Funding a College Education with Taxes in Mind

While 529 plans are a popular way to fund expensive college educations, Buckingham Senior Tax Manager Shawn Williamson shares more options that may benefit both students and parents from a tax standpoint.

According to a recent study, a year of tuition, books, supplies and day-to-day living expenses at a four-year university will cost on average $35,551. In addition, the price of college is rising at an alarming 7.1% annually. To combat these soaring prices, many parents prepare for their children’s education by investing in 529 plans. Through this strategy, tuition funds are taken directly out of the plan, and parents avoid paying capital gains tax on the appreciation of the investments in the educational fund. They may even get a state tax deduction for the contributions.

While many agree that the benefits of the 529 are of great support to parents, there can be a few nuances that affect your tax filings. College tuition can be utilized in four different ways on a tax return:

  1. To offset it against scholarships that would otherwise be taxable.
  2. To claim it as qualified tuition distributions out of the 529 plan.
  3. To claim the Lifetime Learning Credit for 20% of eligible tuition, up to $2,000 a year.
  4. To claim the American Opportunities Tax Credit (AOTC), worth up to $2,500 a year for up to four years. Note that it only takes a minimum of $4,000 of tuition to maximize this credit.

The same tuition dollar cannot be used twice, but the total tuition paid each year can be split up and used for different purposes. Furthermore, all of those options may be utilized on either the parent’s or the child’s tax return, conditional on the dependency situation.

Higher-income individuals may be able to take advantage of four underutilized opportunities:

Determine if your child should be claimed as a dependent on your tax returns

First, it’s important to establish whether or not your college-aged child should be claimed as a dependent on your tax returns. When married parents have more than $180,000 in adjusted gross income (AGI), they cannot claim the AOTC or the Lifetime Learning Credit. Those with AGI in excess of $410,000 don’t even get the basic $500 credit for dependents older than 17. For parents who do not receive a tax benefit from claiming their child as a dependent and do not qualify for financial aid, it may be more advantageous to remove the child from the parents’ tax return.

A child is classified as independent if they are providing at least half of their own support through working a part-time or summer job or spending their own savings for room and board. They may also be taking out significant student loans in their own name or covering a huge portion of tuition by way of scholarships. If this is the case, the child has an opportunity to claim the AOTC on their own tax return. For the parents, a $2,500 tax credit might be irrelevant, but to a college student it may be a gold mine and at least worth considering.

Have distributions go directly to the school

Parents may pay college costs out of their personal checking accounts and then request reimbursement from the 529 plan later. As a tax professional, I recommend having those distributions go directly to the university. If the costs are reimbursed, the 1099-Q distribution will show up under the parent’s Social Security number (the reimbursement recipient). If the tuition is sent straight to the university, 1099-Q distributions usually show up under the child’s Social Security number (the beneficiary). If the parent is audited, there should be no debate or need for investigation of whether or not the distributions were qualified since they went straight to the school. Also, if the child claims herself or himself, then all of the college-related numbers can go on the child’s return: tuition, scholarships, 529 distributions and the AOTC. If the child happens to have taxable scholarships because their tuition was used to get the AOTC, they will likely be taxed at a much lower rate than the parent (possibly 0%).

Consider using the Lifetime Learning Credit before and after a bachelor’s degree

Since the American Opportunity Credit is only good for four tax years, normally you will want to use it during the child’s full-time pursuit of a bachelor’s degree. However, a lot of students these days are taking classes for college credit during high school. Many taxpayers do not know that they can use the Lifetime Learning Credit to benefit from those early part-time college classes. Likewise, if your child goes on to pursue a master’s degree or takes longer than four years to get a bachelor’s degree, this credit can continue to benefit the parents or the student after the AOTC expires.

Continue investing after your student begins college

Many parents are falsely under the assumption that if the child has already started college, it’s too late to make 529 contributions. In fact, contributions can even be made a week before the distributions are needed. While there is little time to earn tax-free investment growth, you may still be able to get a state tax deduction of 5% to 10%. In that scenario, it is best to invest the 529 contributions in a cash option to avoid the unnecessary risk of short-term loss.

About the author:

As a Senior Tax Manager at Buckingham Strategic Wealth, Shawn helps clients with tax planning and reviews returns prepared by the firm. Along with reviewing 20,000 individual and business tax returns in his lifetime, he has authored dozens of tax and finance related articles and has written the book “Big Success in Small Business”. He was named 100 St. Louisans You Should Know to Succeed in Business by St. Louis Small Business Monthly.

