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Strange Times: Where Do We Go from Here?

 

We’re at a fascinating crossroads in the world of investing, and in many ways, a truly unique place.  While the adage: “this time it’s different,” always gets burned by the markets, this time, we’ve never been here before.

The best news: we’re almost near the end of the pandemic.  The good news: the economy is screaming thanks to unprecedented monetary (the Fed) and fiscal (Congress) stimulus.  The strange news: things are really out of whack in the markets, and this has quickly become visible in everyday life.

Lumber and building costs have skyrocketed, some things are still hard to find in the grocery store, and there are plenty of job openings, yet a high unemployment rate.  There are also strange things like “meme stocks,” and skyrocketing crypto currencies nobody had heard of until three months ago.  Let’s peel back the onion a bit.

So Much Money

Eight TRILLION dollars is a lot of money, and that’s a rough estimate of what has been dropped on the US economy by the Fed and Congress since the pandemic started.

The US government has sent checks to individuals, boosted unemployment, and supported almost all businesses in a variety of ways.  The Fed has been printing money to the tune of an additional $120 BILLION every month.

While the pandemic raged, the nation attempted to keep everyone and everything flush with cash to minimize economic fallout, but this process set up some strange dynamics.

Inflation

As the economy recovers from the pandemic, shut downs, and lock downs, money is once again flooding into goods and services as life returns to a new normal, and pent-up spending plays out.  The economy is whipsawing from the tremendous drop in output we saw last year to something approaching pre-pandemic right now.  That wave has a tremendous amount of momentum.  Economists were aware this was happening, yet inflation still came in four times higher than predicted last month, raising many eyebrows.

We’re now seeing prices increase in everyday life, coupled with businesses raising wages and offering incentives to attract workers, which also stokes inflation.  What do the financial markets say about this?

The Bond Market

The bond market tends to be intelligent, the smartest money in the room.  The Fed’s message to the bond market has been: this wave of inflation is just a wave, and with the economy getting back to normal, inflation will return to long term averages soon.  The bond market has priced this in as the absolute truth, because it is the absolute truth.

If inflation gets out of hand, the Fed will increase rates quickly, and force inflation back to long term averages.  If you’re old enough to remember double digit mortgage rates from the 1980’s, you’ve seen the Fed do this in real time.

The risk: the Fed doesn’t react quickly enough, is forced to increase rates faster than anticipated, and chokes off the current expansion, possibly creating a recession.

The Stock Market

The stock market is “all in.”

In the world of “blue chip” stocks (think S&P 500 and Dow Jones Industrial Average), the market is behaving as if rates will stay low forever, and the current expansion will never end.  It’s overpriced by most historic measures, and more money is ending up here because it has no other place to go with bond yields so low.

Then we get to strange places like “meme stocks.”  The current example is AMC.  The price of AMC increased by around 400% in one month when nothing really changed in the business of movie theatres.  In the normal investing world this would have meant that AMC figured out some new technology, created a monopoly, or found tons of gold buried under a theatre.  We’ve seen examples of this blind speculation recently with GameStop and others.

We’re at one of those places that feels like the dot com bubble where everyone seems to be trading stocks online, and making a killing because everyone else is buying like mad too.  Remember companies like: Ask Jeeves, eXcite, and Geocities?

Other Strange Things

The crypto currency space is frightening, and this won’t end well.  It’s difficult enough to justify Bitcoin, but these other crypto currencies, spiking almost randomly, make very little sense.  Much like the AMC example, people are dumping their freshly printed money into crypto currencies. What is the long term purpose of these strange coins?  They pay no interest, offer no dividend, and have no real utility.

The list of strange things goes on with things like tokenized art (non-fungible tokens or NFT’s), and SPAC’s, which are “blank check” companies, I give you money, and then you tell me what I bought.

Wrapping It Up

We’ve never been here, but some of these things look oddly familiar, and it’s strange to have them in the same room at the same time.  Inflation may or may not take us back to the 80’s.  Stocks may or may not take us back to the dot com bubble of the 90’s.  Strange things may or may not take us back to Beanie Babies, and Cabbage Patch Kids.

