Shape Up Your Financial Plan for 2024

MIKE TOWNSEND: The end of the year for me is always something of a scramble—getting ready for the holidays, putting the tree up and the lights on the house, trying to avoid the malls while getting my shopping done.

But amidst the holiday hubbub, I try to be disciplined about taking stock of my financial footing before the year ends. For all of us investors, the end of the year is the time to check your portfolio, consider making charitable gifts or taking other steps to minimize taxes, and reviewing whether your investing goals and financial plan for the year ahead might need tweaking for any reason. This year, the markets gave us a bit of an early present—a 9% gain for the S&P 500^® and an 11% jump for the Nasdaq during the month of November, the best month of the year so far. And despite a year in which investors have often felt uneasy, we are on track for a very strong year with the S&P 500 up about 20% year to date.

But there are a lot of questions on investors' minds as 2023 heads toward the finish line. Can the markets sustain that momentum in 2024? How will markets react to the looming presidential election, the moves of the Federal Reserve, and the multiple geopolitical uncertainties? And what should I be doing as an investor to help make sure I can take advantage of the ups and weather the downs?

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

Coming up in just a few minutes, Daniel Stein, a veteran manager of two Schwab branches in Virginia, will join me to dig into what investors are really concerned about right now, what we should be doing as we approach the end of the year, and what to watch for as we had into 2024,

But first, a quick look at some of the issues making headlines right now here in Washington.

Congress is entering the final sprint to the holiday break, with both the House and the Senate hoping to be done for the year by December 15. With the government funding deadline pushed to early 2024, this marks the first time in a decade that Congress has not been facing a potential government shutdown in December. The shutdown issue will be squarely on the front burner when lawmakers return to Washington in January.

The focus in the final days of 2023 is instead on whether Congress can pass a massive emergency spending bill to provide aid to Ukraine and Israel. The president proposed a $106 billion package back in October that has been stymied on Capitol Hill. The centerpiece of the proposal is about $60 billion in aid for Ukraine. There's also $14 billion for Israel, $14 billion for US border security, $10 billion for humanitarian aid in Gaza and other hotspots around the globe, and about $7 billion in support for Taiwan and other Pacific allies.

Earlier this week, the White House sent lawmakers a letter stating that the U.S. would be unable to provide any more weapons and equipment to Ukraine by the end of the year if Congress does not provide more funding. The letter was unusually detailed in how the nearly $100 billion that Congress has already allocated to the war in Ukraine has been spent, pointing out that about 60% of the money has benefitted the U.S. by boosting defense companies and allowing the Pentagon to replace equipment that it has sent to Ukraine with better equipment for U.S. troops.

The key to the package is the border security provisions. In addition to funds for border security, Republicans on Capitol Hill are pushing for policy changes to tighten the border in exchange for their votes on the emergency aid package. A bipartisan group of senators has been working on a compromise on the border issue for weeks and hopes to have that finalized this week. If they can reach a deal―and that remains uncertain―the Senate would likely move quickly to consider the aid package with those provisions attached. House Speaker Mike Johnson, however, has said that he will seek to break the White House proposal into separate votes on aid for Ukraine, aid for Israel, and other elements of the plan. That could complicate final passage of the package before the holidays and push another politically difficult debate into early 2024.

Next week will also see the final Fed meeting of 2023, with the Federal Open Markets Committee gathering in Washington on Tuesday and Wednesday. It's widely expected that the Fed will hold rates steady for the third consecutive meeting, which should increase speculation that the Fed is finished with this cycle of rate hikes. Fed Chair Jerome Powell and other Fed governors have certainly hinted in recent weeks that the rate-hiking is over, though they have been careful not to explicitly say so, leaving themselves a bit of wiggle room in case the momentum on reducing inflation wanes.

But that has not stopped rampant speculation about when and how quickly the Fed will begin cutting rates. Just a few weeks ago, the consensus among traders and Fed watchers seemed to be that rate cuts would not begin until mid-2024 at the earliest. But sentiment has turned a bit more positive in recent weeks. According to the CME's Fed Watch Tool, the chances of rate cuts beginning in March 2024 are now nearly 60%. Fed Chair Powell's comments in next week's post-meeting press conference will be carefully scrutinized to see if he drops any hints about the timing of potential cuts.

