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Understanding Self-Directed IRAs

on July 26, 2024

The speed of change in the investment markets seems to be accelerating, and for many investors, traditional investments may not provide the risk-adjusted return they seek.

Investors who access the markets through a taxable brokerage account often may have access to investments outside traditional stocks and bonds. These alternatives such as real estate, private equity, private credit, infrastructure, and other asset classes can help to diversify a portfolio.

But what about retirement investing? Alternative asset classes may not be available through an IRA account. A self-directed IRA (SDIRA) may be the solution.

The SDIRA is a type of IRA that is administered by a custodian or trustee but is managed directly by the account holder. This type of account is allowed to invest in alternatives that are prohibited in regular IRA accounts.

How Are They the Same?

A regular IRA and an SDIRA have the same tax advantages of allowing pre-tax contributions and tax-deferred growth. Taxes are paid when funds are withdrawn from the account. If you prefer, you can also open an SDIRA as a Roth account which is funded with after-tax contributions. Roth accounts allow tax-free qualified withdrawals since the taxes are paid before the funds are contributed.

How Are They Different?

Regular IRA accounts allow stocks, bonds, mutual funds, and ETFs as investments. SDIRAs allow a much broader scope of assets. Precious metals, cryptocurrency, commodities, private placements, limited partnerships, real estate, and other alternative assets may be available. There are some investments that are not allowed, including life insurance, the stock of S corporations, and collectibles. Prohibited transactions are also not allowed.

Because of the broader range of assets, and the complexity of those assets, fees on an SDIRA account may be higher than a regular IRA. There may be a set-up fee, an annual fee, and fees for paying investment costs. In addition, the account needs to be set up with a qualified IRA custodian that specializes in SDIRAs.

However, while the custodian specializes in SDIRAs, this does not apply to providing investment advice. The account is self-directed, and the custodian is prohibited from giving investment advice to the account holder. The account holder is responsible for selecting all investments and performing all necessary due diligence on the investments.

Why Do Investors Choose an SDIRA?

Broadening the range of investments in your portfolio can help provide portfolio diversification, which can help smooth market volatility. The SDIRA also allows for increased control over selecting investments that can potentially meet the risk/return profile the investor desires. It also allows an investor to create a completely customized investment plan. The investor has total control over investment criteria and the types of investments.

Because the portfolio is completely customized, it can make it easier to incorporate an IRA into an overall investment strategy.

Things to Consider

These investments may have longer holding periods, may not be as liquid as traditional investments, and may have different risks. It’s important for investors to thoroughly understand the investment before investing.

You’ll also need to consider taking distributions from the SDIRA. Different types of investments have different rules associated with them. The investor is responsible for following all rules regarding distributions, and if IRA distribution rules are not adhered to, the investor is required to pay all taxes and penalties.

Working with a Financial Advisor

One way to get the benefits of an SDIRA while managing the burden of due diligence and ongoing investing is to work with a financial advisor. The advisor can help understand your goals, assess the appropriateness of a strategy or asset, and be sure that the SDIRA works with the rest of your investment plan.

The Bottom Line

Setting up an SDIRA can make sense for investors who want to increase portfolio diversification and/or create a very customized investment plan. There’s a lot to consider, and these investments require due diligence and ongoing monitoring. Working with a financial advisor can help you determine what is right for you and your financial goals.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA

Fixer-Upper or Money Pit?

on July 24, 2024

The combination of a strong housing market, high mortgage rates, and meager inventory is forcing some would-be homebuyers to settle for less in the home or neighborhood they prefer. But others are approaching the homebuying process with an entirely different mindset. Buying a home in less than move-in condition, or one that requires significant work, can result in a bargain. But there are very distinct trade-offs, and there’s a fair amount of risk involved. What seems like a way to save money or get a good deal could be very expensive in the long run. It’s not just money at stake – time, relationships, and mental health can all suffer from a long renovation process.

Entire streaming channels and social media feeds are full of DIYers doing everything from undertaking trash-outs in hazmat suits to uncovering hidden rooms and dealing with decades-old vegetation. Along the way, they seem to find historic fireplaces, vintage tiles, and all kinds of amazing treasures.

It looks romantic and makes for great content, but the reality is a long, expensive, and risky process. It’s important to develop a plan before you commit.

It’s Still Location, Location, Location

Even if it’s the (rundown) house of your dreams, if the location doesn’t fit your lifestyle, it might not be for you. Prioritizing location over the house can make sense, as it can make a difference in the overall value of the home on top of your renovations.

If you find a home in a sought-after location, it can also create a built-in relief hatch in case things go wrong or you get less than you bargained for. A partially renovated house in a desirable location is an easier sell, and you may make money on the flip in addition to getting out from under a burden.

