Andrew Schaetzke, CFP® 7/25/25 Andrew Schaetzke, CFP® 7/25/25

From Capitol Hill to Main Street: How the Big Beautiful Bill Impacts Your Business

As we discussed in our last blog post, Congress passed the long-anticipated One Big Beautiful Bill Act (OBBBA). True to its name, this legislation covers a wide range of tax and financial provisions. And for business owners in particular, the impact is meaningful [1].

By Senior Advisor Andrew Schaetzke, CFP®

As we discussed in our last blog, Congress passed the long-anticipated One Big Beautiful Bill Act (OBBBA). True to its name, this legislation covers a wide range of tax and financial provisions. And for business owners in particular, the impact is meaningful [1].

We know new legislation brings new questions. That’s why we’ve cut through the fine print and highlighted the updates that matter most for business owners and entrepreneurs. Here are some of the most important features of the bill:

The 20% deduction for Qualified Business Income (QBI) under Section 199A is now permanent for pass-through entities. This includes expanded phase-out thresholds for service businesses—and even a $400 minimum deduction for those with at least $1,000 in QBI [6].
Why it matters: This offers long-term planning clarity for LLCs, S Corps, partnerships, and sole proprietors—especially those concerned about prior sunset provisions.
The rules for Qualified Small Business Stock (QSBS) under Section 1202 just became more flexible—and more favorable.
- 50% of gains are excluded if the stock is held for 3+ years
- 75% of gains are excluded if held for 4+ years
- 100% exclusion still applies after 5+ years
In addition, two key thresholds have expanded:
- The gain exclusion cap is now the lesser of 10x basis or $15 million (up from $10 million), with both figures indexed for inflation
- Companies with up to $75 million in assets (up from $50 million) are now eligible [2]
Why it matters: This modernized framework may make QSBS more accessible and more beneficial for founders, early-stage investors, and business owners considering equity-based succession strategies. The new tiered holding periods also allow for partial exclusions on shorter timelines—a notable change from the traditional 5-year requirement.
Starting January 19, 2025, 100% bonus depreciation is back for non-real property. The prior phase-down schedule is scrapped [2].
Why it matters: This allows businesses to immediately write off the full cost of qualifying assets, boosting after-tax cash flow and incentivizing investment.
100% bonus depreciation now extends to certain production and refining facilities—split proportionally between operational and administrative areas [4].
Why it matters: Capital-intensive industries may see significant tax savings, particularly when upgrading or expanding plant infrastructure.
Section 179 limits increased to $2.5 million, with phase-outs starting at $4 million [2].
Why it matters: Small and mid-sized businesses have more flexibility to expense capital investments—without worrying about hitting outdated limits.
Domestic research and experimentation costs no longer require amortization, reverting to pre-2017 rules. Businesses may also retroactively expense R&D costs dating back to 2021. (Note: Foreign R&D still requires 15-year amortization.) [3][4]
Why it matters: This is a major win for innovative companies—especially those in engineering, technology, and manufacturing—who have been burdened by post-TCJA amortization rules.
Corporations may now only deduct charitable contributions above 1% of taxable income, though the existing 10% cap remains. Unused deductions can be carried forward [3].
Why it matters: This change could alter how C corporations structure philanthropic commitments—especially those with lower taxable income.
The excess business loss limitation is no longer temporary. Carryforward rules are clarified and locked in, adding predictability [2].
Why it matters: Business owners facing irregular income years will need to plan carefully—but the permanence of the rule helps with long-term modeling.
The pass-through entity tax (PTET) strategy—where states allow entities to pay income tax at the business level—remains intact [2].
Why it matters: This is still a viable workaround for state and local tax (SALT) deduction caps, especially in high-tax jurisdictions.
The interest expense limitation is now permanently based on EBITDA, rather than EBIT [2].
Why it matters: This provides more flexibility for capital-intensive businesses, especially those leveraging financing to fund growth.
Employee Retention Credit (ERC) claims for Q3 and Q4 of 2021 can no longer be filed after January 31, 2024 [4].
Why it matters: If you missed the deadline, no further claims can be submitted. If you filed already, consult your tax advisor on potential audit exposure.
The Opportunity Zone program is now permanent, with a rolling 10-year designation window starting in 2027 [2][5].
Why it matters: This helps create more long-term predictability for tax-deferred (or tax-free) investing in designated areas—potentially aligning with broader growth or real estate strategies.

So What Does This Mean for Business Owners?

Whether you're operating a closely held business, running multiple entities, or preparing for a transition, the long-term clarity in this bill creates real planning opportunities.

From expanded deductions and restored expensing rules to clear guidance on loss limitations and investment incentives, OBBBA offers a more stable tax planning environment.

We’re Here to Help You!

If you’re wondering how these updates may affect your business or personal financial plan, let’s talk. Your SJS advisor is ready to collaborate with your CPA or legal team to help you structure decisions around these new provisions—strategically, and in sync with your broader goals.

Important Disclosure Information & Sources:

“H.R.1 - One Big Beautiful Bill Act”. 119th Congress, 01-Jul-2025, congress.gov.
Mayer Brown, “One Big Beautiful Bill Act Introduces Significant Domestic and International Tax Changes” July 9, 2025.
RSM US, “New Tax Law Introduces Big Changes for Exempt Organizations,” July 14, 2025.
Doeren Mayhew, “Breaking Down ‘The One, Big, Beautiful Bill Act,’” June 10, 2025.
Bi-Pacific (BIPC), “One Big, Beautiful Bill … Simplified,” July 2025.
Tax Foundation, “199A Deduction: Pass-Through Business | Big Beautiful Bill,” June 2025.

There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.

Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.

Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Thomas Kelly, CFA 1/5/24 Thomas Kelly, CFA 1/5/24

Inside MarketPlus® Investing – Fund Spotlight: SRDAX

SRDAX is a shining example of the value alternatives can bring to traditional stock and bond strategies.

By Founder & CEO Scott J. Savage.

What lights me up and has made our clients money in 2023? Diversified alternatives!

After an extensive year-long due diligence process by our Investment Committee seeking to access additional markets while staying true to the core MarketPlus® Investing philosophy, SJS approved the Stone Ridge Diversified Alternatives Fund (SRDAX) as a potential client investment in December 2021. SRDAX is an open-end mutual fund designed to provide access to five underlying investment strategies that have historically performed differently than global stocks and bonds: reinsurance, market risk transfer, style premia, alternative lending, and single-family rental homes.[1] All of these underlying strategies seek systematic income streams.

Starting in December 2021, we began adding SRDAX to client portfolios that we deemed to be appropriate. As of the end of 2023, the fund finished up over 19% for the year.[2]

Source: Stone Ridge Asset Management. Data from April 30, 2020 (inception of the fund) through December 29, 2023. Total return includes reinvestment of all distributions. Tax implications are not considered. Past performance does not guarantee future results. Short-term results may not be indicative of long-term performance. See Important Disclosure Information.

No investment that purports a return over the risk-free rate will move up consistently, and SRDAX is no different. For example, in November 2023, SRDAX declined almost 1% for the month. It just so happened that coincident with this short-term decline, global stocks and U.S. bonds rallied, up 9.3% and 4.5% respectively in November (as measured by the MSCI All Country World Index and the Bloomberg U.S. Aggregate Bond Index, respectively.)[2]

While November 2023 is anecdotal, we believe it is also evidence that SRDAX returns are not only uncorrelated to the performance of global stocks and bonds, but they are unrelated. Since adding this strategy to our client portfolios, SRDAX has been an excellent diversifier to our MarketPlus® Investing strategies (see table, below). We don’t believe the 2023 pace of return is sustainable due to underlying investment conditions; however, it is a shining example of the value alternatives can bring to traditional stock and bond strategies. Namely, providing expected returns commensurate with the risk that is being assumed while not following the ups and downs of the publicly traded stock and bond markets.

*Source: Stone Ridge Asset Management, Morningstar. The* *MSCI All Country World Index* *captures large and mid cap representation across 23 developed market and 24 emerging market countries, covering approximately 85% of the global investable equity opportunity set. The* *Bloomberg U.S. Aggregate Bond Index* measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. Tax implications are not considered. See Important Disclosure Information.

In supplementing traditional bond strategies with an alternative income-seeking strategy, the diversification through SRDAX is as close to a free lunch we have found over the past couple of years. The search for what’s next to add to our MarketPlus® Investing portfolios continues.

Important Disclosure Information & Sources:

[1] Source: Stone Ridge Asset Management.

[2] Source: Morningstar.

MarketPlus® Investing models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Hyperlinks to third-party information are provided as a convenience.

Bobby Adusumilli 4/5/23 Bobby Adusumilli 4/5/23

How The SECURE 2.0 Act May Impact Your Finances

In efforts to further improve retirement plan saving and investing, the SECURE 2.0 Act was signed into law in December 2022. We want to highlight how this act may impact your finances.

By Investment Associate Bobby Adusumilli, CFA.

In 2019, the SECURE Act was signed into law with the goal of helping people to save and invest for retirement.[1] In efforts to further improve retirement plan saving and investing, the SECURE 2.0 Act was signed into law in December 2022.[2][3] We want to highlight how this act may impact your finances.

Option For Roth Matching & Non-Elective Employer Contributions To Retirement Plans

Beginning in 2023, employer retirement plans (such as 401(k)s and 403(b)s) will be able to offer the option for employees to receive matching and non-elective employer contributions as Roth contributions, which are immediately vested. The Roth employer contributions would be added to the employee’s taxable income for that year.

It is important to recognize that this is optional for your employer, and this feature may not be available yet on your employer's retirement platform.

Increasing The Beginning Age For Required Minimum Distributions (RMDs)

Currently, owners of retirement accounts including Traditional 401(k), 403(b), 457(b), and IRA accounts are required to begin taking RMDs from these accounts starting at age 72. Based on birth year for people who have not already begun taking RMDs, the SECURE 2.0 Act changes the beginning age for RMDs to the following:

Required Roth Catch-Up Contributions For High Wage Earners For Employer Retirement Plans

Effective in 2024, for employees age 50+ who made at least $145,000 in wages (will be adjusted for inflation going forward) in the previous year from an employer, any catch-up contribution to that employer’s retirement plan must be a Roth contribution. If an employer retirement plan doesn’t offer a Roth catch-up contribution option, then catch-up contributions are not allowed for anyone for these employer retirement plans. Roth catch-up contributions do not apply for self-employed individuals, nor do they apply to IRAs such as SIMPLE IRAs.

