@markusspiske

On July 31st Jerome Powell, Chair of the Federal Reserve, announced the Fed Rates are to be cut by a quarter-percentage point, its first reduction since 2008. The decision to cut rates was made “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

WHAT DOES THIS MEAN FOR THE INVESTOR?

• Investors holding bonds before the rate cut greatly benefit. Bond prices rise as yields fall, making the bondholder money with a decrease in the interest rates.

• Good news for those who are looking to borrow money. A cut should mean a decrease in the cost of mortgages, auto loans, and credit cards. Thus, encouraging consumers to spend and sustain the expansion of economic activity.

• A possible decrease in the yield for those who have dollars deposited in savings accounts.

AS FOR THE US ECONOMY?

With any changes to monetary policy, there tends to be a lot of talk about what will happen next and what this means for our economy. Where will we end up? The last few times the Fed cut rates, in 2008 and before that 1996 and 1998, the results varied:

• The last time the Fed cut rates was December 16, 2008, where there was a market decline as the S&P 500 continued to fall by of over 25% by March 9, 2009.

• While the cuts in 1996 and 1998 managed to positively impact the economy and drive up the S&P 500 more than 20% in the following year.

What will the impact of the Fed cuts be this time around? I am reminded that prognosticators often have a poor aptitude in predicting what’s next. There is a correlation between the Target Federal Fund Rate and the 10 Year Treasury Rate, providing an example for us of how hard it is to predict what’s next.

In an October 2018 survey conducted by the Wall Street Journal, more than 50 economists predicted where they thought the 10-Year Treasury yield go in 2019.

Did any of the analysts guess correct? No, not one was close. With the Fed’s recent announcement, the delta continues to grow between their assumptions and reality. As of August 1st, the yield for the 10-Year Treasury Note was below 2%.

Sources: WSJ Survey of Economists (predictions); Tullett Prebon (actual)

What does this say about our ability to predict the future of the stock market, interest rates and the next “10 Hot Stock Picks For 2019”? Betting our financial future on radio personalities, financial websites, and even economists can be emotional and folly. Building a financial plan provides a solid foundation for one’s financial future, rather than basing it on intuition and predictions.

HOW CAN WE HELP?

Are you interested in trading in guesswork for a disciplined process, or learning more about comprehensive financial planning (we call this hiPlan™)? Please call us at (503) 905-3100 or let us know about your needs.

Further Reading

Here’s what that Fed rate cut means for you, CNBC

Federal Reserve, Press Release on Rate Cut.

Bloomberg, Why Are Economists So Bad at Forecasting Recessions?

WSJ, Some Investors Had Hunch Yields Were About to Fall.

REFERENCES

Chilkoti, A., & Kruger, K. (2019, June 9). Some Investors Had Hunch Yields Were About to Fall. Retrieved from www.wsj.com

Board of Governors of the Federal Reserve System (2019). Federal Reserve issues FOMC statement [Press release]. Retrieved from: https://www.federalreserve.gov/newsevents/pressreleases /monetary20190731a.htm

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In 2018 Nike opened Restricted Stock Units to their already generous benefit line up.  Now employees have the option of choosing either Stock Options, RSUs or, a combination of the two. 

The following content provides guidance—and highlights the benefits and drawbacks of each option choice.

RSUs (Restricted Stock Units)

An RSU is a grant of stock units that, after a specified vesting period, provides an employee with a pre-determined amount of company shares.  The vesting schedule for RSUs varies by company.  At Nike, the vesting schedule is typically 3-4 years.  You do not receive the stock until you are vested, but once vested the stock is yours and will always have value unless the stock price goes to $0.  

Many consider RSUs to be a less-risky investment. However, it is essential to remember that the realized value of your vested grant may increase or decrease depending on the movement of the stock price.  Once the stock vests, you may choose to either sell the stock immediately or hold it.  RSUs are taxed as ordinary income equal to the market value of the stock at the time of vesting.  One crucial planning consideration is that the actual tax due on the RSU is often higher than the amount of tax withheld at vesting.  This leaves many RSU option owners with an unpleasant surprise at tax time. 

At Human Investing, we help our clients plan for the additional they will need to set aside for taxes, thereby avoiding end-of-year tax surprises. Tax planning and anticipating future tax liabilities are important for both RSUs and Stock Options.

