The end of summer generally signals the hottest time of year, so what better way to beat the heat than with a good book and a cold drink? A genuine thirst for knowledge is part of RGT’s culture, and members of our Investment Team would like to share some of their favorite books with you. We’ve included books for those that love a good narrative, books for the analytically minded, and even something for the sports fans. Please enjoy.
The Most Important Thing, by Howard Marks is comprised of various letters Marks has written over the years. The letters provide insight into the famous investor’s strategy, as well as his views on markets and the overall economy. Value investor Warren Buffett has said of Marks, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.”
The Intelligent Investor: The Definitive Book on Value Investing, by Benjamin Graham has been a must-read book since it was first published in 1949. As evident by its title, this book introduces value investing in a manner that transcends time.
Bulls, Bears, & Basketball: Financial Planning for College Hoops Fans, by Chuck Thoele is an RGT staple, and a must-read for college basketball fans. Published by one of our founders, the book presents financial planning in a relatable, easy to read manner.
Thinking, Fast and Slow, by Daniel Kahneman is an overview of Economist Daniel Kahneman and Psychologist Amos Tversky’s findings over their careers, based on behavioral science. The book provides several examples and explanations of their experiments and findings, along with more recent studies on happiness. This book is essential to an understanding of the science behind behavioral investing.
The Undoing Project, by Michael Lewis was published last winter and is about Kahneman and Tversky’s lives and careers. It touches on their history and explains their research and conclusions. While not as detailed as ‘Thinking, Fast and Slow,’ it is written in narrative form by a best-selling author.
Red Notice, by Bill Browder has elements of suspense, intrigue, finance, and Russian politics. Bill Browder is the co-founder and CEO of an investment firm that was once the largest foreign portfolio investor in Russia. The book is an unbelievable true story written like a crime thriller. You won’t want to put this one down.
Against the Gods, by Peter Bernstein describes the history of probability and risk management, from the early games of chance and probability theory to modern applications of risk management. While the book was written in the mid-90s and is dated to a certain extent, it still touches on the rise of derivatives in modern finance.
Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor, paints a historical picture of how economic and psychological forces drive the desire to speculate. From the Tulip mania of the 1600’s to Long-Term Capital Management’s collapse in the late 1990’s, readers will see how bubbles are made, manipulated, and who wins when they pop.
This list is not exhaustive, but ideally it gives readers some insight into what drives our thinking, and lets you know what we like to read. Please enjoy the remaining “dog days” and let us know if we can serve you in any way.
Approximately 77 percent of retirees now prefer to give money to loved ones throughout their retirement rather than leave inheritances in estates after they pass away according to a recent study.[i]
This post will explore the potential benefits and risks of gifting inheritances early, and help you determine if this could be the right strategy for you.
What are Some Benefits of Gifting Inheritances Early?
- Avoiding inheritance and death taxes. When it comes to estate planning, the tax code can be complicated. Currently, twenty-one states and the District of Columbia have a death tax, inheritance tax, or both.[ii] These taxes can greatly reduce any remaining assets loved ones inherit. The IRS currently allows gifts of up to $14,000 per person each year[iii] that are not taxable for either party. Because of these taxes and the ability to annually distribute monetary gifts, many are looking to distribute their wealth to loved ones early rather than leave inheritances in wills.
- Providing financial assistance when loved ones need it. Gifting to loved ones now allows you to help them when they need the money the most, as opposed to waiting until after a death. This often includes assisting with the purchase a new home, unexpected medical expenses or paying off school loans. The flexibility to assist loved ones financially often makes sense for some when compared to willing assets at a later date.
What are Some Risks of Gifting Inheritances Early?
- Ensuring enough money is left for retirement and unexpected expenses. People are living longer; thus, retirement savings are being stretched further. It is important to determine your retirement lifestyle goals and financial needs first, and then look at remaining resources for loved ones. You don’t want to put yourself in a situation where you are not able to cover your living expenses or unexpected medical costs because you gifted loved ones too much, too soon.
- Not gifting all loved ones equally. Some people may feel pressure regarding how to gift inheritances early rather than leave gifts in their wills, especially if gifted amounts vary. Distributing gifts of varying amounts to family members and loved ones has the potential to create unintended consequences and strain relationships. It will be important to consider your loved ones’ financial needs, and determine when monies will best benefit them.