But, we’ve never been in a place where humanity is coming out of a gut wrenching pandemic with so much money to spend, and not enough places to put it.  This will surely end badly for some.

If you’re a regular reader of these blogs, you already know the punch line.  A balanced, diversified portfolio will weather whatever comes as this unprecedented wave in the financial markets passes, and serve you well in the post pandemic new normal on the horizon.

Not as exciting as a Dogecoin, but just as cute, and you’ll sleep well at night.  Please let us know if we can help, we’re here to help answer your questions.

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

Reddit Takes on Wall Street

The Reddit drama with GameStop and AMC has many people captivated, and it’s fascinating because nothing like this has ever happened.  The perception that Reddit is really taking on Wall Street is overblown, but identifying “good guys” and “bad guys” isn’t so simple. 

A group on the website Reddit called WallStreetBets decided it would be fun to go after hedge funds betting against small stocks like GameStop and AMC.  One way to bet against a stock is to sell it, borrow shares to deliver to the person you sold it to, and then buy the stock in the future to pay off the loan.  That’s called short selling, and it’s very common among institutional investors such as hedge funds. 

Short sellers are often vilified, which isn’t warranted.  The downward pressure of short selling is one way markets keep stocks priced appropriately.  In fact, short sellers are sometimes credited with finding corporate fraud and bringing it to light.  In the case of stocks like GameStop, they were simply viewed as overvalued by a couple of hedge funds. 

The WallStreetBets group decided to take out some vigilante justice on short sellers.  They were helped by the simple fact that these were small stocks.  When short sellers are wrong, they lose money fast.  These hedge funds were forced to buy shares to close the trade, this buying pressure only pushes the price up further. 

As far as “justice” goes, it may read as good drama, but these games go on among institutional traders all the time as they may seek to bust various trades by competitors.  This was interesting because it was accomplished by novices with relatively small amounts of money acting as a “mob”.  Many of these people had no idea what they were doing other than buying a stock that looked like it would make them money, and feeling like they were sticking it to the man. 

The sad story is that eventually this will run it’s course, and as we see in gambling, these novices are likely to lose money they can’t afford to lose.  This isn’t helped by testimonials you can see on WallStreetBets by users discussing how the money changed their life.    

Now there is another interesting side to this that does have to do with small investors.  Robinhood offers “free trading” as do many brokerages these days.  That always sounds like a great deal, but the small investor is the product in this world, and the market makers and hedge funds are the consumers.  Large firms that facilitate trading across the stock market are willing to pay for trade volumes, they’re paying Robinhood, and many other brokerages, for the trade flow. 

Large institutions trade very rapidly over very short periods of time, this can only happen when there is an ocean of trade volume.  So, the trades themselves, regardless of direction, provide the mass enabling this process.  This is why the trades are “free” to the small investor. 

In this little story Robinhood’s mistake was to limit trading in GameStop and others.  While they can claim to be protecting clients, the other side of the story is that Robinhood itself is owned by large investors including…you guessed it, large institutions that pay for trade flow. 

There has been a lot of discussion of the good guys and bad guys here, and as you can see, when the onion is peeled back the story becomes much more complex. 

The hedge funds that shorted the GameStops of the world were doing what hedge funds do all day every day, and short selling can actually be good for markets.  They did get a little greedy here, and happened to be in the wrong place at the wrong time, but hedge funds blow up and reconstitute themselves all of the time. 

Robinhood got itself into a pickle because they have gamified trading, and it’s no game.  The huge rush into such a small stock caused them operational issues that needed big money, and they bent to the will of their owners who had skin in the same game.  Limiting a client’s access to trading is generally bad in a free market system. 

The reddit WallStreetBets group?  A wild mob during a time where mob scenes are playing out in our culture.  Some of these people will make money, many will ultimately get creamed, but it’s difficult to know what to make of it because we’ve never seen the likes of this animal.  Institutional investors have already infiltrated this group, and you can bet they’ll try to use it to their advantage until the gig is up.  As this is being written WallStreetBets is going after silver (the metal), this should be interesting. 