While the cost of higher learning is at record levels, there are several ways to fund your child’s education while receiving tax benefits. If you need assistance with this complicated issue or have questions, reach out to your advisor.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this document. R-23-4998

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Emphasizing Safety on the Bond Side of the Portfolio

At Lauterbach, we understand the importance of incorporating a safe fixed income investment strategy into your portfolio. In this edition of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan shares our philosophy on fixed income investing, why it’s important to deemphasize credit risk and a historical examination of taking such risks.

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Donor Advised Funds

With so many people in need, financially supporting non-profits is more important than ever. In this edition of Buckingham Weekly Perspectives, Chief Planning Officer Jeffrey Levine shares three reasons why donor advised funds are a great way to support your favorite charities while still receiving a tax break.

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Recently Widowed: Dealing with Immediate Financial Concerns and Planning for the Future

The strong emotions associated with the death of a spouse can become even more amplified by the overwhelming host of financial issues that need to be addressed. Where does one start?

Losing a spouse is a life-changing event that married couples unfortunately need to be prepared for. Since survivors are faced with the daunting tasks of dealing with strong emotions while addressing immediate needs, oftentimes finances are put on the backburner. These are the times when your wealth advisor and other estate planning professionals can provide support. I have helped many clients navigate the financial complexities that occur after the death of a spouse, and my goal is not only to help manage necessary housekeeping tasks, but also to empower the survivor who may have never handled these important matters before.

If you are in this position, it can be difficult to know where to start, what needs to be done and the timeline for settling an estate. While many concerns don’t need to be addressed immediately, I often recommend that a helpful starting point can be in accessing all safety deposit boxes to secure essential documents and review the financial wishes of your spouse.

Next, it is important to reach out to your accountant, financial planner and/or attorney to let them know of your spouse’s passing. Oftentimes , you can inform the professional you are most comfortable with, and they will notify the others. This team of trusted professionals will be able to handle many necessary tasks and provide guidance. The first thing they will likely do is prepare a list of items to be completed by each family member, along with a timeline to help guide and set priorities. The team may also start gathering and organizing the documents you will need in the coming weeks.

If feasible, I recommend meeting with your team in a comfortable space such as your home or their office. It may be beneficial to have a close family member or friend join the meeting for support. Having multiple sets of ears listening to the conversation can be extremely helpful and make the process feel less overwhelming.

It is perfectly normal to not know what to ask or expect during that initial meeting. While your advisor will welcome all questions, here are some considerations to begin the conversation:

  • What are my immediate spending needs, and do I have enough cash on hand to cover them?
  • Are there any other family members’ spending needs that need to be reviewed?
  • How do I obtain a death certificate, and how many copies do I need?
  • How do I gain access to all of my account information, including online accounts, hard copies of statements and more?
  • Do I need to authorize any family members or trusted contacts to work with my advisory team?
  • Is there any additional documentation that I need to provide?

After the meeting, both you and your advisors will have a clearer outline of the next steps needed.

While the list of things to accomplish may seem lengthy, approaching them one at a time at a manageable pace can help you from feeling overwhelmed. Lean on your professionals to help guide you.

For additional resources, I encourage you to review our detailed What to do After the Death of a Loved One and Personal Document Checklist pieces. From record maintenance to insurance issues, these handy documents can help you maneuver through the red tape and paperwork.

The difficult emotions associated with the death of a spouse are often even more intensified by the overwhelming host of financial issues that need to be addressed. If you need assistance navigating this challenging time or have questions, reach out to your advisor.

About the author:
As a wealth advisor, Jada Diedrich spends time getting to know clients personally and professionally. She feels forming strong relationships enhances her ability to help clients define and achieve their goals. Away from Buckingham, she is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-4997

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Buckingham Connects Quarterly Webinar: January 2023

Buckingham connects webcast banner

The end of last year brought some big changes, so we kicked off 2023 with a recap of important planning considerations. Chief Planning Officer Jeffrey Levine, CFP®️, CPA, PFS, CWS, AIF mentioned that we are still processing the huge impact of SECURE Act 2.0. passing in December, which introduced nearly 100 changes affecting retirement planning. In the webinar, he answered questions from clients about the implications of some of the changes.