The Money Pit Red Flags

Replacing kitchens and bathrooms, adding additional electric and plumbing, and reconfiguring layouts for modern life can be expensive but are expected when buying a true fixer-upper. But there are other problems that will be even more expensive to fix and may delay your project. This can create serious cost overages.

Do a very comprehensive walk-through, film and photograph everything, take notes, and then have another look at everything before you make a decision.

Do you see mold, smell moisture or does it feel damp?
is the foundation cracked? What is it made of? Old fieldstone or brick foundations are lovely, but the craftsmen that can fix them are hard to find and expensive to hire. You may have to go with more modern concrete block foundations.
Do you need a new roof? The lifespan of a roof is about 25 years, and in some states, you may have difficulty getting insurance if the roof is older than that, even if the roof looks ok and there aren’t any leaks.
What condition is the siding in? Some forms of older siding, like asbestos shingles, can be expensive to remediate. While you are looking at the siding, also have a look at the windows. If you are going to replace siding, windows are usually done at the same time.
How old is the electrical wiring? Does it have an old-school fuse box or a modern circuit breaker? Beyond the extensive costs of the rewiring, it may be necessary to demo down to the studs and start over.
Check the water pressure by turning on multiple taps and flushing. Does it drop? Does the house have municipal sewer access or a septic tank? If it has a septic tank, asking for an inspection before you close is important. Septic systems are expensive to install, and it may be necessary to radically reshape your lawn to replace an outdated system with a modern one.

Create a Budget – And Allow for Overage

Paying a contractor for a consultation to help you understand what will be necessary can be money well spent. In addition to the scope of the project, the contractor can help you determine the right order of operations. It’s important to understand what the dependencies are for each stage of the job and to plan adequate timing for permits, inspections, weather, or anything else that can throw you off track.

Building 20% extra into your budget can feel like a huge additional financing cost, but it avoids problems, and planning in advance for adequate funding can save you money in the long run. Relying on your credit cards should not be an option.

Understanding a Renovation Mortgage

A renovation mortgage includes funds for the repairs to the home. A conventional mortgage can’t exceed the value of the home, less the down payment. With a renovation mortgage, the loan includes the purchase amount and additional money to pay for renovation costs. There are several advantages, including the ability to buy a home that would not otherwise be eligible for financing, and the lower interest rate available for a first mortgage. You’ll also only have one loan payment. If you buy the home with one mortgage, and then take out a separate home improvement loan, interest will likely be higher.

However, the benefits come with the requirement of limits and oversight on how you use the funds, and there are extra paperwork requirements and additional inspections.

The Bottom Line

Buying a home that requires a serious commitment of time, money, and effort can result in getting a good deal and a home you love. But do the research before you commit.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

This content not reviewed by FINRA

Women and Money: An Evolved Approach

on July 21, 2024

Women at all age levels are redefining how they think about their financial journey. This includes career paths, planning for flexibility, taking charge of family finances, or being successful on their terms.

There are some generational differences among Gen Z, Millennial, Gen X, and Boomer women—but not as much as you’d think. And two main differences that set them apart from men hold across generations:

Women are better investors than men¹
Women are more likely to approach financial planning as a partnership with a trusted advisor²
Women value a financial advisor that listens to them more than men do³

Women tend to outperform men partly because they are more patient investors and trade less. This results in better performance over time and lowers costs.

As to the second result, the easy reach is to point out the men are reluctant to ask for directions when driving too. But it’s a little more complicated than that, and the reasons why women seek financial advice change as they move through their lifecycle.

How they want to partner with a financial advisor is also different. Women want to be sure that the advisor listens to them and understands and respects their priorities.

Gen Z and Younger Millennials

Younger women (Gen Z and younger Millennials) are generally comfortable and confident about money and financial planning. They’ve grown up with more salary transparency, the proliferation of money-related apps to help with budgeting and investing, and the optimism of youth. They are interested in financial planning that fits their busy lives. They make good salaries, still have debt, are single or newly partnered, and want to get a good foundation in place.

They gravitate to financial planners that offer the planning they need in a way that they can relate to. This includes cash-flow planning, debt reduction strategies, maximizing employee benefits, and above all – helping them improve their financial literacy.

This generation of women understands the value of starting early on the path to financial independence and wants financial planning advice that can help them build a solid foundation.

Older Millennials and Gen X

As women approach the mid-point of their careers, money becomes more complex. Careers are in full swing, and growing wealth brings to the fore the costs of making a mistake.

These women may not have worked with a financial advisor before. Whether single or partnered, they realize that all the different pieces of their financial lives need to come together in a comprehensive plan.

For them, it’s about creating the option to stop work, scale back work, start a business of their own, or do more meaningful work that may not be as highly paid – while maintaining a current lifestyle and still save for financial goals in the future.

