Five Minute Finance

We all know the risks, we understand how to think about the pros and cons of a decision. But when it comes to the stock market, are you certain you’re thinking about it the right way?

The risk isn’t that your portfolio goes down in value, the risk is that you can’t reach your goals. What are your goals and when do you want to reach them? When do you expect to spend the dollars that you put into the market today? 

I think about risk as either:

• You permanently lose money

OR

• You do not reach your goals

If you have long-term goals that require money, the biggest risk you take is not investing in the stock market. It’s one of the safest places to make a long-term investment and not lose purchasing power.

Borrow, Buy, Die.  

That’s how billionaire’s avoid paying much in taxes. When your assets are growing quickly (10%+ / year), you don’t need to sell stock or pay yourself a salary, you just borrow money at 2% interest / year.

If you have significant wealth, and it continues to grow, you can take advantage of borrowing money at low cost. If there is a downturn in the economy or the market, you have enough wealth to “bridge the gap”.  In other words: you can take advantage of “average returns” over decades because you have the risk capacity.

How does this apply to the rest of us?

• You are already doing this with your mortgage. You borrowed money and have investments in the stock market.
• While the current high market might not be the best time to “borrow for lifestyle”, have financing ready (HELOC, refinance, margin borrowing) in case the market drops significantly. You want to buy while it’s on sale.
• Understand that your mental wellbeing trumps all. Sure, you might “make more money” buy leveraging your house and investing in the market. But will you worry too much? Nothing beats a good night’s sleep.

Resources:

• Buy Borrow Die: How Rich Americans Live Off Their Paper Wealth [WSJ]
• The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

Finding a financial advisor is daunting because you know it’s important and yet it’s so hard to figure out. 

Bottom line up front: Start with finding Certified Financial Planners (CFP®) that understand your situation; do a little online research and then interview a couple.

Tune into this week’s podcast to learn more about:

1. Hiring a CFP®. This should be a minimum bar. There are plenty of planners out there and it shows a commitment to doing your best job for clients.
2. Who calls themselves advisors? It could be a broker, someone working at a local bank, a wealth manager or an insurance provider. Unfortunately hanging out a shingle of “financial advisor” is not distinguishing enough.
3. Look for domain knowledge. Not only knowledge of financial planning, but also your specific situation. Are you close to retirement? Are you starting a family? Have you just taken your first job?
4. Understand compensation: make sure that you know how the advisor is paid. Is she paid by how much money she manages? Or paid a commission if you invest in a certain mutual fund or buy life insurance? Make sure you know how your incentives are aligned

Resources:

• Find a CFP®: Lets Make a Plan
• Find a Fee-Only Fiduciary Planner: NAPFA.org
• Ten Questions to ask a Financial Advisor [Marotta on Money]
• Another: Ten Questions to ask a Financial Advisor [NerdWallet]

In this bonus episode, Matt and I continue our conversation about stock market bubbles and in particular behavioral economics.  We discuss how the future investing models might change based on more studies of human behavior.  Smarter people than the two of us will study and dissect the market in new ways based on human participants.

We also chat about different areas of the markets, different aspects of bubbles, and how various investment strategies can work.

Be sure to listen to the end where I reiterate why I pound the table on simple portfolio allocations!

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

The stock market is reaching new all-time highs, which begs the question: Are we in a market Bubble? 

There are two areas to review when thinking about “bubbles” in the stock market: the market fundamentals (valuations) and investor sentiment (or behavior). Both of these are looking quite hot. 

On the fundamental side, the popular Shiller PE Ratio currently sits at 38.5. The only time this indicator was higher was in 2000, and you know how that ended.

And investor sentiment, in general, is pretty happy, or dare I mention exuberant? From cryptocurrencies and NFTs, to Meme stocks - investors are bidding up assets to new heights every day. Although corporate earnings are doing very well, the rest of the news is fairly bleak. Given that backdrop, I’d say investor appetite is pretty strong.

So, what should you do as an investor? Unfortunately, that’s the hard part. I know that the stock market will go down but I don’t know when and I don’t know by how much. Without that knowledge, what should you do? Continue to take a defensive stance with your portfolio. If you generally invest 75% in stocks (and 25% in bonds), keep that allocation or tweak it to 70% stocks. 

Recall the last drop of 30% in March of 2020? Stocks were on sale you that’s when you want to buy. So be ready to take advantage of the next downturn, whenever that comes.

