees across generations.

Recognize the impact of benefits

While financial security is highly valued by every generation, younger employees (Millennials and Gen Z) may prioritize salary less than older workers. What’s often more important to recent generations is a robust, well-rounded benefits package.

Of particular importance is mental health care. Whereas older generations may have historically approached mental health issues with hesitancy, and some still do, younger generations generally prioritize psychological well-being quite openly. Business owners should keep this in mind when designing and adjusting their benefits plans, and supervisors (and HR departments) need to encourage and guide employees to optimally use their benefits.

Promote workplace harmony

To be clear, a person’s generation doesn’t necessarily define him or her, nor is it a perfect predictor of how someone thinks or behaves. Nevertheless, supervisors who are aware of generational differences can develop more flexible, dynamic management styles. Doing so can lead to a more harmonious, productive workplace — and a more profitable business. We can assist you in developing cost-effective strategies for upskilling supervisors and maximizing productivity.

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Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.

The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.

Here are some additional points about the plug-in electric vehicle tax credit:

It’s allowed in the year you place the vehicle in service.
The vehicle must be new.
An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Electric motorcycles

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

Are You and Your Business Taking Enough Risks?

No. Do not quit your job.

Not Disclosing All of Your Assets Helps No One

Building Customers’ Trust in Your Website

Now or Later: When’s the Right Time to Transfer Your Wealth?

2021 Individual Taxes: Answers to Your Questions About Limits

Are Your Supervisors Adept at Multigenerational Management?

The Power of the Tax Credit for Buying an Electric Vehicle