They realize the value of working with a financial advisor that can help them put together all the pieces of their lives:

Equity compensation
What to do with an annual bonus
Tax planning
Saving for education
Taking the right amount of investment risk
Buying a second home or income property
Creating opportunity with their wealth

These women want a trusted partner that explains the “why” to them, and guides them to make choices that are right for them. As things change, they value being able to make changes to a plan to accommodate new goals or different circumstances.

Older Gen X and Boomers

These women are driving the decision to work with a financial advisor for themselves and their families. Very often, something has sparked the need to partner with a financial advisor to solve an immediate problem.

A change of job
A spouse’s health issue
Aging parents
Imminent retirement
Death of a spouse
Tax issues

Having a trusted partner to help them sort through the issue calmly in a non-judgmental way is paramount. They want someone to help them fix problems, provide solutions, and ensure that no other avoidable situations are on the horizon.

They may realize that a spouse has always done the financial planning and that it may be time for them to understand the specifics of their wealth. They may want to plan for a retirement that allows them the time they have always wanted with their family. They need to develop trust and have an investment plan that helps them achieve their goals – without taking on too much risk.

The Bottom Line

Women are taking control of their and their families’ wealth at all points on the age spectrum. They value working with a financial advisor, but they are clear in their need to have someone who listens, prioritizes their goals, is a trusted partner, and truly understands how they want to build and maintain wealth.

Forbes. Why Women Are Better (Investors) Than Men. 2023.
Advisor Advancement Institute. Inspiring Women by Partnering in Their Financial Growth. January 2024
IBID

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This content not reviewed by FINRA

July Market Commentary A Disinflationary Trend Re-emerges

on July 19, 2024

June Recap and July Outlook

At the FOMC meeting in mid-June, the story was the drop in expectations for multiple rate cuts in 2024 to potentially only one rate cut later in the year. However, positive data around inflation and labor markets appears to have counteracted market pessimism about the cautious nature of the Fed’s messaging.

As we hit the mid-point of the year, the economy appears to have been able to sustain a soft landing so far. With a Fed still undecided on rate cuts and waiting on data, as well as continued heightened geopolitical risk and an election season that is already dramatic, what is in store for the balance of 2024?

Let’s get into the data:

PCE Inflation, the Fed’s preferred measure, declined from the level seen earlier this year. PCE rose 2.6% for the 12 months through May, lower than April’s 2.7%.
Consumer spending inched back up. May retail sales were up 0.1% overall, and up 0.3% if plunging gas station sales are excluded. Spending in housing-related categories, including furniture shops and building stores, also declined.
Second quarter 2024 GDP estimates have moderated. On July 3^rd, the Federal Reserve Bank of Atlanta’s GDPNow estimate was 1.5%. As of mid-June, this estimate was over 3%.
Non-farm payrolls increased by 206,000 jobs in June. The Labor Department’s Bureau of Labor Statistics report was above consensus expectations, but May gains were revised down sharply to 218,000 from 272,000.

What Does the Data Add Up To?

After a return to increasing inflation in the first quarter, the June data shows inflation trending back down, and a moderating of the strong labor conditions we’ve seen for some time.

Reducing inflation to where it can be sustained at a level close to 2% has been the priority for the Fed. Inflation impacts all segments of the economy, but particularly the most vulnerable, and Chairman Powell has been vocal about the Fed’s goals. However, with inflation lower, the costs to consumers of sustained high interest rates are also beginning to be felt, as consumer have run through savings surpluses and are now supporting spending through higher credit card balances that are accruing interest at much higher rates.

The Fed has been talking about the labor market a lot, and the recent numbers finally show a cooling trend. The downward revisions from previous month’s data in the second quarter now show a three-month average of job gains of roughly 177,000 — much lower than the 269,000 seen in the first quarter.

The tick up in the unemployment rate to 4.1% in June, from 4.0% in May is small, but it’s significant that the rate has remained above 4.0%. This is higher than it has been since 2021. The Fed’s balancing act is to provide relief from inflation, but without exacting a toll on consumers through rising unemployment.

At this phase in the cycle, the risks to the Fed’s inflation and employment goals of low inflation and full employment “have come back much closer to balance” according to Powell.

The Fed will be data dependent as always, but if inflation continues to moderate, the Fed may feel that more than one rate in the second half of 2024 will help to keep the economy in balance.

Chart of the Month: The Fed’s “Disinflationary Path”

Toward the end of the month, Chairman Powell appeared more positive when speaking at a monetary policy conference sponsored by the European Central Bank. He referred to the U.S. as being on a “disinflationary path.”