Chief Investment Officer Kevin Grogan, CFA, CFP®️  shared his thoughts on what markets are expecting from the Federal Reserve this year on the pace of interest rate increases. He pointed out that monetary policy works with a lag, and the economy won’t start seeing the full effects from rate increases for six to 18 months. However, there are some early signs that higher rates are slowing parts of the economy, and many economists are predicting a recession this year.

The good news for markets – it’s been a solid month year to date. All stock markets have delivered positive returns so far this year, with international markets outpacing the U.S. market. Kevin reminded clients that despite the predictions for a recession this year, the markets are forward-looking and are discounting potential future earnings and dividends well into the future.

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Avoiding Fraud, Theft and Overcharges

When recession risks grow, normally that can lead to lower profits for businesses. For business owners, if your profit margin is razor thin or nonexistent, you sure can’t afford to lose funds to fraud, theft or overcharges. Most business owners I’ve met don’t think about those risks until after they have a problem. As an auditor for over 25 years, I observed dozens of ways that people steal and commit fraud. Part of my job was to help business owners design controls to safeguard their assets. Here are some common things to watch out for and ways to prevent them from happening to your small business.

Unauthorized credit and debit card use. This is a common problem when your employees are running around with company credit cards. They buy $400 worth of legitimate business supplies at Costco on the company card, plus an extra $100 worth for themselves. As a control procedure, you should examine all credit card activity monthly, or maybe even weekly, to make sure it all looks legitimate. However, some of this fraud can only be discovered at the invoice level. Make sure there are receipts or invoices to back up all credit card and debit card charges, and spend a little time reviewing those. If you see something questionable, start making phone calls.

Hacked business debit card transactions. Besides employees, you have to watch out for criminals that swipe your debit card number and start buying things. I’ve learned the hard way that banking laws provide almost no protection for business debit cards. Any restaurant, gas station or retail store in which you have used your card may have a security breach that puts your whole business account balance at risk. The fraudsters simply use a fake business name to run extra charges through your debit card. If you don’t discover and protest the charges fast enough (my bank allowed only two days), you lose the stolen money. Fortunately, my lesson only cost $30. Now I have a business credit card instead of a debit card, which offers much better protection and a longer period to protest.

Diverting business revenue. Nobody ever thinks about the possibility of someone stealing checks made out to their business. Yet, it can be done, and it’s not too hard. The thief just sets up another bank account in the name of the company they work for at a new bank down the street. Then they grab legitimate revenue checks out of the mail and deposit them at the new account no one else knows about. Sometime weeks or months down the road, they can distribute money to themselves, as the only signer on the account. So, make sure the revenue you expect to receive actually makes it to your bank account.

Misdirected checks. If you have an outsourced bookkeeper writing your checks, believe it or not, some have been known to pilfer their client’s money. One way to do that is to write checks to themselves and then enter the checks in the books as though they were written to someone else, such as a power company. One small business owner told me that his bookkeeper was using his checks to buy personal items at Sam’s. I once discovered an in-house accountant paying all of her personal water, sewer, gas and power bills with company checks. We also came across a situation where a small-town clerk was giving himself an extra $9,000 check each month and cashing it at a bank in the next town. Bottom line, examine your check images from the bank each month and the receipts that back them up to make doubly sure that your checks are going to the right places.

Returning parts or supplies for cash refunds. Again, this is something employees can do pretty easily. They can buy unneeded equipment or supplies and just return the extra items for cash or credit a couple of weeks later. So, make sure you receive and retain all the small equipment and supplies you paid for.

Getting charged for the same thing multiple times. For example, in the past, my firm was charged twice for a shipment of toner cartridges. If we hadn’t noticed it, we would have paid double. I’ve seen this happen many times to my clients for repair bills, insurance premiums and other items – mostly by “mistake.” You know you ordered the item, so you errantly pay the bill twice if it was presented to you twice. One time a local school district in the St. Louis area errantly paid an architect over $1 million twice, and he kept the money permanently. Whether you are guarding against error or fraud, be on the lookout for two or more identical bills for the same item.

Completely fake invoices. Some years ago, I received a $120 invoice in the mail for four cases of duct tape. For half a minute, it seemed legitimate. Then I decided that there was no way I ordered that much duct tape. In fact, I had not ordered any duct tape at all. The culprit was just sending out fake invoices to random companies, hoping that they would pay without any questions. I’m sure many did. So, take a little time to review your incoming invoices, and do not assume they are all legitimate.

