​It’s been a stellar start to the year. The S&P 500 has risen nearly 20%--crossing the 3,000 mark for the first time on June 12th, 2019.

​Stock market valuations are getting a bit high and investor confidence remains unchecked.

​While corporate earnings growth is slowing.

​And as a contrarian indicator, investors remain very upbeat about the market…

​…while volatility remains low.

The Fed seems to be caving to political pressure and markets believe we’ll get one or two rate cuts during the second half of 2019. The yield curve has avoided a major inversion as short-term rates have continued to fall.

Other things that we find worrisome:
​
Treasury Secretary Mnuchin indicated the government may run out of funds by early September. However, Congress is scheduled for a summer recess and politicians seem to be more divided than ever so the Federal budget could become a big deal.

Although the markets seem to have priced-in an easing of trade tensions, there may be no quick end to the US trade war with China

Here’s What Oak Street Advisors is Doing Now:

When making any decisions we need to ask ourselves “Can I afford to be wrong?”. The long-term lesson of the markets dictates that our default position should be fully invested. The markets may go down-- but they do not stay down-- and the price of the permanent ups is the short-term downs.
​
With that said, and knowing we may be wrong, we have made some changes to our stock portfolios. We’ve taken about 10% out of the stock allocation in the equity portion of your portfolio and are holding those funds as extra cash positions.

This means if the stock market were to gain an additional 10% from now until year-end, we would only achieve a 9% gain. However, if the market were to pull back from here by 10%, we would only fall the same 9% and would have cash available to reinvest at lower prices.

Only time will tell if our caution is justified.
 
Note. This information does not constitute investment advice. It is merely posted so clients can understand the thought process that goes into managing their portfolios. Each individual’s circumstances and needs are unique. No one can predict the future or the valuation of any financial market with accuracy.

Often, navigating the Social Security Administration’s rules can be complex and confusing. None more so than trying to determine a surviving spouse’s social security benefit. Nearly every couple will face this problem at some point.

Timing is everything regarding social security surviving spouse benefits. The filing date alone—when you decide to claim social security and when your spouse does—ultimately determines how much you both will receive in Widow or Widowers benefit. Getting your initial claiming strategy right is paramount to maximizing this important benefit.

If the deceased spouse has not begun receiving social security income at the time of death, the survivor’s benefit is based upon the decedent’s primary insurance amount (their social security income at Normal Retirement Age) plus any delayed retirement credits up to the date of death. Delayed retirement credits add about 8% to the social security income received for each year you delay taking your social security benefit beyond your normal retirement date, up to age 70. If this is the case the surviving spouse’s decision to claim social security benefits will be based on their age at the time they file. What this means is if the survivor decides to receive social security income before they reach their normal retirement date, there will be a reduction in income for each year of early filing, even if the deceased spouse had earned delayed retirement credits.

If the deceased spouse had been receiving social security income before their normal retirement date, their benefit and the widow(er)’s benefits are reduced forever, depending on when the initial benefit claim was filed. Generally, you would lose about 8% of social security income for each year you receive social security payments prior to reaching your Normal Retirement Age (NRA). A widow(er)’s benefit is limited to the larger of 82.5% of the deceased spouse’s death primary insurance amount or the reduced income benefit the deceased would have been eligible for if they had lived.

The Social Security Administration provides the following example:

“Mr. B, age 64 on August 3, received reduced retirement income benefit of $350 (primary insurance amount $374.90) for August and September. He died in October. Mrs. B, age 66, comes in, to file for widow's benefits. The retirement income benefit if Mr. B were alive would be $350. 82 1/2 percent of the death primary insurance amount is $309.20 ($374.90 X .825). The life and death primary insurance amounts are the same. The widow’s income benefit will be the higher of the two, $350 in this example.”

Your widow or widower can get benefits at any age if they take care of your child younger than age 16 or disabled, who’s receiving Social Security benefits. If the surviving spouse is disabled, benefits can begin as early as age 50. Unmarried children, younger than age 18 (or up to age 19 if they’re attending elementary or secondary school full time), can also get benefits.  Children can get benefits at any age if they were disabled before age 22.  Under certain circumstances stepchildren, grandchildren, step-grandchildren, or adopted children may also be eligible for benefits. These circumstances are exempt from the deemed filing rules and do not affect future claims made under their own work record. There is a family maximum to survivor benefits that will vary between 150% and 180% of the deceased worker’s benefit amount.