Nonqualified Stock Options

Nonqualified stock options differ from RSUs as they are an option to buy Nike stock at a specified price, called the grant price.  Nonqualified stock options can provide a considerable upside if the stock grants are held during a time of substantial growth in the underlying stock.   

The downside is that if the stock price does not rise above the grant price, the options will be worth $0 at vesting.  Another piece to monitor is that stock options expire if they are not exercised within ten years, leaving the owner without benefit.  When a stock option is exercised, it is taxed on the grant price as ordinary income.  If held for a qualifying period, there will also be a tax on long-term capital gains on the difference between the grant price and market price at the time of sale.

Making Your Choice

Ultimately, considering the following questions has the potential to improve your outcome.  Questions like:  How high is your risk tolerance?  What is your confidence in how the stock will perform in 3, 5, and 10 years?  Is your portfolio diversified or highly concentrated in company stock? Are you looking to retire or leave the company? 

While RSUs can provide more predictable income and tax planning, if you separate from the company, you will lose any RSUs that are not vested.   

Stock Options must be vested upon separation and are generally required to be exercised within 90 days of separation from employment.  This is a risk depending on the stock price at the time of departure.  There is one exception to this rule when you turn 55, but additional criteria apply.

Both Stock Options and RSUs are great benefits and a great way to build wealth. At Human Investing we walk our clients through these choices with a close look at their situation.  We help our clients to determine the best course of action with all their benefits with a comprehensive financial plan we call hiPlan. 

Want Us To HELP? Let’S TALK.

You can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968 to take your next steps.

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Take control of your benefits

At Intel, along with the great benefits provided, there seems to be no shortage of “events” that require thoughtful consideration and timely attention. Our aim is to come alongside you with measured and practical methods to approach each event.

These events can be related to 401(k), ESPP, RSUs, Stock Options, or SERPLUS Deferred Compensation. Some others include performance bonuses, estimated tax payments and open enrollment for insurance benefits. 

Two ways to get started

1. Sign up below to receive your 2019 benefits calendar to learn how Human Investing will implement a cadence to serving you.

2. Talk to us about creating a financial plan for you and your family. For information about our offering built for Intel employees, please click here.

@marissa_price

Although the front end of the baby boom generation is well into retirement, we are still 10-15 years away from the final boomers to hit retirement age.  With this in mind, we wanted to take a look at this cohort and highlight the research specifically aimed at women.  You may be surprised by the uphill battles they’ve faced over the last few decades.

Limited Career Choices and Gender Bias in Retirement Policies

Although Baby Boomer women were far more likely to go to college and get a job than the previous generation, the concept of “acceptable” careers for women often pointed them toward work with lower compensation.  As a result of these lower paying careers, women had less money to defer into retirement accounts than their male counterparts—if they chose to defer funds at all.

Also, due to part-time work and lower wages these women are looking at significantly smaller Social Security payments in retirement.  This may leave many women either dependent upon a spouse or relying on Social Security and personal savings.  This, coupled with less time in the workforce due to pregnancy and child rearing, has left many female Baby Boomers at a great disadvantage.

Individual Responsibility and the Psychology of Saving

Another challenge facing female Baby Boomers is the fear of risk and the perception that money is something that should be left to men.  The latter mindset may have led some women to leave retirement planning and budgeting up to their spouses.  Couple this with a lack of individual responsibility on the parts of both men and women in this generation, and we are left with a big problem. 

According to several studies conducted in the mid-nineties (O’Neill, 1991; Twentieth Century Services, 1994). Hayes and Parker (1993), Kadlec (1994), and Pope (1994), the Baby Boomer generation was shaped by a more affluent lifestyle than their parents.  They enjoyed a higher median gross income and higher free spending limits.  Additionally, since Boomers are a generation detached from the Great Depression’s influence on the importance of saving, many have more reliance on Social Security for retirement and simply have not saved enough.

Risk Averse and Under Educated

Research dating back to 1994 and prior (NCWRR) found that women tend to be conservative, low-risk investors.  At the time of these studies, 72% of the women who saved chose investments that provided only marginal returns.   In order to keep up, women now need to be willing to take more risk in their investments.  This is counter intuitive to how many women of this generation were raised and educated.  To compound this difficulty, many financial advisors and brokers assume women want less risk and therefore fail to do the planning and education needed to help their clients see the risk-reward return and to understand a pace of investing that keeps up with inflation. 