Source: Bureau of Economic Analysis

Equity Markets in June

The S&P 500 was up 3.47% for the month and 14.48% YTD
The Dow Jones Industrial Average rose 1.12% in June and was up 3.79% YTD
The S&P MidCap 400 returned -1.77% for the month, but was positive 5.34% YTD
The S&P SmallCap 600 fell -2.46% and the first half return was -1.61%

Source: S&P Global. All performance as of June 30, 2024

Only five of eleven S&P 500 sectors gained in June. The “Magnificent 7” stocks (Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) accounted for 79% of the return for the month. Q1 2024 S&P 500 earnings season closed with 77% of issues beating operating earnings estimates. For Q2 2024, the expectation is to increase 6.6% over Q1.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 4.39%, down from 4.51% the prior month. The 30-year U.S. Treasury ended June at 4.55%, down from 4.765%. The Bloomberg U.S. Aggregate Bond Index returned 0.95%. The Bloomberg Municipal Bond Index returned 1.53%.

The Smart Investor

Is your financial plan meeting your goals? Your portfolio might be hitting or exceeding its benchmarks, and may be in alignment with your risk tolerance. Those are table stakes. The bigger question is whether your overall plan is going to help you get where you want to go. But you can’t determine that until you really know what your goals are. Some things to think through that can have a very big impact on your plan:

How long do you want to work? Do you want to retire early, take a sabbatical, have one spouse scale back work, or some other configuration? Will your plan create the flexibility for you to do that?
Is your career everything you want it to be? Are you getting the most out of job? Are you maximizing your benefits?
If you are at the point where you have excess income after paying off bills and hitting savings goals – what do you want to do with it? What’s most important to you? Fully funding kids’ education, buying a family vacation home, having a lot of great experiences while your kids are young?
What keeps you up at night? Is your family protected?

This content not reviewed by FINRA

July Market Commentary A Disinflationary Trend Re-emerges

on July 18, 2024

June Recap and July Outlook

Let’s get into the data:

PCE Inflation, the Fed’s preferred measure, declined from the level seen earlier this year. PCE rose 2.6% for the 12 months through May, lower than April’s 2.7%.
Consumer spending inched back up. May retail sales were up 0.1% overall, and up 0.3% if plunging gas station sales are excluded. Spending in housing-related categories, including furniture shops and building stores, also declined.
Second quarter 2024 GDP estimates have moderated. On July 3^rd, the Federal Reserve Bank of Atlanta’s GDPNow estimate was 1.5%. As of mid-June, this estimate was over 3%.
Non-farm payrolls increased by 206,000 jobs in June. The Labor Department’s Bureau of Labor Statistics report was above consensus expectations, but May gains were revised down sharply to 218,000 from 272,000.

What Does the Data Add Up To?

After a return to increasing inflation in the first quarter, the June data shows inflation trending back down, and a moderating of the strong labor conditions we’ve seen for some time.

At this phase in the cycle, the risks to the Fed’s inflation and employment goals of low inflation and full employment “have come back much closer to balance” according to Powell.

The Fed will be data dependent as always, but if inflation continues to moderate, the Fed may feel that more than one rate in the second half of 2024 will help to keep the economy in balance.

Chart of the Month: The Fed’s “Disinflationary Path”

Source: Bureau of Economic Analysis

Equity Markets in June

The S&P 500 was up 3.47% for the month and 14.48% YTD
The Dow Jones Industrial Average rose 1.12% in June and was up 3.79% YTD
The S&P MidCap 400 returned -1.77% for the month, but was positive 5.34% YTD
The S&P SmallCap 600 fell -2.46% and the first half return was -1.61%

Source: S&P Global. All performance as of June 30, 2024

Bond Markets

The Smart Investor

How long do you want to work? Do you want to retire early, take a sabbatical, have one spouse scale back work, or some other configuration? Will your plan create the flexibility for you to do that?
Is your career everything you want it to be? Are you getting the most out of job? Are you maximizing your benefits?
If you are at the point where you have excess income after paying off bills and hitting savings goals – what do you want to do with it? What’s most important to you? Fully funding kids education, buying a family vacation home, having a lot of great experiences while your kids are young?
What keeps you up at night? Is your family protected?

A great relationship with a financial advisor is one where you feel comfortable surfacing all these questions, and more. We’re always here to help.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

This content not reviewed by FINRA

July Market Commentary A Disinflationary Trend Re-emerges

on July 17, 2024

June Recap and July Outlook

Let’s get into the data:

PCE Inflation, the Fed’s preferred measure, declined from the level seen earlier this year. PCE rose 2.6% for the 12 months through May, lower than April’s 2.7%.
Consumer spending inched back up. May retail sales were up 0.1% overall, and up 0.3% if plunging gas station sales are excluded. Spending in housing-related categories, including furniture shops and building stores, also declined.
Second quarter 2024 GDP estimates have moderated. On July 3^rd, the Federal Reserve Bank of Atlanta’s GDPNow estimate was 1.5%. As of mid-June, this estimate was over 3%.
Non-farm payrolls increased by 206,000 jobs in June. The Labor Department’s Bureau of Labor Statistics report was above consensus expectations, but May gains were revised down sharply to 218,000 from 272,000.