So as people try to sum this up into a simple Tweet, please realize it’s not as simple as it may appear. 

Long term investing is the best approach for most investors.  Buoyant Financial would be quite happy in a world where stocks only traded once a week.  Leave the foolish trading games to the gamers.  At Buoyant Financial this isn’t a game, it’s your financial life.    

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

A Rocky Road to a Bright New Year

Despite the pain wrought by the virus, there is finally a light at the end of the tunnel.  The virus forced many of us in the investing world to become armchair epidemiologists since it’s nearly impossible to look at the economy without looking at the virus too.  

When I wrote about the pandemic in the spring, some of the models were showing numbers that seemed impossible, and by September those enormous numbers seemed even more impossible.  Unfortunately, we’re now living in a world where those painful numbers have become reality.  

The good news: we’re on a bright path forward thanks to effective vaccines being rolled out in real time.  A new normal finally seems within reach.     

We’re not looking at a setup for the greatest year the markets have ever seen.  As with the rest of our lives, we’re looking for a new normal, a post virus world that looks more like what we remember.  It will take at least two years for the economy to really move past the virus when you look at interest rates, unemployment, inflation, and volatility. 

Since the recession wasn’t driven by a financial meltdown, the monetary and fiscal stimulus measures were quite potent and effective.  But, these measures come with the price of having to be “unwound” over time.    

The stock market is currently overvalued by almost every measure, which was caused, in part, by irrational exuberance coupled with extremely low interest rates.  We’ll probably see a pull back, and that’s not all bad since we ultimately want assets priced rationally (there really is such a thing).  

As the virus is slowly brought under control, and our lives return to a new normal, there will be an increase in demand for products and services, which will be a source of economic strength.  This demand will push corporate earnings up, and at some point in 2021, stock prices and the underlying corporate earnings will meet closer to long term averages.  

A new normal will take longer in the world of interest rates.  The Fed promised that rates will remain low for years, and history tells us they will make good on that promise.  The downside: we could see real inflation for the first time in decades; however, it should be easy for the Fed to quickly tame any spikes above target.  

From a bond investor’s perspective, it’s important to keep in mind that if inflation goes up 1% and bond yields go up 1%, you’re in the same place, you’re not really enjoying a higher yield.  Inflation will be important to watch given the amount of money “printed” this year.  

After the tragedy of 9/11, things were never quite the same again.  There was a new normal, and with time, the trauma passed, receding into history and memory.  The post-pandemic world is likely to be similar, things will never quite be the same again, but with time we’ll reach a new normal, and this period will fade into memory. 

I wish you happy and boring holidays in the hopes that a subdued holiday season this year will give us many more in the future!  Please follow best practices around all things pandemic, such as avoiding large (or any) gatherings, wearing a mask when you’re out and about, and when the time comes, please get those shots.    

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

Stuck in the Middle with You: Clowns & Jokers

Thinking about this post, the Stealers Wheel classic kept coming to mind.  We seem to be at the natural half time of the COVID pandemic, medical experts have been consistent in that we’ll probably see a vaccine during the first several months of 2021, which means we’re currently stuck in the middle.  Stuck in the middle is also the story of US markets.  The bond market and Federal Reserve are priced for the absolute worst-case scenario, and the stock market is priced as if things couldn’t get any better.  Clowns to the left, jokers to the right, but none of this feels very funny.  

I often mention to clients that the bond market tends to reflect a smarter, longer term view, and the stock market is naturally more speculative and prone to craziness.  On September 16th, Fed chair Jerome Powell made it clear that rates would remain at zero until at least 2023, and the Fed was willing to watch inflation exceed it’s target.  They’re essentially saying things are so bad, we’re going to do everything we can to stimulate the economy until it overheats.    

This isn’t ambiguous, in the past they might have said something vague like: “until conditions change.”  The new language is very clear, and while open to criticism, nobody trades against the Fed because the Fed always wins.  They wield enough power to put the bond market where they want it, and keep it there for better or worse.  So, the bond market is in line, and has been in line.  To put this into perspective the 10-year US T-Bond is currently yielding around 0.63%, over the last 20 years the average has been closer to 3%.  People buy bonds to protect money, and that buying pushes yields downward.  After nearly 7 months in COVID world, the bond market remains priced for the end of the world.  These clowns are sad, but tend to be smart too.  