Higher Catch-Up Limits For Employer Retirement Plans For Participants Age 60-63

Currently for employer retirement plans, participants age 50+ may make catch-up contributions of $7,500 to a 401(k) or 403(b), or $3,500 for SIMPLE IRAs. Starting in 2025, individuals age 60-63 will have the ability to make larger catch-up contributions. For a 401(k) and 403(b), the annual catch-up contribution limit for people age 60-63 will increase to the greater of $10,000 or 150% of the regular catch-up amount for 2024. For a SIMPLE IRA, the annual catch-up contribution limit for people age 60-63 will increase to the greater of $5,000 or 150% of the regular catch-up amount for 2025. These catch-up contribution limits will be indexed for inflation beginning in 2026.

Ability To Offer Roth Option For SIMPLE IRA & SEP IRA Plans Beginning In 2023

Limited Ability To Transfer A 529 Balance To A Roth IRA

Starting in 2024, a 529 plan beneficiary whose account has existed for at least 15 years may be able to use their balance to make Roth IRA contributions cumulatively up to $35,000 throughout their lifetime, subject to conditions.

Annually, the total amount you contribute to a Roth IRA - both via money earned as well as through a 529 account - cannot exceed the Roth IRA contribution limits.
You must have earned at least corresponding income within the year to contribute 529 account money to your Roth IRA.
Any contributions and associated earnings made to the 529 account within the previous five years are ineligible to be transferred to a Roth IRA.

This aspect of the SECURE 2.0 Act is complicated, and we expect further rule clarifications in the future.

Employer Matches For Student Loan Payments

Effective in 2024, employers will be able to to offer employer matches for eligible federal student loan payments made by participants. The student loan payments will be treated as salary deferrals for vesting and matching purposes.

It should be noted that this is an option for employers, but not an obligation.

For IRAs, The Catch-Up Limit As Well As Qualified Charitable Distributions (QCDs) From Traditional IRAs Will Be Indexed To Inflation Starting In 2024

As always, if you would like to discuss how the SECURE 2.0 Act may impact you and your family, please reach out to us.

Important Disclosure Information & Sources:

[1] “H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019". United States Congress, 2019, congress.gov.

[2] “SECURE 2.0 Act of 2022". United States Senate Committee on Finance, 19-Dec-2022, finance.senate.gov.

[3] “SECURE Act 2.0: Later RMDs, 529-to-Roth Rollovers, And Other Tax Planning Opportunities“. Jeffrey Levine, 28-Dec-2022, kitces.com..

Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience.

Thomas Kelly, CFA 12/16/22 Thomas Kelly, CFA 12/16/22

5 Investing Lessons Learned & Re-learned In 2022

The end of the year provides a great time for us to reflect on recent experience to divine lessons to help us going forward.

By Chief Investment Officer Tom Kelly, CFA & Investment Associate Bobby Adusumilli, CFA.

The end of the year provides a great time for us to reflect on recent experience to divine lessons to help us going forward. We want to highlight five lessons that we have learned and re-learned throughout 2022.

Volatility Can Happen Quickly

From a year-to-date performance perspective through November, 2022 has been the worst year for global stocks since the Great Recession from 2007-2009.[1] After more than a decade of positive performance, we knew that global stocks (as measured by the MSCI All Country World Index (ACWI)) having a down year was entirely possible.[1] What has been particularly unusual about 2022 is that U.S. bonds (as measured by the Bloomberg U.S. Aggregate Bond Index) have experienced their worst calendar year performance in the history of the index going back to 1976.[2]

Stock market volatility is to be expected - it is one of the trade-offs in pursuing higher expected returns, as this graph demonstrates:[1]

Source: Morningstar, as of November 30, 2022. Returns are based on total return of the MSCI All Country World Index, which is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. See Important Disclosure Information.[1]

In comparison, bond markets typically have much lower volatility than stocks. However, due to higher-than-expected inflation in 2022, the U.S. Federal Reserve has raised interest rates dramatically throughout 2022, which has led to an upward shift in interest rates across maturities:[2][3]

*Source:* *Department of U.S. Treasury, as of November 30, 2022. See Important Disclosure Information.*

As a consequence of the rapid increase in U.S. interest rates, existing U.S. investment grade bonds have had to decline in price in order to compensate prospective investors to buy existing bonds versus new bonds with higher interest rates. This is partially why the U.S. investment grade bond market has suffered this year:[2]

Source: Morningstar, as of November 30, 2022. Returns are based on total return of the Bloomberg US Aggregate Bond Index, which is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. See Important Disclosure Information.[2]

Unfortunately, it is very difficult to know when volatility will occur and what changes to make to investment portfolios ahead of time. While sometimes client portfolios experience short-to-medium-term pain, we believe that strategically designing portfolios for the long-term is most likely to benefit the majority of our clients.

For Investment-Grade Bonds, Duration Is Critical

While current yield is a good predictor of return for investment-grade bonds over their maturities (which tend to be higher-quality bonds with low expected risk of default), duration is the most important factor that influences investment-grade bond prices over the short-term.[4] Duration measures a bond portfolio’s price sensitivity to interest rate changes. Because interest rates have risen dramatically throughout 2022, higher-duration bonds have experienced significantly worse performance than shorter-duration bonds in 2022:

Sources: Morningstar, S&P as of November 30, 2022. Duration measures a bond’s or fixed income portfolio’s price sensitivity to interest rate changes. The S&P indices are broad, comprehensive, market-value weighted indices that seeks to measure the performance of their respective markets. See Important Disclosure Information.

Given recent performance, you may be wondering: if the U.S. Treasury yield curve is nearly flat, meaning investors are getting paid nearly the same interest regardless of maturity, why would you buy longer-term bonds? There are two important factors to consider:

The future is uncertain. It is very difficult to predict how interest rates will change relative to what the market is already pricing in. With longer-duration investment grade bonds currently yielding higher than the market’s priced-in expected inflation rates, we think it makes sense for long-term investors to have some exposure to longer-duration bonds.[5][6] Additionally, shorter-duration bonds have reinvestment risk, meaning that if interest rates have fallen by the time the bond matures, then new bonds may have to be purchased at lower interest rates. Longer-maturity investment grade bonds can allow you to “lock-in” an interest rate for longer.
If / when the U.S. Federal Reserve reduces interest rates, longer-duration bonds will likely benefit more in price compared to shorter-duration bonds.

As investment advisors, we continuously monitor duration and credit quality across the bond investments that we recommend. While this year has been rough, we believe the outlook is significantly brighter for bond investors.

Alternatives Are Becoming More & More Important

Alternative investments include asset classes that behave differently than publicly-traded stocks and bonds. Some of these asset classes include private equity, private debt, real estate, infrastructure, natural resources, insurance / reinsurance, and other more complex trading strategies.

High-quality alternative investments have historically been primarily offered to ultra-high net worth institutions and families. Many of the world’s top investors have had significant allocations to alternatives for decades.[7] With advances in investment technology, more and more investors now have access to alternative investments. As a result, the demand for alternative investments is expected to increase in the coming years.

Alternative investments have important tradeoffs to consider. They typically cost more in fees, are more complex, and are less transparent compared to publicly-traded stocks and bonds. Additionally, alternative investments often have lock-up periods, tax inefficiencies, and usually involve more account management. As a result, it is critical to do thorough due diligence before choosing an alternative investment.

In late 2021, SJS added the Stone Ridge Diversified Alternatives Fund (SRDAX) to MarketPlus Investing models.[8][9] While the timing was fortunate given the recent struggles of publicly-traded stocks and bonds, we believe that alternative investments can provide meaningful diversification benefits to client portfolios over the long-term.[8] We are focusing most of our investment research and due diligence efforts on alternatives, with the hope of finding more beneficial investments for our clients.

There Is Always Something Smart To Do

Even when stocks and bonds are struggling, there are smart things that investors can do to potentially help their investment portfolios over time:

Rebalancing means selling investments that are higher than your target allocations, and buying investments that are under-allocated, with the goal of maintaining your target level of risk.
Tax loss harvesting for taxable accounts allows for realized net capital losses to be used to offset current / future capital gains, sell investments that you no longer want to hold, and offset up to $3,000 of your federal taxable income for the current year and future years.
Adding to investments that have attractive expected risk/return characteristics. For example, we believe that allocating to what we think are high-quality alternative investments may be able to help client portfolios over time, though there are no guarantees. Additionally, we previously wrote about Series I Savings Bonds, which are bonds offered by the U.S. government that pay you interest based on the CPI-U inflation index.
Revisiting asset location, which involves placing the most tax-inefficient investments in tax-advantaged accounts. For example, most alternative investments tend to be tax-inefficient, paying high amounts of dividends, interest, and capital gains. Therefore, we have prioritized placing these alternative investments within tax-advantaged client accounts when possible.

Long-Term Investors Have An Advantage

One theme that shows up over and over again in research and our experience with clients is that investors with long time horizons (10+ years) have an advantage over those with short time horizons (<5 years) when it comes to withstanding volatility in order to capture market performance over time.[10][11] Beyond just their time horizon, we have found that investors who are able to keep recent events within perspective of long-term history are better able to stay committed to their investment plan even in the midst of difficulty. For example, despite experiencing 15 recessions, societal changes, and periods of political difficulties, the U.S. stock market (as measured by the S&P 500) has still grown over 10,000-times its initial value from January 1926 through November 2022, as depicted in this graph:

-*Sources: NBER, Morningstar, as of November 30, 2022. Recession start and end dates are based on the* *US Business Cycle Expansions and Contractions data* from the NBER. Gray shaded areas represent periods of recession. The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.

While there are no guarantees that the stock market going forward will experience positive performance like the past, we believe in the global economy and innovation. As a result, we believe that stocks and bonds can continue to provide positive returns over the next 10+ years on average, though volatility will cause year-to-year performance differences. While nothing is certain, we are optimistic about the future.

Important Disclosure Information & Sources:

[1] Source: Morningstar, Dimensional Returns Web, as of November 30, 2022. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets.