For divorcees who had been married for ten years or longer, the survivor benefit is available if they have not remarried before age 60. An ex-spouse’s survivor benefit has no effect on the family maximum benefit, so a new spouse and any children can still be eligible to receive survivor benefits based on the same wage earner.

Although a widow may be eligible for benefits based on their own work record, if they file for social security benefits, they will receive the highest benefit they qualify for at the time they file.  Some benefits are calculated independently with the larger benefit being paid or the smaller benefit being paid plus the excess amount of the larger one. Other types of benefits are calculated with a carry-over reduction amount from the first benefit to the second.
​
Although the loss of a loved one is a terrible time to assess and compare your social security filing options, it is important that you choose wisely. If possible, delay the decision until you have had the time to be emotionally ready to face the problem and consult with a trusted financial planner.
 

“Money has never made man happy, nor will it, there is nothing in its nature to produce happiness. The more of it one has the more one wants.”-  Benjamin Franklin
 
I agree with the last sentence, but there is no doubt that money can buy some happiness. Studies show that earning $75,000 annually buys happy; and $95,000 annually buys really happy.

Taking that into account, the final financial commandment to conquer is a self-assessment of the way you spend your money. Do you spend more on the things that really matter in life-- providing protection for your family, ensuring you have enough assets in retirement, and making memories with the ones you love? Or do you spend more on that new car payment, credit card debt or eating out every night?

Keeping up with the newest trends, cars, boats—you name it, is expensive. You need a safe car your family can rely on, but does it need to have 8 temperature-controlled zones, leather seats with warmers and a sporty trim package? Your family will always need clothes on their backs, but a shirt from Target or Costco provides the same warmth as the one in the mall that costs over $200.

Some of the wealthiest families somehow find a way to spend every penny earned with little to show for it in the end. When you reach the final commandment it’s time to take an honest introspective look at yourself and your household to make sure you’re spending your money in a deliberate way, on things that really matter and build your wealth into the future.
 
You can control your money, or your money can control you.

Many investors love the Federally tax-free income they receive from municipal bonds. Municipal bonds are debt securities issued by state and local governments to fund operations or special projects. Because the income an investor receives is not taxed, the after-tax return of municipal debt is often higher than the after-tax income provided by corporate bonds and bank CDs.

For example, the yield on the iShares Core US Aggregate Bond ETF (AGG) currently stands at about 2.73%. For a taxpayer subject to a 22% marginal income tax rate, the after-tax return drops to just 2.1% and is even lower as you climb into higher marginal tax brackets. Compare this to the Vanguard Tax-Exempt Bond Index Fund ETF (VTEB) which yields 2.28% federally income tax free.
​
An often-underappreciated item in the US income tax code deals with qualified dividends. A qualified dividend is a dividend from a common stock or a preferred stock that the filer owns for a specified minimum time period. The beauty of qualified dividends is that they are taxed at the filers long-term capital gains rate rather than as ordinary income. The following table compares ordinary income rates and long-term capital gains rates for married filing jointly returns.

Capital gains rates are not perfectly aligned with the marginal tax rates due to the Tax Cut and Jobs Act of 2017, but except for a small slice of taxable income between $78,751 and $78,950, the tax rate on long term capital gains is lower that the tax rates on other forms of taxable income.

Which brings us to the value of qualified dividend income (QDI). QDI extends to income received from preferred securities. Preferred stocks are debt-like securities issued by corporations that rank below the bond holders-- but above the stockholders-- in the event of a liquidation. The term preferred is used because the dividends on these shares must be paid in preference to dividends paid to common stock shareholders. To learn more about preferred stocks you can view the Wikipedia entry here.