Finally, I always keep in mind a phrase that Ronald Reagan made famous: Trust but verify. If one of your trusted vendors asks why you are re-counting those boxes of supplies, just tell the vendor that you know humans make mistakes, and therefore you don’t trust anyone fully, not even yourself.

My list above is certainly not comprehensive, but I hope it has given you several things to think about and watch out for while managing your small business and safeguarding your assets.

 

Shawn Williamson, CPA

Senior Tax ManageratBuckingham Strategic Wealth

As a Senior Tax Manager at Buckingham Strategic Wealth, Shawn helps clients with tax planning and reviews returns prepared by the firm. Along with reviewing 20,000 individual and business tax returns in his lifetime, he has authored dozens of tax and finance related articles and has written the book “Big Success in Small Business”. He was named 100 St. Louisans You Should Know to Succeed in Business by St. Louis Small Business Monthly.

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Central Bank Digital Currency (CBDC)

This article is a transcript of the Buckingham Weekly Perspectives video.

In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan explores the concept of central bank digital currency (CBDC), the evolution of our fiscal system and the future of money.

Thanks to advances in technology, the world is increasingly becoming more automated. Our monetary system is no exception. In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan explores the concept of central bank digital currency (CBDC), the evolution of our fiscal system and the future of money.

Transcript:

Kevin Grogan: We had a question come in asking about the Central Bank digital currency. So today’s video is going to talk about what they are and how they might affect investors. So a central bank digital currency or CBDC would be the abbreviation can be thought of as a digital form of paper money. Meaning that it would be issued by the Federal Reserve and it is effectively a liability of a central bank. And Americans have long held money predominantly in a digital form. For example, money has long been held in bank accounts recorded as computer entries held on a commercial bank’s Ledger.

How does a CBDC differ from paper money?

Kevin Grogan: A CBDC though would differ from existing digital money because a CBDC would be a liability of the Federal Reserve just like paper money is while a deposit at a bank is a liability of that bank. So that’s the primary difference between what a CBDC would be versus what a deposit held that a bank is it’s who is that a liability of it’s either a liability of the bank in today’s world or a liability of the Federal Reserve like paper money is today and it’s important to note too that Federal Reserve payment technologies have evolved over time. So one example is back in the 1970s the FED develops the Automated Clearing House system or ACH system that allows for an electronic alternative to paper checks.

How have cryptocurrencies have pushed modern banking?

Kevin Grogan: And recent technological advances have ushered in a new wave of financial products and services including digital wallets Mobile payment apps and new digital currencies such as cryptocurrencies and stable coins. And these technological advances have led central banks around the world not just here in the US with the Federal Reserve but other central banks as well to start exploring the possibility of issuing a central bank digital currency. And so I think right now in terms of the State of Affairs, it’s very much and sort of a research exploratory phase. I don’t think anything is imminent here. And in fact the Federal Reserve at least in terms of their stance today has said they would not issue a CBDC without an authorizing law that’s passed by Congress and signed into law by the president. So for now nothing too much happening here other than discussion research and analysis so far. If you do have any questions on anything, I’ve covered today, please don’t hesitate to reach out to your advisor.

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2023 Planning Considerations and Strategies for Individual Taxpayers

Tax planning shouldn’t simply focus on hindsight. Upcoming life changes and external factors such as tax policy developments also deserve attention and may offer opportunities to consider. With 2023 bringing the largest inflation adjustments in nearly 40 years, this is especially true, making it a great time to see how they could affect you.

IRS Inflation Adjustments

The IRS makes inflation adjustments annually, and the increases have two purposes:

  1. To prevent tax bracket creep for those whose income keeps pace with inflation.
  2. To limit government revenue increases resulting from inflation.

Since the 1980s, the adjustment amounts have held within relatively predictable ranges. Given inflationary pressures, the 2023 adjustments represent the sharpest increase in nearly four decades. More than 60 provisions ranging from Social Security payments to income bracket and retirement savings limits received significant increases.

This should come as welcome news for the many households who saw their purchasing power decrease throughout 2022. However, even with these increases, as compared to January 2022, many families will still have less net income on an after-tax, inflation-adjusted basis. This article provides an overview of some key IRS inflation adjustments and the tax planning strategies associated with them.

Click here for a summary PDF of our 2023 Tax Guide.

