3 Things to Understand about Your Investments

Investors who have financial advisors are on the path to financial freedom, but that does not necessarily mean they should sit back and ignore their portfolios. Investing is a never-ending process, and your relationship with your financial advisor is an ongoing partnership. That means it is a good idea to be educated about your investments. You can start by asking the three questions below.

How am I invested? You would be surprised by how many investors don’t know the answer to this question. Start with the basic asset classes: Are you invested in stocks, bonds, or cash? Then move on: Are you invested in any alternatives, such as real estate and commodities? Then ask about the allocation: How much of each asset class are you invested in? And are you invested directly in those assets or via mutual funds? And how might you expect that mix of assets and investment types to change over time?

Are changes warranted? When to buy or sell depends on several things. What is happening in the overall market (i.e., a bull or bear market)? What is happening in the asset class? Is the buy or sell price attractive? If you should buy or sell, how much and when? And what will you do with the proceeds? Are there other investments that you believe have more potential? As you can see, a change isn’t as simple as it seems.

What do I do with winners and losers? When your investments fare well, do you keep them or sell them? Not all investments work out, however well planned, and successful investors should know the answer to this question (and the reasoning behind it). In other words, have a plan for investments that are performing well and for those that are performing poorly.

If you need help answering these questions, please reach out to us.

7 Ways to Get Financially Healthy and Keep on Track in 2020

Investing advice may come and go, depending on the economic environment, the ebbs and flows of the markets, and the life stage of the investor. But foundational financial advice is timeless. Here are seven tips to keep us on track.

Save part of your income every month. This is true regardless of your life stage. If you are in your working years, save for retirement. If you are retired, save for emergencies.

Use automatic deductions if they are available. Maybe your employer offers automatic paycheck deductions, or maybe you can have a little transferred to a mutual fund each month.

Track your income and expenses. Again, this is true regardless of your life stage. You should do it when you are working, and you should do it in retirement. Knowing what comes in and goes out is the key to financial freedom.

Avoid overspending. Avoid buying on impulse. How? Create a budget. Plan your dinner menus in advance. Make a shopping list and stick to it. Keep the money in your wallet to a minimum.

Consider gifts carefully. Gifts and donations may seem like they do not count toward your spending, but your generosity should not threaten your financial security.

Take advantage of your employer’s offerings. If you have a retirement savings plan, a health savings account, or a pre-tax transportation plan, use them. They save money on taxes, and even small savings add up.

Be conscientious. Keep track of your bills, whether they are mailed or accessed online. Review your bank and credit card statements monthly. Pay your bills on time. Refinance mortgages and other loans when it makes sense. Don’t sign anything without reading the contract.

If you need help with your financial planning, please contact us.

How to Save for Retirement with Tax Deferral

A number of tax-deferred investment vehicles are available to individuals saving for retirement, and that is a wonderful thing. With tax deferral, the return on your investment is not reduced by income taxes every year: you pay taxes only when you withdraw the money, most likely in retirement, when you may be in a lower tax bracket and will thus pay fewer taxes on the distributions. So what are your options?

The first kind of retirement plan you may think of for its tax-deferral benefits is your employer-sponsored retirement plan. These plans include defined benefit plans (more commonly referred to as pension plans), which provide a specific benefit in retirement, and defined contribution plans (such as 401(k) and 403(b) plans), which provide a specific contribution to an account in your name, but the benefit you will receive upon your retirement depends on the investment experience of your account.

But you have other options, including individual retirement accounts (IRAs). Traditional IRAs (to which anyone can contribute) and SEP and SIMPLE IRAs (designed for self-employed individuals and smaller employers) are like employer-sponsored retirement plans, but you purchase them yourself. Roth IRAs are a little different: you make after-tax contributions and investment income accrues tax free, but distributions are generally not taxed.

Finally, you could consider a fixed annuity, which is a financial product that provides a stream of income based on guaranteed rate of return for a certain period of time or even for your entire life. Because of this, annuities are similar to defined benefit plans or traditional pensions.

Note that there are different eligibility rules for each of these investment vehicles, such as income phase-outs, age requirements, and contribution limits. Please reach out to us if you need help determining which of these options is most suitable for you given your financial circumstances.

Understanding Rules Around IRA Contributions

With tax time approaching quickly, many American investors are asking questions about their individual retirement accounts (IRAs).

One big question: “If I didn’t turn 70 1/2 until early 2020, can I still make deposits into my traditional IRA?”