[2] Source: Morningstar, Dimensional Returns Web, as of November 30, 2022. The Bloomberg US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

[3] “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.

[4] “SJS 2021 Capital Markets Expectations: Making Sense Of The Future“. SJS Investment Services, 04-Feb-2021, sjsinvest.com.

[5] “5-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.

[6] “10-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.

[7] Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. David Swensen, 2009, Free Press.

[8] “Stone Ridge Diversified Alternatives Fund“. Stone Ridge Asset Management, stoneridgefunds.com.

[9] MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor's decision making if the advisor were actually managing client money. Not to be construed as investment advice.

[10] “Quantitative Analysis of Investor Behavior“. DALBAR, dalbar.com.

[11] “Are Stocks Riskier Than Bonds?“ Bobby Adusumilli, 07-May-2021, sjsinvest.com.

Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience.

Bobby Adusumilli 8/30/22 Bobby Adusumilli 8/30/22

What Should You Do About A Recession?

We explore what is a recession, how the US stock market has performed before and after a recession, and how an investor can prepare for recessions.

By Investment Associate Bobby Adusumilli, CFA.

One common discussion topic with our clients recently is whether the US is in a recession. While it is commonly believed that a recession is a period of two or more consecutive quarters of negative economic (GDP) growth, that is not exactly how recessions are officially defined within the US. As of August 2022, the National Bureau of Economic Research (NBER) has not declared a recession in the US during any part of 2022.[1]

In an effort to better understand recessions, we explore how a recession is defined, what have been the recessions throughout US history, which indicators go in to determining a recession, how the US stock market has performed before and after a recession, and how an investor can prepare for recessions.

What Is A Recession?

The NBER's traditional definition of a recession is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The NBER believes that while each of the three criteria - depth, diffusion, and duration - needs to be met individually to some degree, extreme conditions revealed by one indicator may partially offset weaker indications from another.[2]

It is important to note that the start date for a recession is often declared in retrospect, meaning it is possible to be in a recession for a few months before it is officially declared.

Since 1928, there have been 15 recessions in the US lasting on average 12.5 months, according to the NBER.[1]

*Source: “US Business Cycle Expansions and Contractions“. NBER,* *nber.org*.

What Indicators Go In To Determining A Recession?

Data for all indicators can be found and downloaded from the Federal Reserve Bank of St. Louis FRED website. Indicators include:[2]

How Has The US Stock Market Performed Before A Recession?

Over the last 15 recessions, the S&P 500 has had an average annualized return of 15.80% during the two years before the start of a recession.[3] None of these two-year periods had a negative return. This is not a huge surprise, as the period before the start of a recession usually coincides with a peak in the business cycle.[1]

*Sources: Dimensional Returns Web, NBER, Morningstar. Recession start dates are based on the* *US Business Cycle Expansions and Contractions data* *from the National Bureau of Economic Research. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.*

How Has The US Stock Market Performed After The Start Of A Recession?

Over the last 15 recessions, the S&P 500 has had an average annualized return of 5.97% during the two years following the start of recession.[3] While the average return is positive, the S&P 500 had a negative return in 5 of the 15 two-year periods. In some cases, the S&P 500 fell significantly (such as at the start of the Great Depression), fell but then rebounded quickly (such as during the start of the COVID-19 pandemic), or just didn’t really experience any outsized volatility (such as after World War II).[1]

Taking a longer-term view, the S&P 500 has eventually recovered and grown after all recessions over the past century, though in some recessions it has taken many years for this to happen.[3] The US stock market has been able to withstand the short-term volatility caused by recessions, growing significantly over time.

*Sources: Dimensional Returns Web, NBER, Morningstar. Gray shaded areas represent periods of recession. Recession start and end dates are based on the* *US Business Cycle Expansions and Contractions data* *from the National Bureau of Economic Research. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.*

How Can You Prepare For A Recession?

Build Up Your Emergency Fund

An emergency fund can give you the ability and confidence to stick with your investment plan through a recession. The amount that you should save in your emergency fund partially depends on what would help you sleep comfortably at night if your investment portfolio begins to decline in value. Some people feel comfortable with an emergency fund with 6 months' worth of living expenses, while others prefer 1-2 years' worth of living expenses.

The idea behind an emergency fund as a way to make it through a recession is not new. Detailing his experiences living through the Great Depression, Benjamin Roth wrote in The Great Depression: A Diary, “This depression has indelibly impressed on my mind one thing - and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss.“[4]

Diversify Across Stocks, Bonds, & Alternatives

Periods of negative US stock market performance are inevitable. By diversifying across global stocks, high-quality bonds, and alternative investments with low correlations to US stocks, you can help to limit the impact of a period of negative US stock market performance on your portfolio.

Review Your Asset Allocation Ahead Of Time

Your asset allocation refers to the amount of stocks, bonds, and alternatives that you hold in your investment portfolio. While it may be difficult to imagine how you may react to declines in your investment portfolio, we believe it is critical to choose a level of riskiness that you will be able to stick with during good investment times and bad.

Important Disclosure Information & Sources:

[1] “US Business Cycle Expansions and Contractions“. NBER, nber.org.

[2] “Business Cycle Dating Procedure: Frequently Asked Questions“. NBER, nber.org.

[3] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.

[4] The Great Depression: A Diary. Benjamin Roth, 2010, Publicaffairs.

Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Bobby Adusumilli 8/18/22 Bobby Adusumilli 8/18/22

Inflation Protection Through Series I Savings Bonds

Series I Saving Bonds provide many of the benefits of TIPS, but may be even more beneficial during times of heightened inflation.

By Investment Associate Bobby Adusumilli, CFA.

In the book In Pursuit of the Perfect Portfolio, MIT Professor Andrew Lo interviews pioneering individuals in the investment industry - including Vanguard Founder John Bogle as well as Nobel Prize winners such as Eugene Fama and Robert Shiller - in order to answer a question that has captivated investors for generations: what is the perfect portfolio? While each interviewee gives hints as to what they consider the perfect portfolio, Andrew Lo ultimately concludes that there is no such thing as an everlasting perfect portfolio, writing, “Our Perfect Portfolio today is really just a snapshot of what’s best for you at the moment and in the current environment. Expected returns are ever evolving…. The pursuit of the Perfect Portfolio is all about adapting to our current income, our spending habits, our financial goals, the environment, and expected returns.“[1]

Nevertheless, the interviewees do provide some investments to consider. Andrew Lo writes, “If there is one specific asset that a majority of our authorities recommended for your Personal Portfolio, it’s TIPS (Treasury Inflation-Protected Securities). Inflation in recent years has been stable and low, but there is always the risk of macroeconomic change.“[1] TIPS are U.S. government-issued securities that generally increase in value with inflation and decrease in value with deflation, as measured by the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.[2][3]

*Source:* *FRED, as of July 31, 2022. See Important Disclosure Information.*

Since the book came out in August 2021, U.S. inflation has risen significantly. As a result of this rise in inflation, TIPS (as measured by the Bloomberg U.S. TIPS Index 0-5 Years) have performed relatively well over the past year, outperforming the U.S. stock market (as measured by the Russell 3000) and the U.S. bond market (as measured by the Bloomberg U.S. Aggregate Bond Index), as shown in the below graph. However, because TIPS are subject to market demand as well as other structural features, TIPS have underperformed inflation (as measured by nonseasonally adjusted CPI-U) over the past year.

*Sources:* *Dimensional Returns Web*, *U.S. Bureau of Labor Statistics. See Important Disclosure Information.*

This lends the question: are there any investments that can provide more inflation protection than TIPS? Luckily, there may be.

Series I Saving Bonds provide many of the benefits of TIPS, but may be even more beneficial during times of heightened inflation.[4][5] Offered directly by the U.S Department of the Treasury through the treasurydirect.gov website, Series I Savings Bonds are 30-year government bonds designed to pay interest that matches (or even exceeds) inflation, as measured by the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.[4]

The interest on Series I Savings Bonds is composed of two parts: a fixed rate that lasts for the entire time that you hold the bond, and the inflation interest rate that resets every six months. The rates are set on May 1 and November 1, and you are guaranteed the stated inflation interest rate for the first six months that you hold the bond, and then you are guaranteed the next set inflation interest rate for the following six months, and so on. The interest rate on Series I Savings Bond cannot go negative (though a negative inflation rate can decrease your fixed rate for that six-month period to a minimum of 0%), which is beneficial considering that the specific CPI index includes the volatile food and energy sectors.[3][6]

You can choose to defer paying taxes on the monthly interest that you receive until you redeem the bond. The interest on Series I Savings Bonds is only subject to federal income taxes, not state or local income taxes. You can redeem Series I Savings Bonds directly with the U.S. government via the treasurydirect.gov website after one year, subject to some limitations listed below.[4]

While Series I Savings Bonds have many benefits, there are some drawbacks:[4]

Each eligible person and entity can only purchase up to $10,000 in Series I Savings Bonds per year, thus limiting usefulness for higher net worth people and entities.
Except in rare circumstances, you cannot redeem your Series I Savings Bond within the first year.
If you redeem your Series I Savings Bond within five years of purchase, you lose the most recent three months' worth of interest.
If you decide not to pay taxes on the annual interest while you hold the bond, then the year you redeem a Series I Savings Bond, you may add a significant amount to your federal taxable income, thus increasing your federal taxes in that year.
You must buy Series I Savings Bonds through the treasurydirect.gov website; you cannot buy through another custodian, and your financial advisor cannot buy these bonds on your behalf.
You can only specify one beneficiary (via the Registration List section on your treasurydirect.gov account) per Series I Savings Bond.
If inflation falls back to low levels, Series I Savings Bonds may pay little interest.

Prominent financial journalists including Jason Zweig, Christine Benz, and John Rekenthaler have written about Series I Savings Bonds in recent weeks, and it’s easy to see why given the current inflation interest rate of 4.81% for the first six months if you purchase prior to November 1, 2022.[4][7][8][9] We believe that Series I Savings Bonds can provide value for investors over the near-term as well as the long-term. Whether using for an emergency fund, saving for a big purchase such as a home, or wanting to add diversification to your overall investment portfolio, Series I Savings Bonds can provide a safe and stable way to save money while minimizing loss of U.S. dollar purchasing power. And if inflation ends up rising again in future years, then by accumulating Series I Savings Bonds over time, you can provide some stability and growth for your portfolio at a time when other investments may suffer.