Next Steps to Consider
Now that we’ve explored some of the benefits and risks to gifting inheritances early, here are some next steps to help in your decision making:
- Consult with an estate planner and tax expert before you determine if the benefits outweigh the risks for you. Relying on experts can help you explore other gifting options that still reap tax benefits, including trusts.
- Work with your RGT wealth advisor to determine how much you can afford to give loved ones now and how much you should allocate into your estate planning.
[i] “Giving in Retirement: America’s Longevity Bonus.” Merrill Lynch and Age Wave. 2016. https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_AgeWave_Giving_in_Retirement_Report.pdf.
[ii] Drenkard, Scott. “Does Your State Have an Estate or Inheritance Tax?” Tax Foundation. May 2015. https://taxfoundation.org/does-your-state-have-estate-or-inheritance-tax/.
[iii] “Frequently Asked Questions on Gift Taxes.” Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.
What are factors?
Over the last several years, investors have been inundated with attempts to re-brand factor investing – “smart beta,” “strategic beta,” “engineered equity,” “beta plus,” etc. While the list of marketing-driven buzzwords continues to expand, they are all largely synonymous with factor investing. They each refer to investment strategies focused on systematically gaining exposure to stocks (or bonds, currencies, commodities, etc.) with one or more characteristics that have been empirically shown to drive positive active returns – that is, returns over and above the cap-weighted market index.
The first, and most well-known factor discussed in academic literature is the market factor, which is generally defined as the excess return of the market over the risk-free rate. By increasing exposure to the market factor relative to Treasury bills, (i.e. taking additional, undiversifiable market risk), an investor is compensated with a higher expected return over an extended time horizon. Investors accept the risk of underperforming in the short run for the expectation of outperforming over the long run.
Unfortunately, in practice, exposure to the market factor alone does not fully explain the differences in returns between portfolios. To better understand what characteristics drive performance differentials between portfolios, academics began searching for and finding “pricing anomalies,” otherwise known as factors.
In addition to the market factor, the primary equity factors we focus on are:
- Size – small companies have tended to outperform large companies;
- Value – cheaper companies (in terms of a high book value or earnings relative to market value) have tended to outperform expensive companies;
- Momentum – companies that have recently performed well have tended to outperform companies that have recently performed poorly; and
- Quality – companies with high profit margins and strong balance sheets have tended to outperform companies with lower profits and weaker balance sheets.
Why do these factors add value? If they are widely known, why should we expect them to continue to add value?
The answer to these questions can typically be described as either “risk-based” or “behavioral” in nature. Risk-based explanations assert that factors have rewarded investors with excess returns because stocks that exhibit these characteristics are inherently riskier. Therefore, investors require a risk premium in return for owning them. For example, small companies tend to have smaller capital bases, higher leverage, increased default risk, etc. Value companies, on average, tend to be more exposed to the business cycle, carry more fixed assets, be more highly levered and tend to have a higher risk of distress than growth companies. Given these increased risks, it makes sense that investors would demand, on average, a risk premium (higher expected return) to invest in smaller companies over larger companies or value stocks over growth stocks.
Behavioral explanations assert that factor risk premiums do not exist solely due to increased risk, but rather due to a combination of risk factors and investor biases that hinder the market from correctly pricing these anomalies. For example, the momentum effect is typically supported by behavioral explanations. One version, put forth by Toby Moskowitz, asserts that information travels slowly into prices1. He argues that prices do not immediately adjust to news but tend to drift upwards (or downwards) as the market processes the good (or bad) news – this is underreaction. Somewhat counterintuitively, Moskowitz also finds that overreaction also plays a part as investors chase the newly created trend and can push prices farther from equilibrium, introducing a short to intermediate term momentum effect. Quality is also likely a behavioral anomaly; after all, who would rationally require high quality stocks to generate a risk premium over low quality stocks? Research by Ryan Liu suggests it is related to investor expectations2. Investors are willing to make contrarian bets on low quality companies at the expense of high quality companies. This behavior has the effect of increasing the prices (and therefore driving down expected returns) of low quality firms at the expense of high quality firms, while also increasing expected returns of high quality companies.