The importance of this is the after-tax returns of many preferred securities held long enough to receive QDI tax treatment, are higher than rates generally available in the municipal bond market. Take the Goldman Sachs preferred A shares (GSPRA) for example. This security has a current dividend yield of 4.7%, even at the highest capital gain rate of 20% the after-tax net on this income is 3.7% or 60% more than the tax-free rate of 2.3% from VTEB.

There are some details to keep in mind; to qualify for QDI status, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. Because most preferred securities pay quarterly dividends, you would generally need to make your purchase the day of the preferred trade’s ex-dividend to ensure you receive favorable tax treatment.

Also, preferred issues are highly concentrated in the financial and utility sectors of the market which could lead to poor diversification. You could use exchange traded funds (ETFs) like the iShares Preferred and Income Securities ETF (PFF) or an open-end mutual fund like the Nuveen Preferred Securities and Income Fund; but be aware that not all the distributions from funds like these are considered Qualified Dividend Income. Only 62% of the distributions from PFF were eligible for QDI treatment in 2018 and usually about 60% of the Nuveen funds distributions were QDI eligible.

Still, for investors concerned with building a tax-efficient portfolio, preferred securities are certainly worth consideration.

Okay-- you just completed your income tax return for last year. You want to file it away and not worry about taxes until next year, but before you do-- take a look at your completed return to identify ways you can save tax dollars next year.
​
Income tax planning can add to your future net worth and your future income streams. Here is a line by line view of some of the things that good income tax planning can do to improve your financial life.

Taxable Income
Line 10 on your new 1040 return shows your taxable income after all deductions. Knowing your marginal income tax rate is the first step to efficient income tax planning. Lowering your income taxes in the current tax year is not always the best long-term strategy, lowering your lifetime income tax liability is often much more important.

​For 2019, the federal income tax brackets for individuals are:

Your marginal income tax rate is the amount you would pay on your last dollar. For example, a single person with taxable income of $84,201 would pay a 24% rate on only one dollar of income, not their total taxable income. They would in fact pay 10% on their first $9,700 of taxable income, then 12% on the next $29,775, then 22% on the next $44,725, and finally 24% on the last dollar of taxable income.
​
It is important to remember that the current income tax rates for individuals are scheduled to revert to the pre Tax Cuts and Jobs Act rates in 2025. Barring tax changes passed by Congress in the interim, you have six years to utilize the current brackets to your benefit.

Depending on your income level, managing the income tax bracket you fall in may mean realizing extra income to take advantage of a favorable rate; or you may want to lower your taxable income to qualify for a lower tax bracket or other income tax benefits (such as Obamacare).
 
In my opinion the 12% bracket is extremely valuable. Married couples can have up to $78,950 of taxable income and pay no more than 12% in federal income taxes. Less than 25% of American households have taxable income above this level  and I believe the odds of their marginal income tax rate falling is quite small.
​
If you are among the many that fall into the 12% rate, you should look for ways to pay taxes on as much income as you can without moving into the 22% bracket. Some of the things you should consider are:

Higher marginal income tax payers will want to take the opposite approach. They’ll want to defer more income unless they anticipate being in an even higher bracket in future years. High bracket individuals will want to:

• Increase contributions to tax-deferred retirement plans.
• Use no-load annuities in lieu of taxable savings vehicles.
• Consider tax-free municipal bonds rather than taxable bonds and savings accounts.
• Locate tax efficient investments in their taxable investment accounts.
• Utilize tax free accounts such as 529 Plans and Health Savings Accounts for appropriate financial goals.

The absolute worst taxable income numbers are $200,000 for single filers and $250,000 for joint filers; along with $157,500 for single filers and $315,000 for joint filers who own their own business.
The first range, $200,000 single and $250,000 joint subjects a taxpayer to the 3.8% net investment income tax.

The second range for self employed filers of $157,500 for single and $315,000 for joint are the cutoff for the pass-through business income deduction.
​
Taxpayers at those levels should take aggressive steps to lower their taxable income.

​Moving back up your return, line 2 and line 3 deal with investment income.

Note that these lines have been subdivided into an A and B column. The column on the left is better than the column on the right for income tax purposes.