How We Can Help

In our work over the years with married, divorced or never married women, the answer always seems to be the same: Advisors need to understand their client’s biases, feelings, and fears about money and retirement.  We need to make a concerted effort toward financial literacy and, most importantly, to provide a solid, comprehensive financial plan.  Education and planning enable our clients to see the impact of their spending, savings, and the aggressive/conservative balance of their investments. 

At Human Investing we accomplish this through our process called hiPlan.  The hiPlan goal is to give our clients the peace that comes from the stability of a plan that enables them to live out the retirement they have worked hard and dreamed about.

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@chuttersnap

Do trade wars have an impact on the economy and market? The simple answer is…

It depends (Freeman, 2004).  Krishna, Mukhopadyay, and Yavas (2002) determined that free-trade can hurt the economy when capital markets are distorted.  While at the same time, trade can positively impact the economy when labor markets are in equilibrium.  Whether you are a free market zealot or, believe globalization was an experiment gone wrong, this trade war is not just about trade and tariffs.  It is a part of a much larger conflict between the U.S. and China, which in addition to trade/tariffs, encompasses politics, ideology, and even the current global geopolitical order.

In our view, regardless of the outcome of the current trade negotiations, this is just one chapter in a book that will continue to be written over the decades to come. Anyone looking for a neat and clean expeditious resolution will likely be disappointed. The uncertainty surrounding this conflict will continue for a long time and is out of our control. 

So, what can be agreed upon and has strong academic roots?

What appears to be universally accepted is policy to eliminate deficits, maintaining market-oriented exchange rates, improving the education system, strengthening the legal system, and increasing competition amongst domestic firms (Baldwin, 2003).  These are essential economic considerations both now and into the future—and what will move the needle long term for our economy, our markets, and our country.

How can you prepare for what happens? Having a Financial Plan.

At Human Investing, we emphasize comprehensive financial planning (we call this hiPlan™), which is very different from traditional planning, which tends to focus on a single area such as investing or insurance. By taking a comprehensive approach, we can create stress-tested, long -term, adaptive plans for our clients and gaze beyond the short-term implications of news headlines.

Further, we work as a team to serve our clients.  Much like a peloton where each team member jumps out front to take the lead when appropriate, we've assembled a team of financial planning experts—each with specific knowledge that our clients can leverage for their benefit.  So why are we so focused on financial planning?  For us, the answer is simple, empirical evidence points to its advantage, and we have personally seen it work for the clients we serve.   

Several studies have shown that individuals and families who employed the financial planning process enjoy greater wealth during retirement versus those who fail to plan (Hanna & Lindamood, 2010) (Van Rooij, Lusardi, & Alessie, 2012). As a non-commissioned, fee-only firm, we can provide the most objective and independent advice, making it more feasible to optimize the financial well-being of our clients. We believe that by working with our expert team and taking a long-term and comprehensive approach to financial planning, our clients can have peace of mind regardless of the headline of the day.

Have you started your plan today?

If not, or, if you are interested in learning more about our people and process, please call us at (503) 905-3100 or let us know about your needs.

References

Baldwin, R. E. (2004). Openness and growth: what's the empirical relationship?. In Challenges to globalization: Analyzing the economics (pp. 499-526). University of Chicago Press.

Freeman, R. B. (2004). Trade wars: The exaggerated impact of trade in economic debate. World Economy, 27(1), 1-23.

Hanna, S. D., & Lindamood, S. (2010). Quantifying the economic benefits of personal financial planning.

Krishna, K., Mukhopadhyay, A., & Yavas, C. (2005). Trade with labor market distortions and heterogeneous labor: Why trade can hurt. In WTO and World Trade (pp. 65-83). Physica-Verlag HD.

Van Rooij, M. C., Lusardi, A., & Alessie, R. J. (2012). Financial literacy, retirement planning and household wealth. The Economic Journal, 122(560), 449-478.

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Happy New Year from your team at Human Investing! We would like to help guide you in your 2019 New Year's resolution of saving appropriately. You may already know but the 2019 limits of how much you can save differs from 2018 amounts. See below for your 2019 contribution limits. Human Investing is here to help make sure you are maximizing your retirement savings. Give us a call 503.905.3100 with any questions. Click here to be directed to the IRS website for further information.