Finally, one tax issue to note. The IRS announced in late November that it was delaying for at least two years the requirement that payment and e-commerce platforms like Venmo, eBay, StubHub, PayPal, Uber, Airbnb, Etsy and DraftKings send 1099-K forms to any taxpayer who had more than $600 in transactions this year. The previous standard only required those forms to be sent to the IRS and taxpayers if the individual had more than 200 transactions totaling more than $20,000. Those thresholds will now continue for 2023 and 2024. The provision, which was part of a 2021 law, was designed to ensure that taxes were properly collected in the online economy. But it has been fiercely debated in Washington, with businesses, taxpayers, and even some lawmakers arguing that the new lower threshold would be confusing to taxpayers who had just a handful of transactions and potentially make taxpayers think that they owed taxes when they did not. Another source of confusion was the 'friends and family' exception, which does not count personal transactions, such as using Venmo to repay a friend for a share of a dinner out. Distinguishing between personal transactions and business transactions is likely to be tricky for these platforms.

Meanwhile, many in Congress are having a bit of buyer's remorse over this tax provision and there are bipartisan efforts underway to repeal it or revise it to a higher threshold. The urgency for doing that has abated a bit with the IRS announcing the delay, but it looks increasingly likely that this provision will be revisited by Congress sooner rather than later. In the meantime, you don't have to worry about getting a tax form this year for each time you resold concert tickets or paid for an Uber ride home.

On my deeper dive today, I want to take a closer look at this unusual year for the markets, where we may be headed and what we need to be doing as investors to put us in the best possible position for success. To help me do that, I'm going to get some particularly cogent insights from Daniel Stein, who manages two Schwab branches in Northern Virginia. He and his team spend their time working directly with investors, helping them navigate the markets and achieve their financial goals. Dan was an early guest on the show, and I'm thrilled to have him join me again. Dan, welcome back to WashingtonWise.

DAN STEIN: Mike, this is one of my all-time favorite podcasts, so it's an honor to be invited back again.

MIKE: Well, great to have you. So, Dan, you live here in the greater Washington D.C. area, so you've got a good sense of just how crazy a year it's been in the nation's capitol. We had a debt ceiling fight earlier this year that went right up to the last hours before a potentially catastrophic default. We've had two last-minute agreements to temporarily averted a government shutdown. We saw 15 votes to elect a Speaker of the House at the beginning of the year, and then the unprecedented ouster of that same Speaker in October, followed by 22 days of limbo to find somebody to be the new Speaker. Just last week, we saw the House vote to expel one of its own members for only the sixth time in history. So Washington's dysfunction has really hit unprecedented levels. Last month, Schwab conducted a survey of active traders, and one of the questions was about their biggest concerns for investing. Political uncertainty in Washington turned out to be the number one concern. So how much is all this on investors' minds?

DAN: Wow. Well, when you sum it all up like that, it really brings into focus that it has been quite the year. Mike, there's an old saying that the markets don't like uncertainty, and neither do investors. I'd say that the items that you mentioned have caused varying levels of angst among investors. While the adventure over the Speaker of the House caught a lot of headlines, I wouldn't necessarily say it created a high degree of investor worry. Now, the potential government shutdowns, they certainly raised a lot of questions. And you mentioned the potential of U.S. debt default. Now, that definitely caused a lot of concern and angst amongst investors and made people hesitant to invest without a resolution. And we're likely to see heightened volatility leading up to the next debt ceiling debate, as well. And while we've been focusing on U.S. politics, well right now there are geopolitical risks that are making some investors cautious, with the wars in Ukraine and the Middle East chief amongst them.

But with all of this going on, it points to one of the reasons that our advice is always to take a long-term view, and not to take on more risk than you need or that you can handle. When you do that, uncertainty around current events is a lot easier to overcome.

MIKE: Well, probably the next policy event that investors have their eye on is the potential government shutdown in early 2024. As I mentioned, we've avoided it twice in the last couple of months, but I think there's a real potential for one when the next deadline hits in early February. Now, historically, government shutdowns have not been big market movers. The markets may not be worried, but are clients?

