Bob’s Journal for 11/2
Number of Millionaires in the United States Increases
The average net worth of American families exceeded $1 million for the first time in 2022, according to the Federal Reserve’s Survey of Consumer Finances, conducted every three years.
The 2022 level is 42% higher than the $749,000 average net worth recorded before the pandemic in 2019. Of course, inflation was a factor in the increase.
But the Fed calculates that after adjusting for inflation, the real average net worth increased by 23% from 2019 to 2022. Wealth inequality skews the average net worth figure higher because of the billionaires and multimillionaires with enormous net worth that are a small percentage of the population.
The Fed also computes the median net worth of American families. The median net worth was $193,000 for 2022.
The real median net worth increased by 37% from 2019 to 2022. That means many families experienced a substantial after-inflation increase in net worth over the three years and the wealth gap narrowed.
Also, the number of U.S. millionaires increased. In 2019, 9.8 million families had net worths exceeding $1 million. In 2022, there were about 16 million millionaire families.
Families with net worths of $2 million or more jumped from 4.7 million in 2019 to almost eight million in 2022.
Most of the millionaire families are headed by someone age 55 or older. Only 1% of families under 35 have net worths of $1 million or more, while the number jumps to 21% for families whose heads are ages 55-64. A high percentage of millionaire families are headed by college graduates. Most of the millionaire families have annual incomes between $150,000 and $250,000.
These upper-middle-class families made the most substantial wealth gains over the three years. Families who were in the 80th to 90th percentage of income distribution had a 69% increase in their net worths over the three years. Those numbers aren’t adjusted for inflation.
Other key attributes of the families with substantial increases in their net worths are that they owned stocks and their homes and reduced debt payments as a share of their incomes (down to 12.9% in 2022).
In short, these families benefited from education, reducing debt and increasing savings. They also benefited from the Federal Reserve policies that kept interest rates low and boosted asset prices.
Actor James Caan Reveals Trap in Self-Directed IRAs
The estate of the late actor, who appeared in “The Godfather” and many other films and television shows, lost a recent Tax Court case that has lessons for other taxpayers.
The case involved two of Caan’s IRAs. The IRAs owned interests in a hedge fund. Under the tax code, IRAs are allowed to own such non-publicly traded assets, but not all IRA custodians allow them. Caan had a truly self-directed IRA whose custodian allowed ownership of such assets.
After each calendar year, an IRA custodian must report to the IRS and the account owner the value of the account as of the end of the previous year. When the IRA owns an asset that isn’t publicly traded, the custodian must determine a value and report that.
The agreement between Caan and the custodian required Caan to estimate the year-end value of the hedge funds and provide that data to the custodian.
One year, Caan failed to provide the value to the custodian. The custodian promptly notified Caan it no longer would serve as custodian of his IRAs.
It then distributed the IRA assets to Caan and sent both him and the IRS a Form 1099-R reporting the distribution. The custodian distributed the hedge fund shares by instructing Caan to contact the hedge fund and have it re-register the shares in his individual name instead of the custodian’s name.
Caan transferred most of the assets to an IRA at another broker. But the hedge fund shares couldn’t be transferred to the other broker, because it didn’t accept assets that aren’t publicly traded. Eventually, Caan had the hedge fund shares liquidated and transferred the cash to the new IRA.
But the transfer wasn’t completed until after the 60-day period for tax-free rollovers.
Caan claimed the distribution was nontaxable because he didn’t take physical control of the shares or cash. He also asked the IRS to rule that he had a reasonable excuse for missing the deadline.
The court ruled that once the custodian relinquished title to the hedge fund shares, Caan had full control. It didn’t matter that he didn’t have cash in hand or in his bank account.
To complete a rollover under the 60-day rule, a taxpayer not only must meet the 60-day deadline but must roll over the same property that was distributed. Caan failed on both counts.
The court determined that he didn’t have a reasonable basis for not meeting the 60-day deadline. The problem essentially was of his own making because he didn’t provide the custodian with the required valuation. Also, after the distribution, all he had to do was contact the hedge fund and have the shares re-registered in the name of a custodian that accepted such assets. Nothing prevented him from doing that in a timely manner, so he didn’t have a reasonable excuse for the delay.
(Estate of Caan v. Commissioner, 161 T.C. No. 6)
Why the True Diversification Portfolio Is Better
Most investors believe a diversified portfolio is one that’s allocated about 60% to stocks and 40% to bonds. That thinking cost them a lot of money in the last couple of years, and probably will cost them more in the coming years.
I’ve been saying that for a while, but you don’t have to take my word for it. The Wall Street Journal has been pointing it out recently.
In one article, it stated that the 60-40 portfolio “just had its worst year in generations.” Another article concluded that the set-it-and-forget-it portfolios that worked well over the last 40 years haven’t worked well in the last couple of years and won’t work well in the coming years. The articles effectively summarize what I’ve been saying for some time.
A portfolio with true diversification is one in which the different assets aren’t correlated with each other. Different assets do well in different markets and economic environments.
The 60/40 portfolio provided some benefits when Federal Reserve policies were geared toward keeping interest rates low and providing liquidity to support stock prices.
But those days are gone because inflation returned. The Fed now must keep interest rates high and restrict liquidity to reduce inflation. Those policies hurt both stocks and bonds at the same time.
Indeed, over time, a 60/40 portfolio hasn’t provided diversification benefits. The stock portion accounts for 90% or more of the portfolio’s volatility and returns. Bonds provide little protection in bear markets and reduce returns in bull markets.
