Its tax time in America.
Sensibly, our tax year matches the calendar year so its easy to recall what income, spend and investments you have made.
For most Americans, filing taxes isn’t as threatening an occurrence as it may immediately sound – and that’s because many US tax filers will receive a refund. A gift from Uncle Sam? Not really, you are just getting back the money you have already overpaid in withholding taxes – effectively an interest free loan you made to the US Treasury – with a cumulative worth of $130billion from 150 million tax filers.
But the size of those refunds is shifting.
During the Covid 19 pandemic, the US Federal Government issued the CARES Act which pushed tax breaks and allowances to help Americans, boosting refunds. But after the CARES Act expired in 2022, tax filers felt a bit of a shock when their refunds shrunk.
What we did with our money has also changed over the previous 12 months.
Sat on our decks and porches, working remotely, or freelancing in the gig economy meant instead of traipsing into the office we had more idle time on our hands.
To fill the void, many of us have the TV on all day hopping between channels and streams.
I know I have an unhealthy viewing diet of global sporting fixtures from Merseyside, Mumbai, Melbourne and Manhattan to feed my sports habit.
But I also watch the plethora of business and finance shows, and like tens of millions of others, opened a Robinhood trading account last year to have a flutter on America’s favourite sport – the Stock Market.
The Robinhood app sits on your phone and after stuffing it with your table stake, you buy stocks on a whim for almost zero fee. While most people have much of their retirement funds in more traditional brokerage accounts, the app is popular with risk takers for speculative punts on the market. As I said, just a flutter.
Perhaps unwittingly, what this has exposed millions of us too is something unexpected.
As a recovering ‘ad man’, I am aware that much of what is pronounced as opinion or insight on 24/7 business news channels and streams isn’t healthy or useful.
Despite the headlines on many a YouTube channel promising to reveal ‘3 stocks which will make you a millionaire in 2024’ or “The secret investment strategy of the mega rich’ – the truth is somewhat different.
The broadcast and online chatterati are simply pumping the stock market.
Their message isn’t about you picking one stock over another, it is simply about encouraging you to invest. After all, those big fund managers who sponsor the broadcasts and streams charge you a fee irrespective of whether you picked a winning stock like Nvidia or back a loser like Covid drugmaker Pfizer.
More money being pumped into the market is good news for the financial institutions – a bit like the casinos, the house always wins.
Broadcasters and marketers know this. We know that if you can create or leverage bias in people’s behaviour you can return remarkable results – in the supermarket, at the ballot box, or on the stock exchange.
Money is one of those topics which has many bias opportunities.
The simplest behaviour bias being played with is emotion. If you can generate fear, anxiety, greed, or FOMO – Fear Of Missing Out – you are on to a winner.
Many of you will roll your eyes, thinking “it could never happen to me” – but it doesn’t matter if you are smart or not, you are still perceptible to these bias twitches.
As Morgan Housel wrote in his book, ‘The Psychology of Money’ – “doing well with money has little to do with how smart you are and a lot to do with how you behave.”
Think about how much trouble we have with eating better or exercising more, things we know are good for us, but struggle to achieve because changing our behaviour is tough.
The oft-quoted Warren Buffett is alleged to have said, ‘if you can’t control your emotions, you cannot control your money.”
Emotional bias can make us do things with our money we wouldn’t normally do. When the world was shouting about meme-stocks, NFT, crypto – things we didn’t truly understand – billions of dollars came out of bank accounts and went into these ‘assets’ on the promise of wealth and riches aplenty.
Recency bias is also alive and well.
While every ad has the ‘speed read’ disclaimer that ‘past performance is no guarantee of future success’ – our brains tell us differently. When the screen is full of charts showing meteoric rises, long term gains, and happy retirement images – we think differently.
For much of the last decade, interest rates were near zero and that was our norm. We planned that they would always stick around that level and borrowed and invested accordingly. This year, they hit 6% triggering billions out of stocks and into bonds and other fixed income products, making us believe this is how it will now always be based on less than 12 months of recency bias.
But 2023 was a great year for stock investors. Even the most conservative of investor saw returns of plus 20% from the lows of 2022.
But it must be noted that money isn’t free.
This tax year, millions of fellow Robinhood investors are going to see a tax bill for their flutter.
If you hung on to those winning stocks, you are probably OK as capital gains are only triggered when you sell the stock and realise the gain. But because the app is on your phone – and commission free – the tendency or behaviour to buy and sell more frequently is much higher than calling your broker or pension fund manager and swapping your investments.
Like having a sportsbook or online bookies account, the money is there to be played with and very few Robinhood investors are holding their stocks for 12 months or longer to benefit from the reduced Capital Gains Tax rates.
So, this week Robinhood started sending out tax return 1099 documents.
Many unsuspecting Americans will be in for a bit of a shock.
Dividends received and any capital gains realised in 2023 are now taxable at anything up to 37% for higher earners. If you sold your gains in the ‘magnificent seven’ and took the wife to Barbados for Christmas, you might be facing a hefty bill which now needs paying.
The IRS starts accepting tax returns next week and Americans have until March/April to pay their tax bills without further penalty.
Robinhood, it seems, is doing what he has always done – ‘robbing the rich to pay the poor’.