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

BONUS Episode!

Matt and I continue our conversation. Listen in to the discussion on

• Zombie investors: how the massive uptick in index investors may be affecting markets
• Is it Good? Are the capital markets still good for companies and investors? Have we gotten away from the point of investing?
• Complexity: If you can't explain it, don't invest in it.

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

I absolutely love what software can do for us, freeing up our time and energy to focus on the less mundane. And when Robo-Advisors first launched, with simple portfolios of low-cost index funds, they were great. Taking away the human emotions, keeping you invested correctly with a massively diversified portfolio - what's not to love?

However, I've recently come across a few problems that stem from both the Robos themselves changing and how to handle distributions and tax situations with my clients - some first-hand information that I want to pass along.

Robo-Advisors are getting more sophisticated and complex - which is never in the client's interest. You want simple, easy-to-understand investments. Robos that used to create portfolios of 5-10 funds are now are holding 15-20 funds. And they are holding more complicated investments such as risk parity funds. You simply don't need this level of complexity to be successful.

But a bigger problem is Tax planning. The Robo-Advisor has no idea of your unique situation. They do not adjust rebalancing based on your outside assets (401k, IRAs, etc), nor your changing tax situation (i.e. wait until you are in a lower tax bracket next year due to a life change). I've had client situations where these are easily over $30k in taxes that could have been avoided.

I haven't researched all the options, so there may be some simple Robo-Advisors that just buy-and-hold for you. Unfortunately, I can no longer recommend those that I have interacted with for my clients.

On today’s show, Meg Bartelt, CFP®, MSFP joins me to talk about how you should think differently about your total compensation in order to take advantage of your employer benefits. 

Meg is the founder of Flow Financial Planning, LLC, a fee-only, virtual financial planning firm dedicated to women in their early-to-mid career in tech. She specializes in equity compensation and not making people feel bad about their finances.

Many employees of large tech companies are not taking full advantage of their employee benefits and leaving significant money on the table. If your employer offers after-tax 401k contributions and/or an Employee Stock Purchase Plan (ESPP), you need to understand those benefits.

But what if you cannot afford to save more from your paycheck because you are already just barely covering your living expenses plus vacations, home improvements, etc? Take another look by understanding your total compensation and account balances. Do you get an annual bonus? Do you receive RSUs?  

You have to think a little differently: your total compensation is available to spend on living expenses, not just your bi-monthly paycheck. Maximizing your after-tax 401k contributions may reduce your paycheck, but you can make that up using your quarterly RSUs. Sell the stock and transfer the cash to your everyday checking account to fund monthly expenses.

Your future self is going to thank you.

How do you make your money work for you? Do you take it to the casino and bet on black? Do you have fun at the race track? Do you save into your 401(k) and put the money into an index fund? Or do you buy individual companies each week on Robinhood?

Each activity may win or lose you money in the future. Does that make it investing, speculating, or trading? Each word means something different and it’s important for you to understand how you are using your money.

Let’s give a quick breakdown:

• Trading: Exchanging assets of value in the hopes someone will pay more than you did.
• Speculating: A wager that you will receive some payoff in the future
• Investing: Using knowledge and research to make an educated allocation of resources. 

I see a lot of speculating under the guise of investing - and that’s dangerous. The risk of speculation not only includes the potential to lose money but also confusing luck with skill. That can lead to risking too much of your hard-earned money in irresponsible ways.

Make sure that you understand how you are putting your money to work.

Resources

• You Can’t Invest Without Trading. You Can Trade Without Investing

You need to have a plan in case of an emergency and typically you need some money to go with that plan: your Emergency Funds. 

First, let’s define Emergency: something which happens unexpectedly, which you could not easily predict would occur at this moment. Examples include losing a job, having a severe accident or having to take care of a loved one. As you can tell, these mostly include losing or temporarily leaving your job, which means no income for some period of time.

Emergencies are not the fridge breaking down, car maintenance or a new roof. All of those you can easily predict will happen in the future and you need to plan and budget for those separately. 

So, what to think about in terms of this emergency fund?

• Typically it should be 3-6 months of required expenses, in case you lose a job.
• You can increase or decrease that depending on job stability, income stability and your employability.
• This fund should be mostly in cash. Cash is King.
• If your brokerage portfolio is large enough, you can have this money invested as part of your overall portfolio.

Mostly you need a plan for when the sh*t hits the fan. Make sure you are prepared.