All five factors mentioned have risk-based or behavioral explanations that support each factor’s existence, and often more than one of each. What is important to know and remember is that no one can be certain which, if any, hypothesis is correct about why a certain factor works or has worked. We cannot prove why a factor works, but by utilizing a rigorous and analytical framework we may be able to assess whether a factor is real and whether it can be expected to continue to exist in the future.
Researchers and practitioners Larry Swedroe and Andrew Berkin propose such a framework below, requiring that any factor pass the following five-part test3. They stipulate that for an anomaly to be considered a true factor and not just noise, it must be:
- Persistent – it must generate excess returns over long periods of time and across market regimes
- Pervasive – it must be present across different asset classes and geographies
- Robust – it must continue to “work” despite tweaking the definition of the factor
- Investable – the excess returns must be large enough to still add value after frictions such as trading costs are accounted for
- Intuitive – it must have a logical underpinning (risk-based or behavioral) that supports a risk premium being associated with it and that also supports its efficacy in the future
So, is Factor Investing Easy?
Unfortunately, no. Even the factors with the strongest historical returns have the potential to significantly trail the market over long stretches – think Value stocks during the tech boom in the late 1990’s. Even more recently, Value stocks were trounced by the broad market in 2015 and early 2016. Experiencing a massive drawdown or trailing an index by double digits is painful – but potential for such short-term pain is also why factors tend to add value over long time horizons. If something works all the time, there would be no risk premium associated with it. Thus, patience is a prerequisite for harvesting a factor’s excess returns. It is also why diversifying across factors is an important component of a sensible factor strategy. Value and Momentum, for example, have historically displayed a low correlation to each other. When Value tends to be out of favor, Momentum tends to be in favor and can offset losses in the Value portfolio, and vice versa. Similarly, Quality can augment Value and Size, helping to screen out the lowest quality companies most likely to be “value traps.” By diversifying across factors, we can dampen the volatility of the portfolio while reducing the risk of any one factor having an outsized impact on the portfolio.
Factor investing is no free lunch. It requires conviction, patience, discipline, the willingness to be out of step with the broad market, and a long-time horizon. Note that these are many of the same characteristics required to be successful in virtually every other area of investing, as well.
- Factors are characteristics of stocks or stock portfolios that have been shown to drive positive excess returns over time
- Factor investing seeks to harvest excess returns by owning stocks that display these characteristics and by avoiding stocks that display the opposite characteristics
- Factor risk premiums exist due to some combination of increased risk, behavioral biases, or structural inefficiencies in the market
- We can avoid mistaking randomness for a factor that deserves a risk premium by making sure the factors we utilize are persistent, pervasive, robust, investable, and intuitive
- Factor investing is hard; it does not work all the time and individual factors can sometimes trail the broad market significantly. It requires conviction and patience.
- Factor diversification can reduce volatility but not eliminate it.
- Moskowitz, Tobias J., “Explanations for the Momentum Premium,” AQR Capital Management White Paper, 2010
- Liu, Ryan, “Profitability Premium: Risk or Mispricing?” November 2015. https://pdfs.semanticscholar.org/94f3/bb0d05a8fe349d3ca378bbe52e1f9ac72831.pdf
- Berkin, Andrew L. and Larry E. Swedroe. Your Complete Guide to Factor-Based Investing. Saint Louis: BAM Alliance Press, 2016. Print.
Wealth management firm makes list for third year
DALLAS – The Dallas-based financial planning and investment advisory firm, RGT Wealth Advisors (“RGT”), has been named to the Dallas Business Journal’s Best Places to Work list for the third consecutive year.
“Our primary focus is to be champions of our clients’ financial goals and futures, and that all starts internally with our employees and our culture,” said RGT Managing Director Mark Griege. “We work hard to ensure that we are advocates for our employees, and are very pleased to see that they and others in the community recognize that.”
RGT was one of the companies selected from among more than 500 North Texas businesses by a third-party research firm that reviewed applications. Finalists were chosen based on employee survey feedback. RGT was ranked in the medium category for organizations with 50-249 employees.
The firm was recently recognized among the top 10 registered investment advisory firms in the nation by Financial Planning Magazine and has repeatedly been ranked among the top wealth managers in Dallas by D Magazine.
Founded in 1985, RGT is an independent, fee-only firm that provides wealth advisory services, portfolio management and family offices services. Clients partner with RGT to manage their financial life and keep them on track to achieve their goals. To learn more about RGT Wealth Advisors and the firm’s approach, please visit their website at: https://rgtadvisors.com/.