Tax-Exempt Interest
On the left you have tax-exempt interest, which is income generated from municipal and state government entities. Municipal bond interest is generally income-tax free, although there are some taxable municipal bonds, and some municipal bond interest is subject to the Alternative Minimum Tax.
Tax-exempt interest is also added to your Adjusted Gross Income (AGI) for purposes of calculating how much of your Social Security benefits are taxed. The higher your marginal income-tax rate, the more valuable tax-exempt interest is. To determine the taxable equivalent yield of a tax-exempt security, you divide the tax-exempt yield by 1 less your marginal income tax rate.

For an investor in the 12% marginal income tax bracket, a municipal bond yielding 2.5% gives them the same after-tax return as a taxable security that yields 2.8% (.025/ (1-.12)). For an investor in the 32% tax bracket the same 2.5% yield from a municipal bond equates to a 3.6% taxable yield.

Qualified Dividends
Again, the column on the left is more valuable than the column on the right. A qualified dividend is a dividend from a company that: a) trades publicly on a US exchange and b) is incorporated in a US possession or c) is eligible for the benefits of a comprehensive income-tax treaty with the US. The advantage to generating qualified dividend income is that these payments are taxed at your capital gains rate, which is generally much lower than the rate on your ordinary income

 Dividends from REITs, MLPs, employee stock options, tax-exempt organizations, money market accounts, and shares used for hedging are not eligible for qualified dividend status. 

Make sure to also consider the treatment of preferred stock dividends. Although ranked below bondholders in the event of financial difficulty, preferred stock pay yields that are similar to long-term bonds. All taxpayers should consider these securities against table bond holdings for the tax advantages alone.

IRAs, Pensions, and Annuities
Income received from pensions and some annuities are absolute, in that you receive the income and you pay the taxes; however, income from an IRA and certain types of annuities are somewhat discretionary. You can plan the timing and the amount you withdraw to achieve the best income-tax outcome for your personal needs. If you are over 70 ½, you are required to take some distributions from your traditional IRA accounts (required minimum distributions/RMDs), but even then you can take advantage of the Qualified Charitable Distribution rules to lower the amount that is reported to the IRS.

Income derived from variable annuities can be problematic for some. All income from variable annuities is considered ordinary income until you have spent down those assets to your cost basis. At that point, the withdrawals are deemed to be return of principal and are no longer subject to income taxes.
​
Although we prefer to use IRA to Roth IRA conversions to manage income tax brackets for those in the 12% marginal tax bracket, you can certainly use variable annuities in a similar fashion. If you are in a higher marginal tax bracket, you can also consider exchanging your variable annuity for an immediate annuity. Doing this will change the deemed ordinary income rule to a pro-rata distribution rule, where some of your distribution is considered ordinary income and some of it is considered a return of principal.

You probably will pay taxes on some of your Social Security benefits. If your total income is more than $25,000 but less than $34,000 for individuals; or $32,000 but less than $44,000 for joint filers, you will pay income tax on 50% of your Social Security benefit. If you are above those ranges, you’ll pay income tax on 85% of your Social Security benefit.
​
Sadly, I have to say I have seen cases where an individual is less than 70 years old, in a 30%+ marginal income-tax bracket, saving money, and still insists on claiming their Social Security benefit. It would be a simple fix to suspend Social Security benefits, reduce their taxable income, and accrue delayed filing credits to their future social security income. Yet some will still continue those benefits because they feel they have paid in all their life and want to see some return on their money. Yes, you could die, but throwing away money paying needless taxes is hard to understand.

In trying to make the form 1040 look simpler, the IRS added this line. It refers to a Schedule 1 and is attached to your 1040.
​
Alimony

Under the old tax rules, alimony was deductible to the payer and taxable to the payee. No more--Congress has managed to shift the income tax burden for alimony payments to what is likely the higher earner with the higher marginal income tax rate. If you are divorcing it is important that the income tax liability of alimony payments be considered in developing an equitable settlement.

