Can You Contribute to an HSA After 65?

Posted On November 12, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

If you are working past age 65 and covered by an employer-sponsored health plan that is HSA compatible (a high deductible health plan or HDHP), you could in theory continue to fund a Health Savings Account with employee or employer contributions. However, an HSA contribution is only allowable if you do not have any other type of insurance. Once you enroll in Medicare Part A (or any other Part), you cannot continue to make new HSA contributions. Many health plans require coordination with Medicare at age 65, so be sure to check with your insurer. Once you have enrolled in Medicare, no further HSA contributions are possible.

If you don’t sign up for Medicare at age 65, be sure to maintain records that you were covered by an employer sponsored health plan. Otherwise you will pay permanently higher premiums for Part B when you do eventually enroll.

[For a primer on HSAs, start here: Health Savings Accounts, 220,000 Reasons Why You Need One.]

The Benefits of an HSA

Fortunately, if you have an existing HSA, there are lots of uses for your account after 65. Just like before you started Medicare, you can use funds in an HSA to pay your out-of-pocket expenses such as doctor or hospital co-pays and prescription drug costs. You can also use your HSA to pay for dental, vision, or other medical expenses not covered by Medicare.

Additionally, Medicare participants can use an HSA to pay for their premiums for Part B, Part D, or for a private Medicare Advantage plan. Are your Medicare premiums are automatically deducted from your Social Security check? If so, you can reimburse yourself from your HSA. Be sure to keep detailed records as proof. Retirees may also use their HSA to pay a portion of their premiums towards a Long-Term Care policy.

You can use an HSA to reimburse yourself for medical bills for past years, again providing you can document and prove these were qualified expenses. When you pass away, if you have listed your spouse as beneficiary, your spouse can inherit your HSA and treat it as their own. Then they can also access the money tax-free for qualified medical expenses. However, if your HSA beneficiary is not a spouse (or one is not named), then the account will be distributed and that distribution will be taxable.

For Medicare participants interested in an HSA-like option, there is the Medicare MSA. This is a Medicare Advantage Plan which provides a cash account for expenses, with a high deductible. Details from Medicare here.

Have retirement planning questions? We are here to help! Contact Scott for a free consultation.

Are Your Tax-Deductions Going Away?

Posted On November 5, 2017 By Scott Stratton, CFP(R), CFA In Tax Strategies /

Last week, we discussed the current tax reform proposal in Washington and discussed how it would reduce incentives for homeowners two ways: by increasing the standard deduction and by eliminating the deduction for state and local taxes, including the deduction for property taxes. Recall that itemized deductions only are a benefit if they exceed the amount of the standard deduction, currently $6,350 single or $12,700 married.

While the legislation has yet to be finalized, it appears increasingly likely that we are on the eve of the most significant tax changes in 30 years. The proposals are slated to take effect in 2018, which means that if they are approved, there is still several weeks in 2017 to make use of the old rules.

For many Americans, your taxes will be lower under the current proposal. The biggest tax cuts, however, would go to corporations, with a proposed reduction from 35% to a maximum of 20%. That’s the proposal, but the final version may be different. The advice below is based on the current GOP plan; we would not advocate taking any steps until the reforms are in their final version and passed.

1. Itemized Deductions. The proposal would increase the standard deduction from $6,350 (single) and $12,700 (married) to $12,000 and $24,000. As a result, it is believed that instead of 33%, the number of taxpayers who itemize will fall to only 10%. If you have itemized deductions below $12,000/$24,000, you will no longer receive any benefit from those expenses in 2018.

Consider accelerating any tax deductions into 2017, such as property taxes, charitable donations, or unreimbursed employee expenses.
Itemized deductions for casualty losses, gambling losses/expenses, and medical expenses will be repealed.
Many miscellaneous deductions will disappear, including: tax preparation fees, moving for work (over 50 miles), and unreimbursed employee expenses.
Investment advisory fees, such as those I charge to clients, will still be tax deductible. However, these miscellaneous deductions only count when they exceed 2% of AGI, which will be more difficult to achieve with so many other deductions disappearing.
The $7,500 tax credit for the purchase of a plug-in electric vehicle will be abolished. If you were thinking of buying a Chevy Bolt or Nissan Leaf, better do so now! If you are on the wait list for a Tesla Model 3, you probably will not receive one before the credit disappears. Read more: “Is Your Car Eligible for a $7,500 Tax Credit?”

2. Real Estate. The Senate version we discussed last week had completely eliminated the deduction for property taxes and state/local taxed paid. Luckily, this has been softened to a cap of $10,000 for property taxes.

If your property taxes exceed $10,000, you might want to pay those taxes in December as part of your 2017 tax year. If you pay in January 2018, you would not receive the full deduction.
The proposal also caps the mortgage interest deduction to $500,000, and for your primary residence only. This is a substantial reduction. Currently, you can deduct interest on a mortgage up to $1 million, and you can also deduct mortgage interest on a second home, including, in some cases, an RV or yacht.
Many owners of second homes will likely try to treat these as investment properties, if they are willing to rent them out. As a rental, you can deduct taxes and other costs as a business expense. See my article: “Can You Afford a Second Home?”