Important Disclosure Information & Sources:

[1] In Pursuit of the Perfect Portfolio. Andrew Lo & Stephen R. Foerster, 2021, Princeton University Press.

[2] “Treasury Inflation-Protected Securities (TIPS)“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[3] “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average“. Federal Reserve Bank of St. Louis, fred.stlouisfed.org.

[4] “Series I Savings Bonds“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[5] “Comparison of TIPS and Series I Savings Bonds“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[6] “Series I Savings Bonds Rates & Terms: Calculating Interest Rates“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[7] “Fight Runaway Inflation With I Bonds“. Jason Zweig, 29-Jul-2022, wsj.com.

[8] “Is It Too Late to Add Inflation Protection to Your Portfolio?“ Christine Benz, 22-Jul-2022, morningstar.com.

[9] “Run, Don’t Walk, for I Bonds“. John Rekenthaler, 10-Aug-2022, morningstar.com.

The Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers.

Russell 3000 TR USD Index is a market-capitalization-weighted index that measures the performance of the largest 3000 US companies representing approximately 98% of the investable US equity market.

Bloomberg US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0–5 Year Index is a market-weighted index measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years

Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Andrew Schaetzke, CFP® 7/29/22 Andrew Schaetzke, CFP® 7/29/22

How Should You Donate To Charitable Organizations?

We detail a few ways that you can donate to charitable organizations in order to help you determine what strategy would be financially best for you.

By Investment Associate Bobby Adusumilli, CFA.

Most of us accumulate money in order to support ourselves and our families. We also use our money and resources to make a positive difference for the communities and organizations that we care most about. Research has even found that donating money to a charitable cause is one of the best ways to use money to make ourselves happier.[1] Do good, feel good.

While cash is usually the easiest form of donation, it may not be the best way for you financially. Depending on the situation, some ways make more financial sense than others. Below, we detail a few ways that you can donate to charitable organizations in order to help you determine what strategy would be financially best for you. As always, please work with your tax professional as well as your estate planning professional when developing and implementing your charitable plan.

Donating Appreciated Investments

Whether it's a stock, bond, mutual fund, ETF, real estate, or another investment type, you may be able to donate the appreciated investment directly to the charity. If you have held the investment for more than one year, you can potentially deduct the full market value of your investment from your income taxes for that year, and you may also be able to avoid capital gains taxes.[2] Not all charities can accept all types of investments, so please work with the charity to determine if they can receive an investment you are interested in donating.

Beneficiary Of Your Investment Account

Specifying a charitable organization as your beneficiary on an investment account is one of the easiest ways for you to leave assets for a charity when you pass away. You can specify the charity as a beneficiary to receive a percentage of your investment account in the future, hopefully benefitting from any investment growth over time.[3] Additionally, if the charity is the beneficiary of your Traditional (pre-tax) IRA, then the charity may not have to pay federal income taxes like a child or grandchild may have to.

Your beneficiaries on your accounts typically take priority over bequests in your will, so please ensure that your beneficiaries and bequests in your will are consistent. One potential downside for this option is that depending on how you have set up your finances, your financial assets may need to go through the probate process, which can be complicated and time-intensive.

Bequest Through Your Will

Through bequests, you can use your will to help specify where your assets will go when you pass way. Some common types of bequests include:[4]

General Bequest: You specify a sum of money to be donated to the charity.
Percentage Bequest: You specify a percentage of your estate to be left to the charity.
Specific Bequest: You specify that a particular asset that you own is left to the charity, such as real estate or an investment.
Residuary Bequest: Once all other bequests have been satisfied, the charity receives some percentage of your estate.

If you choose to leave a bequest in your will, it is important to work with an estate professional.

Qualified Charitable Distributions From Your IRA

A Qualified Charitable Distribution (QCD) allows someone age 70 1/2 (earlier than the RMD age of 72) or older to make donations directly from your IRA to an eligible charity. Each eligible person can donate up to $100,000 per year in QCDs, which can count towards your required minimum distribution (RMD). By donating directly from your IRA, you avoid increasing your adjusted gross income, and a QCD will not cause your Social Security income to be subject to more taxes.[5] Some IRA administrators may charge a fee or have other limitations for QCDs, so please work with your IRA administrator to determine whether you can complete a QCD.

Donor-Advised Fund

A donor-advised fund (DAF) is an account you establish at a community foundation or a qualified custodian like Schwab Charitable. You make an irrevocable contribution of assets (such as cash, stocks, bonds, or real estate) to the DAF, for which you may be able to receive an immediate tax deduction. You may be able to keep the asset as is within the DAF, or you can sell the asset and invest in a selection of investments (often mutual funds and ETFs) offered on the public charity’s platform. You can elect for the DAF to make contributions to your intended charity on a timeline you specify. A DAF can help you ensure that the money will go towards your intended charity both while you are living as well as after you pass away, though DAFs typically have an annual fee. Some donor-advised platforms have limitations on what types of assets they can accept as donations and to which charities they will donate to.[6]

Charitable Lead Or Charitable Remainder Trust

A charitable lead trust is an irrevocable split-interest trust in which a charity receives proceeds from the trust during its life, and other non-charitable beneficiaries receive remaining assets once the trust terminates.[7]

A charitable remainder trust is an irrevocable split-interest trust in which non-charitable beneficiaries receives proceeds from the trust during its life, and a charity receives remaining assets once the trust terminates.[7]

If properly implemented, these trusts can have tax advantages for you. Creating and implementing these trusts usually entails significant fees, and it is important to work with an estate professional.

Conclusion

Donating can help you leave a positive impact on the world. By controlling what you can ahead of time through thoughtfully implementing your charitable plan, you can increase the chances that the money makes it to your intended charitable organizations. If you have any questions or want to discuss which charitable planning strategies may make sense for you, please feel free to reach out to us.

Important Disclosure Information & Sources:

[1] “Happy Money: The Science of Happier Spending”. Elizabeth Dunn & Michael Norton, 2014, Simon & Schuster.

[2] “Benefits of Donating Appreciated Non-Cash Assets to Charity“. Schwab Charitable, 21-May-2020, schwabcharitable.org.

[3] “Naming a Charity as a Beneficiary“. Trust & Will, trustandwill.com.

[4] “What are bequests?“ Fidelity Charitable, fidelitycharitable.org.

[5] “How to Reduce Your Taxes and AGI by Giving to Charity“. Mark P. Cussen, 08-May-2022, investopedia.com.

[6] “What is a Donor-Advised Fund (DAF)?“ National Philanthropic Trust, nptrust.org.

[7] “How to donate to charity in your will“. Thrivent, 31-May-2022, thrivent.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

What Is Driving Inflation, And What Can You Do About It?

By Investment Associate Bobby Adusumilli, CFA.

It’s hard not to notice inflation these days - we see it in higher gas prices, higher grocery bills, and higher housing costs, among other areas. This is true beyond the U.S.: inflation rates in countries around the world are higher compared to recent history.[1]

For the one-year period ending May 31, 2022, the U.S. inflation rate (as measured by the CPI for All Urban Consumers Unadjusted Index) is 8.6%.[2] While most of the U.S. economy is experiencing some inflation, energy - which includes gasoline, oil, electricity, and other commodities - has experienced an outsized amount of inflation, approaching 35%.[2]

*Source: “Consumer Price Index Summary“. U.S. Bureau of Labor Services, 10-Jun-2022,* *bls.gov*. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. See Important Disclosure Information.

While these higher prices are difficult to handle right now, we believe there are some reasons for optimism regarding inflation. Energy prices spiked largely in response to effects from the COVID-19 pandemic as well as the war in Ukraine.[3] While we may experience elevated prices in the short-term, companies and markets tend to respond when there is high demand for a product, creating more competition and thus more supply, which should help constrain energy prices over time. Additionally, the Federal Reserve has been aggressively raising interest rates to combat inflation.[4] While this has hurt stock and bond prices recently, we believe this will help decrease inflation over time.[4]

Global bond markets are also expressing optimism that the U.S. inflation rate will fall back to more normal levels. For example, the 10-year breakeven inflation rate - which is a measure of what bond investors expect U.S. inflation to be over the next 10 years on average - is 2.33% as of June 30th, 2022.[5] While this is higher than the Federal Reserve’s goal of 2.00% inflation, bond markets do not expect medium- to long-term inflation to be anywhere close to the recent inflation rate.[5][6]

*Source:* *FRED*, as of June 30, 2022. The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 10 years, on average. See Important Disclosure Information.

Given all of this information, we have designed MarketPlus Investing portfolios to have some built-in inflation protection. For example, MarketPlus Investing model portfolios with fixed income allocations have exposure to U.S. Treasury Inflation-Protected Securities (TIPS) as well as short-duration (<5 years) bonds, which tend to provide some protection from inflation. And while global stocks can underperform inflation over the short-term (< 5 years), research has demonstrated that global stocks tend to provide inflation protection over the intermediate- (5-10 years) and long-term (10+ years).[7]

Investors looking for additional inflation protection can also consider purchasing Series I Savings Bonds, which are 30-year savings bonds offered by the U.S. government designed to match the Consumer Price Index for All Urban Consumers inflation rate. Each individual can buy up to $10,000 worth of these bonds per year, and you can sell after one year, subject to some conditions.[8] While SJS cannot buy these bonds for you directly, we are supportive of Series I Savings Bonds as potential investments for inflation protection. You can find additional information on the treasurydirect.gov website.

Global stock and bond markets have been tested by inflation many times in the past, and these markets have historically demonstrated their resilience in providing returns higher than inflation over time.[7] While it may be difficult in the short-term, we believe that staying invested is the key to getting through this market volatility and inflation.

Important Disclosure Information & Sources:

[1] “Inflation Rate - By Country“. Trading Economics, June 2022, tradingeconomics.com.

[2] “Consumer Price Index Summary“. U.S. Bureau of Labor Services, 10-Jun-2022, bls.gov.

[3] “How High Is Inflation and What Causes It? What to Know“. Gabriel T. Rubin & David Harrison, 10-Jun-2022, wsj.com.

