Client Update

A normal human being walks around with a slight sense of optimism, confident that a drunk driver won’t smash into his car that day, that he doesn’t have a dread disease, that he will get what he wants for his birthday.  There is nothing wrong with that, psychologists say: Our ability to forge ahead despite the constant real dangers we face helps us to plan, work, and accomplish. Depressed individuals who lack that mild optimism have a hard time just getting out of bed in the morning.  However, this generally healthy attitude is not so well suited to working with the investment markets, because it leads many investors to a general state of overconfidence.

Behavioral psychologists say studies show that too many investors are overconfident in their own skills, thinking they can pick individual investments or mutual funds, or time when to buy and sell investments based on their forecasts of market movements. Such overconfidence leads investors to trade more frequently than they should. On average, frequent trading reduces returns, according to several studies of thousands of trading records of individual investors.

We don’t learn from mistakes

Studies have shown that it is not just that we remember our successes and forget our mistakes.  Instead of forgetting mistakes, we remember them in a way that bolsters our feeling of confidence.

Psychologists call it the “heads I win, tails it’s chance” phenomenon, say Gary Belsky and Thomas Gilovich in their book, “Why Smart People Make Big Money Mistakes - And How to Correct Them”.

Do you believe the worst is over?  Wall Street traders seem to think so.

After the large U.S. market indices fell 12.4% in March, I think most of us were expecting more of the same.  Many thought the stock market would continue to produce bearish returns until there was certainty—that is, until we knew what the pandemic’s impact on corporate earnings would be, and the extent of the economic damage from all those empty hotel rooms, restaurant and airline seats, record unemployment and everything else.

Instead, the S&P 500 jumped 12.8% in April, with all eleven of the sectors gaining during the month.  Only 29 stocks in the broad index showed a loss in April.  This was the best monthly performance for since January 1987—and the S&P was not alone.  The technology-heavy Nasdaq Composite gained 15.4% for the month, its best performance since the height of the tech mania in June 2000.

It would be pure speculation to say that the stock traders who define our market movements are being a bit too optimistic about the long recovery we are facing.  We don’t know whether the markets will decline from here or, against the odds, hold up while negative earnings reports pour in for the next two quarters.  But the last two months serve as an interesting reminder of that humility.  It would have been easy to listen to all the negativity coming from the pundits, and sell after seeing the downturn in March.  Turns out, that would have cost one of the nicest one-month returns in market history.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice

Many people are doing their jobs from home on a sustained basis for the first time in their careers.  They have had to set up a home office.  Does that mean they can claim a home office deduction, even though they still have a workstation, cubicle or office at their place of work?

The bad news is that the Tax Cut & Jobs Act of 2017 severely curbed what had been a valuable home office deduction for staff people who had to do some of their work at home.  Previously, people could deduct unreimbursed job expenses that exceeded two percent of their adjusted gross income on their income tax return.  Since 2018, employees working at home can no longer deduct their out-of-pocket expenses.  Only gig workers and self-employed free-lancers could still claim the deduction for qualifying costs—the rental or mortgage cost of the part of their home that was used as a home office, plus maintenance, insurance, utilities, a proportionate share of property taxes and security system fees.

The bottom line is that you need to have self-employment income to benefit from the home office deduction.  If you find yourself temporarily furloughed and start taking on assignments on the side, then you can claim the deduction if your home is your principal place of business, and if you have set aside a “separately identifiable space” in the home (not, say, the kitchen table).  During this pandemic, every penny—and tax savings—counts.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice

You may not feel like being congratulated, but congratulations are in order.  You have managed to live through the worst first quarter on record in the U.S. investment markets. 

You also endured the fastest, longest, hardest roller coaster ride in market history, as measured by the VIX volatility index.  Basically, that means that one day the markets were down at record or near-record levels, and then as we thought perhaps the bear market would continue, we experienced near-record one-day gains.

The previous record for instability in the stock market was an eight day stretch in November of 2008, when the markets seemed to be gyrating up and down uncontrollably after traders realized the full implications of the collapse of Lehman Brothers.  At the end of this recent first quarter, the CBOE Volatility Index (VIX), presented us with a record 10-day run with the index above 60.  (The long-term average for marketing volatility, as measured by the VIX index, is 20.)

Just about every asset class outside of bonds saw declines in 2020’s disastrous first quarter. 

You don’t have to ask why Wall Street traders are abandoning stocks in near panic mode.  The coronavirus epidemic, social distancing and the closure of home offices, malls, theaters and anywhere else where people once gathered to work has raised uncertainty about the extent of business disruption in the U.S. and world economies.  Unemployment has sky-rocketed, with record numbers of people applying for unemployment benefits.

The White House has announced federal guidelines for the easing of social distancing orders that have been put in place to slow the spread of the coronavirus.  The leadership of different states will have the final say, of course, but the guidelines offer some indication of when we can expect to start congregating again without gloves and masks.

There are three phases in the proposed guidelines.

Phase 1

Communities would enter Phase 1 when the statistics show a downward trajectory of reported illnesses within a 14-day period, and when hospitals were able to treat all patients without resort to crisis care. 

In addition, before we can enter Phase 1, there would need to be a “robust testing program” in place for all at-risk healthcare workers.