The stock market on the other hand is priced as if it were in some other magical world.  It seems to ignore that unemployment has only come down to where it was during the great recession of 2008.  It seems to ignore that overall economic output has been knocked back to 2018.  It seems to ignore that corporate earnings, while recovering, are nowhere near where they were in February, and are much harder to forecast given all the uncertainty we face. 

The value of stocks can be measured by the price to earnings ratio.  This simply looks at how much you’re paying for $1 of earnings.  Looking at the largest US corporations (S&P 500), investors are currently paying around $26 for $1 of earnings.  Last year, when the economy was solid, this number was around $23, and historically back to 1970 this number averages closer to $19.  What do these jokers know that the clowns don’t?  Nothing. 

There are many explanations as to why stocks prices have been driven up.  Some of this is Fed driven, when rates are at zero stocks are naturally worth more for reasons I won’t bore you with here.  Some of this is driven by mom and pop investors with too much free time on their hands, trying to get in on the action.  Some of this is driven by gamblers with a habit to feed, and a lack of sporting events (the sports betting market is measured in the hundreds of billions).  The jokers seem to be running wild.  

I’m stuck in the middle with you.  Historically, we know pandemics fade into history, and that the world is indeed not coming to an end, but the clowns are very depressed and scared.  Historically, we know stocks aren’t usually worth $26 for $1 of earnings even during the best of times, the jokers have lost their mind running with lady luck.  

The real answer will be somewhere in the middle.  Long before 2023, as inflation rises, the Fed will allow longer term rates to rise while keeping their promise of a zero overnight rate.  Stocks will find fair prices as earnings stabilize, and the realities of a long recession take a toll on corporate earnings.    

With clowns to the left of us, and jokers to the right, the only place to be is in a diversified portfolio of stocks and bonds reflecting your risk tolerance, and retirement goals.  

We’re happy to be stuck in the middle with you, please reach out if you have questions, or would like to talk about your financial plan and portfolios.  

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

Watching the COVOID Weather

It’s been noted that 2020 reads like a Stephen King novel, and that doesn’t seem too far off base, Mr. King has even said as much.  It was tempting to write about the illogical and rapid rise of the stock market, which is very concerning, but the virus itself remains the biggest issue from a public health and economic perspective.

As the country begins to reopen it appears that we’re collectively ignoring what’s happening with the virus.  For example, in North Carolina where I happen to live, we’re averaging around 1,000 new cases each day.  The NC peak in April, at the height of “stay at home,” was around 350 new cases per day.  These numbers are heading off the charts as we attempt to quickly return to the old normal.  There are similar trends in other states such as Arizona, Florida, and Texas.

The national numbers are more challenging because the spike, and subsequent drop in New York City was so large it throws things off a bit, but not too much.  One source I’ve been following closely is the COVID-19 Simulator created by Harvard Medical School and Georgia Tech.  It allows you to look at state and national projections under a variety of scenarios.  The data is updated on a weekly basis.

Let’s look at North Carolina for example.  I’ve chosen their “Minimal Restrictions” scenario since that’s the curve our actual numbers are following, and we’re using the “log” scale, which means the axis on the left increases exponentially.

 

 

As you can see, this trend is not slowing down, and only gaining steam.  This implies that by July 4 we might see over 3,000 new cases per day in North Carolina, triple the current rate, and it keeps going up from there.

Let’s look at the national picture using the same settings.

 

The number of national cases is currently decreasing, largely due to New York City making great progress; however, two weeks from now we’ll be back to our past national peak, rapidly heading north.  By July 4th we might see around 66,000 new cases per day, which is almost twice as high as the April peak.  This is the exponential growth that keeps doctors up at night.

While Harvard Medical School and Georgia Tech are no slouches, Columbia and Mount Sinai are independently coming to similar conclusions.

 

 

As you can see, they expect the daily number of new cases in the US to more than double by early July with 25,000 – 63,000 new cases per day around July 4th.