[4] “Fed Raises Rates by 0.75 Percentage Point, Largest Increase Since 1994“. Nick Timiraos, 15-Jun-2022, wsj.com.

[5] “10-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Jun-2022, fred.stlouisfed.org.

[6] “Why does the Federal Reserve aim for inflation of 2 percent over the longer run?“ Board of Governors of the Federal Reserve System, 27-Aug-2020, federalreserve.gov.

[7] Stocks for the Long Run. Jeremy Siegel, 2014, McGraw Hill.

[8] “Series I Savings Bonds”. U.S. Department of the Treasury, June 2022, treasurydirect.gov.

MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Andrew Schaetzke, CFP® 6/14/22 Andrew Schaetzke, CFP® 6/14/22

Should You Use A Donor-Advised Fund?

To help you figure out the best way for you to donate to the organizations you care about, we provide this resource.

By Senior Advisor Andrew Schaetzke, CFP®.

With the growth in global investment markets in recent years, many investors are donating more to their communities and the causes they care about than ever before.[1] Based on Giving USA’s 2021 Annual Report, U.S. charities received a record $471.44 billion in donations in 2020, with more than two-thirds of these donations coming from individuals and families.[1]

Figuring out the best way for you to donate can be complex. There are a lot of different options on how to donate, including:

Each option has its own benefits and tradeoffs regarding taxes, costs, and flexibility. By understanding your options and creating the charitable strategy most appropriate for your situation, you can increase the chances that the organizations you most care about will receive the money that you intend for them.

To help you figure out the best way for you to donate to the organizations you care about, we provide the below resource. As always, we are here to help you as you begin your charitable journey. We can provide resources, experience and strategies that may be valuable to you. Please feel free to reach out to us if you have any questions.

Important Disclosure Information & Sources:

[1] “2021 Annual Report“. Giving USA, 2021, givingusa.org.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Phantom Stock Plans

Business owners are looking for compelling ways to attract and retain talent. One approach to achieve this goal is through implementing a phantom stock plan.

By Founder & CEO Scott Savage.

Today more than ever, business owners are looking for compelling ways to attract and retain talent in a highly competitive labor market. One approach to achieve this goal used by some business owners is through implementing a phantom stock plan. This type of plan affords business owners a way to reward key employees for past service and to align their interest with that of the company going forward.[1]

What Is A Phantom Stock Plan?

A phantom stock plan qualifies as a type of deferred compensation plan, contractually tying monetary compensation directly to the value of the business if certain conditions are met.

The idea of phantom stock is that it simulates ownership, providing the means for an employer to offer employees the potential benefit of company growth while avoiding the complications of transferring actual ownership. In practice, when the phantom shares are earned by the employee, a valuation date is set. Then, a formula is used to imitate the actual stock value, and the payout is based on the value of those shares.[2]

Note: Working with tax and legal professionals to set up this type of plan is important for proper execution.

Why Choose A Phantom Stock Plan?

A phantom stock plan can potentially succeed because it provides mutual benefits and protections for both the employer and employee.

For the employer, along with avoiding ownership dilution, it affords flexibility in selecting who is eligible for participation. Compared with employer-sponsored (ERISA) plans, which require benefits to be available to each employee, a phantom stock plan allows for the employer to offer participation to key employees and adjust values on an individual basis.[1] Additionally, this type of plan can help lead to less employee turnover, through both vesting period requirements and, in some cases, non-compete agreements.[3]

For the employee, participating in this plan is a bonus for their dedication to the company, and can endure into the future. Specifically, it can provide a predictable stream of cash flow after leaving the company or into retirement. In addition, if the company is sold, the plan typically vests immediately, offering protection in case ownership changes.

Final Thoughts

As you, a business owner, consider options to motivate your employees, a phantom stock plan is a valuable tool to build a mutually beneficial agreement with key employees within your organization. We believe this type of plan is a great way to potentially help propel the growth of your business, while giving you the ability to reward the people who help make it possible.

Important Disclosure Information & Sources:

[1] “Phantom Stock Plan“. Adam Hayes, 22-May-2022, investopedia.com.

[2] “An Introduction To Phantom Stock And Stock Appreciation Rights“. Gary Pattengale, 22-Feb-2022, bdfllc.com.

[3] “Phantom Stock Plan“. Corporate Finance Institute, 10-Mar-2021, corporatefinanceinstitute.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

What Makes A Great Investor?

In my opinion, investing is arguably the most competitive field in the world. So what differentiates a great investor from the rest?

By Investment Associate Bobby Adusumilli, CFA.

In my opinion, investing is arguably the most competitive field in the world. With financial and technological innovations in recent decades, almost anyone in most developed countries with a sum of money can buy and sell public stocks, bonds, mutual funds, ETFs, and other financial instruments. Additionally, regardless of their occupations, many people invest through 401(k)s, 403(b)s, 457 plans, IRAs, taxable accounts, and / or a number of other financial accounts. Even if their primary occupations take up most of their time, these people are also investors.

With billions (or even trillions) of dollars in potential gains at stake, investing has become increasingly competitive as time has gone on. Thousands of investment firms across the country employ smart people and cutting-edge technology, all in the pursuit of achieving higher returns. As a result, investment market prices are constantly adjusting from the buy and sell orders of sophisticated parties, making it very difficult for someone to outperform the market.[1][2]

So what differentiates a great investor from the rest?

Over a series of recent newsletters and articles, financial journalist Jason Zweig (author of Your Money and Your Brain, as well helped Nobel Prize-winning psychologist Daniel Kahneman write the bestselling book Thinking, Fast and Slow) details what he believes are the seven virtues of great investors.[3] We share these virtues below, providing our own experiences with each.

Discipline

Discipline is about creating a well-thought-out investment process appropriate for you, and then following your rules.[4] Discipline also helps you get out of your own way, particularly in the tough times. In our experience, the more disciplined an investor is, the better their investment returns tend to be. As John Bogle writes in his book Bogle On Mutual Funds: New Perspectives For The Intelligent Investor, “Successful investing involves doing just a few things right and avoiding serious mistakes.“[5]

Curiosity

Curiosity is driven by wanting to understand the world, wanting to get closer to what is true.[6] By being curious enough to understand what investment strategies work and why, you can potentially help yourself become a better investor.

Skepticism

Skepticism requires focusing on your foundational principles, and questioning arguments that differ from these principles.[7] For example, research demonstrates that most stock market investors underperform total stock market index funds, particularly over the long-term.[1] If someone tries to pitch you an investment that they say will outperform the stock market, and there is not enough good theory and evidence to back up their claim, then we would strongly caution you against purchasing that investment.

However, skepticism is not the same as pessimism. Skepticism also calls for open-mindedness when theory and evidence support a particular argument. As Howard Marks writes in his book The Most Important Thing, “Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.“[8]

Independence

Independence means doing the right thing.[9] If others are doing the right thing, then independence doesn’t mean that you have to be alone. But if others around you are doing something that doesn’t align with your principles and investment strategy, then being independent means having the courage to stick with your investment plan, even if that means going against the crowd.

Humility

Humility means understanding the reality of your situation, not deceiving yourself.[10] Humility recognizes that you don’t control and know everything. As an investor, there will be times when you underperform others around you, and there will be times when you outperform. In our experience, performance is always subject to some degree of luck. Humility also means that there will be someone more successful at investing than you, and recognizing that that is okay as long as you have a sound investment strategy in place and you are making progress towards your goals.

Patience

The longer you invest, the more time you are giving your investments to potentially grow, as the graph at the bottom of this article demonstrates.[11] While each investor has different circumstances and goals, in our experience, many of the best investors give themselves as much time as possible to grow their money; they have the patience to have the longest view in the room.

Courage

It is hard to be a great or even good investor. It is hard to continue investing when the market is going down, and it is hard to be disciplined enough to stick with your investment strategy when other strategies are booming.[3] If you create a well-thought-out investment plan backed by theory and evidence, then in our experience, having the courage to stick to your investment plan in both good times and bad tends to work out for people in the long run.

So What Can You Do To Become A Great Investor?

Research shows that the vast majority of stock market investors underperform the stock market, with greater underperformance as the period of time studied is lengthened.[1] While there are some people who outperform for a period of time, it is very hard to know who these people are in advance. Even if you know who they are, as the period of time increases, some of these great investors no longer achieve the same level of outperformance.

So what can you do to become a great investor? One strategy is to aim to be an above-average investor each year for a very long period of time. For example, research shows that just owning the stock market through an index fund will help you outperform most investors in most years as well as over time.[1] For example, if you had been able to own the global stock market as measured by the MSCI ACWI Index from 1988 (the index inception) through April 2022 (assuming reinvestment of all distributions; no other expenses or taxes considered), an initial investment of $100,000 would have grown to over $1,400,000. While the definition of a great investor is ambiguous, this performance seems like a great outcome to me.

*Source: Dimensional Returns Web. See Important Disclosure Information.[12]*

While future performance will differ from past performance, and while it was more difficult to invest in global investment strategies in the past, investors today have the ability to nearly match many global stock and bond indices even after considering fees.[13] Therefore, we believe that investing in low-cost, low-turnover, broadly-diversified global mutual funds and ETFs is a sound investment strategy that can potentially help a lot of people over the long-term.[14] And if you stick with a sound investment strategy long enough, you may become a great investor yourself.

Important Disclosure Information & Sources:

[1] “2022 Quantitative Analysis of Investment Behavior Report”. DALBAR, 2022, dalbar.com.

[2] “Why Do Investors Underperform?“ Bobby Adusumilli, 24-Jun-2021, sjsinvest.com.

[3] “The Secret to Braving a Wild Market“. Jason Zweig, 02-Mar-2022, wsj.com.

[4] “2020: The Sequel?“ Jason Zweig, 12-Jan-2022, The Intelligent Investor Newsletter - wsj.com.

[5] “Bogle On Mutual Funds: New Perspectives For The Intelligent Investor“. John Bogle, 2015, Wiley Investment Classics.

[6] “'The First Great Investing Virtue“. Jason Zweig, 19-Jan-2022, The Intelligent Investor Newsletter - wsj.com.

[7] “A New Month, A New Market?“ Jason Zweig, 08-Feb-2022, The Intelligent Investor Newsletter - wsj.com.