What Does the Data Add Up To?

After a return to increasing inflation in the first quarter, the June data shows inflation trending back down, and a moderating of the strong labor conditions we’ve seen for some time.

At this phase in the cycle, the risks to the Fed’s inflation and employment goals of low inflation and full employment “have come back much closer to balance” according to Powell.

The Fed will be data dependent as always, but if inflation continues to moderate, the Fed may feel that more than one rate in the second half of 2024 will help to keep the economy in balance.

Chart of the Month: The Fed’s “Disinflationary Path”

Source: Bureau of Economic Analysis

Equity Markets in June

The S&P 500 was up 3.47% for the month and 14.48% YTD
The Dow Jones Industrial Average rose 1.12% in June and was up 3.79% YTD
The S&P MidCap 400 returned -1.77% for the month, but was positive 5.34% YTD
The S&P SmallCap 600 fell -2.46% and the first half return was -1.61%

Source: S&P Global. All performance as of June 30, 2024

Bond Markets

The Smart Investor

How long do you want to work? Do you want to retire early, take a sabbatical, have one spouse scale back work, or some other configuration? Will your plan create the flexibility for you to do that?
Is your career everything you want it to be? Are you getting the most out of job? Are you maximizing your benefits?
If you are at the point where you have excess income after paying off bills and hitting savings goals – what do you want to do with it? What’s most important to you? Fully funding kids education, buying a family vacation home, having a lot of great experiences while your kids are young?
What keeps you up at night? Is your family protected?

A great relationship with a financial advisor is one where you feel comfortable surfacing all these questions, and more. We’re always here to help.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

This content not reviewed by FINRA

Should You Max Out Your 401(k) Contributions?

on July 16, 2024

Saving for retirement in a 401(k) is one of the most effective ways to build up a nest egg. But with the maximum contribution limit at a considerable $22,500 for those under 50 and $30,000 for savers age 50 or older, should you be maxing it out?

If you are saving in a Roth account, contributing the max allows you to get to your goal sooner and take advantage of the power of compounding for longer before you need the money. If you are saving in a traditional 401(k), a 403(b), or 457 plan, you receive that benefit and the ability to contribute with pre-tax dollars. This lowers your taxable income for the year the contribution is made and may save you money on taxes.

But there’s more to consider than just the investing and tax benefits. You want to consider your 401(k) contributions in the context of the plan’s structure, the employer match, and your own situation.

The 401(k) Basics

First, let’s determine a minimum contribution to a Roth or traditional 401(k). If your employer offers to match your contribution, getting the most out of this benefit should be your goal. The match is usually capped at a percentage of your salary, for example, 6%.

The formula is determined by your employer, and it may be a dollar-for-dollar match, or a percentage of your contribution. Or it could be a combination of the two. From the employer’s perspective, matching allows them to provide you with a benefit and incentivizes you to save for your retirement. It doesn’t count against your own contributions.

You want to figure out the amount you need to contribute to get all employer matching funds allowed. Otherwise, you’re leaving money on the table. This is the first minimum hurdle.

Once you’ve met the match, how much more should you contribute? Your 401(k) may offer an automatic increase feature that pushes your percentage up every year. This can be a good idea to help you save money over time, and it’s usually capped at a specific percentage, such as 10%.

Another general rule is to contribute 15% of your salary. As your salary increases, you may max out your contribution before you get to 15% of your salary. Whether or not that’s the case, should you be maxing out contributions?

Are There Better Uses for the Funds?

Even if your salary is high enough that maxing out contributions is not a burden, there are some boxes to check first.

Is your “rainy day fund” fully funded? You may need more than you think, especially if your salary or lifestyle has changed. You should have enough saved to cover either 3-6 months of your salary or 3- 6 months of your expenses. Drawing money from a 401(k) if you need funds is expensive in terms of penalties and taxes, and it’s generally a better idea to put money aside in advance than have to withdraw from your retirement funds.

Have you considered a Health Savings Account? HSAs allow you to put money aside for health care costs. Diverting some funds to an HSA may make sense, as they are “triple tax-advantaged,” meaning that you contribute with pre-tax dollars, the funds grow tax-free, and they are not taxed when you use them for qualified health care expenses. This is an advantage over funds in a traditional 401(k) or similar account, which are taxed upon withdrawal.