I’ve provided links to both sources so you can play along at home.  The sites offer different views, and as you can imagine, the numbers related to things like ventilators and hospitals beds are even less reassuring.

These numbers will never capture the lives lost and shortened due to the economic stress and uncertainty that is surely playing out in the form of mental health issues, heart disease, and other systemic issues created by the toxic effects of stress.

It doesn’t seem like we were ever out of the woods despite our natural human desire to want to have it over with, and unfortunately this has all been over politicized.

I think the important takeaways are:

  • Consider stocking up on the things that disappeared at the grocery store
  • Consider the possibility of a second round of “stay at home orders” come late summer or early fall
  • Expect the financial markets to become volatile once again, they won’t take this well
  • Think about where we are now as the eye of a hurricane, or maybe halftime at a sporting event

From an investing perspective we are sticking to our mantras of staying with an appropriate allocation between stocks and bonds with a persistent long-term view.  The approach is boring, but it works, and gets the job done in the long run.

I would also warn you against the temptation to actively trade stocks, or other securities, for short term gains during this time.  There are very large, professional, institutional investors, who literally specialize in nothing but market volatility, they will happily eat your lunch, and maybe dinner.

Please stay well, and follow all guidance related to avoiding the virus, and we’re always here to help with your financial life.

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

Coronavirus: To Sell or Not to Sell? (Mostly, Not)

The markets call things like the coronavirus black swan events.  That thing with a very small chance of happening, but with a big impact in terms of humanity, markets, and our head space.  A lot of stocks have been sold in a very short period.  The world seems uncertain, and that uncertainty is growing.

Markets hate uncertainty, and we know that companies won’t make nearly as much as anticipated this year.  This naturally makes stocks worth less, but how much less?  Unfortunately, it’s likely to take months before we see the real impact of the virus reflected in the data, and this is the information the market needs to price stocks.  Until the actual impact to profits is known, the market will continue to wrestle with values.

Expect wild swings to continue in the coming weeks.  The Fed has already made one emergency rate cut to assure markets, and while this has provided a small boost, cutting the Fed Funds rate doesn’t really get to the core issue, which is the massive slowdown of business and trade.  The only long-term solution will be to wait for virus fears to fade, and for business to return to normal, which it will.

For long-term investors these things come and go. Long-term investors wouldn’t consider selling because they’ve seen the stock market return to normal following past black swan events after what always seems like a long time.

If you’re contributing to a retirement account that owns stocks, you’ll have the opportunity to buy throughout the dip, and enjoy more bang for your buck when markets return to normal at some point in the future.  This is called dollar cost averaging, and it’s a powerful tool.

This is usually not the time to make major changes to your mix between stocks and bonds.  If you own bond funds, they’ve enjoyed a nice run up as money has flowed into bonds from stocks. Bonds are typically where investors seek shelter during black swan events.

Selling a long-term portfolio only locks in losses.  If you continue to do what you’re doing anyway, holding for the long term, you’ll enjoy the return to normal in the coming months, and your dividend reinvestments will be buying shares at a nice discount along the way.  If you’re a long-term investor, you should consider dividend reinvestment, which is another powerful tool.

If you’re an active trader using margin and options to day trade stocks and industries you know little about, these are indeed tough times.  We believe in a diversified, long-term, buy and hold approach to investing.

We’re here to help if you have questions about investments, or the current market environment.

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

Holiday Reading List

Over the holidays many of us will spend some time curled up with our devices in a food coma, or using our devices to avoid an awkward conversation (introverts, I’m looking at you).  I wanted to close the year with a post offering some useful holiday reading.

Below are links to articles and sites I’ve found interesting throughout the year.  You might want to bookmark this page so you can come back to it when you’re growing weary of social media, or when that distant eggnog-laden family member wants to talk politics.

The Decade of the “Young Old” Begins

This article on Boomers appeared in a year end supplement from The Economist.  It’s a great read for any generation because Baby Boomers will change what retirement looks like.  Boomers are the largest generation to reach retirement, and are entering retirement healthier and wealthier than any prior generation.  They have a lot of options, and most won’t choose to “couch surf” or “get their rest.”