The answer is yes. Because you didn’t reach age 70 1/2 in 2019, you are eligible to make a contribution for the 2019 tax year (which is the year before the year in which you turn 70 1/2).

The maximum contribution is $6,000, and because you are older than 50, you qualify for a catch-up contribution of $1,000, meaning your total 2019 contribution can be up to $7,000.

There are some rules to follow, however. You may not contribute more than 100% of your earned income (or salary from work, but not dividend interest from your investments). So, if your earned income for 2019 will be less than $7,000, you may not contribute the full amount.

Another question: “When can I start taking distributions from my IRA?”

Anyone may begin taking distributions from an IRA without penalty at age 59 1/2. But you must begin taking required minimum distributions (RMDs) by April 1 of the year following the year in which you turn 70 1/2 (April 1, 2021, in the case of the questioner above). RMDs are determined by dividing the total balance of all your IRAs as of December 31 of the prior year by your life expectancy, as listed by IRS Publication 590.

Sound complicated? It can be. That is why it is helpful to have a financial advisor guiding you. Please reach out to us for assistance with your IRA contributions or withdrawals.

Stocks: Should You Go Small or Large?

Small-cap stocks appeal to some investors because of their potential for strong growth. Still, not everyone can stomach their potentially higher volatility. Are they right for you, and if they are, how can you best add them to your portfolio?

First, some background. Small-cap stocks typically include companies with market capitalizations of $250 million to $2 billion, while mid-cap stocks range from $2 billion to $10 billion, and large-cap stocks have market capitalizations of greater than $10 billion. To review, the market capitalization of a company is its stock price times the number of shares it has outstanding.

Smaller-cap stocks typically have greater growth potential than larger-cap stocks. This is because smaller companies are generally more nimble than larger companies, so decisions about new products and services and adjustments when problems arise can be made and implemented quickly. This flexibility often helps smaller companies perform well.

But that is not always the case. According to conventional wisdom, small-cap stocks can perform better than larger-cap stocks (a) when markets have been down and are improving and (b) when interest rates are rising. At other times in the market cycle, larger-cap stocks may perform better. For example, when markets are declining, investors may prefer the security of well-known names and shun small-cap stocks in favor of large-cap stocks.

You probably know, however, that it is wise to avoid trying to time the market. Instead, we recommend choosing an appropriate asset allocation for your risk tolerance and financial goals and sticking with it over time. You may want to ensure your distribution includes some allocation to small-cap stocks, perhaps through a small-cap mutual fund, so you have adequate diversification among a number of small-cap companies.

We can help you decide if small-cap stocks are right for your financial goals and, if so, in what allocation. Please reach out if you have any questions or would like to consider adding these investments to your portfolio.

Investing an Inheritance: What You Need to Know

An inheritance may be expected, or it may be a complete surprise. Either way, when we receive one, we worry that others do not: What should I do with the inheritance?

When it comes to investing in a windfall like an inheritance, there are many options. Spend it on a sports car? Donate it to charity? Invest it? And if the latter, how?

Let’s focus on the investing options. The steps for this are relatively simple.

First, determine appropriate asset allocation. Such an allocation should take into account the fact that no one knows how the market is going to perform.

Ideally, your assets should be divided among different types of investments based on your financial goals and appetite for risk. This is a mix of stocks, bonds, and other investments.

Next, you would invest the inheritance based on that mix of assets. You could do this all at once, which gets your money working more quickly and does not leave you too conservatively invested in cash for a period of time. Or you could use an approach called dollar-cost averaging, which involves investing the inheritance a little at a time. With this approach, you can take on less risk by slowly investing small chunks at a time rather than throwing it in all at once.

Regardless of which approach you choose (other than the sports car), we can help you determine the appropriate asset allocation.

Please reach out if you have received an inheritance or expect one in the future and would like assistance with this investment.

Managing Market Volatility in 2020

After one of the longest bull markets in history, many investors are worried about a stock market decline, and that is natural. Markets have cycles, and even if another financial crisis is not impending, even minor downturns can be troubling. But you can take steps to protect your portfolio from market volatility by following these three tips.

Review your asset allocation. Take a look at your asset allocation before you are tempted to make changes based on emotion. Make sure your portfolio is diversified. How much do you have invested in stocks, bonds, and cash? Is it still appropriate for your growth goals and risk tolerance? Although diversification can’t protect you from a loss, it may help cushion your overall portfolio from significant declines.

