Five Minute Finance

"I am turning 18 soon, I have an account shared with my dad, but are there specific funds I should invest in? For example, Roth IRA, Target Date Fund, and should I invest in foreign markets/am I even old enough to do that? Or should I stick to investing in companies I think will do well and stick to those?"

Congratulations on having the interest and means to save and invest at a young age! I absolutely love helping people get started with investing especially at a young age. You have a super power on your side: time! Compounding interest really is the 8th wonder of there world.

I recommend the following general points

• Roth: Use Roth accounts as much as possible. Tax-free-forever!
• Low-Cost Index Funds: Understand the different classes of assets and their historical performance. 
• Individual Stocks: If you want to invest in companies, go for it! Learn about investing while you are not risking "too much" and more importantly, how you feel about making (and losing) money. 

Matt and Mike discuss the situation of this young person and how to get started. Resources include:

• 90 Years of Performance
• Four Asset Classes with Great Long Term Returns

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Target Date Funds (TDF) are one of the best inventions in the investment industry. These funds allow individual investors a one-stop purchase to invest in stocks, bonds, and cash across the US, International, large companies, small companies, and bonds. But even better, the rebalancing occurs automatically and is set to take on less risk as you approach retirement!

The big downside to only using a TDF is that they are set up for the average investor. Are you average? They do not take into account your risk tolerance, particular job or industry or the economic cycle. They also assume a particular retirement date to put you into a default allocation.

While there are drawbacks to TDF, if you can save and invest consistently into one, you are going to be great shape.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Net Worth is something very simple but it tells you a lot about your situation. By spending the time to aggregate your various financial accounts, home, car, business, or other valuable 'stuff', you can start to get organized. And it also helps surface ways of saving of making more money in the future! Maybe you have a fund with a high cost or can combine multiple accounts to simplify your life. 

The other thing that I like to do at the start of the new year is to come up with a Savings Plan. This is where you decide how much money you will save in 2022 and where to put it. This is important so you start the year with a proactive plan!

Tune in to hear the details!

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

When it comes to saving money for the future, there are variety of accounts from IRAs, 401(k), 403(b), HSAs and more! How do you know which is best for you? 🤔

Megan and I chat about her recent article which goes through exactly which accounts to fund for 2022.

A brief summary:

1. Pay off credit card debt
2. Flow qualified education expenses through a 529
3. Contribute up to the match in your 401(k) or 403(b)
4. Budget 10% for unknowns (emergency fund)
5. HSA
6. Roth IRA (or backdoor Roth IRA)
7. Maximize your 401(k) or 403(b)
8. Save into your 457 plan
9. Contribute to a SEP IRA
10. Maximize any other employer retirement plan
11. Save into a 529 for future education expenses
12. Roth Conversions
13. Savings into a Brokerage account
14. Pay down low-interest debt (student loans and mortgages)

Check out the entire blog post at Marotta On Money to read the details.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Matt Robison and I take a look at what transpired during 2021 in the financial industry including a look at the stock market, ESG, Crypto and Inflation.

The US stock market continues to rise, posting highs throughout 2021. It has been on a tear, posting 20%+ return the past two years and besting 16% annually over the past decade! Does this lead to any insights for market returns in 2022? Markets tend to go “up and to the right”, so it shouldn’t be surprising. Continue to stay invested with your asset allocation, and be ready for any future turbulence.

ESG or Environment, Social and Governance investing really took off this past year. There are now so many funds focused on ESG that it’s really hard to understand exactly what they stand for and are invested in. Be wary. The companies that put together funds are for-profit and are capitalizing on this investing trend.

What is the deal with Bitcoin, Ethereum, Dogecoin and crypto in general? Should you invest in this “asset class”? Listen to what Matt and I have to say on this topic.

You can’t end the year without talking about inflation. We began the year with the typical story of trying to reach 2% inflation. Well, we blew right past that, recently topping 6.8%! Real wages are barely keeping up - but good news: you should ask for a raise. With the demand outstripping supply in many areas, now is a good time to evaluate your position and salary.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

A Donor Advised Fund (DAF) is an account that you own and manage, just like your brokerage account.  The difference is how it’s treated when it comes to paying taxes.

Money that you put into the DAF is treated by the IRS as having been given away to a non-profit organization, even though it’s still under your control.  That means you get to deduct it from your income and pay less in taxes!  Eventually, the money in your DAF must be given out to charities, but you can do that over the next months and years.

The big benefit of this account is when you have a year with a very high income.  If you are charitably minded, go ahead and donate 3-4 years’ worth of giving into the DAF.  That means you save more on taxes, while still supporting your favorite organizations over the coming years.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Near the end of the year, after the market has been up 20%+ for the past 2 years: now is a good time to check in on your portfolio balance. Do you still have the correct mix of stocks and bonds to meet your goals? 🤔

It’s important to understand your financial goals and have a portfolio balance that has the best chance to reach them. And if you had that dialed in (you did, right!?) - then it might currently be out-of-whack. The stock market has gone straight up, while your bonds have been stuck on idle. So you might find that your portfolio has too many stocks, leaving you at risk of a bigger fall.