Protecting Our Digital Selves

Not wanting to put you to sleep, I resisted writing a data security blog, but wanted to offer something useful that can be quickly digested.  This was posted by a firm that caters to companies (this is not an endorsement, and I don’t do business with them); however, the article can be useful for everyone, and is something you can come back to.

The biggest thing I’ve been sharing with clients, friends, and family this year is: don’t use public wi-fi unless you absolutely have to.  If you end up on public wi-fi try not to login to anything sensitive like a bank account.  Most of us have data plans with our wireless carrier, and these are secure.  If you’re going to be on public wi-fi a lot, please purchase VPN software, and use it all of the time.  VPNs aren’t perfect, but it’s inexpensive insurance and much better than nothing.

The Stanford Center on Longevity

As you’re probably guessing, this site is from Stanford University, and I found it while doing some research early in the year.  It offers a lot of great articles and ideas.  This site is worth bookmarking, and checking from time to time.

Most of the content is in plain English, and runs the gamut from mental to physical to financial health.  Hope you check this one out!

A Random Walk

It’s no secret that a low cost, index-based approach to investing is far more successful than active management in the long run.  Research has backed this notion up time and again over the decades.  Active managers charge significantly higher fees, and while some may have a hot streak every once in a while, in the long run, after fees, an index, asset allocation-based approach wins the race.

This article by Bob Pisani gets to this very point.

When to Take Social Security: The Complete Guide

Everyone’s situation with Social Security is unique, so “the complete guide” might be a stretch, but this page does have helpful information, and answers a lot of basic questions.  The “go to” answer on Social Security is becoming: wait until 70, but that’s not always possible or necessary.

Please ignore the gratuitous ads from other financial firms on this page, and simply contact Buoyant Financial for all of your planning and investment needs. Sorry, couldn’t resist a shameless plug, and we always bring Social Security strategy into our planning process.

Money Isn’t Everything

That may sound strange coming from a financial firm, but your health, happiness, and wellbeing are far more important than money and investments!  The benefits of simple meditation recognized by medical professionals are too many to list here; however, this site from the Mayo Clinic offers a nice introduction on the why’s and how’s.

Start slowly over short periods of time.  Don’t worry about “being good at it,” there are no contests, judges, or prizes involved.

Wrapping Up

I hope you find something on this reading list helpful, and that you do come back to it.  Always here to help with your financial questions, please don’t hesitate to reach out.

Wishing you, your family, and friends a wonderful holiday season, and happy New Year!

 

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

Beware the Annuity in Your 401(k)

We’re seeing a rise in annuity or income products offered as “investment” options in 401(k) plans.  While investing with a guaranteed return may sound attractive, many of us should think twice before going this route.

The idea of an income annuity in a 401(k) may have some appeal at first blush because it may offer guaranteed retirement income, or some kind of downside protection on retirement income; however, there are a lot of caveats that you should consider before choosing this option.

The Offering

The annuity option in the 401(k) is not a generous perk offered by your employer, but rather an attempt by plan sponsors to keep your hard-earned retirement dollars invested with them for the remainder of your life and your spouse’s life.

Outside of 401(k) plans, annuities can offer some tax advantaged savings (along with high fees).  An annuity in a 401(k), however, is like buying a tax shelter inside of a tax shelter.  There is no additional tax benefit, since the contributions you, and your employer, have made to the 401(k) are already sheltered from taxes until withdrawal.

A 401(k) plan creates challenges for a lay person because they’re expected to be their own pension manager. This works for astute investors, and people who really enjoy this stuff, but it’s common for many to struggle with these decisions.  An annuity with a guarantee can seem like a welcome “silver bullet.”

What Does This Really Cost? 

While the actual costs depend on what is offered in the plan, let’s take a look at a typical scenario.

If you place some or all of your retirement savings in one of these products in exchange for monthly payments until death there is an implied rate of return that is difficult to calculate, but typically much lower than what you might be able to earn with an otherwise balanced portfolio.  In addition to the fees charged, it’s likely that the plan also makes money by investing your money in a portfolio that earns a higher rate of return for them in the long run than what they are on the hook for with you.

