Essentials List:
Year-End Update

Year-end provides a vital opportunity to review your financial well-being on multiple fronts, and to get a jump on planning for the year ahead. From taxes and estate planning to investing and philanthropy, here are some essential topics to consider. As always, your J.P. Morgan team is here to help with all of your planning goals.

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Are you waiting for Congress to act before preparing your tax returns?

There are two big reasons why you should not let tax-reform talk delay preparations for your 2017 filing:

  1. 1) The later in the year any tax bill is adopted, the less likely it will affect 2017 returns—and Congress has a number of important issues to address before getting to taxes.
  2. 2) It’s wisest to speak with your accountant and other advisors now to discuss your holdings and potential deductions for this year versus next. If rates or the rules on deductions change, you can adjust before submitting the final return.

Prepare thoughtfully now and file later—just don’t miss any important deadlines. For more information, review our tax-saving techniques to keep in mind for year-end.


Is your family well cared for by your estate plan?

One of the greatest gifts you may ever give your family is to have the right estate planning strategies in place and key legal documents up to date. Now is a good time to make sure that’s true for you, as you’ll already be reviewing other financial matters as you prepare to file your 2017 tax returns.

Attention is warranted if you do not have a plan, if it’s been five years since you last reviewed your plan, or if you’ve experienced a major life event, such as marriage, the birth of a child or grandchild, a move to a new state, or a new job.

Key questions to help you refine your plan include:

  • Will the people I care about inherit my wealth the way I want?
  • Who will take care of my affairs?
  • Who will take care of my children?
  • Will my plan accomplish my goals?

Click on any of these building blocks to learn more about the key documents and techniques. Your J.P. Morgan team is ready to help.


Should you hold a family meeting?

The holiday season is an ideal time for families to discuss common goals and values. There also are likely important financial matters to review. But it often takes planning and some expertise to make such conversations truly productive.

Why would you want to hold a family meeting? It creates an opportunity for you and your family members to discuss important matters, share information and pursue specific goals.

What might suit your family? Some prefer a full, formal agenda with outside speakers, and others a quicker, more casual discussion.

Explore all the possibilities, and potential benefits, with your J.P. Morgan team.


How will your generosity make a difference?

Last year more than $390 billion* was donated to charity in the United States, a record amount that could be surpassed in 2017. Individual donors have been leading the charge, accounting for 72% of all contributions in 2016. As encouraging as these numbers are, there may be opportunities for you to give more strategically. It is important to ask yourself a few questions before giving this season. What assets will you donate and how much? When is the best time to give, and through what vehicle?

Philanthropists are increasingly embracing donor-advised funds to enhance their impact. Donor-advised funds are easily established, flexible and offer immediate tax deductions. You also can give them to others, engaging the next generation and allowing your children or grandchildren to pursue their own philanthropic passions.

Regardless of the cause you choose to champion, consider increasing the impact of your generosity through the Charitable Giving Fund at J.P. Morgan.

*Source: The Giving Institute, Giving USA 2017: The Annual Report on Philanthropy for the Year 2016. U.S. data as of 2016.


Are equity markets too expensive?

It’s no secret that as markets continuously hit new highs, stocks are not as cheap as they once were. Similar to buying a nice house in a great neighborhood, you might pay a premium to tick all the right boxes. Today, U.S. stocks are priced appropriately in a neighborhood with stable growth, low-inflation, solid profits and improving global momentum.

In looking at the below chart, equity valuations remain slightly above historical averages. As long as economic data continue to remain supportive, we believe this valuation is justified. But diversification is still important, as investors should recognize that higher valuations can exacerbate short-term pullbacks.

Sources: FactSet, FRB, IBES, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. Price to earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since December 1989, and FactSet for September 30, 2017. Average P/E and standard deviations are calculated using 25 years of FactSet history. Shiller’s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-month consensus dividend divided by most recent price. Price to book ratio is the price divided by book value per share. Price to cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Moody’s Baa seasoned corporate bond yield. Std. dev. over-/under-valued is calculated using the average and standard deviation over 25 years for each measure. *P/CF is a 20-year average due to cash flow data availability. Guide to the Markets – U.S. Data are as of September 30, 2017.

