Diversified portfolios are the 8th wonder of the modern world. OK, maybe not that spectacular, but extremely important to millions of investors. In a world where individuals are increasingly responsible for their own financial futures, risk (defined as variability of returns) must be mitigated, while allowing (and encouraging) growth in the overall portfolio. A tall order, to be sure. Alone, no individual Asset Class provides both safety and opportunity.
While researchers have identified three key elements of success in portfolio construction and management, multiple studies have concluded (1) Market Timing is insignificant as a driver of long-term success, (2) Securities Selection contributes very little to overall results, and (3) Diversification amongst Asset Classes is the main element of success. In practice, properly mixing assets from various Asset Classes drives over 90% of long-term portfolio returns.
It stands to reason that more attention should be paid to Diversification than to those other two factors combined. Why, then, do so many advisors and investors concentrate on the Selection and Timing of buying and selling individual stocks? Or, if I might, trading?
Primary Asset Classes include Domestic Stocks, Domestic Bonds, Foreign Stocks, Foreign Bonds, Real Estate, Cash (and equivalents), and Alternatives, such as Commodities. Diversification involves the selection of portfolio assets from at least two, and preferably more, of these categories.
Even the smallest portfolios can benefit from Diversification. For young and/or novice investors, an all-stock portfolio may be exciting, but their portfolios will benefit over time from Diversification into other Asset Classes. Many people choose Target-Date Funds, which are often called Retirement Date Funds. These funds are diversified, using Bonds and, frequently, International Stocks. Simple to buy and sell, especially in these days of commission-free trading, these funds provide excellent Diversification to even the smallest investors.
Certified Financial Plannersâ (CFPsâ), operating as Registered Investment Advisors (RIAs), apply Asset Allocation techniques to develop and manage individual portfolios, based on individual risk tolerance and the financial goals of investors. For assistance in finding Advisors working in these arenas, we suggest the Certified Financial Planner Boardâ website (letsmakeaplan.org), and the National Association of Personal Financial Advisorsâ website (napfa.org). When shopping for a Financial Advisor, look for the “fee-only” designation to be sure the Advisor is a fiduciary at all times. Do not be fooled by claims of “fee-based” advisors, who are not required to act as fiduciaries at all times.
Next week we will address the age-old dilemma regarding how many stocks are required to sufficiently diversify a portfolio.
Van Wie Financial is fee-only. For a reason.
Last week, we discussed the value of accepting Personal Responsibility for our own financial futures, including starting and/or contributing to an Individual Retirement Account, or IRA. Our primary focus was on potential 2022 tax savings. Our suggestion was to open (or contribute to) a Traditional IRA, in which all contributions are deductible for qualified Account Owners. 2022 contributions can be made up to Tax Filing Day in 2023, but the benefit will still be reaped for 2022.
Today, we shift our focus to the Roth IRA, which does not provide current income tax relief, but provides other worthwhile benefits later, when withdrawals made by Account Owners will be tax-exempt. Despite not having to open a 2022 account and contribute until early next year, there may be a good reason for new investors to open an account in the remaining few days of 2022.
Maximum benefits from a Roth IRA are not realized until the account has been open for 5 years, and until the Account Owner reaches age 59-1/2, at which point withdrawing earnings becomes tax-free. Before the 5-year period is satisfied, contributions may be withdrawn at any age with no tax due, but prematurely withdrawing earnings may require income tax and/or a 10% tax penalty, depending on age.
The full 2022 credit is a result of how the 5-year holding period is calculated. A Roth IRA opened before the end of the year will have satisfied Year 1 at midnight, December 31, 2022. Year 2 starts on January 1, 2023, and satisfies the entire second year of the requirement. This means that on January 1, 2026, the 5-year holding period is considered complete.
Anyone desiring to open a Roth IRA and satisfy the 5-year qualification period can still open an account with a small initial deposit before this year-end. Most custodians will allow a new account to be opened online, or by appointment in a local office. Some banks and credit unions can open a Roth IRA in person, and a deposit can be made, so long as a minimum opening deposit is made.
Another strong argument for starting a Roth IRA lies in the generous rules for making future withdrawals for education, home purchase, etc. Rules can be found on the irs.gov website, or on the website of the custodian you choose to hold the account.
With few exceptions, opening a Roth IRA before year-end will provide benefits to the owner of the account. If you qualify, why not take this opportunity to establish another block in your retirement income foundation? Do it now, and you may be able to receive full benefits sooner, rather than later.
Van Wie Financial is fee-only. For a reason.