For 2023, the amount you can contribute to an HSA is $3,850 for an individual and $7,750 for family coverage. These accounts also have a catch-provision, allowing those 55 and older to contribute an additional $1,000. It is necessary to select a high-deductible health care plan to be eligible to save in a health savings account.

When Should You Max Out?

If you are in a high tax bracket, contributing to a 401(k) now and withdrawing the money in retirement, when your tax bracket may be lower, can make sense. However, taxes tend to increase over time. Especially as you get close to retirement, beginning to plan not just savings but the tax strategies you will implement to keep your taxes low once you’ve retired is critical. Having an overall picture of how much you need for income and where you will draw funds from can help you keep taxes low and may provide clarity on 401(k) contributions now.

Your Goals, Plans, and Lifestyle Should Be Considered

Creating a retirement nest egg is just one piece of the retirement puzzle. Are there goals that are more important to you now? When do you want to retire? What does that retirement look like? If you want to buy an investment property at the beach that you’ll move into once you retire, that may be more important.

You also want to consider your entire investment strategy. Retirement plan investment options may be limited, and you may prefer setting up a taxable account where you have more choices that may help you get to your goal, such as alternative investments. If you have a concentrated stock position from your employer’s stock, you may want to develop a strategy to mitigate the concentration risk away from equities. Or, if you have the opportunity to buy and exercise options, diverting funds to that use can be a powerful retirement savings builder.

The Bottom Line

Having a plan for retirement is critical, and saving as much as possible in a Roth or traditional 401(k) is usually the foundation. But as you move along your financial journey, it’s a good idea to create a bigger-picture plan that takes more into account so you can decide what’s right for you.

Bankrate Financial Independence Survey, March 2023.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.

This content not reviewed by FINRA

Managing Investments Means Managing Your Emotions

on July 16, 2024

The market crashed over 10% in a single day in March 2020. While many investors sold out of their positions, those who held on and continued investing were rewarded, heavily.

In just 354 days following the crash, the stock market as represented by the S&P 500 surged back into a bull market and doubled in value. Those who sold at the bottom missed a rare opportunity, which demonstrates the importance of managing emotions in uncertain times. Some believe that you can remove emotion from decision-making, but we’re human. Everyone has emotions. The important part is learning how to manage them while managing your money.

We’re going to cover the challenges that come with the mixture of investing and emotions and how you can best manage your money in uncertain times to increase your chance of being a successful investor.

The Current State of Investing

With the rise of retail investing with apps, we can now trade stocks on our phones, and paired with social media, investing has become more of a social experience. Examples of this are the “meme stock” phenomenon and the rapid proliferation of cryptocurrencies and other blockchain-linked assets.

Cryptocurrencies have captured the interest of many, even beyond the dedicated crypto community. Sharp increases have caused many investors to jump into the hottest new thing without fully evaluating and understanding the investment. We’ve seen cryptocurrencies increase in a short period of time, only to come crashing back down as quickly as they went up.

Managing emotions during a period of growth is just as important as during a crash. Investors may shy away from investing in bull markets due to the belief that prices are too high and are bound to come back down. While it is true that the market can’t continue going up every day forever, trying to time market crashes to buy in at the bottom can be just as harmful to portfolio returns as panic selling, because of the missed growth.

Throw in high inflation and interest rate increases — we’ve got an unfortunate recipe for emotional, reactive investing.

Challenges of Trying to Time the Market

Trying to time the market is like trying to win back-to-back roulette spins. The odds aren’t in your favor and trying to do so will most likely end up costing you money – not just in losses, but in opportunity cost.

Recent research¹ shows that over a 30-year timeframe starting in January 1994, the S&P 500 returned 8.00% annualized. If you weren’t invested on the 10 best-performing days, the overall returns would drop down to 5.26%.

Missed the 30 best-performing days? 1.83 % returns

Missed out on 50 of the best-performing days? You’re now earning negative returns.

Investing Should Be Personal, Not Emotional

Managing emotions is challenging. Throw money into the equation, and it becomes even harder. Luckily, there are ways to reduce the emotional skin in the game and invest with confidence. First, it’s important to realize that you have your own goals, and you’re playing your own game when investing. The returns other investors are earning play no role in how your investments are performing.

But aside from the mental side of investing, there are strategies that can be used to reduce overall risk. Reducing risk will help keep emotions in check.

A Prudent, Risk-Focused Long-Term Plan

Understanding your ability to tolerate loss is critical to building an investment strategy. As we saw above, staying invested drives return. If the market drops and you panic-sell, you’re just crystalizing losses. Being honest about your tolerance for risk, or working with an advisor that has experience in building a risk profile can help you get to an asset allocation that is comfortable for you, even in extreme conditions.