DAN: Well, we tend to get a lot of questions about the potential impacts, but as you mentioned, there is precedent that we can point out and data that you yourself have educated us on, Mike, that shows that markets have had little impact due to shutdowns. And knowing this, it tends to ease investor fears. But of course, here in the D.C. area, we do have a lot of clients that are directly impacted by government shutdowns with a disruption and a delay in pay. And while most investors won't be directly impacted by the shutdown, it is a prime example of why we always recommend that everyone keep an emergency fund of at least three to six months of essential living expenses.

MIKE: Yeah, that's important advice because one thing we know is that government shutdowns, when they happen, are very unpredictable in terms of their length. Some have been just a day or two, while the most recent one that started at the end of 2018, lasted more than a month. So having that emergency cushion is really critical.

Well, another topic that investors think a lot about, especially this time of year, is taxes. So what's your advice to clients about tax-related moves that they should be considering?

DAN: Honestly, Mike, we wish that even more investors thought about taxes towards the year end, rather than wait until shortly before the tax filing deadline the following year. And I don't say that because I want to ruin people's holiday season by making them think about the taxes that they might owe. I love the holidays and, actually, I want to help them save money where possible.

Now, when we are still in the calendar tax year, there are several strategies that we can help clients implement that could reduce their tax bill in the year ahead. We have a year-end tax planning checklist on schwab.com that covers many of these opportunities. But among these, this is the time of year when we often help investors look at their gifting strategies to help maximize deductions. We look at potential Roth IRA conversions to save taxes in future years. We look for opportunities for people to maximize retirement plan and HSA contributions. And we also look for tax loss harvesting opportunities.

MIKE: Yeah, tell me a little bit more about that last one, tax loss harvesting. What's the strategy there?

DAN: Tax loss harvesting is where we look for investments that are held in taxable accounts that have gone down in value. Now, these could be sold to offset realized gains. So let me give you an example. Let's say that during the year, an investor in the highest tax bracket sold stocks that they had held for over one year and they realized a $50,000 profit. Now, if these were their only sales, they would pay long-term capital gains of 23.8% on that amount, which would create a tax bill of $11,900. Now, if that same investor had $50,000 in unrealized losses in other securities, well they could sell those securities and lock in the losses, and then those $50,000 in losses would offset the $50,000 in gains, and effectively it would eliminate that $11,900 tax liability. In addition, if you end up selling more of your losers than winners, or you realize more losses than gains, or if you only sold losers and had no realized gains at all, well, you can use the first $3,000 in losses to offset ordinary income. And any additional losses beyond that, well they can be carried forward to future years to offset future capital gains.

MIKE: Dan, I've always thought that one of the hardest things about tax loss harvesting, and maybe I'm speaking from personal experience here, is that it often means admitting to yourself that you were wrong on a stock or a fund that you picked that you thought was going to perform better, and that can be hard. But I think you've done a great job of explaining the silver linings of a loss. Are there any downsides or risks to be aware of when talking about tax loss harvesting?

DAN: Yes. The biggest risk is something called the Wash Sale Rule. So the Wash Sale Rule essentially disallows any losses for the purposes of offsetting realized gains if you turn around and purchase the same or substantially identical security within 30 days before or after the sale date. Now, if this rule is violated, the realized loss is deferred by being added to the cost basis of the replacement purchase that you made, which would eliminate the benefit of realizing that loss for the current tax year.

So, for example, if you had a $20,000 loss in a stock that you sold for a $100,000 and you turned around and bought that same stock back for $100,000 the next day, you would not be able to use the $20,000 loss to offset other gains that you realized. Instead, that $20,000 loss, it would be added to the $100,000 cost basis on the security that you repurchased. So you'd end up with $120,000 cost basis on that $100,000 position.

MIKE: So how do you avoid the Wash Sale Rule to be able to use that loss?

DAN: Well, one option is to wait 31 days and repurchase the same security, but we don't advocate market timing. And the issue that you would run into there is the uncertainty of how that security might move in price during the 31 days that you're out of the market. So what you can do is look for different securities that could be expected to have similar performance under the same market conditions. One of the best potential opportunities that we've seen for this recently is within fixed income investments.