Where were you on the Eve of the Millennium? December 31, 1999, was long ago, but like many uber-significant events, it remains unforgettable for those of us who were old enough to appreciate the moment, with the many associated “Y2K” fears. What would happen? Would our cars and planes work? Would the banks reopen? Would our ice cubes melt overnight from blackouts?
As with memories of the Kennedy assassination, the attacks of 9/11, and a few other life-altering events, we retain memories in permanent brain storage. Somehow, reminiscing about important events from long ago tends to render the remaining few days of 2022 seemingly insignificant, and certainly forgettable. But we should remain aware of the opportunities we face currently.
With perfect 2020 hindsight (pun intended), the nation’s economy has been transformed from a prosperity machine into one of uncertainty and doubt. Navigating through the economic (COVID-19-stimulated) rubble, it is easy to understand the primary lesson of the 2020s. Never can I remember a time where self-reliance played a more important role in American life.
As layoffs pile up, prices skyrocket, and interest rates rise, the stock market faces real losses for the year. We need to tend to our own plights. As most Americans are facing zero-to-minus real wage “growth,” one immediate tactic comes to mind. There is no quicker way to save needed dollars than by reducing our tax bills. There’s still time for many to help themselves.
Retirement Planning is a two-sided coin, where Heads we win now, and Tails we win later. When the Individual Retirement Account, or IRA, was introduced, very few people understood what personal responsibility for Retirement Income meant. Being the thoughtful and educated people we are, the IRA caught on like wildfire, and today there is an estimated balance of over $1 Trillion (12 zeroes) in our collective personal IRA accounts.
Much of this cash already served purpose number one, by creating an “above-the-line” tax deduction for contributions. These create the best tax savings, as they have the effect of never being recognized as current earnings. Eligible people should plan to contribute to their IRAs to the extent possible, simultaneously saving taxes and providing for a better future.
With few days left in the year, coupled with slack economic conditions, maxing out IRA contributions by December 31 may seem financially difficult. In a rare user-friendly moment, IRS allows these contributions to be made until Tax Filing Day of 2023, while also providing a 2022 tax deduction. There are more tips and suggestions for late-year tax savings, but none (in my mind) is easier and more important than the IRA. Self-reliance, tax-saving, and Retirement Planning, all rolled into one. It doesn’t get much better than that.
Van Wie Financial is fee-only. For a reason.
Sometimes, at this time of year, I enjoy looking at my past Congressional Christmas Wish Lists. This year, I thought it might be particularly interesting, as my last lookback was in 2018, the halfway point of the Trump Administration. We are now at that point in the Biden Administration.
In 2018, much of my list was due to the need for economic revival. Prior to Trump, my priority was tax cuts, and he delivered with the Tax Cuts and Jobs Act of 2017 (TCJA). As expected, the results were spectacular, with unemployment on the decline in every demographic, wages rising in excess of (almost nonexistent) inflation, and most people enjoying a tangible paycheck increase. The stock market was booming, as my wishes were coming true.
Tragically, the 2020 COVID-19 pandemic interrupted economic progress in unparalleled fashion. Despite temporarily shuttering most businesses, and the resultant deep recession, we began to recover almost immediately. Without TCJA, the recovery would have been much longer and more painful.
Unfortunately, TCJA tax rate cuts were written to expire in 2026, and under the Biden Administration, chances of getting the lower rates made permanent have decreased significantly. Therefore, my 2022/2023 Wish List Priority #1 is to make TCJA tax cuts permanent.
My 2018 Wishes #2 through #10 were smaller, taxpayer-friendly, “tweaks” to the Tax Code, but under the new Administration and Congress, none of them have more than a Florida snowball’s chance of seeing the light of day.
Inadvertently, a few good things have happened in the personal finance arena, albeit some for the wrong reasons. Inflation adjustments in the U.S. Tax Code have allowed savers to increase contributions to Retirement Accounts. My 2022 Wish #2 is to further increase contribution limits in excess of inflation.
Another consequence of the pandemic was the passage of the S.E.C.U.R.E. Act, now dubbed SECURE 1.0, due to a tag-alone version (called SECURE 2.0) is currently pending in Congress. Because of the immediacy of some of its provisions, my 2022 Wish #3 is to get SECURE 2.0 through Congress, and signed by President Biden, with several days left in 2022. Need I say, “Please?”
2022 Wish #4 has already been granted by the voters, who are responsible for changing the majority in the House of Representatives, effective in early January. Faced with a taxpayer-unfriendly Administration for at least two more years, the best we can wish for is a divided government, where further legislation basically grinds to a halt. When in a hole, stop digging and have patience. For now, let’s not make things worse.