Invest a little at a time. If you are still contributing money to a retirement account, you may want to contribute a little at a time instead of all at once. This is called dollar-cost averaging, and it can help manage risk.

Because the amount you invest remains constant, you are able to buy more shares of a stock or mutual fund when the price is low and fewer shares as the price rises. Over time, your average cost per share could be lower than the investment’s average price per share.

Hold steady. Some investors attempt to overcome market volatility by trying to time the market, jumping in on an upswing and jumping out on a downswing. But it’s difficult to predict how financial markets will react to any specific situation or event. You have to be right twice: when you sell and when you buy. So, stick it out.

Although past performance is no guarantee of future results, historically, the markets have always rebounded. From 1957 through the end of 2018, the S&P 500 Index has returned roughly 8%.

Don’t Skip These Important Estate Planning Tasks

You may not be subject to estate tax, which is applied to estates with values that exceed the exclusion limit set by law, but that does not mean you should avoid estate planning.

Here are five tasks for everyone to consider that fall under estate planning.

Check your beneficiaries. If you have filled out beneficiary designation forms for your financial accounts (such as your life insurance or 401(k) plan), they override any other estate planning documents, so review them and ensure they are up to date.

Create two wills. That is correct: two wills. You need a living will to indicate how you would like to be cared for if you become unable to express your wishes, and you need a last will and testament to explain how you’d like your assets distributed after your death.

Draft two powers of attorney. You also need two powers of attorney to indicate who will handle your affairs if you are incapacitated. One will specify who will handle healthcare decisions, and another will specify who will handle financial matters. You can designate one person to handle both.

Designate guardians if necessary. If you have children, you will want to name a guardian to look after them (day to day and financially) if you are unable to care for them.

Name an executor. When you die, your executor will make sure your assets are distributed in accordance with your will. You can specify a family member or a professional, such as a bank trust officer.

Just be sure to tell your executor that you have named him or her.

3 Steps to Avoiding Probate Delays

If you die without a will, the court will decide how to distribute your assets among your heirs.

This process will take place in one or more state probate courts, depending on where your assets are located, and it will be based on state laws.

This can be expensive, and your estate may have to shoulder court costs and pay for any legal advice your heirs may require. Is this what you want?

Probably not. Your estate represents a significant amount of work, and it is natural for you to want to leave as much as you can to your heirs, as efficiently as possible.

One way to do so is to avoid probate court altogether. How? To avoid probate, increase the number of items in your estate that are transferred without a probate procedure. Here are three ways to achieve that.

1. Register assets as “joint tenants with rights of survivorship” or “transfer on death.” You can specify that many of your assets, such as securities and brokerage accounts, be set up as “transfer on death”. Similarly, other assets (such as properties) can be titled as “joint tenants with rights of survivorship.” Upon your death, these assets will bypass probate court and go directly to whomever you specify.

2. Ensure retirement accounts have a designated beneficiary. Many retirement accounts (such as IRAs and 401(k) plans) and insurance products allow you to name who should receive the assets when you die. These assets are excluded from your probate estate and transferred directly to your heirs.

3. Place assets in a revocable living trust. A revocable living trust is a legal entity that has the power to hold legal title to assets. Assets in revocable trusts provide for a direct transfer of assets to your beneficiaries.

Feel free to reach out to us if you need guidance with this process.

Should You Consider Index Funds for Your Next Investment?

The concept of indexing is simple: Instead of trying to beat the market, you try to meet the market. But is indexing the right approach for you?

The 1976 launch of the Vanguard 500 Index Fund created an entirely new philosophy of investing: holding all the stocks in the market instead of trying to pick potential winners.

Index funds, as they are called, are thus considered passive investments, and they often have lower turnover and lower fees than actively managed mutual funds.

Today, index funds track all kinds of market indices. There are more than 1,000 index funds and exchange-traded funds (which are similar to index funds) available. Many of them target specific countries (such as China), industries (such as technology), and even strategies (such as long-short investing).

The strategy has often worked. Many studies have shown that the bulk of traditional mutual funds have not been able to keep pace with index funds over time. But it is hard to determine if an index fund is right for you, and if so, which one.

If you think index funds are right for you, you may want to stick with the basics, such as choosing one U.S. stock fund, one international stock fund, and one bond fund.

Or you might use index funds for certain allocations (such as large-cap stocks) and use actively managed mutual funds where manager expertise and research may be more beneficial (such as small-cap stocks).

We can help you determine whether indexing is suitable for you based on your individual financial situation and goals.