The internet’s ability to connect people and share ideas has evolved and given rise to a new type of investing called crowdfunding. In 2015 alone, the total equity invested in crowdfunding worldwide reached $2.56 billion dollars, according to the Massolution Crowdfunding Industry Report[i].
In this blog post, you will learn more about crowdfunding, how it works as an investment tool, and get tips on how to leverage it as part of your investment portfolio.
What Is Crowdfunding?
Research in the Journal of Business Venturing defines crowdfunding, or equity crowdfunding, as a method for entrepreneurs and startup companies to fund their ventures through small contributions submitted online from many people[ii]. It essentially expands investment opportunities once limited to venture capital groups or wealthy individuals. Ordinary people have a chance to invest in early stage startups solely based on a product idea or service concept and marketed on dedicated crowdfunding websites such as Kickstarter.
How Does Crowdfunding Work as an Investment Tool?
The 2012 JOBS Act signed by President Obama legalized equity crowdfunding to be used as an investing opportunity as noted in research published in the Journal of Business Venturing[iii]. Just as stocks give individuals an equity stake in a company, equity crowdfunding promises individual investors a share of the business or future project sales. However, unlike stocks, there is no “market price” for crowdfunding pledges. Interested individuals simply invest an amount they can afford in the company or idea. The crowdfunding site only collects the money pledged to the project by the collective investors if the full capital goal is raised. However, only one in nine projects ever gets fully funded through crowdfunding, according to research published by Harvard Business School[iv].
If the business or project takes off, investors will see a positive return on their investment. If the opposite happens, investors lose their money.
One unique aspect of crowdfunding investing is that there is a high level of transparency between the entrepreneur and investors. Once the required funds are raised, entrepreneurs communicate timelines for product or concept delivery and often communicate updates in bringing the product or concept to life. Based on these launch timelines and considering product adoption rates, it is important to view any crowdfunding participation as a long-term investment.
The federal government now acknowledges the popularity of crowdfunding and has implemented new regulations around this collaborative investment practice. The U.S. Securities and Exchange Commission (SEC) even has a complete section on the topic.
Recently updated SEC guidelines indicate that “because of the risks involved with this type of investing, you are limited in how much you can invest during any 12-month period in these transactions.[v]” For a complete list of 12-month limits based on annual income levels, visit the SEC website here: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_crowdfundingincrease.
Crowdfunding Investment Tips
Now that you are more familiar with crowdfunding and how it works, here are some simple tips to help guide participation in it as part of your investment portfolio:
- Do your research. Much like participating in the stock market, crowdfunding investment opportunities are like hedging a bet. You should spend time researching the startup company that is seeking investments, as well as the idea being proposed. Researching won’t make your investment a sure bet, but you can feel more confident in the entrepreneur and the idea.
- Consult with a certified investment advisor. He or she can work with you to review your comprehensive investment portfolio and weigh the benefits and risks before participating in crowdfunding investing. Also, an advisor can help with the research and analysis to determine how much you should invest through crowdfunding.
- Wade through the crowd. The openness of crowdfunding platforms like Kickstarter allows you to see who else is investing in startup companies. Following notable angel investors and VC firms is one way to help you navigate the flood of ideas offered on crowdfunding websites. You should still perform your own research, but watching other investors can narrow your crowdfunding investment options.
[i] 2015 Crowdfunding Industry Report. Massolution. http://reports.crowdsourcing.org/index.php?route=product/category&path=20.
[ii] Mollick, Ethan. “The dynamics of crowdfunding: An exploratory study.” Journal of Business Venturing. Vol. 29. 2014. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298&http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298.
[iii] Mollick, Ethan. “The dynamics of crowdfunding: An exploratory study.” Journal of Business Venturing. Vol. 29. 2014. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298&http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298.
[iv] Mollick, Ethan and Ramana Nanda. “Wisdom or Madness? Comparing Crowds with Expert Funding in the Arts.” Harvard Business School. August 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2443114.
[v] “Investor Bulletin: Crowdfunding Investment Limits Increase.” U.S. Securities and Exchange Commission. May 2017. https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_crowdfundingincrease.