But wait you say, “my plan lets me invest in stocks and bonds within the annuity, and I get downside protection.”  Maybe, but if you read the fine print, you’ll quickly see this protection comes at a cost that’s difficult to calculate, but results in long term returns that will be lower than if you had invested in the same mix outside of the “annuity option.”

Wait, We’re Still Not Done with Fees

Let’s say that you choose this option, have been investing for years, and are now ready to take your monthly income from the annuity.  You’ll have some choices…

Would you like inflation protection?  Yes.  Ok, we’ll lower the initial monthly payment we quoted you, and adjust for inflation going forward.  That’s a fee.  If you die, do you want payments to continue to your spouse until their death?  Yes.  Ok, we’ll lower the initial monthly payment we quoted so that your spouse is covered. That’s a fee.  Wait, I’ve thought about this, and want out of this product.  Sorry, you’ve been in this long enough that you may have to pay a steep surrender fee.  And it goes on.

You Wanted to Leave Something After You’re Gone?

Annuities are ultimately insurance products.  Typically, any money “left” goes to the insurance company after you, and maybe your spouse, have left this world.  Of course, they used your life expectancy to help calculate what the monthly payment would be.  Once you select this option, you’ve exchanged the lump sum for the monthly payments.

To be fair, some plans may allow you an option to leave something to your estate under certain criteria (like you not living so long); however, you guessed it, that comes with a fee.

Better Options

Many people would do better in the long run by investing in the plain vanilla choices offered in the 401(k) by selecting an appropriate mix of stock and bond funds that align with your age and risk tolerance.  The plan should have information to help you make these selections.

If that is more investment stuff than you care to do, many plans also offer target date retirement funds, which naturally rotate from stocks to bonds as the target date approaches.  One small issue with target date funds is that they don’t take your risk tolerance into account, so they naturally tend to be more conservative.  But, if you were even considering the annuity options, the conservative side may not be so bad.

Another option is to work with a fee only investment advisor, acting as your fiduciary, to develop a financial plan that will create an appropriate allocation that also considers your retirement goals, Social Security, Medicare & ongoing medical costs, and what you might want to leave your heirs.

Please reach out if you have any questions about this topic, or any part of your financial life!

 

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

Tax Efficient Charitable Giving

Heading into fall, with the holidays right around the corner, many of us begin thinking about our year end charitable giving.  Changes to the tax code that went into effect last year made charitable deductions harder, or impossible, for some of us to find; however, there are still some basic and effective options available for investors.

In 2018 the Tax Cuts and Jobs Act increased the standard deduction for individuals and married couples, and as a result many are no longer itemizing deductions.  While these changes have impacted people in different ways, there was a big impact for those who lost the ability to deduct individual gifts to charities and nonprofits.

The real impact on charities is hard to measure at this point because there is a lot of big data and number crunching involved, but the bottom line is: the changes removed what had been a nice incentive to give, and that will take a toll on the good work of many organizations.

While you should give to worthy non-profits and charities regardless of tax implications, let’s look at two of the easiest ways to give and save on taxes too.  These strategies are: donating appreciated stock, and Qualified Charitable Distributions(“QCD”) from an IRA.  While they both involve investment accounts, donating stock applies to taxable accounts, and QCDs apply to certain IRA accounts.

Donating Appreciated Stock

Let’s say you want to contribute to a favorite charity, and also happen to own securities in a taxable account.  If you’ve owned a stock (or fund) for more than one year and the shares have appreciated you can often donate these shares directly to a charity, and avoid the Federal capital gains tax.

This beats selling shares, paying the capital gains tax, and then donating the cash.  You will have avoided the tax altogether!

This is a great strategy for long term investors (the best kind) who have been purchasing shares over long periods of time.  Your brokerage or custodian tracks the cost basis on your purchases for tax reporting. With this strategy, you typically select shares with the lowest cost basis because these shares would otherwise generate the highest capital gain and tax bill.

If you want to donate company stock received as part of an incentive plan the shares can only be donated after any required holding period has lapsed.