Business Income/Loss

This has become a much more important item than in years past, as owners of any business that uses a pass-through entity can receive a 20% reduction to taxable income generated through that business. Assuring you maximize this important benefit is essential. See our previous post ‘Big Savings for Self-Employed and Business Owners’.
​
Capital Gains and Losses

For all taxpayers, it is important to use tax-efficient strategies for taxable investment accounts. High yield stocks and bonds are more efficient being owned in tax advantaged accounts (401ks, IRAs, Roth IRAs etc), while investments that mostly appreciate in value are a better fit for taxable accounts. Still, capital gains rates are attractive relative to the tax rates on ordinary income.

You can use capital losses to offset any capital gains you receive, plus $3,000 of ordinary income. Capital losses are never a good thing, but at the end of each year you should review your investments to look for opportunities to offset gains.
​
Rental Real Estate, Royalties, Partnerships, S-Corps, trusts, etc.

​If you own rental properties you know how helpful depreciation can be for your income tax liability. Yes, some of the depreciation will be needed to maintain the property, but some of it will also reduce your taxable income, and if you sell, will result in more income being taxed as capital gains at currently favorable rates. If you own a property that has been fully depreciated you might consider using a tax-free exchange to like property to increase your basis and start the depreciation process all over again.

Health Savings Accounts​

Many American’s are now covered by high-deductible health insurance plans either through their employer or purchased directly from insurers through the Affordable Care Act Marketplace. Contributing to an HSA will reduce your current income tax liability, and if the funds are used to pay for qualified medical expenses the distributions are tax-free as well. See our post on ‘Hacking Your Health Savings Account’.
​
Self Employed SEP, SIMPLE, and Qualified Plans

An easy way to reduce your current year income tax liability is to contribute to a retirement plan. IRA contributions are reported on line 32, but if you’re self-employed you can defer taxes on even more money. You can establish a SIMPLE retirement plan before October 31 of the current tax year and defer up to $13,000 ($16,000 if you are over age 50) annually.

A SEP retirement plan allows an even bigger tax deferred contribution of up to $56,000, plus a catch-up contribution of $6,000 if you are over age 50. Another useful benefit is you have until your income tax filing deadline, plus any extension, to establish and fund a SEP for the previous tax year. If you’re a business owner who still needs to reduce your previous years taxable income-- this is your chance!

Self Employed Health Insurance Deduction

If you’re self-employed, this is where you get to reduce some of your taxable income for health insurance expenses. If you’re not self-employed and are not covered by an employer health insurance plan, this is motivation for starting a side gig.

For example, the mechanic that works on cars after hours, or maybe the carpenter that does an occasional job on the side. Formalize your business to take advantage of this deduction.

In Conclusion
While this is far from an exhaustive list of ways to reduce your income tax liability both now and in the future, you can see there are opportunities for almost everyone to benefit from income tax planning. Take some additional time to review the tax forms you just filed or see a financial planning professional-- there is a lot at stake.

Once you’ve filled up all your tax-deferred and tax-free investment accounts, it’s time to start paying Uncle Same (now) to invest. The 9th Financial Commandment for Millennials is to open a taxable investment account, while keeping tax management a key feature of this aspect of your portfolio.
​
Investors need not worry about dividends, interest, or gains in a 401k, 403b, 457, SEP or Traditional IRAs because those will be taxed when you decide to have them taxed (or an annual portion is taxed when the government says so via Required Minimum Distributions at age 70 ½). Gains, dividends and interest in Roth IRAs are tax-free if you meet certain qualifications. For this reason, its best to have growth, dividend, and other income producing investment held inside these accounts.

Now that you’re opening a taxable investment account, any growth, dividend, interest or other income is taxed in the year the gains are realized or the dividend and interest is paid (usually…i.e. phantom income). While you can use long-term capital gains tax rates to your advantage on investments held over a year, the ideal goal for a taxable account is to participate in investment growth while also not being taxed left and right for gains and income produced.

To accomplish this, we recommend using a portfolio made up of Exchange Traded Funds (ETFs). ETFs offer broad diversification that reduce the need for trading, minimize taxable distributions, and provide the long-term growth you want in a tax-efficient manner. Here’s an example of Oak Street Advisors’ FatPitch ETF Portfolio investments:

Even better-- our clients experience $0 trading cost because of our relationship with TD Ameritrade as custodian. However, any DIYer can implement a similar ETF strategy on their own for a minimal $5-$8 per trade. 