Check out your entire portfolio, not just your 401(k). Don’t forget about your brokerage account, your IRA and if you’re married: double those. Add it all together and see where you sit in stocks versus bonds. Does that match your goals, risk tolerance, and risk capacity?

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

“Would you rather put your money in companies founded in North Korea or in South Korea?” This is the opening thought experiment posed by Megan Russell of Marotta Wealth Management. The difference between the two is obvious. Do you want your money sitting in a state-controlled environment like North Korea or in a more economically free country like South Korea? It’s important to understand global investments and how they fit into your overall investment portfolio.

You can listen to Megan Russell and I chat about Freedom investing on a recent episode of my podcast. We explore Marotta Wealth Management’s ideology and strategy with regard to Freedom Investing. Megan is no stranger to the topic. On her blog, Marotta on Money, she has spent years exploring this topic and has an admirable history of openly sharing her strategy and results. Megan has done a lot of first-hand research in this area and shares her expertise on the show and in what follows.

The simple thought experiment above was meant to give you pause for thought. What does it mean to invest in an economically free environment? For starters, companies without state control can pursue profits, hire and fire employees, and innovate without fear of retribution. Freedom to explore opportunities is not a given around the globe. It makes sense to avoid companies operating under a regime that can change the rules at a moment’s notice, potentially wiping out your gains.

How do you go about determining which countries are “economically free?” Luckily, you don’t have to figure it out on your own. The Heritage Foundation has developed an Index of Economic Freedom. Countries are evaluated on a number of criteria including, but not limited to, labor and monetary freedom, government spending, and tax burden. The list is updated yearly and offers results on a scale from 0-100 which allows you to take a deeper dive into the component parts.

In terms of strategy, the idea is to invest your money into countries where the operating environment is on the high end of the economic freedom scale and avoid those countries that fall on the low end. It makes intuitive sense that the local laws and culture will greatly impact the success of a company, but what do the numbers say?

Megan and the Marotta on Wealth blog offer insightful details about the specifics of Freedom Investing. You can read a variety of articles on their website that include backtesting and refining results if you want to immerse yourself in the details. I’ll give you some tips for implementing the strategy a bit further along in this article but let’s first explore just how much of a difference it could make.

Megan found in her backtest of their current strategy that “basically the average advantage of freedom investing is a 2% annual advantage” over the MSCI EAFE index.

In "A 25-Year Review of Freedom Investing", Megan explains how compared to the EAFE, "on average Freedom Investing has a 1-year advantage of 2.093%, 5-year advantage of 1.995%, 7-year advantage of 2.314%, 10-year advantage of 2.400%, 15-year advantage of 2.392%, and 20-year advantage of 2.073% over the EAFE Index."

The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia, and the Far East, excluding the U.S. and Canada. It covers approximately 85% of the free float-adjusted market capitalization in each country.

This is a good benchmark for comparison because the Freedom Investing strategy is investing in developed markets outside the US.

As is always the case with factors, in the backtests of results over varying lengths of time sometimes Freedom does better and sometimes not, but, Megan writes, "of the 293 measured 1-year periods, Freedom Investing lost to the EAFE Index in 96 of them" while "of the 185 measured 10-year time periods, Freedom Investing lost to the EAFE Index in 0 of them."

While 2% may not sound like much, let’s take a closer look. Say that you invest $10,000 and assume the EAFE Index gets a 6% annual return and Freedom Investing returns 8% per year. After 1 year, you are obviously ahead by only $200 ($10,800 in Freedom versus $10,600 in EAFE). By year two Freedom Investing is ahead by $428 and in year three that’s $686. But compounding continues its yearly march and after 20 years the Freedom Investing account has outgrown the EAFE account by $14,538 or 45%! That’s 45% more money by investing in countries that are freer.

Does this investment strategy come with more risk? We typically measure risk by the standard deviation of returns, or volatility, which is how much the portfolio goes up and down. This is a terrible way of measuring your risk, but it’s the industry standard for portfolios. By that measure, looking backward with actual results, it turns out that Freedom investing had a superior risk-adjusted return. You can read more about this in Megan's "Risk-Return Analysis of Freedom Investing."

As mentioned above, this strategy is to invest in developed countries with greater degrees of economic freedom and not include those with heavy restrictions. The US is near the top of the economic freedom index (currently 20), and that’s essentially where the line is drawn: those above the US are freer and those below should not be included in your portfolio. However, not all of those 20 countries have large enough markets to warrant investment and there are some other nuances to take into consideration (listen to the podcast for more discussion on this topic). 

Since these are developed countries outside the US, it makes sense to think about this portion of your portfolio as the International (not including Emerging Markets), or the ex-US developed countries. 