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In my last post, I wrote about the positive impact of financial planning on an investor's ability to stay in the market and manage the cognitive bias of loss aversion. In this post, I want to address recessions, market performance, and the cognitive bias of "recency." Recency bias occurs when an individual is more inclined to remember something that happened more recently than what may be recognized years before, creating a bias.

Economic Slowdowns and the Market

Several times in the last few days I have heard a stock market prognosticator suggest an economic slowdown is upon us. So, what is a slowdown or “recession”? Technically speaking, a recession is two consecutive negative quarters of GDP growth. Importantly, recessions are not uncommon and do not necessarily coincide with a decrease in the stock market.

While examining the chart below, the first column highlights the last nine recessions. The next five columns track the corresponding stock market performance for one year before the recession, the stock market return for the length of the recession, along with one, three, and five-year performance following the recession. In my view, the data is quite interesting and full of surprises.

Recency Bias

Recency bias, as mentioned above, clouds an investor’s understanding of complete market data. As such, with the last two most recent recessions having had a negative 35.5% and 7.2% respectively, investors are more likely to believe all recessions have comparably negative returns—this is in fact not true. 

Although recessions and market volatility are unnerving, it is both normal and part of the price we pay for the opportunity to achieve fantastic long-term returns. We encourage you to focus on the financial plan which offers investors the best odds of achieving financial success.    

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@priscilladupreez

In order to achieve retirement readiness, financial planning should be the focus of most individuals and families. Indeed, knowing how much a household needs to save and invest in producing a suitable level of income at retirement makes much sense.  At the same time, given the recent uptick in market volatility, I have noticed additional benefits.  Clients who have gone through the financial planning process appear to be at greater peace with the stock market gyrations.  Further, when focused on executing their plan and not mentally tethered to the markets, clients are less prone to letting their behavior negatively impact their long-term performance.

Much of the time, financial planning does a great job of identifying how much an individual or family should own in both "safe" and "risk" investments to meet short-term cash and safety needs, as well as long-term growth objectives.  In the absence of a financial plan, investors are left to wonder if they have the right mix of investments.  Moreover, when market volatility increases, they are often the first to let their emotions get the best of them.  Absent a financial plan; the focus is on the stock market.  If the focus is on the stock market, and the market is temporarily going down, the pain of the volatility or what psychologists call "loss aversion bias" is too much to handle.  As a result, at exactly the wrong time and for the wrong reason, we get a call to "sell everything" locking in those temporary losses—only to see the market recover as the investor sits on the sideline wondering when to get back in.  Selling into a market that is going down is a significant reason investor returns and market returns are so different.

Dalbar, Inc. tracks investor return versus market returns, and the results are eye-opening. Our observation is that much of the gap between the long-term investor return and the long-term market returns are due to poor behavior and investors lacking a financial plan.  In our view, having a financial plan is paramount as it gives a leg up to investors in two ways: 1) it helps center the discussion about money around goals and 2) it allows investors to minimize their dependence on monthly, quarterly, and annual stock market swings while redirecting the discussion back to goals-based planning.  Goals-based planning is just a discussion on how many dollars will be needed and in what timeframe—this process alone will help determine the amount of safe versus risky investments.  

Finally, comprehending the odds of success or failure in the market may be a massive help in keeping nerves at bay and focused on the things that matter most.  Although the legal language would point us towards a statement about past performance being no indication of future success, we can look at the distribution of returns in the stock market going back to 1825 and feel very good about the chance of a positive outcome.  It all adds up to 71.5% of the time the stock market has been favorable, in spite of many ups and downs in between.

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@_danielita

I’ve never really minded flying. I enjoy the anticipation of going somewhere, the people watching, the exhilaration as the wheels leave the tarmac, the only occasion on which I will order a ginger ale. As I settle down into a book or movie, at some point I forget I am at a cruising altitude of over 30,000 ft. I forget until inevitably the plane lurches, my stomach drops and my nerves are rattled as the flight encounters turbulence. When experienced, turbulence can cause even seasoned travelers to lose their cool demeanor as they begin planning their exit strategy if worst comes to worst. When investing even the most seasoned investors can have a similar response when experiencing volatility.  

Whether investing or flying, it is important to ask 3 questions: WHERE ARE WE? WHERE ARE WE GOING? WHAT IS NORMAL?

WHERE ARE WE?

Since 2009 the S&P 500 has taken off, up over 200% (As of 12.31.2018).

However, 2018 has provided turbulence for investors that have caused questions about how to navigate.