Van Wie Financial is fee-only. For a reason.
What passes for financial advice is easy to find without paying a cent out of pocket at the time. Often it is not free, at least in the long run. Advice is a well-defined and regulated concept in the world of financial services. Between two laymen, the law doesn’t get in the way of dispensing suggestions, even when the term “advice” is used incorrectly by either party. In that regard, the information transmitted and received is free. Or is it?
Bad investment advice, when followed blindly, can result in significant costs to an investor. Losses may be direct or indirect, through what we call “opportunity costs.” Choosing one investment to the exclusion of another creates an either/or scenario, where the outcome reflects the quality of the advice taken.
How is anyone to evaluate competing advice? For starters, consider the many sources of “free” opportunities. Television commercials tout precious metals, radio ads promote double-digit returns from real estate, free seminars at local high-class eateries promote Living Trusts (while selling annuities), stockbrokers know the “hot stocks,” and insurance agents can show you how to “participate in market returns while never losing money.” And that nice guy at church has the most successful mutual funds ever. Websites promote tax-free lifetime income. If you need even more help, robinhood.com offers “meme stocks” that show meteoric rises, at least until they crash from lack of fundamental underlying value.
Looking “under the headlines” usually reveals a polished sales job, presented by marketing professionals seeking commissions from sales of products or newsletters. Whether or not their offerings are suitable to you is irrelevant, as they are not required to place your interests ahead of their own. Unregulated industries and providers pose a clear and present financial danger to an unsuspecting and unwary population.
Far too often, sales pitches are built around people’s basest instincts – fear and greed. Numerous studies have shown that Americans fear running out of money more than they fear death. Powerful emotions open up lucrative sales opportunities. In the absence of regulation and potential penalty, the door is open to unscrupulous sales pitches from unethical providers.
In the world of professional financial advising, true “advice” is offered by qualified professional advisors whose businesses require them to serve as fiduciaries. If you are in doubt about the person advising you, simply ask the question, “Are you a fiduciary?” There is only one correct answer, an unequivocal “yes.” And yes, we are fiduciaries.
Van Wie Financial is fee-only. For a reason.
For decades, Congress and several successive Administrations have encouraged individual financial responsibility by authorizing tax-favored Retirement Accounts. Over time, tax benefits from participation in retirement plans have evolved, but the final goal remains constant – encouraging personal retirement income to supplement government-based benefits.
In exchange for tax deferral, or tax elimination on the growth of some assets, Congress requires account owners to begin drawing funds from accounts as they grow older. Dubbed Required Minimum Distributions, or RMDs, these withdrawals are taxable in the year of withdrawal. No tax is due on withdrawals from Roth Accounts, and there is no requirement to take age-based distributions for (non-inherited) Roth IRAs.
Rules for withdrawals and taxes are forever being “tweaked” by Congress and IRS, making it important to follow changes to minimize lifetime tax effects on Retirement Account withdrawals. Passage of the S.E.C.U.R.E. Act (dubbed “SECURE 1.0”) in 2020 changed many rules, and a pending modification called “SECURE 2.0” is likely to further alter RMD rules.
Major changes are pending for Inherited IRAs, but as of this writing these rules have not been finalized. Due to uncertainty, IRS has waived the 50% penalty for missing an RMD on Inherited IRAs, both for 2021 and 2022. This applies to Inherited Accounts where the death of the original owner took place after December 31, 2019.
While we expect finalized rules sometime later in 2022, or certainly in early 2023, anyone who has doubts regarding their RMD status should consult a qualified professional for guidance through the maze of regulations pertaining to retirement savings. We are available on Saturday mornings during the Van Wie Financial Hour radio program on WBOB radio from 10:00 to 11:00. Your account custodian should also be able to address your questions, but they will be extremely busy until year-end.
Other changes made to RMD rules in recent years included the elimination of all RMD requirements for the year 2020 (due to COVID-19), and implementation of new Life Expectancy Tables on January 1, 2021. These welcome changes extended the expected life of affected Retirement Accounts, reflecting increased longevity in today’s citizenry.
Occasionally, IRS implements user-friendly changes, and we give credit when and where it is due. There is, however, a great deal yet to be done to bring benefits for individuals and small company employees in line with those in large company 401(k) Plans.
Van Wie Financial is fee-only. For a reason.