In general, investors can see less return drag from investment and tax expenses by utilizing this strategy in their taxable investment accounts. The relationship of the taxability of an investment and the taxability of the account it is held matters, and can keep dollars in your pocket. As with any investment, making sure you’re sticking to your strategy via rebalancing and reacting to market conditions, or paying someone to do so on your behalf, is crucial.

Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, we go through the advantages of paying down common and often necessary consumer debts such as car loans, mortgages, and student loan obligations.
​

If you’ve made it to the 8th Commandment congrats, you have established a strong financial foundation; we also know you’ve paid off your high interest credit card debt—but now it’s time to start pecking away at the larger consumer debts weighing down your net worth.

I’m referring to debt typically considered “necessary” for most Americans—student loans, your mortgage, car loans, business loans etc. These are loans with normally reasonable interest rates and longer payoff schedules. Paying them down may seem almost unattainable but be assured, if you commit to doing so you will save a lot of money.

For example: adding $100/month to a $500,000 mortgage at 4.5% interest will save $36,240 over 30 years. That seems abstract, like you will never really see that savings—but your net worth doesn’t lie.
 
 
What Should You Start Paying Down First?
We discuss the two different debt payoff methods in Getting Out of Credit Card Debt: The 2nd Financial Commandment for Millennials. Our advisors tend to favor the Snowball Method, so we’d recommend starting with the smallest loan first.

The thinking is as follows; Paying off a car note early not only saves interest but also increases monthly cash flow by eliminating the monthly car payment. The money that would have been allocated to the car payment can now be used to pay down student loans or add monthly principle additions to the mortgage.
 
Paying down your mortgage or student loans is not sexy financial planning advice—but doesn’t saving tens of thousands of dollars and eliminating all debt down sounds pretty awesome?

Over the course of my thirty-year career in the financial services industry I have seen and continue to hear many investment theses. Some brilliant, some not so much so.  I have also witnessed a number of changes that in retrospect were obvious and inevitable. The personal computer revolution was one of the first. I recall there were many would be winners that vanished into dust, but some of the early players like Intel, Microsoft, and Cisco became the next generation of mega-cap companies. Likewise, with the internet boom. Companies came and went, but some like Amazon and Google became behemoths. Cell phones were the stuff of dreams in my youth, but the ability to access people and information, no matter where you are, was inevitable and although early participants like Nokia and Motorola have become footnotes, Apple and Samsung have had explosive growth and rewarded investors many times over.

Recognizing inevitable change is only half of the battle for successfully profiting in new industries and market opportunities. Diversification and patience are more important long-term ingredients to financial success.  If you put all your eggs in the Commodore computers basket you were a loser. The same for eToys.com or Lycos, or Palm Inc.  Even if you recognized the inevitable, it was still much too easy to lose all or most of your investment.
Perhaps, though you were bright enough or lucky enough to pick the winners. On 3/24/1980 you could have bought Intel for just $0.32 adjusted for splits. By 10/20/1980 it had already soared 56% to $0.50. A year later, the price had fallen about 48% to just $0.26 per share. Would you have held on? Would you still have faith that this was inevitable? It wasn’t until the second quarter of 1983 that Intel reached that $0.50 peak again. Today, no one gets very excited about Intel, but the stock price has reached $51 per share netting those long-term patient investors $100,000 for every $1,000 they invested nearly 40 years ago.

So, although you can find inevitable investment opportunities, today the rush of the quick pop in price per share will not always be there. Sometimes, it is just waiting, and waiting, and waiting.
​
With those words of warning, we will share with you four inevitable investment opportunities we feel all investors should be considering right now.