[8] “The Most Important Thing: Uncommon Sense for the Thoughtful Investor“. Howard Marks, 2011, Columbia Business School Publishing.

[9] “Stepping Away from the Herd“. Jason Zweig, 15-Feb-2022, The Intelligent Investor Newsletter - wsj.com.

[10] “On Humility and Independence“. Jason Zweig, 22-Feb-2022, The Intelligent Investor Newsletter - wsj.com.

[11] “Patience Amid Turbulence“. Jason Zweig, 02-Mar-2022, The Intelligent Investor Newsletter - wsj.com.

[12] The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, consisting of 47 country indices comprising 23 developed and 24 emerging market country indices. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.

[13] “Index funds“. Vanguard, vanguard.com.

[14] “MarketPlus Investing“. SJS Investment Services, sjsinvest.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Scott Savage 5/4/22 Scott Savage 5/4/22

Bitcoin & Cryptocurrencies: Do They Have A Place In Your Portfolio?

To help you better understand cryptocurrencies, we provide a short history, potential benefits, concerns, and how your portfolio can potentially benefit from cryptocurrencies.

By Founder & CEO Scott Savage.

Increasingly, this is a question that is posed to the SJS Team: Should I buy bitcoin?

While bitcoin and other cryptocurrencies have risen dramatically in price over the past ten years, most of the ideas underlying cryptocurrencies are not all that new, and cryptocurrencies are not as complicated as they may appear to be.[1] To help you better understand cryptocurrencies, we provide a short history, potential benefits, concerns, and how your portfolio can possibly benefit from cryptocurrencies.

History Of Cryptocurrencies

The idea behind a digital currency is not new. Starting around the 1980s, many individuals have attempted to create a digital currency, with each breakthrough building on top of past breakthroughs.[2] For example, in its early years, PayPal (which also now owns Venmo) was driven by the “idea of creating a new digital currency to replace the U.S. dollar.”[3] Technology and the internet have allowed for transactions to become faster, more secure, and lower cost. Many people in the US today don’t even use paper cash today, meaning the U.S. dollar already feels like a digital currency for them.

In 2008, another breakthrough occurred: an unknown person or team named Satoshi Nakamoto outlined a new cryptocurrency called bitcoin in a white paper, calling bitcoin, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.“[4] Simply put, bitcoin is digital money that securely allows people to transact over the internet, without needing a bank or traditional financial intermediary involved.

Bitcoin’s single biggest innovation is the blockchain, which is the technology underlying bitcoin that allows for all historical transactions to be recorded for anyone around the world to access at any time. The blockchain also allows for transactions to happen almost instantaneously, securely, in a relatively low-cost manner, and be verified by anyone around the world.

21 million bitcoin is the maximum number of bitcoin that will ever be created.[4] Today, there are roughly 19 million bitcoin outstanding, and the remaining 2 million will be “mined” over the next 100+ years to compensate people for ensuring the accuracy of the blockchain.[4][5] You can own fractional interest of one bitcoin. In 2011, the price of one bitcoin exceeded $1 US dollar; by April 2022, the price of bitcoin is around $40,000 US dollars, meaning the total value of all bitcoin in existence today is roughly $750 billion.[5]

As with any lucrative technology, bitcoin and the blockchain have given risen to thousands of other cryptocurrencies and related digital assets. While we believe the vast majority of these digital assets won’t have value over the long-term, another cryptocurrency called Ethereum has made significant innovations building off of bitcoin, which is why it has become the second most valuable cryptocurrency behind bitcoin.[6]

If you would like more information on the history of bitcoin and cryptocurrencies, we recommend the book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper.

Potential Benefits Of Cryptocurrencies

Transparency: Bitcoin is designed to be transparent, in efforts to limit the ability for a group of people or institutions to manipulate both bitcoin and the blockchain.
Limited amount of currency: Bitcoin and some other cryptocurrencies limit the amount of currency that will exist in the future. Many supporters believe this will help these cryptocurrencies serve as a store of value (this is why bitcoin is sometimes referred to as “digital gold”) as well as protection from inflation.[6] This is a major positive factor for people who are worried about governments printing money to pay off debts, which would devalue those currencies.[6]
Ability to hold around the world: Particularly for people who live in countries with volatile currencies or who move around the world, owning cryptocurrencies can be significantly more stable and secure for them compared to holding the local currencies.
Lower transaction costs: Cryptocurrencies may be able to help lower financial transaction fees over time. For example, many individuals in developing countries have to pay significant transaction fees in order to wire money to the US. Bitcoin can potentially reduce these transaction fees. Additionally, many people hope that the blockchain will help to lower (or even eliminate) credit card fees over time.
Privacy: Each bitcoin has a public key and a private key. Someone needs to use their private key (a long string of numbers and letters) in order to initiate a transaction. During a transaction, the public key is used by others on the blockchain to verify transactions. Both public and private keys are not associated with a person’s name, so as long as people don’t know that you own the private key and public key, then this can help to limit the chances that they will learn that you own that bitcoin.
Increasing adoption: Both individuals as well as institutions have been increasingly adopting the two largest cryptocurrencies (bitcoin and Ethereum) over the last few years.[7]

Concerns Of Cryptocurrencies

Volatility: Historically, even the largest cryptocurrencies have been highly volatile in price.[5] While this volatility is expected to decrease with increasing adoption, the volatility limits usefulness as an actual day-to-day currency.
Technological vulnerabilities: Cryptocurrencies and exchanges are subject to security risks, operational shutdowns, and hackers. For example, the Wall Street Journal estimates that approximately $3.2 billion worth of cryptocurrency was stolen in 2021.[8] However, the largest risks often impact newer and less-adopted cryptocurrencies and exchanges. In the coming years, the technology and infrastructure for the largest cryptocurrencies such as Bitcoin and Ethereum will become more robust, and hackings may become less common as a result.
Can lose your cryptocurrency: If you have a private wallet not affiliated with a major exchange, then if you lose your private key, you may potentially lose your cryptocurrency forever. For example, the New York Times recently estimated that nearly 20% of the total Bitcoin outstanding has been lost or is in stranded wallets.[9]
Increasing use of financial intermediaries: People and institutions are increasingly using financial intermediaries to store their cryptocurrencies.[7] This trend is in contrast to the initial vision for bitcoin.[4]
Less privacy than expected: Some people and institutions may not be able to achieve the level of privacy that they are hoping for with cryptocurrencies. For example, due to Russia’s war with Ukraine in 2022, Coinbase announced that it would block nearly 25,000 Russian-linked accounts (addresses) believed to be engaging in illicit activity, and governments around the world are also trying to seize Russian-linked cryptoassets.[10][11]
Limited current regulation, and potential for cumbersome regulation in the future: So far, regulation in countries around the world has lagged the growth of cryptocurrencies. However, governments are increasingly prioritizing regulation for cryptocurrencies, which could lead to uncertain effects. For example, China (which is expected to become the largest economy in the world by around 2030) has banned citizens from transacting in cryptocurrencies.[12] Additionally, the United States has not allowed for cryptocurrencies to be held directly in mutual funds and ETFs.[13] How will future regulation impact the value of cryptocurrencies?

How Can Your Portfolio Potentially Benefit From Bitcoin?

Market prices are driven by supply and demand. There is large and increasing demand for cryptocurrencies, and therefore we believe that cryptocurrencies are here to stay.

However, we don’t know what the aggregate market capitalization of cryptocurrencies will be, nor do we know how quickly cryptocurrencies will grow or decline, nor which ones will flourish and which ones will cease to exist. Bitcoin doesn’t have any earnings and doesn’t pay dividends, so we can’t value it like stocks.

What we do know is that cryptocurrencies have been quite volatile, and many clients are not comfortable investing in them. Additionally, for people who don’t do their homework, we view their buying of bitcoin as speculation, not investing.

Therefore, we do not invest client assets directly into cryptocurrencies. However, there are other ways to benefit from potential growth in cryptocurrencies. For example, there is an expansive options market for bitcoin where people and institutions do everything from speculating to hedging to achieving indirect exposure. In alignment with our view that cryptocurrencies are here to stay, we believe there are positive expected returns available in providing capital to the bitcoin options market. It is very complicated; we rely on an investment manager who has extensive experience with this market as part of a diversified alternatives mutual fund.[14] Additionally, due to their exposures to cryptocurrencies, some of the underlying stocks in the mutual funds and ETFs that we recommend may benefit from potential growth in cryptocurrencies.

The Ancient Chinese proverb famously says, “The best time to plant a tree was 20 years ago. The second best time is now.” When it comes to speculating in bitcoin, I would urge caution when applying this proverb to anything other than trees!

Important Disclosure Information & Sources:

[1] “Total Cryptocurrency Market Cap“. CoinMarketCap, 22-Apr-2022, coinmarketcap.com.

[2] “Cryptocurrency“. Wikipedia, wikipedia.org.

[3] Zero to One: Notes on Startups, or How to Build the Future. Peter Thiel & Blake Masters, 2014, Currency.

[4] “Bitcoin: A Peer-to-Peer Electronic Cash System“. Satoshi Nakamoto, 2008, bitcoin.org/en.

[5] “Total Circulating Bitcoin“. Blockchain, 22-Apr-2022, blockchain.com.

[6] Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money. Nathaniel Popper, 2016, Harper Paperbacks.

[7] “Our Thoughts on Bitcoin“. Ray Dalio & Rebecca Patterson, 28-Jan-2021, bridgewater.com.

[8] “Cryptocurrency-Based Crime Hit a Record $14 Billion in 2021“. Mengqi Sun & David Smagalla, 06-Jan-2022, wsj.com.

[9] “Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes”. Nathaniel Popper, 14-Jan-2021, nytimes.com.

[10] “Using Crypto Tech to Promote Sanctions Compliance“. Paul Grewal, 06-Mar-2022, coinbase.com.

[11] “The hunt for Russian crypto is on“. Benjamin Pimentel, 08-Mar-2022, protocol.com.

[12] “What's behind China’s cryptocurrency ban?“ Francis Shin, 31-Jan-2022, weforum.org.

[13] “SEC Delays Decision on Bitcoin ETFs Again“. Chitra Somayaji, 23-Jun-2021, wsj.com.