Notably, there are two countries that are more free than the US, large enough to warrant investment but lie within the FTSE emerging markets, rather than developed markets: Taiwan and Chile. There’s no technical definition of what is an emerging or developed country but generally, developed countries have more advanced economies and mature markets. And most importantly for us, companies that maintain market indices define which countries are part of which index. Since emerging markets have their own risk/reward and different labor forces at play, it makes sense to separate them from developed markets. 

You might feel confident replacing your developed market (index) investments with the freedom investing strategy discussed here since it includes approximately 10 different countries. This keeps your international investments well diversified. On the other hand, since emerging market indices generally include 20+ countries, only investing in Taiwan and Chile may not be diversified enough. 

So, how do you actually put this strategy to work within your portfolio? Aside from the obvious: compiling research and determining what works best for your situation, you should also consider the following (in order from most to least complicated):

1. Make a list of the investable, free countries from the Heritage Foundation.  Look at the market-cap-weight from FTSE for those countries and divide your investment into country-specific funds (see below for a list of funds).
2. Same as #1, but just equal-weight the countries (i.e. 10% into each of 10 country-specific funds).
3. Decide on a handful of free countries and put some investment into each.
4. Get someone else to do this for you! Give me a call or check out Marotta Wealth Management,

What I love about Freedom Investing is that the strategy makes intuitive sense and the backtesting results support the concept. Furthermore, it feels good to put your money in business owners that are allowed to operate with freedom and own the rewards. Investing in countries that allow businesses more freedom to operate is a win-win-win.

I want to extend my sincerest gratitude to Megan and her firm for openly providing so much information about this Freedom Investing strategy and beta testing results for many years. I’m not a fan of complicated investing. Freedom investing is a strategy I use because it’s simple to understand and easy to execute as a buy-and-hold investment.

If you have any questions or comments, please feel free to reach out!

The following is the list of country-specific funds Megan's team uses in their implementation:

• Australia: FLAU
• Canada: FLCA
• Hong Kong: FLHK
• Switzerland: FLSW
• United Kingdom: FLGB
• Denmark: EDEN
• Finland: EFNL
• Ireland: EIRL
• Netherlands: EWN
• New Zealand: ENZL
• Singapore: EWS
• Taiwan: FLTW
• Chile: ECH

To read more about Marotta Wealth Management's latest updates on their Freedom Investing strategy, you can browse their articles on the topic here.

Want to save on taxes? Matt and I discuss 8 different strategies that can help you keep more money in your pocket. We cover the first 3 tips in this first podcast, followed by 5 more in the next podcast.

1. Use Index funds over actively managed funds. This is generally great advice, but also better at saving on taxes due to       less turnover of holdings.
2. Use ETFs instead of mutual funds.  ETFs are a unique “wrapper” that avoids you from paying taxes on interest and dividends.
3. Hold the right asset in the right account. Tax-deferred and Tax-free accounts (401k, IRA, etc) are great for bond funds     because you avoid paying taxes on the interest and dividends each year.
4. Tax-loss Harvesting. Make lemonade out of lemons by intentionally taking a loss and deducting it from your taxes or         offset other gains and pay no tax.
5. Tax-Lot Management. It’s important to sell the correct shares so that you take advantage of short-term or long-term          gains/losses in your account.
6. Savvy Rebalance. Use additional funds or tax-deferred/free accounts to do your rebalancing and avoid paying capital       gains.
7. Long-term Investing Horizons. Long-term capital gains are taxed at a lower rate than short-term.  Invest for the long run!
8. Charitable Giving. Donating appreciated assets helps you avoid paying taxes on capital gains.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Want to save on taxes? Matt and I discuss 8 different strategies that can help you keep more money in your pocket. We cover the first 3 tips in this first podcast, followed by 5 more in the next podcast.

1. Use Index funds over actively managed funds. This is generally great advice, but also better at saving on taxes due to       less turnover of holdings.
2. Use ETFs instead of mutual funds.  ETFs are a unique “wrapper” that avoids you from paying taxes on interest and dividends.
3. Hold the right asset in the right account. Tax-deferred and Tax-free accounts (401k, IRA, etc) are great for bond funds     because you avoid paying taxes on the interest and dividends each year.
4. Tax-loss Harvesting. Make lemonade out of lemons by intentionally taking a loss and deducting it from your taxes or         offset other gains and pay no tax.
5. Tax-Lot Management. It’s important to sell the correct shares so that you take advantage of short-term or long-term          gains/losses in your account.
6. Savvy Rebalance. Use additional funds or tax-deferred/free accounts to do your rebalancing and avoid paying capital       gains.
7. Long-term Investing Horizons. Long-term capital gains are taxed at a lower rate than short-term.  Invest for the long run!
8. Charitable Giving. Donating appreciated assets helps you avoid paying taxes on capital gains.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/