MIKE: Well, I want to come back to some of the opportunities in fixed income in just a few minutes, but let's stick with the taxes topic. Looking ahead, there are a number of tax code changes coming in 2024 that should benefit investors. So what are the key ones for investors to keep in mind?

DAN: Well, among the changes, the standard deduction was raised to $29,200 for married couples filing jointly and $14,600 for single filers. So with an increase in wages in 2023, this will help keep the standard deduction a viable option for many filers. 401(k)s will see a modest increase in contribution limits, up from $22,500 in 2023 to $23,000 in ‘24. And the catchup contribution for employees 50 and over went up to an additional $7,500 you can add. Now, IRAs also saw an increased limit of $7,000 per year, which was up from $6,500 in ‘23, but the additional amount for those 50 and up stayed at $1,000.

Now, a popular strategy among investors that are subject to Required Minimum Distributions, or RMDs, is the Qualified Charitable Distribution, or QCD. Now, with a QCD, you can make a traditional IRA distribution directly from your IRA to a charity with the distribution amount avoiding ordinary income tax. The limit for this has historically been $100,000 per year, but that limit rises to $105,000 in 2024.

MIKE: Those are some important changes that are coming up for 2024, but perhaps the biggest tax policy issue looming out there comes not next year, but in 2025. All of the 2017 tax cuts are set to expire at the end of 2025, and that includes the current lower income tax rates, higher standard deduction, and perhaps most significantly for financial planning, changes to the estate tax. So in 2024, the exempt threshold is 13.61 million per person. But if those tax provisions aren't extended, then the estate tax exemption in 2026 would be cut roughly in half, and that would impact a lot more people.

Certainly, choosing what year you die, not part of the plan. But what options do investors have as the tax cut expirations get closer?

DAN: Well, first off, Mike, we believe that everybody should have an estate plan. So anybody that hears those large numbers and thinks estate planning is only for those with over 14 million in wealth, well, I say think again. No matter what the size of your wealth is, proper estate planning can ensure that your legacy goes to your intended beneficiaries and that you also minimize the IRS becoming one of your beneficiaries as much as possible.

Now, without an estate plan, we've seen situations where investors forget to update outdated beneficiaries and inadvertently leave large accounts to those that they never would have intended to, say, for example, an ex-spouse who was once named beneficiary on an account and was never changed.

Even if your beneficiaries on financial accounts are correct and up to date, well, you would likely have other assets that you would like clear direction on. And so along with a trust, a will can help you detail these plans and also name an executor to carry out your wishes for you. Now. while there are many types of trusts with various estate planning benefits, at a high level, a trust can allow you to state exactly how you would like to see your assets distributed, whether that's immediate or over time, as it can hold assets that aren't meant to be transferred in the near future.

MIKE: Well, what's a common example where you see trusts used for that purpose?

DAN: Well, Mike, I'll give you my own. So my wife, who also works in financial services, and I, we have two boys, five and eight years old. Now, if we passed away tomorrow with our kids surviving us, and we didn't have an estate plan, no will, no trust, maybe improper beneficiaries, well, we would essentially be leaving it up to the state of Virginia to decide on a guardian for our children, how our assets would be dispersed, and who will be in charge of them while our children are still minors. But with a complete estate plan, we can spell out exactly who we would want to be the guardian of our children, and by using trusts, we can choose how our assets will be cared for, how they will be distributed to our children or families in the future, and we can include other wishes, like charitable donations. Now we get to make these decisions in advance and make it very easy for our chosen executor to carry out these wishes.

MIKE: So with the potential changes to the estate tax exemption looming out there, are you seeing more people proactively seek guidance on their estate plan?

DAN: We are, and that's actually a very positive thing. So I'll say it again, that everyone should have an estate plan, but I'll add one more thing to that. Everyone should have a current estate plan. Now, it's very common for people to go through a comprehensive estate planning process once and then just leave things in place for many years. Well, the reality is things change rapidly in our lives, and that estate plan that was prepared 10 years ago, well, it might not apply to your current situation.