Americans’ attitudes about money have shifted as a result of the 2008 Great Recession[i]. Many people either experienced financial hardships firsthand or saw loved ones struggle, making financial literacy more important than ever. Fast-forward nine years, and those financial conditions are still affecting money management methods used by many today.
In this post, we will shed some light on how a many Americans are managing their money, and what you can do to safeguard your personal finances.
Spending less and saving more is a financial priority for most Americans. According to a recent Gallup poll, 59 percent of people report that they enjoy saving money more than spending it[ii]. In fact, 27 percent of people say that spending less money, and saving more is their “new normal” money management practice. Of those who are currently spending more money than in previous years, two-thirds responded that the change in their spending patterns is only temporary, implying that they will revert to saving more when they are able.
While 85 percent of Americans say they are watching their spending very closely[iii], 56 percent of households have at least $15,000 of credit card debt, according to the National Foundation for Credit Counseling[iv]. At an average interest rate of 15.59%[v], this means that a majority of households are at a minimum paying in excess of $2,243 a year in credit card interest. Credit card debt and accumulating interest on that debt can interfere with savings, so it is important to pay off debt as quickly as possible.
A majority of a family’s income is spent on three essential categories: housing, transportation, and food[vi]. To follow the mantra of saving more, moving may be one way to free up additional funds, as the average person spends 32 percent of their income on housing alone.
Investing can be an effective way to grow savings over an extended period of time. There are several types of investment accounts that are solid options based on your financial goals, including a variety of IRAs (individual retirement accounts), as well as non-retirement brokerage accounts offering stocks, bonds, mutual funds and exchange-traded funds. However, most people are not currently leveraging this money management tactic.
The 2017 TIAA IRA Survey reveals that only 31 percent of Americans have any type of IRA, but of those, only 5 percent fully utilize the benefits by contributing more than $5,000 annually to their accounts. Approximately 45 percent of people do not have any type of IRA because they either don’t understand how these accounts work or find them too complicated[vii].
According to Bankrate’s Money Pulse survey, 52 percent of people are not taking advantage of stocks or stock-based investing at all[viii]. Not having enough to invest is the most common reason for the lack of investing. A major misconception about investing in stocks is that one must invest large amounts of money at a time, when in fact, steadily investing smaller amounts of money over time can be an effective strategy.
Taking the time to research investment options or consult with a financial advisor to better understand investing could empower many Americans to efficiently grow savings for large purchases and retirement.
Tips to Manage Your Money
To improve your financial literacy and money management skills, here are a few tips to consider:
- Create a budget. Look at how much money you have coming in each month, and allocate funds for known expenses, such as mortgage, groceries, phone bill, and car insurance. Next, set aside funds for a savings account that you can access in case of an emergency, such as an unexpected medical bill. Any money leftover can then be used as discretionary income
- Pay off debt. If you carry credit card debt, try to pay more than the minimum payment each month in an effort to pay it off completely. As mentioned earlier, debt and interest from that debt can cut into potential savings.
- Look at investment options to grow retirement savings. Research investment options that can help grow your retirement savings. Remember that it doesn’t take a lot to begin investing, and that you will reap the biggest benefits of starting early, and investing over time.
- Consult with a wealth advisor. A financial advisor can work with you to create a financial plan that is easy to follow. A qualified advisor can help ensure that you have money going into savings and investment accounts that will work for your financial goals, including buying a house or retiring by a certain age.
[i] Gallup Poll. May 2017. “Americans Still Say They Like Saving More Than Spending.” Web log. Gallup. http://www.gallup.com/poll/209432/americans-say-saving-spending.aspx?g_source=ECONOMY&g_medium=topic&g_campaign=tiles.
[ii] Gallup Poll. May 2017. “Americans Still Say They Like Saving More Than Spending.” Web log. Gallup. http://www.gallup.com/poll/209432/americans-say-saving-spending.aspx?g_source=ECONOMY&g_medium=topic&g_campaign=tiles.
[iii] Gallup Poll. May 2017. “Americans Still Say They Like Saving More Than Spending.” Web log. Gallup. http://www.gallup.com/poll/209432/americans-say-saving-spending.aspx?g_source=ECONOMY&g_medium=topic&g_campaign=tiles.