​In January of 2012, marijuana became legal for medicinal and recreational use in Colorado. In 2018, it became legal for the entire country of Canada. Around the world attitudes toward “pot” are changing rapidly. We are now witnessing the birth of an entirely new industry. We believe the opportunity is akin to the liquor industry at the end of prohibition, and we are not alone. On November 1, 2018, Constellations Brands (STZ) closed a $5 billion investment in Canadian cannabis producer Canopy Growth (CGC). On August 1, 2018, Molson-Coors (TAP) announced a joint venture with Canadian cannabis company HEXO Corp. (HEXO) to develop non-alcoholic cannabis infused beverages. Additionally, in December of 2018, Philip Morris (PM) invested $2.4 billion in the Canadian cannabis company Cronos (CRON). What do these large multi-national companies see in the future of the cannabis market?
Take a look at some of the numbers.

In four and a half years, total sales of cannabis have more than doubled in the state of Colorado, jumping from $683 million to over $1.5 billion. Colorado ranks 21st in the US by population with about 5.7 million residents. That works out to sales of about $263 per year per person.

There are now ten states in the US where cannabis is legal for both medicinal and recreational use. This includes California, ranked number 1 by population and Michigan ranked number 10. These states in aggregate have a population of about 80 million. Throw in New Jersey and New York who are likely to follow suit and that means about one third of American’s live in states where cannabis is legal.
​
Even if Colorado is an outlier and sales in other states are only say 70% as high (haha) or $184 per person that works out to a market of $14 billion. Maybe Constellation Brands and Molson-Coors envision a day when you stop by your local pub for a cannabis infused drink rather than a beer. For comparison, the US market for beer topped $35 billion in 2018. Like the acceptance of the lottery, there will be many states reluctant to join the party for moral reasons, but sooner or later acceptance is inevitable.

​No, you don’t have to be a tree hugger to realize that renewable energy is inevitable. Take a look at this chart from Yahoo Finance showing the fastest growing jobs in every state.

In eight states, the fastest growing job is solar panel installer. In four states, the fastest growing job is wind turbine service technician.
​
Climate change concerns aside, it is obvious renewable energy is becoming a much bigger deal both in the US and abroad. Although, starting from a low base the following chart from the Yale School of Forestry illustrates the beginnings of an explosive growth in solar energy production worldwide.

Much like the tipping point in software adoption, we believe solar installation will reach a critical mass that will one day lead to a distributed production model for energy use. With a large installed base of photovoltaic solar panels, today’s electric utility could evolve into a sort of common carrier like the Telcos, moving electricity from areas of high production to areas of high consumption. Your rooftop solar array and the arrays across the nation would provide power for homes and factories across the country. Rather than spending most of their capital on new power generation assets, they might spend more on upgrading and improving the efficiency of our electric grid instead.
​
Both utility scale solar and wind systems currently provide the lowest power costs available. As photovoltaic systems improve, and manufacturing systems evolve, the price will head only one way – down, as illustrated in this chart from Lazard on levelized energy costs.

You have likely heard about the Tesla (TSLA) cars with autopilot, or maybe Google’s Waymo division. The first generation of self-driving vehicles is nearly here, and it means big change for the entire transportation industry. It will change the way automobiles are used, change the ways roads are built, and change the way freight is shipped.
​
Like most people in America, you own a car that sits parked in your garage or at your place of employment 90% of the time. Cars are expensive. There was a time when the average family could buy a vehicle and pay for that vehicle with three-year financing. Today dealers are stretching that financing out to six or even seven years to make ownership possible.

Imagine getting up in the morning and using a smartphone app, you summon your ride to work. On the way you are free to check your email, read the news, or even just nap because you are not driving the vehicle - it is driving itself. In 2018, the average payment for a new car in the US was $523 per month. That doesn’t include insurance, fuel, or maintenance. It is easy to guess that the total cost of car ownership to be around $700 per month. With autonomous vehicles, you would pay only for the time you are using the vehicle and various companies would own fleets of vehicles around the country. They would pay for the maintenance and insurance, you would just rent a ride. Again, once critical mass is reached with autonomous vehicle adoption, our roads would become safer, parking garages would go the way of payphones, and travel becomes less frustrating. How many traffic jams would be eliminated if crashes were rare and rubbernecking were eliminated?