Diversification is first up when it comes to allocating assets. By owning assets that react differently to the same market or economic situation, you create the potential for assets that are performing well to offset assets that are struggling. For example, when equities are up, bond prices may decline. Your asset allocation should match your goals and where you are in your financial journey.

It should be built for the long-term, to cover at least one market cycle – ten years is a good rule of thumb. As things change, it may make sense to shift and rotate your portfolio into different sectors to align short-term events.

Another way to reduce risk and manage emotions is by dollar-cost averaging (DCA). In this strategy, you invest the same amount of money each month regardless of how the market performs. The goal is to help you make consistent investments and avoid ill-timed decisions because you’re buying in at every price point.

The Takeaway

Managing uncertainty and keeping emotions out of investing is easier said than done. It’s hard to remain level-headed and logical if you see your investments drop by 20%+ in a given period of time. But being aware of your financial situation, understanding the purpose behind your investments, and knowing that it’s impossible to completely avoid risk in the stock market will help you manage emotions and stay aligned with your overall investment strategy.

¹Wells Fargo, The Perils of Trying to Time Markets, January 2024.

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Having Successful Money Conversations as a Couple

on July 16, 2024

Money is personal to each of us and deeply related to our histories, childhoods, fears, and dreams of success. For most couples, sharing finances at some point becomes necessary and desirable. So how do you successfully combine finances in a way that protects each person and lets you move ahead together? It starts with good communication.

Money taps into so many emotions that have the potential to be negative, such as fear, shame, and stress. It can also be a core part of our relationships with our parents growing up and navigating maturity and adult life. These can all be minefields when setting out to discuss finances constructively. It’s a good idea to have a framework that allows for the space, respect, and kindness you strive for in other aspects of your relationship.

Be Curious, But Not Judgmental

A study from the Financial Therapy Association found that 79% of people surveyed hadn’t talked to friends or family members about money in over a year.¹ No matter how far you are into your relationship, it’s never too late to start talking about money. But it’s always a priority to approach the topic with curiosity and care and not from a judgmental point of view.

Every person has their own beliefs and biases around money, starting from a very young age. So, to begin getting on the same page financially, you have to practice empathy. Ask questions, listen carefully, and don’t immediately start looking for solutions. A few questions to get the wheels turning:

“What did you observe about money growing up? How did your family view/feel about money?”

This question helps clarify existing beliefs and habits, which is necessary to start moving forward and having more in-depth, constructive conversations.

“If we received $10 million tomorrow, what would be the first thing you’d do with the money? What would life look like a year from now?”

This allows you to begin thinking big-picture and can help get to the root of your desires and goals with money.

“What’s one thing you would change about the way we manage our money?

This helps set a baseline for where you’re at and gives you both a chance to share concerns, allowing you to begin working towards a common solution.

“What would you like money to do for us that we haven’t done yet?”

A step down from the first question, which helps create more tangible action items that you may be able to start immediately acting on.

Set Collaborative Goals

It’s essential to set financial goals, to put your money to work towards your life goals. The critical part is doing it together. These don’t necessarily have to be milestone goals; it could be as simple as setting a goal to review your spending once a month.

If you’ve created trust and comfort, it may be possible to tackle goals that are difficult together. These could be prioritizing paying down student loan debt or personal debt or improving a bad credit score. If your individual finances are in good shape, you can tackle life goals such as saving for kids’ college education, buying your dream home, or figuring out a retirement plan.

When you set goals together, you get buy-in from both sides. Each person gets to express their thoughts and opinions, and ultimately, you find common ground and can begin working towards your goals together.

It’s important not to neglect individual financial goals. You may have a joint checking account for standard household spending, and then you each have separate accounts for your spending. Having conversations around what you each value creates transparency, which helps ease potential concerns around what money is being used for.

Make a Plan

After setting goals, you then need a plan to reach them. Once you’ve had conversations and highlighted some key goals, get out a pen and paper (or a Google Doc) and write them down. Don’t let your progress go to waste by not following through on previously discussed goals and action items. While the plan isn’t going to be perfect and adjustments will need to be made over time, it serves as a starting point to get going in the right direction.

Aside from the big goals, your money plan can consist of many different things. It can outline financial responsibilities for the household, such as who pays the bills, who reviews the spending, or who manages the investments. This may already be established in your family, but it’s worth checking together to make sure everyone’s comfortable with their current “chores.”

The Takeaway

Having conversations about money is challenging. Having a healthy mindset around money is essential for your relationship. Hidden fears and concerns can slowly take their toll, and conversations can shine a light on them so you can resolve them together. Communication is vital in all relationships, and it should extend into the financial side of the relationship.