WHERE ARE WE GOING?

Once we assess where we are, it is important to focus on where we are going. Each flight has a flight plan and in that flight plan a destination. It’s important to know where you’re going whether in an airplane or with an investment account. Asking yourself, “What are these dollars for?” is a great way to assess your plan and savings timeline.  

• Do you need to save for this year’s holiday season to avoid taking on an additional $1k in debt?

• Are you saving for the down payment of a home in the next 3-5 years where a high-yield savings account may be appropriate?

• Are you saving for retirement where the time horizon is 10, 20, 30, 40 years in the future?

Knowing where you are going can help calm nerves on a plane or in financial markets and may also prevent you from abandoning ship before you get to your destination. No matter your goal or timeline it is appropriate to have a plan. It is also essential to check in to make sure you are staying the course. Sometimes this takes a call to ground control to assess.

WHAT IS NORMAL?

Finally, What’s normal? “From our perspective, turbulence is, for lack of a better term, normal,” said commercial pilot Patrick Smith, host of AskThePilot.com. Comforting to know from someone who spends their working days with their head in the clouds. Like turbulence, market volatility isn’t comfortable yet it’s normal.

What’s normal in the financial markets? Over the last 38 years, the S&P 500 has shown a positive annual return in 29 times. Meaning 76% of the time the market has finished positive on the year despite intra-year volatility and declines.

Source: ImageFactSet, Standard & Poor’s, J.P. Morgan Asset Management - Guide to the Markets.

Returns are based on price index only and do not include dividends. Intra-year drops refer to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2017. Over this time-period the average annual return was 8.8%. U.S. Data is as of October 31, 2018.

So what we are experiencing in 2018 is normal and with an average annual return over the last 38 years at 8.8% there is a strong case for the long-term investor to be disciplined and stick to the plan.

In summary ask yourself (or ground control):

1. Where are we?

2. Where are we going?

3. What is normal?

These questions can help stay the course and not panic, even when your stomach drops. If you find yourself traveling this holiday season and need additional help overcoming a fear of flying see this practical guide. If you find you are flying toward retirement and find you need help building a financial plan lets us know, Human Investing is happy to help.

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@rawpixel

Effective September 22, 2018, a new federal law requires credit bureaus to allow consumers to freeze their credit for free. 

On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act, which requires the three major credit bureaus: Experian, TransUnion and Equifax, to allow consumers to freeze their credit at no cost.    

 A credit freeze prevents other people or institutions from pulling credit information on an individual.  Effectively it keeps identity thieves from opening a new account or loan in a person’s name.

This new law passed by Congress came after Equifax had a major data breach in 2017 that exposed personal information of 143 million Americans.  Hackers were able to steal sensitive information which included addresses, dates of birth, Social Security, driver’s license and credit card numbers.

How a Credit Freeze Works

The process requires contacting all three credit bureaus, Experian, Trans Union and Equifax, to request a credit freeze.  The credit bureaus will then provide a PIN which should be kept in a safe and secure location.

If credit is needed to process a loan, the individual or couple will then have to unfreeze their accounts by contacting the three credit bureaus and providing the assigned PIN either over phone or online.  Keep in mind that it can take up to 3 business days to unfreeze credit.

In the past, it could have cost a couple up to $216 to freeze credit, unfreeze it to get a loan, and then refreeze their credit again.  Now that this is free, it makes a credit freeze a more reasonable strategy to help prevent identity theft. 

Should you do a Credit Freeze?

Freezing your credit can be time consuming, but it keeps others from opening new accounts in your name.  However, if you check your credit annually and you intend to borrow from new lenders, it might not be worth the hassle. 

If you want to ensure that one significant avenue of ID theft is protected, it can be a great idea.

While a credit freeze does keep others from opening new accounts in your name, it does not solve all ID theft issues. 

Changes to Fraud Alert

The new law also extends a fraud alert on a credit report from 90 days to one year.  A fraud alert requires lenders to verify the identity of the individual before issuing credit.  Unlike the credit freeze, a single request to one credit bureau is all that is needed.  The one credit bureau is required to communicate the fraud alert with the other two.

A fraud alert does not freeze the credit, but it makes it much more difficult for a thief to open a fictitious account.

Freezing credit or relying on fraud alerts are two possible steps in protecting your ID against potential financial loss. 