[14] “Stone Ridge 2020 Shareholder Letter“. Ross Stevens, 2020, stoneridgefunds.com/?tab=srdax.

Other resources that influenced this blog post.

“Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals“. Matt Hougan & David Lawant, 07-Jan-2021, cfainstitute.org/en.
“Why Bitcoin Matters“. Marc Andreesen, 11-Jan-2014, nytimes.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Scott Savage 4/22/22 Scott Savage 4/22/22

Structured Notes - Caveat Emptor! Buyer Beware!

We summarize structured notes as well as detail concerns we believe investors should understand before investing one penny.

By Founder & CEO Scott Savage.

We want to warn you about an investment product called structured notes. These derivative instruments typically purport to provide investors with a coupon payment higher than available in the bond market, as well as downside protection from the underlying reference asset, which is often a stock-based investment like the S&P 500 Index.[1] Sounds great, right? What could go wrong? A lot!

Below, we summarize structured notes as well as detail concerns we believe investors should understand before investing one penny. While risk management is the responsibility of each advisor who touts these investments, we want you to be aware of the risks in case someone recommends structured notes to you.

Summary

A structured note is a derivative instrument designed to typically provide both a regular coupon payment as well as some degree of principal protection compared to an underlying (usually stock) reference asset. Typically, the investor purchases an initial issue of the note from the sponsor (usually an investment bank) in exchange for coupon payments over the length of the note (often 1 to 5 years).

Generally, if the underlying reference asset only declines a little over the length of the note, the investor has a pre-specified level of principal protection and still receives the coupon payments. If the reference asset value falls below the predetermined knock-in level (the minimum value specified in the contract to receive coupon and principal payments), you may not receive all of the coupon payments and your principal amount would decline. When the reference asset increases over the note length, the investor usually receives the coupon payments and some principal upside based on the participation rate.[1]

*Source: “Spotlight on… top issuers in the US“. Structured Retail Products, 07-Jan-2022,* *structuredretailproducts.com.[2]*

Advantages

An investor can receive a coupon rate that is higher than yields available in the bond markets, while receiving some downside principal protection if the underlying reference asset declines.
Some structured note platforms are creating more competition among sponsors, which can help to create more investor-friendly structured notes.
Many banks offer structured notes for a wide variety of underlying stocks, indices, and other financial assets.

Concerns

Most structured notes are relatively complicated, often with dozens of pages of details such as protection (specified knock-in levels), maturity, coupon rates, and underlying reference assets.
Most structured notes are subject to multiple layers of fees, and the fees are often difficult to understand.
In terms of issuers, structured notes are primarily issued by large, predominantly Wall Street banks.[2]
Structured notes tend to have maturities of 1 to 5 years, meaning upon maturity you will have to review newer structured notes if you want to continue investing in structured notes.
Many structured notes can be redeemed (called) by the issuer, either automatically triggered based on the underlying reference investment or whenever the issuer has the right to call.
Typically, there are no federal or state insurance guarantees on the principal invested in structured notes. Additionally, structured notes tend to be senior, unsecured notes by the sponsor. If the sponsor is unable to make interest and / or principal payments, the investor may not receive the full note value.
Many structured notes do not provide full downside protection in case the reference asset falls below the knock-in level. The downside market protection may not fully cover your investment in more volatile market periods.[4]
Most notes have a relatively illiquid secondary market. Some notes allow the investor to sell back the notes to the sponsor, often at a discount to the current value.
Interest (excluding principal) from the notes can be complicated, and often considered taxable income if held within a taxable account.
Sponsors typically measure reference assets without dividends and other distributions.
Structured notes are over-the-counter investment products, which have less regulatory supervision compared to mutual funds and ETFs.
The total market for structured notes is not as competitive (particularly on costs and product features) as other investment products such as mutual funds and ETFs.[1]
Structured notes are not standardized across issuers.
In recent years, the U.S. Securities & Exchange Commission (SEC) has issued Investor Alerts & Bulletins detailing the risks of structured notes. In particular, the SEC encourages you to answer the following questions before purchasing a structured note:[5][6]

Conclusion

As we contemplate our duty to our clients as fiduciaries, SJS does not recommend structured notes to clients. They tend to be complex, primarily offered by Wall Street banks, have multiple layers of fees, and require a lot of work to fully understand each structured note.[1][2][4][5] Finally, we are not aware of any well-regarded institution or endowment fund that invests in structured notes. We wonder why?

Important Disclosure Information & Sources:

[1] “Why Structured Notes Might Not Be Right for You“. Jason Whitby, 11-Dec-2021, investopedia.com.

[2] “Spotlight on… top issuers in the US“. Structured Retail Products, 07-Jan-2022, structuredretailproducts.com.

[3] “Barclays to Book $591 Million Loss Due to Debt-Sale Snafu“. Anna Hirtenstein, 28-Mar-2022, wsj.com.

[4] “Structured Notes: The Risks of Insuring Against Risks“. Jason Zweig, 17-Oct-2014, wsj.com.

[5] “Structured Notes with Principal Protection: Note the Terms of Your Investment.” United States Securities and Exchange Commission, 01-Jun-2011, sec.gov.

[6] “Investor Bulletin: Structured Notes.” United States Securities and Exchange Commission, 12-Jan-2015, sec.gov.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Scott Savage 4/12/22 Scott Savage 4/12/22

MarketPlus Investing

Video on our MarketPlus Investing philosophy.

Important Disclosure Information:

MarketPlus Investing® portfolios consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Statements contained in this video that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Buy-Sell Agreements for Business Owners: Why You Should Have One

This article explores how a buy-sell agreement works, why we strongly recommend one for our business owner clients who share company ownership, and how we can help with implementation.

By Founder & CEO Scott Savage.

Business ownership, especially starting a business, can be overwhelming. Over the years, we have seen business owners make two types of mistakes:

Errors of commission, or an incorrect decision, which include paying too much for real estate, hiring the wrong people, or buying the wrong inventory.
Errors of omission, or missed opportunities, which include not having a board of advisors, not hiring a tax expert to help with structuring the business, or not creating a buy-sell agreement.

Although mistakes are inevitable, it is possible to take steps to avoid errors of omission. This article explores how a buy-sell agreement works, why we strongly recommend one for our business owner clients who share company ownership, and how we can help with implementation.

What is a Buy-Sell Agreement?

“The beginning of wisdom is the definition of terms.” —Socrates

Stated simply, a buy-sell agreement is a legal document made between two or more shareholders of a privately held corporation or entity. The agreement helps the business streamline the transition between owners after a triggering event, such as death, disability, divorce, or disagreement.

The agreement works by establishing a valuation method for the business. There are various ways to determine the value of a business, including:

Fixed Price Approach: Setting a fixed price of the business, typically on an annual basis.
Formula Approach: Agreeing on a formula that utilizes components such as cash flow or assets to determine the price.

Finally, the buy-sell agreement will include a funding strategy. It can be funded or unfunded, but typically people will fund buy-sell arrangements with insurance, which is what we generally recommend.

Why Have a Buy-Sell Agreement?

A buy-sell agreement can greatly simplify a transition between business owners. Without an agreement in place, you can anticipate holdups, delays, and potentially, litigation in transferring ownership to the other shareholders. A buy-sell agreement aids in bypassing these issues, helping the business to move forward during times of change.

Some business owners think such an agreement is useful once their company gains in value, not at the outset. But we encourage anyone who is starting a company with someone else to get a buy-sell agreement in place. You never know what will happen, and this agreement can prevent a lot of trouble and heartache.

How SJS Can Help

Depending on the needs and company structure, we can help advise on the proper approach to a buy-sell agreement. We are able to coordinate the process with attorneys and tax professionals to help you create an agreement that is effective and valuable.

This is part of the ongoing service we provide and one that isn’t simply drafted and put on the shelf. Buy-sell agreements become part of a dynamic, ongoing conversation with our business owner clients. We can monitor the company’s growth and indicate if our client should fund or update the agreement given the company’s increase in value.

Schedule a complimentary discovery meeting today to discuss what’s on your mind and how we may be able to help.

Important Disclosure Information & Sources:

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

What Should You Consider When Starting A Business?

To help you figure out what you need to do in order to start your business, we provide this resource.

By Senior Advisor Andrew Schaetzke, CFP®.

For aspiring entrepreneurs, deciding what business you want to start and when you want to start it are great first steps in the entrepreneurial journey. Starting a business can be thrilling, but there is also a lot that you need to do to get it up and running. If you set up good structures and processes when you start your business, this can go a long way in helping the sustainability of your business and making your life easier over time.

To help you figure out what you need to do in order to start your business, we provide the below resource. From this, you may come away with answers and action items for the following:

How should I fund my business?
What legal structure should I use for my business?
What do I need in place in order to have business partners and a business succession plan?
What do I need to consider from a tax perspective?
What insurance and other benefits should I have in place?

As always, we are here to help you as you begin your entrepreneurial journey. We can provide resources, experience and strategies that may be valuable to you. Please feel free to reach out to us if you have any questions.

Please click on the below images to view.

Important Disclosure Information & Sources:

Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal professional or tax professional for specific advice. This material has been prepared for informational purposes only.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Selling Your Business To Employees

All business exits have pros and cons. Recently, I was introduced to a business owner who had just completed selling his company to a long-time loyal employee.

By Founder & CEO Scott Savage.

Recently, I was introduced to a business owner who had just completed selling his company to a long-time loyal employee. He described to me that despite higher offers from private equity-backed buyers, he chose to sell it at a lower price to a key employee who has the respect of other employees and the business' customers.

The business owner felt strongly that had an outsider purchased his small business, then before too long his key employees would be looking for another job. Additionally, he reasoned that his loyal customer base would be better served - after all, they are the reason he was going to be able to exit on his terms.

The buyer came up with a down payment. Rather than using a bank to finance the balance of the purchase price, the business owner took a seller’s (promissory) note, so the new owner can pay off the balance over time with profits from the business.

All business exits have pros and cons, but I am convinced that the sentiments shared with me and the actions taken by this benevolent business seller increase the likelihood that the business he started nearly 30 years ago will survive and thrive!

Important Disclosure Information & Sources:

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Pension Plan Options For Small Business Owners

To help you differentiate among the most commonly adopted pension plans by small businesses, we provide this resource.