Decades ago, and repeated periodically, increases in gasoline prices elicited demonstrations of our political and public lack of economic understanding. Over and over, “Big Oil” took a very public whipping from politicians and “progressives.” Remember Hillary Clinton in the 2007 Senate saying, “I want to TAKE those [oil company] profits?” Shameful rants by politicians filled the evening news and local papers for weeks. Halliburton moved to Dubai to escape disparagement (and taxes) at home.
Since oil companies were getting so much negative press, I started asking the question, “Who owns ExxonMobil?” Are its owners responsible for perceived problems brought on by “Big Oil?” Many people assume that ExxonMobil is owned by evil executives and fat cat mega-shareholders. In fact, however, only 0.07% of ExxonMobil is owned by employees and executives. 59.65% of XOM is owned by 3,799 institutions and pension plans. The balance of shares are held in retirement accounts and in the hands of individual investors, otherwise not affiliated with company management.
In response to the ownership question, many were surprised to find that they and/or their parents, neighbors, teachers, firefighters, police officers, bus drivers, soldiers, sailors, Marines, and so on, were the owners (stockholders) of ExxonMobil. Nearly everyone with a pension, an IRA containing mutual funds, a 401(k), or any similar investment account, is an owner of ExxonMobil, which is among the most widely held stocks in the world. Steady dividends received from that ownership help pay the pensions for retired people all over the world. Growth in the company, and therefore in stock price, spurs rising account balances and wealth accumulation. This allows an increasing number of people to retire comfortably.
If Congress does not extend the corporate tax rate cut passed in 2017 under the Tax Cuts and Jobs Act (TCJA) of 2017, ExxonMobil and other large corporations will be subjected to a substantial tax increase in 2026. Since dividends are paid to shareholders from after-tax profits, companies will have no choice but to cut future dividends. As a result, individuals, institutions, pensions, etc., all will perform less well, and the “victims” will be various groups and individual shareholders.
Capitalism has long been the object of derision among many Americans, and even more so in foreign countries. An unbiased look into the entire impact of ExxonMobil and other major corporations uncovers the “inconvenient truth” that we are all beneficiaries of a better lifestyle that they help to produce.
Far too many Americans harbor a distorted view of our capitalistic economic system and the modern energy production techniques that underly our success. Without improved understanding, America’s future is in jeopardy.
Van Wie Financial is fee-only. For a reason.
“The coal industry is evil. Fracking must be stopped. Oil companies are ripping us off. Carbon-based energy is the bane of man’s existence, and will soon cause the death of us all. We need renewable energy sources to save the world. We need them RIGHT NOW.” Blah, blah, blah. Lather, rinse, repeat. Underlying the push for a “Green New Deal” is a deep-seated hatred of capitalism. Most of us cannot grasp this sentiment, understanding that capitalism is responsible for elevating the entire global standard of living. Instead, today’s Socialist leaning “leaders” remain convinced, like many of their predecessors, that all they need is the “right people” to implement their “Progressive” policies.
History tells us that Socialism fails every time it is tried. Are oil and coal bashing the only or even the best, examples of socialism’s failures? Hardly! Remember failed automobiles like the Yugo, or the Russian Lada? An old joke about the Lada goes like this: “What’s the difference between a golf ball and a Lada?” Answer: “You can drive a golf ball 300 yards!” Bada-Boom!
Back to renewables and the “Big Green Lie.” We are told that every family will save a minimum of $500 annually using renewables because wind and solar are “less expensive to produce.” For an excellent, comprehensive analysis of the cost of various forms of energy, we strongly recommend the article, The Real Cost of Wind and Solar, at wattsupwiththat.com. Search on “real cost” and it pops up. Hold on to your wallets if these people get their way.
Problematic in the “green” argument is the computation of costs for electric power generation versus “fossil fuels.” Cost estimates we are force-fed every day assume 100% efficiency, which cannot be realized. Solar panels experience night, wind turbines are stationary during calm weather conditions, and both are therefore inefficient. Coal and natural gas run 24 hours per day, assuming supply lines remain open. Truly efficient solar panels would need to be constantly repositioned to face directly into the sun (while the sun is up). Because of the obvious expense of constructing the needed mechanisms, most solar panels are stationary, further reducing efficiency (and increasing costs).
Downtime, either from lack of sun or wind, means that overall demand must be fulfilled from other sources. For every kilowatt of renewable power generation that goes offline for extended periods, a conventional backup generator must also be available to avoid blackouts. Duplicative construction costs further increase the actual unit costs of renewable energy sources.
For a glimpse into our future, simply watch energy-starved European households shiver during the coming winter. The only difference between them and us is their head start toward the fallacy of a “Green New Deal.”