Qualified Charitable Distribution from an IRA

While many of us own stocks within our IRAs, you cannot donate these appreciated shares directly to a non-profit or charity.  The alternative here is to donate some or all of a “Required Mandatory Distribution.”

This strategy is limited to people 70 ½ and older, subject to mandatory distributions from traditional IRAs (as opposed to Roth IRAs).

With this approach you decide how much of your mandatory distribution to donate, and that amount is not subject to Federal withholding (State rules vary).

The amount donated is excluded from taxable income, which may reduce the impact to certain tax credits and deductions such as Social Security and Medicare in your favor.  If you do itemize you can’t claim a deduction for the donation, sorry, the IRS frowns on double dipping.

Wrapping Up (please read this too)

While there are other options available, these are two of the easiest and most practical for many investors.  Your investment advisor, accountant, or brokerage should be happy to help you make either of these happen as appropriate.

It’s important to note that this is a general overview.  Everyone’s situation is unique.  It’s important to consult with your CPA, tax preparer, or investment professional as you decide if either of these approaches may be appropriate for you.  The professional you work with may suggest a different approach, or find that these are not ideal or appropriate for your particular situation.

As always, I’m here to answer questions about this, or anything else related to your financial life.  Please don’t hesitate to reach out!

 

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

 

 

 

Your Employer is Confused Too

While looking at some research on the Stanford Center on Longevity website, I came across an interesting white paper with the wordy title: Beyond Defaults:Using Behavioral Economics and Psychological Science to Improve Retirement and Health Outcomes.

The paper was published by the International Foundation of Employee Benefit Plans, and what really caught my attention was the admission in the introduction that the financial and health care education provided by many employers is essentially failing.  While this is something I’ve long suspected given lots of circumstantial evidence, it’s interesting to see the industry begin to acknowledge the issue.

Employers began moving from traditional pensions to 401(k) plans in the 1980’s and at the same time there has been a rapid shifting of healthcare costs and decisions to the employee as well. The issue is that most people aren’t, and never wanted to be, financial and medical experts.

The paper acknowledges that the retirement and benefits world assumes everyone will make: “decisions like the highly logical, highly rational Mr. Spock of Star Trek.”  It only took them 30 years to figure out that people behave like humans, and often make many decisions that are less than ideal.

The point of the paper is that a relatively new field called Behavioral Economics may help make things right. Somewhat ironically, this field has been used to help sell you things for some time, and we see this in advertising and how our electronic devices seem to know what we want.

The researchers go on to highlight five action steps based on a poll of members (employers).  These are:

  • “Convince younger workers to save for retirement”
  • “Help plan participants determine how much to save”
  • “Help older workers decide when to retire, including when to start social security…”
  • “Help participants become better consumers of health care”
  • “Help participants adhere to medical treatments”

Nothing too surprising there.  Some of the suggested approaches vary from creative and fresh, to common wisdom, to downright scary.

An example of creative and fresh is dealing with “loss aversion”: people feel more strongly about losing $1 than gaining $1 when it comes to investing, creating investors that are too conservative. A common wisdom example is educating people on the advantages of delaying Social Security, nothing new there. And finally, the scary example: “consider eliminating copays on medicines that treat chronic conditions” … let’s face it, employers want to lower their costs.

I thought this paper was interesting because it offers a peek behind the curtain at what the employers who offer “financial and health care” information to many are wrestling with.  What caught my attention was the admission that what they have been doing, for decades, hasn’t worked, but many of us already knew this.

My takeaway for you: please don’t assume what’s offered through your employer’s benefits website is a silver bullet, or that you’re even interpreting it with 100% accuracy because they admittedly haven’t been getting it right.  Reducing things like how should I invest to a series of 3 or 4 questions doesn’t really capture your risk tolerance, or the realities of long-term investing.

Buoyant Financial was founded to provide expert planning and management with low fees that won’t create a drag on returns because most people don’t want to become experts, and bet their retirement on this new-found expertise.

We’re always happy to answer questions, and offer perspectives.  Please don’t hesitate to reach out!

 

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request.