[iv] National Foundation for Credit Counseling. “More Than Half of Households Surveyed Have Credit Card Debt Over $15,000.” 2017. Web log. National Foundation of Credit Counseling. https://www.nfcc.org/half-households-surveyed-credit-card-debt-15000/.
[v] CreditCards.com Weekly Credit Card Rate Report. “Rate survey: Average card APR rises to all-Time high of 15.59 percent.” 2017. Web log. CreditCards.com. http://www.creditcards.com/credit-card-news/interest-rate-report-32217-up-2121.php.
[vii] Teachers Insurance and Annuity Association of America. “2017 TIAA IRA Survey.” 2017. Web log. Teachers Insurance and Annuity Association of America. https://www.tiaa.org/public/pdf/ira_survey_executive_summary.pdf.
[viii] Bankrate Money Pulse Survey, “Did you miss the stock market rally? You’re not alone.” 2015. Web log. Bankrate. http://www.bankrate.com/investing/did-you-miss-the-stock-market-rally-youre-not-alone/.
Dallas firm celebrates work anniversary of senior financial planner, former baseball pro
DALLAS ─ RGT Wealth Advisors congratulates Senior Financial Planner Brian Cloud for his five years of providing excellent client service at the Dallas-based wealth management firm.
As a certified financial planner, Mr. Cloud works with high net worth clients to develop a variety of wealth management options to best suit their complex planning needs.
“These five years have passed quickly,” Mr. Cloud said. “It’s an honor and pleasure to work with the clients of RGT Wealth Advisors, providing them with personalized advice for their specific financial needs. I look forward to continue growing the strong relationships I have with them.”
Mr. Cloud has always been interested in numbers. Before joining RGT Wealth Advisors, he worked as an analyst managing budgets for a construction company, and he focused on statistics when he played baseball with the Seattle Mariners. For more information on Mr. Cloud visit: https://rgtadvisors.com/bio/brian-cloud/.
“Brian’s background as a baseball player gave him a strong understanding of teamwork, one of our firm’s core values,” said Chuck Thoele, Managing Director at RGT Wealth Advisors. “He successfully collaborates with teams across our firm to provide his clients with excellent service and ensure that they have an integrated wealth management portfolio.”
RGT Wealth Advisors is a financial planning and investment advisory firm based in Dallas, Texas, with more than 30 years of experience in managing finances and investments for high net worth individuals and families.
The White House recently outlined its tax reform plan the administration hopes to officially roll out later this year. According to the outline[i], the reform plan provides “the biggest individual and business tax cut in American history,” but what exactly does that mean for you?
In this post, we’re breaking it down and explaining how it could potentially impact your investment strategy.
Tax Reform Goals
The current administration has identified tax reform as a tactic to grow our domestic economy amidst heavy reliance on economic globalization. By simplifying the tax code, the rationale is that middle-income Americans will be able to keep more money in their pocket, thus spending more, and businesses will be enticed with lower tax rates to keep operations stateside rather than overseas.
Individual Tax Reform
Middle-income families, those with an annual household income that is two-thirds to double the national median after incomes have been adjusted for household size[ii], may benefit from tax reform more than any other group. The proposed plan seeks to get this group of Americans to increase domestic spending by reducing tax brackets from seven to only three, and doubling current standard deductions of $6,300 for individuals and $12,600 for married couples[iii]. The proposed reform also provides for additional tax relief for child care expenses, a growing expense for many families.
Additional tax simplifications listed in the outline include protecting homeownership and charitable gift tax deductions, and repealing the so-called “death tax,” which can be more of a burden than a blessing for heirs by shrinking the size of an inheritance.
Tax reform could benefit individuals in this group by providing additional finances for savings and investment accounts. As people are living longer, retirement savings are being stretched further[iv], so extra money being invested can go a long way.
Business Tax Reform
As previously stated, the aim for business tax reform is to entice companies to bring operations back to the United States and keep them stateside. The proposed outline includes lowering the corporate tax rate from 35 percent to 15 percent, and establishing a one-time tax on trillions of dollars held overseas.
The cost savings companies experience from the proposed tax breaks could benefit stockholders of public companies from the short-term savings. However, there are still many unknowns, as attempting to separate from a globalized economic system such as factories and systems that are in place overseas and moving domestically, and hiring a new workforce takes time and could be costly.
What is Next?