As equity markets continue to make new highs, some investors fear that a market pullback is lurking. Yet, history shows that bear markets (shown below) are not predicted by the number of new highs in a given year. Rather, bear markets are caused by the unwinding of financial and economic imbalances. Typically, this unwinding is triggered by certain conditions, namely recessions, aggressive rate hikes, oil price spikes and extreme equity valuations. Today there is very limited evidence that such imbalances are present, suggesting this expansion still has room to run.

Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. *A bear market is defined as a 20% or more decline from the previous market high. The bear return is the peak to trough return over the cycle. Periods of “Recession” are defined using NBER business cycle dates. Bear and Bull returns are price returns. Guide to the Markets—U.S. Data are as of September 30, 2017.


Should I be worried about geopolitics affecting my portfolio?

Geopolitical conflicts often trigger worries about the global economy. Recent headlines, particularly in regard to North Korea, have raised concerns over a potential market disruption. Yet, it is important to understand these events in the context in which they occur.

Michael Cembalest analyzed the performance of U.S. equities both preceding and following the inception of major geopolitical conflicts since 1950 (read the full piece entitled “Prophet Warnings” here). His findings overwhelmingly showed that, apart from large-scale wars, brief shocks from geopolitical conflicts have not historically had a lasting effect on financial markets. To elaborate, there is only one instance that we found of a military conflict causing a lasting market downturn: the Arab-Israeli war of 1973, which led to a Saudi oil embargo against the U.S. and a quadrupling of oil prices. In the other two instances of negative market performance, markets were resilient in the immediate aftermath of the event, but later declined because of underlying domestic factors.

Cycles typically end due to internal economic dynamics, rather than geopolitical flare-ups, and we do not currently see the workings of major economic or financial imbalances in today’s environment. Rather than worry too much about geopolitics, investors may be better served focusing on market and economic fundamentals instead.

Source: Bloomberg. April 2014. Equity index represents price returns.


Why is market timing a dangerous habit?

Good things come to those who wait …

While markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer losses over longer periods.

This chart illustrates the concept. While one-year stock returns have varied widely since 1950 (+47% to -39%), a blend of stocks and bonds has not suffered a negative return over any consecutive five-year period in the past 66 years.

Sources: Barclays, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to 2016. Stocks represent the S&P 500 Shiller Composite and Bonds represent Strategas/Ibbotson for periods from 1950 to 2010 and Barclays Aggregate thereafter. Growth of $100,000 is based on average total returns from 1950 to 2016. Guide to the Markets—U.S. are as of December 31, 2016.

Market timing can be a dangerous habit. Sometimes, investors think they can outsmart the market; other times, fear and greed push them to make emotional, rather than logical, decisions.

This chart is a sobering reminder of the potential costs of market timing. Though clearly hypothetical, by missing some of the market’s best days, investors can lose out on critical opportunities to grow their portfolio, with devastating results. Importantly, as the chart also notes, “Six of the 10 best days occurred within two weeks of the 10 worst days.” In other words, we know from history that investors are most likely to throw in the towel after the darkest days, essentially locking in the loss and forgoing the rebound that usually follows.

On August 24, 2015 the Dow Jones Industrial Average closed down 588 points. On August 26, 2015 it closed up 609 points.

Sources: J.P. Morgan Asset Management analysis using data from Bloomberg. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Data as of December 30, 2016.


Do you know the potential tax benefits of borrowing now?

There are many ways you can benefit from today’s low interest rate environment. It is important that you explore and understand the variety of borrowing strategies available to you, as you may qualify for tax deductions on your 2017 returns depending in part on the manner in which you use the borrowed proceeds.

Taxpayers who understand the rules governing mortgage, home equity and investment loan interest may find they are able to:

  • Lower their U.S. and state tax obligations
  • Improve their cash flow
  • Reduce their effective borrowing costs, which can be particularly beneficial in high-tax jurisdictions

To qualify as a deduction, interest on personal debt must fall into one of several categories, each of which is subject to certain restrictions.* The most common categories are:

  • Mortgage and home equity interest
  • Investment loan interest

If considering the purchase of a new home, you may want to consider whether borrowing to fund part of the purchase price makes sense for you. Explore the following example to compare these two common categories of deductions and use this as an opportunity to ensure you are well-positioned heading into a new year.

*Deductions discussed in this article consider the regular tax calculations for individuals; however, the remarks are generally applicable to alternative minimum tax (AMT) calculations as well, albeit at a reduced marginal tax rate usage of 28%.


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