So I'll go back and build on my own example because I think my kids are too young to listen to this podcast and get mad at me for this. Let's say hypothetically that my wife and I's trust states that our children get a full and equal distribution of our estate held in trust when they each reach the age of 21. We feel that our kids are responsible―we don't see any issue with this. But let's fast forward 15 years from now, and let's just say hypothetically our younger son has run into some challenges. Maybe he's shown that he isn't as responsible as we hoped, and there's a real concern about him inheriting a lump sum of money at 21. Well, we have the opportunity to amend our estate plan to account for this. We can change the method and the timing of the distributions. But if we don't, if we fall into the trap of never wanting to talk about our mortality, or we keep kicking the can down the road and not reviewing and updating our estate plan, well, if the unexpected happens and we never took action, well, that old estate plan no longer serves its purpose of having our legacy distributed exactly the way we want because our circumstances changed. Now, this is just one example, but there are a million reasons why someone's situation can change, and a review of their estate plan, it should always be a priority.

Now, the thing that holds people back is sometimes we think we're invincible, nothing could happen to us. And also, it's not fun to plan for not being around anymore, but the peace of mind that it gives you to know that your loved ones will be taken care of in the event that something does happen to you, well, that should be reason enough to go out and take action.

MIKE: Well, I absolutely agree that there is not much fun in planning for your own demise, but you're right that it really is necessary. You know, whenever we talk about estate planning, I think of the musician, Prince, who passed away without a will, and it was six years before his estate was sorted out—not the outcome that you want.

While it's good to hear that potential changes to the estate tax are at least driving more conversations around estate planning, I'm sure you're getting a lot of questions about what investors can do now, without knowing what the end result will be of this estate tax debate.

DAN: Yeah. Well, as you pointed out before on January 1, 2026, the federal lifetime gift and estate tax exemptions revert back to 2017 levels adjusted for inflation, which are roughly half of what they are now. So to illustrate the impact here, let's just say a married couple has an estate valued at $20 million today, and let's just ignore growth in the estate for now. Now, the 2023 exemption per person was 12.92 million, or $25.84 million for a married couple. So currently a couple with the $20 million estate, they could pass away and see that entire amount fall below the estate tax exemption, so it could pass to their heirs federally tax free. But if Congress doesn't extend the tax provision, when that same couple wakes up on January 1, 2026, they will have seen the estate tax exemption cut roughly in half to around $14 million for a married couple. So at that point, a $20 million estate would be $6 million over this exemption amount, and that $6 million in excess could be taxed as much as 40%, or $2.4 million. And as I mentioned, ignoring growth in that example, in reality, investors are hoping and even expecting to see growth. So even if someone's current estate is well below these exclusion limits, if they have a long time horizon, if they own assets they expect to appreciate in value, if they own real estate that could have a much higher value in the future, or if they own a business that might see significant growth, all of these can add up and create estate tax liability in the future that there is a chance to start mitigating early on.

MIKE: So what are the things that people should be doing now?

DAN: Well, the simplest strategy to follow is taking advantage of annual exclusion gifts. So the IRS allows for annual gifts of up to $17,000 for individuals, or $34,000 for couples, per person that the gift is made to, with no cap on how many people you can gift to. These amounts will raise to $18,000 per person in 2024. Now, generally it's better to gift assets during your lifetime so your beneficiaries can benefit from them sooner. This also allows you to reduce the size of your estate in advance of passing, and if those assets stay in your possession, assuming they grow in value over time, that growth increases the size of your estate and the potential tax consequence even further. But if they're gifted to others, though, those recipients can benefit from the growth while it is outside of your estate.

So one very popular strategy we see is people funding education for future generations by front-loading 529 plans, and you're allowed to make five years' worth of contributions to a 529 plan in a single year and stay within the annual exclusion amount. So in 2024, this would be $180,000. So let's say the couple with the $20 million estate I mentioned earlier, has eight grandchildren. By funding eight separate 529 plans with $180,000 each, the couple can effectively remove nearly $1.5 million from their estate without decreasing their lifetime gift exemption. Those funds could then grow tax-free in the 529 plans, if they're ultimately used for education, instead of growing in the couple's possession and increasing future estate tax liability.