Additional Ways to Protect Yourself from Identity Theft

1.   Use strong passwords

-     Use different passwords for each account

-     Create unique passwords, no family names

-     Change passwords frequently

-     Consider a password manager

2.   Set up two-factor authentication

-     This requires an account to take a second action to verify account holder making it much more difficult for a thief to get into one of your accounts

-     Turn this on for all financial accounts: bank accounts, credit cards. etc.

3.   Keep all devices secure

-     Use screen locks, pins and passwords for all computers, tablets and phones

-     Enable encryption for stored data

-     Avoid public Wi-Fi for any account transactions or purchases unless you have a separate VPN (Virtual Private Network)

-     Always use security software with firewall, anti-virus and anti-malware

-     Keep your smart phone secure, it is often where your second-factor codes are sent

4.   Sign up for alerts on accounts

-     Most online accounts will send alerts to your phone or through email when used

-     This is especially important for credit cards and bank cards that are subject to skimming - where thieves steal your card information and sell it or use it

5.   Keep personal information secure

-     Shred receipts, credit applications, medical records, anything that has your personal information

-     Limit the use of your Social Security number

-     Keep your financial documents safe at home, at work and in public

6.   Be alert to imposters

-     Don’t give out personal information on the phone, over the internet or by mail unless you know the company and the purpose for the information

-     Don’t respond to emails asking for personal information.  If a company requests your information on line, do not respond to the email but go directly to the companies’ site or call the customer service number on your statement

7.   Whether you freeze your credit or not, check your credit report

-     Get a free credit report annually

-     Consider using a credit monitoring service that alerts you to new accounts

8.  Remember to consider all family members

-     Don’t forget your children.  Be alert.  If your child gets a tax notice, a bill collection call or a credit card application it might be a sign someone is using their ID.  Get a credit report before they turn 16.  It should be blank, but you have time to get it cleared up before they need credit if something is in error

-     Be careful of elderly family members that might not know how to prevent ID theft.  If it does happen to them, they often feel ashamed and do nothing about it.  Since the elderly are prime targets, having a plan for them is essential.  A best practice is having multiple family members monitor their financial records on a regular routine

Identity theft happens to millions of people every year.  Taking these measures does not guarantee your ID will not be stolen but it does put you and your family in a place to minimize the chance of it happening.  If an issue does come up, you will be more likely to identify it and be able to respond quickly.

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@franckinjapan

There is something intriguing about having a domesticated robot like C-3PO (Star Wars), Number 5 (Short Circuit), or Wall-E (Wall-E) to help with everyday tasks that while important are hard to find time to complete. Today our cell phones notify us with the time it will take to get home, refrigerators send us shopping lists (that is if no one is shopping for you) vacuums clean our homes, cars park themselves and it seems as though one day they will all drive themselves. In this day of helpful technology here are three simple tools to automate your finance.

Auto Increase: Auto Increase can help you reach your retirement savings goals without breaking the bank. It’s essential for most people to save at least 15% of their gross income for retirement, however, this can be difficult. If saving 15% is inconceivable, start small and use automation to help. Some retirement plans allow you to set up an annual increase of your contribution percentage. Increasing your savings rate by just 1 percent each year can have a powerful impact on your retirement balance.

Example: A 35yr old with an annual income of $50k begins saving 5% into her 401k by age 65 she can expect to have a balance of $335k. Now if she were to set up an annual auto increase of 1% she could increase her retirement balance to over $825k.

A 1% auto increase can add almost $490k to your retirement balance!!!

Source: dinkytown.net

Hint: Set up your auto-escalation to coincide with the time period you typically get a pay increase. This strategy will help decrease the impact on your bank account.

Auto Rebalance: Setting up auto rebalance can help you avoid unnecessary risk in changing markets. With stocks up 13.57% and bonds up 2.59% annualized over the last 5 years (see graph), you could be taking on some additional risk with an out of balance retirement account. Automating your account or taking the time once a year to rebalance your portfolio can help disperse some of this risk.

Example: Say five years ago an individual had $20,000 in their retirement plan and purposely invested 50% of their portfolio in stocks and the other 50% in bonds, a 50/50 ratio. Over the last 5 years, this account would have grown by 51% to over $30k. In the short period, the purposeful 50/50 portfolio would now be a 62/38 ratio of stock to bonds. This change in the stock/bond ratio can alter the individual’s portfolio and add additional risk.