1. McCoy, Megan. Exploring How One Exploring How One’s Primary Financial Conversations Varies by Marital Status. Financial Therapy Association. 2019.

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Reducing the Tax Impact of Equity Compensation: The 83(b) Election

on July 16, 2024

Employees or company founders that receive equity compensation often must cope with complex tax rules. Utilizing the 83(b) election is a valuable method of reducing tax liabilities, though there are some important caveats.

In this piece, we break down what it is and what you can do about it.

What Is the 83(b) Election?

The 83(b) election is a set of regulations under the Internal Revenue Code (IRC) that enables an employee, or startup founder, to be taxed on the total fair market value of restricted stock or options when they are granted rather than later upon vesting by sending a letter to the IRS.

Restricted shares are unregistered shares of ownership in a corporation issued to corporate affiliates, such as executives and directors. Along with the value of restricted stock, you can include the spread of your options in your election, i.e., the difference between the strike price—the options’ exercise price—and the shares’ fair market value when exercising them. To make the election, your shares must be subject to a considerable risk of forfeiture before vesting; for example, if you would lose the shares by moving to another company before the shares are vested.

The advantage of the election is the ability to pay taxes on the restricted shares earlier, hopefully before the stock price appreciates. Section 83(b) elections only apply to stock subject because grants of fully vested stock will be taxed when granted.

The grant date refers to when the company gives an employee company stock or a stock option award. Vesting is defined as when an employee has achieved ownership of company shares or stock options, usually by working for a certain number of years at the company, often five years.

An 83(b) election allows the employee to pay income taxes earlier, often before the company shares have climbed in value. Thus, when you sell shares for a gain later on (at least a year), you will pay capital gains tax instead of ordinary income tax, which is taxed at a higher rate. Another advantage of filing an 83(b): You start the holding period earlier, just after the grant date, so any capital gains accrued will probably be eligible for the capital gains tax rate.

However, if the value of the company shares declines after you made the 83(b) election, you may end up paying more in taxes than necessary because you prepaid the taxes when the company shares were worth more.

How Does it Work?

The 83(b) election documents must be sent to the IRS within 30 days after the restricted shares are issued. For options, the election must be made within 30 days of exercise. However, you should confirm that your employer’s plan permits you to exercise options before vesting. The recipient of the equity options must also present a copy of the completed election form to their employer.

The employee completes and signs an IRS Section 83(b) form or letter that includes the following information:

Personal information (name, address, Social Security number).
Description of the number and type of shares of which company, along with the date received or purchased, any restrictions your shares are subject to and the fair market value of the shares on the date received or purchased. Restrictions include forfeit if employment ends before vesting.
The amount paid for the company shares.
The amount the employee will record as gross income on their income tax return

Who Can Benefit?

Stock Option Holders
If you can exercise your stock options early (before vesting), you can file an 83(b) election. Doing so can potentially reduce your future tax liability if your company’s share price performs well.

Startup Founders and Key Employees
In some corporations, particularly startups, company founders or owners may receive a significant number of restricted stock shares as part of their overall compensation. Restricted shares are subject to specific rules, such as vesting and/or forfeiture (losing shares if you leave the company).

Key employees may also earn many restricted shares that could rise in value from the time of the grant to vesting. For founders and key employees, using the 83(b) election provides the opportunity to save by shifting the tax treatment of their shares from ordinary income taxes to capital gains taxes.

83(b) Example
Let’s say a co-founder of a company is granted 1 million shares subject to vesting that are valued at $1 per share at the time of the grant. If the co-founder makes an 83(b) election, they will pay tax on the value of the shares upon issuance of the grant, i.e., the tax assessment will be made on $1 million only.

In the reverse scenario, if the employee filed an 83(b) election and the stock price falls when their investments vest, or the company files for bankruptcy, then the employee ends up overpaying the taxes—they paid taxes on shares with a higher value than the current fair value. The IRS does not allow you to file an overpayment of taxes under the 83(b) election—no do-overs are possible.

Another example when an 83(b) election is not beneficial is if an employee exits a company before the end of the vesting period. In this scenario, they paid taxes when the shares or options were granted, but they will not receive the shares.

Conclusion
A Section 83(b) election is a letter you send to the Internal Revenue Service instructing them that you want to be taxed on your shares of restricted stock on the date the shares were granted to you rather than when they vest. The 83(b) rules are straightforward, but you may need to consult your individual tax advisor.

Once the decision is made, the filing must be completed and arrive at the IRS within 30 days after the grant date of your restricted stock; this is an absolute deadline. The grant date of your restricted stock is usually the date the corporate board approves the grant. Thus, you may receive the paperwork a few days after that, so you may have to work quickly to decide about the 83(b) and file the correct paperwork.

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