MIKE: So what if you wanted to go above the annual gift exclusion amounts and make larger gifts?

DAN: Great question. You can absolutely do that, and that brings us to more advanced estate planning strategies. So if you make gifts to individuals in excess of the annual exclusion amount, those gifts aren't taxed now, but the amount of the gift in excess of the annual exclusion amount reduces your lifetime estate exclusion amount. That exclusion amount is the one that's set to be reduced in 2026. So we're seeing a lot of people make large gifts to maximize the current levels. Now, there are many different strategies using various types of trust that people can use, but in the interest of time, let me hit two of the more common situations.

The first is for married couples, they can create dual spousal trusts. To lock in the current higher exemption limit, married couples can each set up a spousal lifetime access trust, or a SLAT, and then transfer assets for the benefit of their spouse into them. At 2024 limits each trust could be funded with the full lifetime exclusion amount of 13.61 million per person. And in addition to removing those assets from the couple's estate, future growth generated within the trust would also be out of the estate. These are irrevocable gifts and there are some additional complexities to consider, so we would strongly encourage people to work with an estate planning attorney if you're considering one, but it is a popular strategy among married couples.

Now, a second common scenario that we see involves business owners. A family limited partnership or a family limited liability company can be used to transfer business ownership to family and future generations, while still maintaining control of the company. Now, again, these gifts can take advantage of the current higher lifetime exclusion amount, and in the best-case scenario where it's a business that continues to grow and increase in value, well those future increases will have been removed from the estate as well.

So these are just two of the many strategies to consider, but the common thread among the many is the chance to make larger gifts now to reduce estate tax liability in the future when you pass away.

MIKE: I really appreciate this discussion of the estate tax because this is a question that I get all the time when I travel and speak to investors. And I try to remind people that as much as they want to know what the estate tax exemption amount will be in 2026 and beyond, the political reality is that we probably won't have that answer until December of 2025. Debating whether to extend those 2017 tax cuts or let them expire will probably be the biggest policy item on Congress's to-do list in 2025, but it will depend on the political configuration in Washington after the 2024 election and so many other factors, and Congress is notoriously slow at getting big, difficult things done. So investors should expect that they won't know the answer to the future of the estate tax until well into 2025.

Well, Dan, I want to shift gears a little bit and talk about what investors can look forward to next year. Schwab just released its 2024 market outlook. What from your perspective are the highlights?

DAN: Our Chief Investment Strategist, Liz Ann Sonders, who has been a guest on this podcast as well, recently published our U.S. Outlook, which you can find on schwab.com. In that outlook, she addresses the ongoing debate about whether the U.S. could be heading for a soft landing or a recession. Well, our take is that we have already been in a series of rolling recessions for some time now, hitting areas like housing, manufacturing, and many consumer-oriented segments of the economy. Our best-case scenario for 2024 is a continued roll-through, with possible recession level weaknesses in services being offset by stability or recovery in areas which have already seen hits. On the other side, a formal declaration of a recession is still a distinct possibility, as well, given what we're seeing across the Leading Economic Index, the yield curve, and other risks like a reduction in consumer spending.

Now, as for impacts to the stock market, the relationship at the center of our 2024 outlook is that of bond yields to stock prices. The relationship between bond yields and stock prices has turned negative, meaning that all else equal, a move lower in bond yields could provide support to the equity market. Now, a caution here is that a huge drop in yields would not necessarily correlate to a large rally in stocks. If we see a large and sudden plunge in yields that indicated economic stress, well that could negatively impact the stock market as well. So what we'll be watching for is not just the direction of bond yields, but also their volatility as well. As far as the outlook for bond yields is concerned, we do believe that the Fed has reached the peak of their tightening cycle, and the markets are pricing this in as well. We believe this should lead to a gradual decrease in treasury yields, but it will be a bumpy ride, not just a straight line down.

MIKE: With all of that in mind, what should we be doing right now?  The equities market has had a pretty good run of late, and bonds are still offering good returns. So how do we add to, or polish up, or protect our portfolios as we head into a new year?