It is difficult to predict if the proposed tax reform will pass through Congress later this year, but it is good to be mindful of how it has potential to impact your financial savings and investing plan.
[i] “2017 Tax reform for Economic Growth and American Jobs.” White House Tax Plan Handout. 26 April 2017.
[ii] America’s Shrinking Middle Class: A Close Look at Changes within Metropolitan Areas. Pew Research Center. 11 May 2016.
[iii] “In 2016, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Are Unchanged.” Internal Revenue Service. 21 October 2015.
[iv] Thoele, Chuck. Bulls, Bears & Basketball. 2014.
For Investors it’s Important to Know the Difference Between Scary and Dangerous
An annual rite of late spring/early summer is the outpouring of articles written by someone with “life experience” (i.e., someone, like me, whose youth is solidly in their rear view mirror) aimed at recent graduates and young adults. These articles, often transcripts of commencement speeches, are a noble attempt to impart a bit of hard-earned wisdom to those just starting out on their life’s journey. Last May, the Wall Street Journal published an article titled “A Dad’s-Eye View of Scary vs. Dangerous” written by Jim Koch, the founder of the Boston Beer Co. (brewer of Samuel Adams), which fit neatly into this mold. In the article Mr. Koch wrote that it is important for both parents and children to learn the difference between taking risks that are scary, but worthwhile, and risks that are dangerous. While this article is focused more on making big life decisions, it struck me while reading it that this way of looking at the world has some real application for investors as well.
It seems worthwhile to spend some time pondering issues that often make investors anxious or concerned and asking the question; is this simply scary or is it truly dangerous?
The idea of selling an investment that has gone up in value and using the proceeds to buy an investment that has gone down in value is often a scary one for investors. Investors often state that they want to buy more of the mutual fund or invest more in the asset class that has gone up. And it’s often difficult to get them to invest in mutual funds or asset classes that have suffered from recent poor performance. However, if there is a sound and well thought out investment plan in place, this sort of rebalancing enforces the discipline of buying when prices are low (after poor performance) and selling when prices are high (after strong performance). Over time a disciplined approach to rebalancing a portfolio will provide a better result for investors. So disciplined rebalancing is sometimes scary, but definitely worthwhile. Failure to rebalance effectively can actually be dangerous, as it may result in a portfolio that is inappropriate relative to the investors’ long-term goals, objectives and risk tolerance.
Selecting the appropriate investment vehicles with which to execute an investment plan is an important part of effective asset management. Oftentimes these decisions are difficult to make. If a manager or fund has performed well recently will it continue to be a good selection in the future? If it has a recent record of poor performance does that imply that it is a poor choice? Even though relying on an investment manager’s track record may provide a sense of comfort, overreliance on performance, particularly recent and short-term performance, in making investment decisions can be very dangerous for investors (hence the well-known disclaimer that past performance is not an indicator of future results). However, utilizing a more comprehensive approach to due diligence which focuses on an investment manager’s process, their people, operational effectiveness, compliance history, investment merits of their approach, and the consistent application of all of these variables over time should lead to better decisions. And sometimes these decisions may be scary, such as the decision to stick with an underperforming manager or investment when recent performance has been bad due to adverse market conditions despite the manager’s continued adherence to their investment mandate. The decision to sell an investment despite strong recent performance due to personnel changes at the manager level or asset bloat inside a mutual fund may cause fear of regret and compromise the decision making process. Having a disciplined investment selection process with a long-term perspective can be quite scary, but it is the appropriate approach to making investment decisions.
It should be apparent that a lack of transparency is not just scary, but also dangerous. The idea of transparency should apply to many facets of the portfolio. Investors should know what they own and they should understand the risks of their investments. They should also know what fees they are being charged and have a full understanding of how their advisors and portfolio managers are compensated. All potential conflicts of interest should be disclosed upfront by investment advisors. There should be transparency around the liquidity provisions of all investments. And investment performance should be reported in a clear and timely manner. The investment industry, like all industries, is rife with insider language and jargon. This can often be confusing, and scary, and will sometimes require an explanation. But if your investment advisor is not willing to take the time to answer your questions, clarify confusing terms, and provide clear and concise answers to your questions, then you should begin to question their commitment to providing adequate transparency.