Van Wie Financial is fee-only. For a reason.
The first known Reverse Mortgage was written in 1961 in Portland, Oregon, to help a widow save her home after losing her husband, a popular coach. In 1969, the concept reached the U.S. Senate, when the late Senator John Heinz proposed a concept that evolved into today’s Home Equity Conversion Mortgage or HECM. The more common term, Reverse Mortgage, is easier for most people, though it often conjures up self-imposed ill feelings.
Fundamentally, a Reverse Mortgage is just another property mortgage and can be used for similar purposes, including purchasing or updating a home, or replacing an existing mortgage loan. The major difference between the HECM and a Traditional Mortgage is seen in the required payment schedule. Rather than a monthly Principal and Interest payment, HECMs have no required payment schedule for so long as the owner uses the home as a primary residence. This renders the Reverse Mortgage a valuable tool in long-term Personal Financial Planning.
Far too many potential customers for Reverse Mortgages believe that “It’s just a way for the bank to take your property.” While incorrect, this belief arose out of the poor introduction of the product to consumers. Hiring celebrities to pitch the new concept, disregarding most common-sense explanations, and granting people large sums of cash with no justification, all led to horror stories the public has yet to overcome. Today, the product’s application, as well as its marketing, has vastly improved.
All Reverse Mortgages have a few common characteristics. One of the most misunderstood is that any and all funds paid out to the homeowner(s) are tax-free. Whether or not the homeowner receives any cash from the HECM, the mortgage will not be required to be repaid until the home is abandoned, whether by selling, moving, or by the death of the owner(s).
Further, once HECM repayment time comes (for whatever reason), the loan will be repaid, with any surplus of the sale price over the HECM balance refunded to the owner or owner’s estate at closing. Should the sale price be less than the HECM debt, no money is due, as this event is fully insured during the life of the HECM.
Americans are homebodies and are generally attached to their long-time residences. Enhancing the ability of older Americans to stay in their homes longer is a fundamental goal of many peoples’ long-term planning. While the HECM requires one owner to be at least 62, Certified Financial Plannersâ will assist Americans of all ages in formulating a plan to satisfy the multiple goals of living a comfortable and safe retirement, in the surroundings they prefer.
Van Wie Financial is fee-only. For a reason.
Five months ago, in this very Blog, we discussed the emergence of I-Bonds as a safe investment with an excellent yield. Backed by the full faith and credit of the U.S Government (read: printing press), and, following years of nearly non-existent yields, I-Bonds suddenly began to advertise eye-opening interest rates. Increased interest rates stirred investors, but something went wrong.
In May, annualized interest on I-Bonds rose to 9.62%. But that didn’t mean that an owner would receive a 1-year yield of 9.62% because payout rates are adjusted every 6 months. Assuming we have now passed “peak inflation” for this cycle (something we suspect, but cannot promise), the new 6-month rate, which was supposedly effective with purchases starting November 1, 2022, would be somewhat less. Rate estimates were down, but still attractive. Naturally, many people wanted to lock in before an adjustment occurred.
There are two methods of purchasing I-Bonds, and the first one is only available to a few people annually, and for a very short time. These are taxpayers receiving refunds from their last year’s tax returns, who are allowed to purchase I-Bonds with all or part of their refund.
The second, and most common, way to purchase I-Bonds is to set up an account at treasurydirect.gov. I went there on Friday, October 28, 2022, to establish an account. There was still time to capitalize on the out-sized interest rate for 6 months, right? Actually not, as the website returned a message that it would be down all weekend for maintenance. Monday morning, October 31, it was scheduled to reopen, so there was still time, right? Not so fast. The November 1 interest rate restatement would be effective on October 31, 2022. The new rate was, however, not announced until Tuesday, November 1.
Logically, any business would seek to accommodate its customers after making a big announcement, but this is government, and different rules seemingly apply. The 20+ year-old Treasury website suddenly needed maintenance that interfered with making purchases at the high yield, and the rate change date had been moved ahead of the standard declaration date.
Worse, perhaps, was that several people have told us that for days leading up to the weekend maintenance, the website crashed when they attempted to purchase I-Bonds at the most favorable rate. Government in action.
While everyone prefers a much lower rate of inflation, the new 6-month I-Bond interest rate is a healthy 6.89%, and worthy of consideration. Note that I-Bonds have many restrictions and conditions that make them suitable for some investors, but the analysis is required to determine if a particular individual would benefit from ownership. We can help make that determination.
Van Wie Financial is fee-only. For a reason.