A better long-term approach is my True Diversification portfolio, listed in Retirement Watch each month.
The 10 funds in the portfolio have low correlations with each other and most of them have low correlations with the major stock indexes.
Our returns lag behind the stock indexes and the 60/40 portfolio during strong bull markets. But we still earn solid, steady returns during those periods.
The portfolio does well when stocks and bonds aren’t shining. During some periods when stocks are down our True Diversification increases in value.
Our portfolio has about half the volatility of the S&P 500. So, when markets are down, we lose a lot less money than traditional portfolios, giving us less ground to make up.
We’ve lagged the S&P 500 since 2013 because the Fed’s policies since the financial crisis have been geared toward supporting stock prices. But over full market cycles, we’ve had comparable returns to the S&P 500 with much less volatility. I expect we’re entering a period when our portfolio will steadily outperform the market indexes and the traditional portfolio.
The Data
Personal income increased 0.3% in September, following a 0.4% rise in August. Compensation increased 0.4% in September after climbing 0.5% in August. Income from assets, especially interest income, increased 0.5% in September.
Personal consumption expenditures rose 0.7% in September after rising 0.4% in August. Spending on services increased 0.8% in September while spending on goods was 0.7% higher.
The Personal Consumption Expenditure (PCE) Price Index increased 0.4% in September, the same rate as in August.
Over 12 months, the PCE Price Index was 3.4% through both September and August.
The Core PCE Price Index, which excludes both food and energy and is the Fed’s preferred inflation indicator, increased 0.3% in September following a 0.1% gain in August. Over 12 months, the Core PCE Price Index was up 3.7% through September and 3.8% through August.
The 12-month increase through September is the lowest for the Core PCE Price Index since May 2021.
The Consumer Sentiment Index from the University of Michigan was 63.8 at the end of October, an improvement from 63 in mid-October but a decline from 68.1 at the end of September.
October’s number was the lowest month-end level for the index since May. Consumer expectations declined significantly while their assessments of current conditions fell slightly.
The Consumer Confidence Index from The Conference Board fell for the third consecutive month to 102.6 in October from 104.3 in September.
Both the Present Situation and Expectations components of the index declined, but the drop in the Present Situation component was more significant.
Consumers reported elevated fears that a recession is impending. The Expectations Index was below 80, which typically signals a recession will occur within the next year.
The Employment Cost Index increased 1.1% during the third quarter, following a 1.0% gain in the second quarter. Wages and salaries increased 1.2% in the third quarter, and benefits rose 0.9%.
Over 12 months, employment costs increased 4.3% through the third quarter after jumping 4.5% through the second quarter.
Durable goods orders jumped 4.7% in September, the highest monthly increase since July 2020. Orders had declined 0.1% in August.
But volatile transportation orders, mostly aircraft, were the main factor in the increase. Excluding transportation, orders increased 0.5% in September, the same as in August.
After excluding both transportation and defense orders, which is considered a good indicator of business investment, orders increased 0.6% in September, which follows a 1.1% jump in August.
Home prices increased 0.4% in August, according to the S&P CoreLogic Case-Shiller Home Price Index. That follows a 0.6% increase in July. The 12-month increase in the index was 2.2% through August and 0.2% through July.
The FHA House Price Index found prices increased 0.6% in August after rising 0.8% in July. Over 12 months the index increased 5.6% through August and 4.7% through July.
Pending home sales increased 1.1% in September after falling 7.1% in August. But pending home sales are down 11% over 12 months through September after being down 18.7% over 12 months through August.
The ISM Manufacturing Index declined in October to 46.7 from 49 in September. September’s number was 10-month high. The index has been below 50 for 11 consecutive months. A reading below 50 indicates the sector is contracting.
The PMI Manufacturing Index improved a little to 50 in October from 49.8 in September.
The Kansas City Fed Manufacturing Index was negative 8 in October, following a negative 13 level in September. Most components of the index were negative in October.
There were 56,000 additional job openings in September, according to the JOLTS (Job Openings and Labor Turnover Survey) report. The total openings in September of 9.55 million marked the highest level in four months.
The private sector added 113,000 new jobs in October, according to the ADP Employment Report. That’s an improvement from September’s number of 89,000 new jobs.
GDP increased at an annualized 4.9% rate in the third quarter of 2023, according to the first estimate. That compares to the 2.1% increase in the second quarter.
A major factor was a 4% increase in consumer spending during the quarter, the highest increase since the fourth quarter of 2021.
The only major component of GDP that decreased during the quarter was nonresidential investment. It fell 0.1%, its first decline in two years.
New unemployment claims increased by 10,000 to 210,000 in the latest week. Last week’s number of claims was a nine-month low.
Continuing claims, which lag a week behind new claims, increased to 1.790 million from 1.727 million.
The Markets
The S&P 500 lost 1.28% for the week ended with Tuesday’s close. The Dow Jones Industrial Average declined 0.29%. The Russell 2000 fell 1.17%. The All-Country World Index (excluding U.S. stocks) decreased 0.59%. Emerging market equities retreated 1.42%.
Long-term treasuries lost 2.07% for the week. Investment-grade bonds fell 0.83%. Treasury Inflation-Protected Securities (TIPS) declined 0.15%. High-yield bonds dropped 0.03%.
On the currency front, ,the U.S. dollar rose 0.57%.
Energy-based commodities fell 0.69%. Broader-based commodities rose 0.20%. Gold gained 0.67%.
Bob’s News & Updates
My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.
My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.
The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations on key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.
A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”
If you’re interested in my books, check my amazon.com author’s page.
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