DAN: Well, let me do my best to tie in some of the topics we've discussed today, and what actions listeners can take now to be in the best position going forward. First off, every single investor is unique. You have your own unique situations, goals, fears, and preferences. Working with a financial consultant to get a holistic view of your situation is the first step in uncovering areas of opportunity. A retirement or income generation plan, it can be a good place to start to identify your needs when it comes to your portfolio, which can shape what your asset allocation should look like and how much risk you should be taking on. But this is just one part of a comprehensive wealth management plan. Now, some of the other areas that we haven't necessarily touched on today that your financial consultant can help you with are reviewing your insurance coverage and needs, reviewing your banking and lending needs, your charitable gifting strategies, what Social Security decision to make, whether a Roth conversion makes sense. And of course, as we discussed, a review of your estate plan. So this holistic view, it allows us to truly understand your situation and make the most personalized and specific recommendations. So with that said, my first action item is to schedule an appointment with your financial consultant, preferably before year-end, but at the start of 2024 would be incredibly beneficial as well.

Now, I mentioned tax loss harvesting within fixed income earlier. We have seen a lot of great opportunities here for some time now. With the rise in interest rates, many people are seeing unrealized losses in fixed income, whether those are individual bonds, ETFs, or mutual funds. Now, there is an opportunity to sell these securities to capture the loss and immediately replace them with different fixed income investments and not trigger the wash sale rule and keep largely the same exposure within this asset class and have a realized loss that can offset realized gains and/or ordinary income up to $3,000. So this is a great time to review your fixed income allocation and see if there might be more appropriate options for you as well.

MIKE: Yeah, I'm glad you touched on fixed income. That's definitely something that a lot of investors are seeking opportunities. What other opportunities are you seeing in that space?

DAN: Well, one ongoing opportunity we continue to see is taking a longer-term approach to fixed income investing. We are in a completely different interest rate environment now than we were for most of the past decade. With investors getting five-plus percent in money market funds, many are hesitant to lock in longer term yields, especially when those yields are currently lower. So we're seeing many cases where people have far too much allocated to cash and cash investments like money markets as a result, without a longer-term plan for if and when rates drop. So this creates reinvestment risk, and we're suggesting that investors start to extend duration and look at locking in some of these higher yields. We believe, again, that the Fed is at the end of its current hiking cycle, and the market is pricing in rate cuts as soon as next year. So as yields start to drop, these yields on money market funds will drop as well, and the opportunity to lock in higher long-term yields will start to dissipate.

MIKE: So what's the main reason you find that people are hesitant to make this kind of change?

DAN: The main reason is recency bias. That is, people are looking at the current state is if the environment won't change. So, today, their money market funds might be paying higher than the yield on a 1-, 2-, 10-year treasury, but we don't expect that to stay. For those that are waiting because they think the yields could still go higher, well they're essentially trying to time the market. And if they're wrong and rates do in fact drop, well, they will have missed the chance to lock in yields at a higher rate.

Now, we don't recommend just going out and shifting all of your cash or money market funds to long-term bonds, but two strategies that can make sense are barbells and ladder strategies. So with a barbell strategy, you could invest in both shorter- and intermediate-term fixed income, concentrated in two maturity dates. And with a ladder, you could invest equal amounts in maturities one year apart out to a set date in the future. So, for example, a seven-year ladder, you could buy CDs or treasuries in equal amounts from one-year to seven years in maturity. With the shortest-term instruments maturing, you then replace them with a new instrument at the back end of the ladder. So this could help smooth the returns when the path of interest rates is uncertain.

MIKE: Well, Dan, this has been a fantastic conversation. You've given us a ton of practical advice, which I really appreciate, and lots of things to think about. Thanks so much for making the time to chat with me today.

DAN: My pleasure, Mike. Thanks for having me on.

MIKE: That's Daniel Stein, who manages two Charles Schwab branches in Northern Virginia.

That's all for this week's episode of WashingtonWise. We're going to take a break for the holidays, so we'll be back with a new episode on January 11. Take a moment now to follow the show in your listening app so you don't miss an episode. And if you like what you've heard, leave us a rating or a review—those really help new listeners discover the show.

For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, happy holidays and keep investing wisely.