By Senior Advisor Andrew Schaetzke, CFP®.

For many people, retirement plans, pension plans, and Social Security serve as their primary means for income during retirement. As a small business owner, the specific plans that you offer within your business can dramatically improve the financial behaviors and long-term investment results of your colleagues.[1]

While defined-benefit pension plans were very popular through the 1970s, only 15% of private-sector workers are offered defined-benefit pension plans through their employers today.[2] Nevertheless, when implemented well, pension plans can still be a potentially cost-effective way to help employees have more income in retirement.

To help you differentiate among the most commonly adopted pension plans by small businesses, we provide the below resource. From this, you may come away with answers and action items for the following:

Who can participate in the pension plan?
Can employees contribute to the plan?
How and when are benefits paid?
What are the possible vesting schedules?

As always, we are here to help you evaluate the best pension plan for your business. Please feel free to reach out to us if you have any questions.

Please click on the below images to view.

Important Disclosure Information & Sources:

[1] “Nudge: The Final Edition“. Richard Thaler & Cass Sunstein, 2021, Penguin Books.

[2] “The Demise of the Defined-Benefit Plan“. James McWhinney, 18-Dec-2021, investopedia.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

How Your Finances May Change In 2022

We detail changes to official federal legislation, proposed legislation, and other financial planning considerations that may impact you and your family in 2022.

By Senior Advisor Andrew Schaetzke, CFP®.

Last fall when the Build Back Better Act was introduced in Congress, we expected taxes could increase significantly for certain families as well as businesses. However, the proposed tax plan has changed often and significantly during congressional negotiations. While the legislation is not yet finalized, if passed in 2022, we do not expect that the Build Back Better tax plan will result in as many big changes as we initially anticipated.

Based on current proposed legislation, the following points summarize the provisions that could impact you and your family:

New federal income tax surcharge on higher earners: Households would have to pay an additional 5% surcharge on modified adjusted gross income (MAGI) above $10 million, as well as an additional 3% on MAGI above $25 million. For earners with greater than $25 million in MAGI, this could result in a top federal tax rate around 45%, which could not be decreased by taking large itemized deductions or the qualified business income deduction.[1]
Expansion of the 3.8% net investment income tax (NIIT) for S corporations and partnerships: The 3.8% net investment income tax on capital gains, taxable interest, dividends, passive rents, annuities, and royalties would be expanded to apply to active business income for pass-through firms.[1]
State and local tax (SALT) deduction for federal income taxes: The cap on the SALT federal income tax deduction would increase from $10,000 to $80,000 starting in 2022 through 2030.[1]
Extension of the enhanced Child Tax Credit (CTC) through 2022: The enhanced child tax credit - $3,600 for each child under age 6, as well as $3,000 for each child ages 6-17 - would extend into 2022 for joint filers with MAGI less than $150,000 ($112,500 for single filers).[1]
Limitations on Individual Retirement Accounts (IRAs) contributions for wealthier households: No longer would allow for contributions to IRAs with balances greater than $10 million. Additionally, IRAs with balances greater than $10 million may have accelerated required minimum distribution (RMD) requirements.[1]
Increased IRS funding: The IRS would receive increased funding for hiring and improving operations, which could lead to more audits for wealthier households.[1]

While the effective date for this legislation is uncertain, we expect the changes could be effective retroactively, as of January 01, 2022.

There have been some other annual cost-of-living and government-controlled changes that may affect you and your family in 2022:

5.9% cost-of-living adjustment for Social Security: For individuals currently or planning to receive Social Security payments in 2022, your benefits will be 5.9% higher than 2021 due to inflation.[2]
Lower required minimum distributions RMDs from Traditional IRAs, Traditional 401(k)s / 403(b)s / 457 plan, and Roth 401(k)s / Roth 403(b)s: If you are required to take an RMD from one of these accounts, your RMD as a percentage of your portfolio will be slightly lower in 2022 due to an increase in life expectancy.[3]
Federal student loan interest payments frozen until May 01, 2022: Due to ongoing effects from the pandemic, the Biden administration extended a freeze on federal student loan interest payments from February 01, 2022 to May 01, 2022.[4]
Changes to retirement plan contribution limits, estate tax exemption, and gift tax exemption: Various limits and exemptions have increased for 2022, primarily resulting from inflation. For example, the maximum employee contribution limit to 401(k)s / 403(b)s / 457 plans is increasing from $19,500 to $20,500. Additionally, the annual gift tax exemption is increasing from $15,000 to $16,000. You can find more information here.

As part of your financial planning process for 2022, there are a few ways that you can implement your plan while potentially lowering your federal income taxes:

Contribute to tax-advantaged investment accounts: Depending on your eligibility, you may be able to contribute to tax-advantaged investment accounts such as 401(k) / 403(b) / 457 retirement plans, IRA, Health Savings Account (HSA), and 529 plans in order to save for specific purposes while also potentially lowering your taxes. Additionally, you have until April 15, 2022 to contribute to your IRA and HSA for 2021 if eligible.
Charitable contributions and donor-advised funds: Because of the rise in many investment markets over the past few years, many people hold taxable investments with large unrealized gains. By directly gifting these taxable investments to eligible charitable organizations or creating a donor-advised fund, you can potentially lower federal income taxes for 2022 while giving to the organizations you want to support.
Tax loss harvesting: Particularly during volatile market periods, tax loss harvesting allows you to sell eligible taxable investments with losses, and use these losses to offset realized taxable capital gains. With tax rates expected to increase for certain taxpayers in 2022, tax loss harvesting could prove increasingly valuable.

As federal legislation evolves, we will continue to update you on any changes that may impact you. Additionally, you can find well-written summaries of the proposed financial changes on the Tax Foundation (taxfoundation.org) website. As always, please feel free to reach out to us if you have any questions or want clarity on how the proposed changes may affect you.

Important Disclosure Information & Sources:

[1] “House Build Back Better Act: Details & Analysis of Tax Provisions in the Budget Reconciliation Bill“. Tax Foundation, 02-Dec-2021, taxfoundation.org.

[2] “Cost-of-Living Adjustment (COLA) Information for 2022“. Social Security, ssa.gov.

[3] “Required Minimum Distribution Calculator“. U.S. Securities and Exchange Commission, investor.gov.

[4] “The White House Will Freeze Federal Student Loan Repayments Until May 1“. Katie Rogers and Tara Siegel Bernard, 22-Dec-2021, nytimes.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

What's Next? Life After Selling Your Business

By Founder & CEO Scott Savage.

Many business owners I have had the honor to advise over the years share a common experience: Their identity is linked to that of their business. One client told me he was terrified to sell his business because he couldn’t imagine a life post-sale.

As I wrote in my ebook, a common experience for most business owners immediately after the sale is an emotional let-down, and in some instances regretting their decision. One client told me that knowing what he knows now, he would never have sold his business at the price he did. That was 5 years after the sale!

In my experience, a successful business exit requires honesty, especially with the person in the mirror. Acknowledging your dependence on the success of the business is worthy of contemplation and soul-searching before you assemble your team of advisors, get a valuation of your company, decide on strategic buyers or private equity buyers, and launching a sales process.

One client of mine was at the closing table after a year-long sale process, and just could not close for fear of becoming “irrelevant”.

In most instances, this emotion letdown - “seller’s remorse” - is quickly replaced with new opportunities, overdue time spent with loved ones, volunteering time and talents with a beloved not-for-profit, or finally having the time to focus on physical and mental health & wellness.

My Dad always said, “We’re all replaceable.” Even as I write this, I wonder how much of my identity is linked to my business.

Important Disclosure Information & Sources:

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

QBI Deduction: Permanently Protected

QSBS: A Modernized Take on a Powerful Planning Tool

Bonus Depreciation Returns to 100%

Qualified Production Property: New Manufacturing Incentive

Section 179 Expensing: More Headroom

R&D Expensing: Retroactive Relief

Corporate Giving: A Shift in Strategy

Excess Business Loss Limitation: Now Permanent

PTET Workaround: Preserved

Interest Deduction: EBITDA Basis Locked In

ERC Deadline Has Passed

Opportunity Zones: Permanence with a Rolling Start

So What Does This Mean for Business Owners?

We’re Here to Help You!

Option For Roth Matching & Non-Elective Employer Contributions To Retirement Plans

Increasing The Beginning Age For Required Minimum Distributions (RMDs)

Required Roth Catch-Up Contributions For High Wage Earners For Employer Retirement Plans

Higher Catch-Up Limits For Employer Retirement Plans For Participants Age 60-63

Ability To Offer Roth Option For SIMPLE IRA & SEP IRA Plans Beginning In 2023

Limited Ability To Transfer A 529 Balance To A Roth IRA

Employer Matches For Student Loan Payments

For IRAs, The Catch-Up Limit As Well As Qualified Charitable Distributions (QCDs) From Traditional IRAs Will Be Indexed To Inflation Starting In 2024

Volatility Can Happen Quickly

For Investment-Grade Bonds, Duration Is Critical

Alternatives Are Becoming More & More Important

There Is Always Something Smart To Do

Long-Term Investors Have An Advantage

What Is A Recession?

What Indicators Go In To Determining A Recession?

How Has The US Stock Market Performed Before A Recession?

How Has The US Stock Market Performed After The Start Of A Recession?

How Can You Prepare For A Recession?

Build Up Your Emergency Fund

Diversify Across Stocks, Bonds, & Alternatives

Review Your Asset Allocation Ahead Of Time

Donating Appreciated Investments

Beneficiary Of Your Investment Account

Bequest Through Your Will

Qualified Charitable Distributions From Your IRA

Donor-Advised Fund

Charitable Lead Or Charitable Remainder Trust

Conclusion

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What Is A Phantom Stock Plan?

Why Choose A Phantom Stock Plan?

Final Thoughts

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Discipline

Curiosity

Skepticism

Independence

Humility

Patience

Courage

So What Can You Do To Become A Great Investor?

History Of Cryptocurrencies

Potential Benefits Of Cryptocurrencies

Concerns Of Cryptocurrencies

How Can Your Portfolio Potentially Benefit From Bitcoin?

Summary

Advantages

Concerns

Conclusion

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What is a Buy-Sell Agreement?

Why Have a Buy-Sell Agreement?

How SJS Can Help

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