Shipping freight will change radically as well. Without the need for human drivers, shipping companies would program their trucks for fuel efficiency rather than speed. Trucks would travel the highways 24/7.  If you have ever been on an interstate highway in the wee hours of the morning, you know there is almost no one using the highway. This becomes prime time for shippers, resulting in less congested roads and decreased need for new road construction.
​
For all these reasons and more, we see autonomous vehicles as an inevitable change.

Yep, it’s as simple as that. History has shown that investing is common stocks for the long run inevitably creates wealth. Markets go down but they do not stay down. You don’t have to be a genius or a prognosticator to participate and profit from the inevitable growth generated by a group of great American companies.
​
Back to our question about Intel. Did you buy it? Did you hold it? The Wilshire Index did. Same for Apple, Netflix, Tesla, and many other great and not so great companies. Some companies that were in the index disappeared, but the growth of market value marched on anyway.

​The Wilshire 5000 Index is a market cap weighted index of all the actively traded stock on all the US exchanges. Originally named the 5000 because when the index was first constructed in 1977, there were about 5,000 companies actively traded in the US. As of June 30, 2018, there were 3,486 companies in the index. You will find the components of all the inevitable trends we covered here, and some that we may not be aware of included in the index. If new companies come to market in the future, they will be added too. The companies in the index are updated monthly to include IPOs and corporate spinoffs and also to remove companies that move to the pink sheets or cease to trade actively.

Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, we discuss the advantages a Roth IRA presents for young investors. From tax-free compound growth to backdoor Roth IRA contributions— we explain why young investors need to use Roth IRAs regardless of their income level.
​

The 7th Financial Commandments for Millennials is to max our Roth IRA contributions. Roth IRA accounts have been available since 1997. Unlike a Traditional IRA, Roth IRA contributions are taxed in the year of the contribution but never taxed again if certain requirements are met.

The magic of compounding means, the earlier you start, the greater the tax-free growth within the account. If you are 20 when you start making contributions, you could be looking at four doubles of your original contribution by the time you retire at age 60.  That means a $6,000 contribution this year could grow to $96,000, creating $90,000 of tax-free income for your retirement years.

With today’s historically low income-tax rates, it would be prudent to put as much money as one can into a Roth IRA. Always consult your CPA before making this decision, but one could argue the tax-free growth and withdrawals outweigh the hurt of paying today’s top tax rates.
 
The 5 Year Rule
Another reason to open a Roth IRA is the flexibility it can provide to fund emergencies that may arise over your life.
You can always withdraw any Roth IRA contributions without taxes, after all, you paid income tax on the money prior to making the contribution. However, if you haven’t had the Roth IRA open for at least five years, your distribution could still be subject to a 10% tax penalty, similar to the early withdrawal penalty for Traditional IRAs.

The five years for withdrawals begins when you open the account, not when you make subsequent contributions. There is also a five-year rule for Roth IRA conversions that start in January of the year you make a conversion; this prevents someone from using a Roth IRA conversion to avoid early distribution penalties from early Traditional IRA withdrawals.
 
Who Qualifies for a Roth IRA
If you have a modified adjusted gross income of less than $122,000 if single, or less than $193,000 if married filing jointly, you can make Roth IRA contributions of 100% of your income up to $6,000 if younger than age 50 or $7,000 if age 50 or older.
 
 
Back-Door Roth IRA Contributions
Without income limitations for converting assets in a Traditional IRA to a Roth IRA, many who are disqualified for income resort to the back-door method for funding a Roth IRA.  This works because anyone may open and contribute to a non-deductible Traditional IRA, even if you are covered by a qualified retirement plan.

Once the funds are deposited into the non-deductible Traditional IRA, they can then be converted to a Roth IRA.  This has the same net income-tax effect as contributing directly to a Roth IRA. The IRS recently loosened the back-door conversion rules and allow for immediate conversions, where in the past investors were recommended to wait a few months before converting to satisfy the IRS.
 
The Younger, The Better
Tax-free growth and tax-free distributions are very enticing, especially for young investors. The more time your account grows tax-free, the better. Another point to make is that the more of your nest egg you have in a Roth IRA, the less your Required Minimum Distributions (RMDs) will be during retirement. Which inherently leads to you and your financial advisor having more ability to control/minimize income taxes during retirement years.