The graph below highlights the growth of $10,000 invested in the Vanguard Total Stock Market Index Fund Admiral (VTSAX) compared to the growth of the Vanguard Total Bond Market Index Fund Admiral (VBTLX) from August 2013 until August 2018. $10,000 invested in stocks (VTSAX) would have grown to almost $19,000 while $10,000 in a bond fund (VBTLX) would have grown to just over $11,000.

Source: Morningstar.com

Automate your Emergency Reserve: American’s now have more credit-card debt than ever, passing the $1 Trillion mark, paying an average of 17.03% interest. To help avoid being stifled by such expensive debt it is important to build an emergency reserve. Building an emergency reserve of at least 6 months of your income can help keep you on track when unexpected expenses come up. Banks’ digital presence makes it easier than ever to automate saving. Rather than waiting to the end of each month to see what’s left over, if you know you get paid on the 1st of the month set up an automatic transfer to your emergency reserve on the 2nd day of the month. Setting up the automatic transfer helps force yourself to be more strategic with your dollars.

Conclusion: Whether you are wary of robots taking over or are excited to pawn off the mundane (like these robots that open doors), taking a few minutes to set yourself up for success can point you and your family in the direction of financial wellness.  

And while Artificial Intelligence can help with much, it can never replace the value of a face-to-face interaction. At Human Investing, our team of world-class humans aim to serve your pursuit of a fuller life with tailored financial planning and advice. This goes beyond the “nuts and bolts” of investing and financial planning and into the heart of why we do what we do.

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@katyukawa

(Reprinted from the Nonprofit Association of Oregon)

How you can build and fortify your donor base

With the recent Tax Cuts and Jobs Act of 2017 – which became effective January 1, 2018 – there’s concern that the increase in standard deduction will dis-incentivize donors who will no longer receive a tax deduction for their charitable giving. This could pose a challenge to nonprofits who rely on consistent donor funding – and it’s not to be discounted. However, while it’s true that a charitable tax deduction is an incentive, it’s not the only reason people give. Northwesterners in particular love their nonprofits. They care deeply about communities, they care about causes and they give in increasing numbers. We’re encouraging nonprofits to plan, be proactive and make sure donors know the impact of their investments. Importantly, this could be an opportune time to modify your fundraising perspective and consider new ways to energize your donor base.

Qualified Charitable Distributions from an Individual Retirement Account

One consideration is to inform your donors who are 70.5 years or older that they are eligible to make charitable contributions from their tax deferred Individual Retirement Accounts. Retirement account holders may distribute up to $100,000 per year, including their Required Minimum Distribution, directly to a nonprofit and avoid taxes on the distribution. These distributions avoid ordinary income tax but also reduce the potential income tax liability on Social Security and may lower Medicare premiums.

Donor Advised Funds

Another opportunity exists for nonprofits to further understand Donor Advised Funds and inform their donor base about the benefits. A DAF is a vehicle where a donor can make a charitable contribution, immediately receive eligible tax deductions and then distribute donations to one or multiple nonprofits of their choice in any time frame. The contributions can be invested and any potential growth is tax-free. Additionally, donors may contribute both cash and non-cash gifts to a DAF.

With the standard deduction now doubled, donors may find that itemizing doesn’t make sense in 2018 and beyond. One tax-planning strategy called “bunching” can help donors maintain their charitable deductions. They may contribute multiple years of charitable giving in one year to surpass the itemization threshold, and in off-years take the standard deduction. Please see the example below. A DAF can operate as a central location to receive, invest and distribute the contributions.

Accept Non-Cash Gifts

Finally, nonprofits should consider providing a method for non-cash donations such as stocks, real estate or other assets. This can be particularly advantageous when the donation is an appreciated asset that has been owned for one-year or longer. In this case, the donor is able to receive a tax deduction for the entire value of the asset while avoiding long-term capital gains from the sale of the asset.

If these types of donations cannot be supported by the nonprofit, a DAF will likely handle the transition and sale of the asset and then the contributions to the donor’s nonprofit of choice.

This is an opportune time to seek out donors who may be looking for creative tax-planning strategies. While this information may be helpful, please consult your CPA for specifics about how these tax strategies will affect your nonprofit organization and donor base.

Human Investing is a certified B-Corporation, a member of NAO and an Oregon-based financial firm serving the financial pursuits of both nonprofit organizations and individual donors. If you would like to learn more, we’d love to hear from you.