Most of us know that a modest amount of debt, artfully applied, can be a useful financial tool. Using an appropriately sized mortgage with manageable payments make the home buying process much better for everyone. The same can be true for the use of debt on a company’s balance sheet. A thoughtful approach to capital structure can help companies grow and help them manage the uneven cash flows that most businesses face as they move through the business cycle. However, an improper use of leverage can become dangerous and scary for investors. Sometimes this leverage is apparent, as when margin is used on investment or brokerage accounts. Other times excessive levels of leverage can sneak into portfolios in more subtle ways. This can occur within investments that have inadequate levels of transparency, such as with hedge funds that use excessive leverage to boost returns on “hedged” arbitrage trades. It can also occur with real estate investments that use aggressive amounts of leverage, particularly if that leverage is based on inflated property values.
In today’s oversaturated world of the 24-hour news cycle being beamed to us constantly across multiple media platforms, the “News” is probably the scariest thing investors face today. This is only compounded when investment markets react quickly and violently to a news event. There are many examples of this overreaction every year. A great example from 2016 would be Brexit, Great Britain’s unexpected decision to leave the European Union. Markets across the world reacted negatively to the news. While Brexit may indeed have long long-term economic consequences, the long-term implications of Brexit will have far more of an impact on UK citizens than US investors. Given that well diversified portfolios are not dominated by investments that will be directly and adversely impacted by Brexit, these events seem to fall more into the scary category than the dangerous category.
We can think back to events like the “Taper Tantrum” or the “Flash Crash” to see markets that react violently and quickly but ultimately rebound in fairly short order. We should acknowledge that when big events lead to market corrections it is definitely scary. Anytime there are wild swings in markets over short periods of time investors should take the time to assess exactly how dangerous these swings are to the long term health of their portfolio.
The ability to distinguish the dangerous from the merely scary is a valuable skill for investors to have. Developing a well thought out investment plan will help will help provide perspective and hopefully lend some perspective to help you determine if something is truly dangerous, or merely scary. And having a trusted financial advisor with whom you can discuss these issues will provide even more help working through difficult market environments. Using these steps to distinguish between the scary and the dangerous should help you make more informed decisions and will hopefully will lead to better long-term financial results.
College tuition is rising faster than the inflation rate[i] and paying for higher education has become a major financial concern among many families and students. When coupled with the fact that wages remain relatively flat, and the cost of living continues to rise[ii], many families are stressed about education expenses and the possibility of incurring debt.
According to Pew Research Center, the earnings gap continues to widen between college-educated and non-educated individuals. As a result, the prevailing view is that higher education is still vital to securing a better paying job and a higher quality of life.
States are Taking Notice
The rising concern of the cost of higher education has become so prevalent that the state of New York recognized the hardship many families face putting kids through college, and instituted a free college tuition program that covers state school tuition for New York families with an annual household income of $125,000 or less.
While there are rules and regulations for those receiving assistance from the program, such as maintaining a specific GPA and remaining in New York following graduation, many families are relieved of the burden of paying for college.
Scholarships, Grants and Student Loans
The latest annual SallieMae How America Pays for College study shows that families are turning to a combination of scholarships, loans, and savings accounts to fund higher education. Fifty percent of families depend on scholarships and grants to absorb an average of 34 percent of costs.
Borrowing money through loans accounts for another 20 percent of college expenses. The terms ‘debt’ and ‘higher education’ have almost become synonymous. The total U.S. student debt stands at $1.41 trillion and the average student debt for a 2014 graduate is $33,000. (Source: newyorkfed.org)
Planning for the Future
Many factors should be taken into consideration when planning and paying for higher education. Here are three tips to keep in mind:
- Create a financial plan in advance that accounts for college tuition and living expenses. You can use tools available online to determine what tuition may look like when your children are ready to attend college. Based on that amount, establish a financial plan that will allow you to allocate savings to reach that goal.
- Consult with a financial advisor on investment options to create separate savings accounts for college funds. There are a variety of options including state-sponsored 529 plans, Coverdell Education Savings Accounts, and establishing trusts. A financial advisor can help map out the best path for you and your family.
- Keep an eye on all investment accounts, and re-evaluate your college savings plan when you get a raise or have changes in other life expenses. A change may mean that you can contribute to college funds more or less, each month. Knowing approximately how much money is in the accounts when your children enter high school and apply to college will bring peace of mind.