Selection of IRS Inflation Adjustments

2023 Tax Planning Considerations

Standard Deduction

In 2017, the Tax Cuts and Jobs Act significantly increased the standard deduction amounts, making it unnecessary for many taxpayers to itemize. If this is the case for you, then strategically managing adjustable below-the-line deductions (charitable contributions, payments of state and local taxes, medical expenses, etc.) to maximize itemization may not be necessary. It also highlights the importance of effectively managing above-the-line deductions, which can be taken regardless of whether someone uses the standard deduction or itemizes. These include deductions for items such as Traditional IRA or HSA contributions, student loan interest and self-employed retirement contributions, among others.

Tax Brackets

All tax brackets increased by an average of 7%. Unless you had a significant increase in income, that gives a fair amount of room to remain in the bracket you were in for 2021, even if very close. By reviewing this early in the year, you can determine whether additional tax-reduction strategies could further reduce income so that you remain in the same bracket.

Long-Term Capital Gains Brackets

Long-term capital gains receive very advantageous tax treatment, so it’s important to ensure you benefit from them when possible. Proper planning can reveal opportunities and help prevent the following undesirable consequences:

  • Unless necessary, hold appreciated investment assets for at least a year before selling. Doing so earlier will result in them being taxed at ordinary income rates, which are much higher than capital gains rates.
  • Consider whether you may be subject to an additional net investment income tax (NIIT) of 3.8%. The NIIT is an additional tax on investment income for single filers with modified adjusted income (MAGI) exceeding $200,000, and joint filers with MAGI exceeding $250,000. If this is a possibility for you, it’s important to review in more depth with your advisor and tax professional.
  • Account for asset location in your overall investment asset tax planning. If you have investment accounts with different types of tax treatment (e.g., taxable, tax-deferred and tax-free), strategically placing certain investments in certain accounts can help you significantly reduce the long-term impact of taxes on your portfolio.

Tax-Advantaged Accounts

It’s important to maximize tax-advantaged options available, such as retirement accounts and HSA plans. As previously mentioned, contributions to many of these accounts are eligible for an above-the-line deduction that taxpayers can take whether they itemize or not. Not only do they help save on tax payments today, but they also provide ongoing tax benefits in the form of tax deferral. Planning early can allow you to spread those contributions out over the year as opposed to potential last-minute large sums to help reduce taxes.

It is also important, however, to take a long-term view of tax deferral. It can be tempting to defer as much as possible to lower taxes today. But doing so could have adverse effects on tax payments in the future. The tax consequences for when the money is distributed should be considered. The decision to pay more taxes today could even come in the form of making non-deductible Roth IRA contributions (for those who qualify), or by converting tax-deferred accounts into a Roth IRA to allow for tax-free growth.

Other Inflation Adjustments

This article outlines only some of the key items that were adjusted for inflation. Depending on your situation, you may want to explore others, such as the Foreign Earned Income Exclusion, Gift Tax Exclusion or Qualified Adoption Expenses.

We recommend speaking with your financial advisor to discuss which inflation adjustments would be most relevant to your circumstances as you begin tax planning for 2023.

Key Dates and Deadlines

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed adequacy of the content presented above. R-23-4935

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2022’s Investment Lessons

While each year features new twists on the age-old investment stories, smart investors know how to apply the same basic principles to every event. That’s why one of my favorite sayings is that there’s nothing new in investing, only investment history you don’t know. Last year, however, investors did experience something that happened for the first time in history. In my top 10 lessons of 2022, I’ll explain what we learned from the markets and why sticking to a well-thought-out financial plan remains the best strategy.

Lesson 1: Just because something hasn’t happened doesn’t mean it won’t.

Last year was particularly difficult for many investors because it was the first time that both the S&P 500 and 20-year Treasury bonds experienced double-digit declines. Although this was a first, investors should not be taken off guard. There are five other years in history — 1931, 1969, 1973, 1977 and 2018 — when both produced negative returns. Despite the historical precedent, the losses were a big surprise for investors who, influenced by recency bias, came to believe that safe bonds were a sure hedge for risky stocks.

Lesson 2: Young, unprofitable companies are not good investments.

In 2022, the finance craze was investing in disruptive, innovation companies with recent IPOs. By the end of the year, these investments had all repriced lower. Investing in young companies that are unprofitable but have high investment spending — making investors think they are poised for growth — has produced poor returns historically. And while exciting investment narratives that capture the public’s attention may be different, the basic principles of investing are always the same.

Lesson 3: Markets are less liquid and thus more volatile.

Last year we saw heightened volatility across markets, even those considered safer, including Treasury bonds and municipal bonds. Investors should be prepared for greater volatility because, for many reasons, markets have become less liquid. When there is low liquidity, big market swings are much more likely because it’s harder to buy and sell a security without affecting its price. Accepting that market swings are becoming more frequent should help investors stay the course.

Lesson 4: Gold is not an inflation hedge over your investment horizon, and neither is bitcoin.

Although gold had performed extremely well in the past few years, in 2022 it disappointed investors, just when an inflation hedge was needed most. Last year proved that buying this shiny security won’t save your portfolio from inflation in the short run — though it might if your investment horizon is at least 100 years. The same goes for bitcoin, which cryptocurrency investors and advocates have also promoted as a hedge against inflation.

Lesson 5: Value investing is not dead.

Value investing is a time-tested strategy in which investors buy securities that appear cheap relative to some fundamental anchor. Although decades of evidence have demonstrated the benefits of value investing, many investors fled value stocks after they underperformed for a relatively short four-year period starting in November 2016. But those that stayed the course were rewarded: between November 2020 and December 2022, value stocks once again outperformed growth stocks around the globe.

Lesson 6: Be aware of recency bias – don’t invest in something just because it has done well.

Historically, investors tend to buy yesterday’s winners (after the great performance) and sell yesterday’s losers (after the loss has already been incurred). Unfortunately, a return in a past year doesn’t necessarily predict the same return the next year. For example, in 2021, the Dow Jones Select REIT index outperformed the S&P 500, with a 45.9% return compared with 28.7%. In 2022, however, it underperformed, with a -26% return compared with -18.1% for the S&P 500.

Lesson 7: Diversification is as important as ever.

After the Great Recession, many argued that diversification no longer works because risky assets have become too correlated. However, diversification benefits also come from the dispersion of returns, or the range of returns in a group of stocks. Last year we saw a wide dispersion of returns once again, consistent with the last 20 years, showing that diversification still has strong benefits, particularly international diversification. For example, U.S. small-value stocks outperformed the S&P 500, and international and emerging markets stocks did as well.

Lesson 8: Active management is a loser’s game in bull or bear markets.

Last year was another in which the majority of active funds underperformed even though proponents claim active managers outperform in bear markets. And even when active management does lead to an investor’s portfolio outperforming benchmarks, it’s typically short lived.

Lesson 9: A liquidity premium is not a free lunch — it’s compensation for taking risk.

Illiquid assets are those that cannot easily be converted into cash, such as private equity, venture capital, reinsurance risk and private credit. Because of this risk, investors require some additional compensation when investing in them. That’s known as a liquidity premium. The risk becomes greater during difficult economic times when investors may be desiring liquidity. Last year reinforced that investors should only allocate what they can afford to illiquid holdings.

Lesson 10: Ignore all market forecasts.

Market movements are often dominated by surprises, which, of course, can’t be predicted. For the Federal Reserve, the big surprise in 2022 was that inflation turned out to be higher than expected. In fact, inflation as measured by the Fed’s preferred price index ended up being more than double its forecast for the year. As economic forecasts are often wrong, it’s unlikely that market strategists will be able to forecast future performance. The lesson for investors is to tune out predictions. Instead, stick to your investment plan, focus on diversification, and rebalance your portfolio when needed.

Summary

Every investor makes mistakes. However, smart investors don’t repeat the same mistakes and expect different outcomes. By utilizing the 10 lessons 2022 taught us, you can avoid making common investment errors. It’s also important to know your financial history and have an investment plan backed by evidence. If you don’t have a strategy, read my book “Investment Mistakes Even Smart Investors Make and How to Avoid Them” or schedule time with your financial advisor.

For a more detailed look at Larry Swedroe’s 2022 investment lessons, see his recently published article on AdvisorPerspectives.com.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party sources which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Total return includes reinvestment of dividends and capital gains. Mentions of securities are to demonstrate passive funds versus active funds, and low-cost funds. The mentions of specific securities should not be construed as recommendations of securities. Performance is historical and past performance is not an indication of future results. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth® or Buckingham Strategic Partners®, collectively Buckingham Wealth Partners. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-4973

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