3. Tax Brackets. The proposal reduces the tax brackets to four levels: 12%, 25%, 35%, and 39.6% (the current top bracket remains). These brackets are shifted to slightly higher income levels, so many taxpayers will be in a lower bracket than today or pay less tax. Those in the top bracket, 39.6%, who also make over $1 million, will have their income in the 12% range boosted to the 39.6% level. So don’t think this proposal is excessively generous to high earners – many will see higher taxes.

The Alternative Minimum Tax (AMT) will be abolished, so if you have any Minimum Tax Credit carryforwards, those credits will be released. The 3.8% Medicare Surtax will unfortunately remain in place, even though Trump has previously promised to repeal it. Capital Gains rates will remain at 0%, 15%, and 20% depending on your tax bracket, and curiously, these rates will be tied to the old income levels, and not to the new tax brackets.

If passed, the tax reform bill will substantially change how we deduct expenses from our taxes. Those with simple returns may find that their tax bill is lower, but for many investors with more complicated tax situations, the proposed changes may require that you rethink how you approach your taxes.

We will keep you posted of how this unfolds and will especially be looking for potential ways it may impact our financial plans. It has often been said that the definition of a “loophole” is a tax benefit that someone else gets. Unfortunately, simplifying the tax code and closing these deductions is bound to upset many people who will see their favorite tax benefits reduced or removed entirely.

Home Tax Deductions: Overrated and Getting Worse

Posted On October 29, 2017 By Scott Stratton, CFP(R), CFA In Tax Strategies / 2 Comments

If you ask virtually anyone about the benefits of home ownership, you will probably hear the phrase “great tax deductions” within 20 seconds. However, the reality is that for many taxpayers, owning real estate is not much of a tax deduction at all. And under the Trump-proposed tax reform bill currently in Congress, the actual tax benefits homeowners achieve will shrink vastly.

The two main tax benefits of being a homeowner are the mortgage interest deduction and the property tax deduction. These are claimed under “itemized deductions”, which also include charitable donations, medical expenses (exceeding 7.5% or 10% of income), and miscellaneous deductions such as unreimbursed employee expenses.

You have your choice of taking whichever is higher: the standard deduction or your itemized deductions (Schedule A). The standard deduction for 2017 is $6,350 (single) or $12,700 (married filing jointly). So, the first thing to realize about home tax deductions is that you only are getting a benefit if they exceed $6,350/$12,700.

If you are married and your mortgage interest, property tax, and other deductions only total $11,000, you will take the standard deduction. All those house expenses did not get you a penny of additional tax benefits. If your itemized deductions total $13,000, you would take the itemized deductions, but are only getting a benefit of $300 – the amount by which you exceeded the standard deduction.

The greatest proportion of tax benefits for homeowners go to those with very expensive homes and large mortgages. People with more modest homes may be getting little or no benefit relative to the standard deduction. But wealthy taxpayers can have their itemized deductions reduced by up to 80% under the Pease Restrictions. So, I have also seen high earning families who don’t get to count their home expenses either, and have to take the Standard Deduction!

The proposal in Congress today via President Trump would make two significant changes to tax deductions for homeowners:

1. The bill would almost double the standard deduction from $6,350 (single) and $12,700 (married) today to $12,000 and $24,000. This would reduce taxes and eliminate the need for itemized deductions for many American families. If you are married and your current itemized deductions are under $24,000, you would no longer be getting a deduction for those expenses.

2. Trump also proposes eliminating the deduction for State and Local Taxes (the so-called SALT deductions), which includes property taxes. Removing the SALT deduction from Schedule A would be devastating for high tax states like California, New York, Connecticut, and New Jersey. But it would also harm many homeowners right here in Texas, where our property taxes can be a significant expense.

While the increase in the standard deduction would offset the loss of SALT deductions for many Americans, it is still an elimination of a key benefit of being a homeowner. The current tax reform bill has narrowly passed in the House of Representatives and will be taken up by the Senate after November 6, where it requires only a simple majority to pass under budget reconciliation rules.

The fact is that real estate tax deductions were already overstated when you recognize that you only benefit when you exceed the Standard Deduction. The first $12,700 in itemized deductions achieve no reduction in taxes whatsoever. Now, if Congress acts to increase the Standard Deduction and to eliminate the ability to deduct property taxes, most people will not be getting any tax break from being a homeowner.

Depending on your situation, your overall tax bill may still go down. The current proposal will simplify the tax brackets to just three levels: 12%, 25%, and 35%. Your taxes may also go down because of the increase in the Standard Deduction, provided the Standard Deduction is higher than your Schedule A.

Tax policy has a profound influence on public behavior. If you know that you are not getting any additional tax benefit from being a homeowner, you may prefer to rent. If you are retired and see your income taxes go up, you may decide to sell your home and downsize to save money. This change in policy may have the unintended consequence of hurting home values, too, because it certainly make being a homeowner less appealing.

Big Changes to Ameritrade’s ETF Platform

Posted On October 22, 2017 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Exchange Traded Funds (ETFs) are a terrific vehicle for investors, offering an easy way to build diversified portfolios that are transparent, tax efficient, and low cost. We’ve written frequently about the advantages of ETFs and hold them as core positions within all of our portfolios.

This week, our custodian, TD Ameritrade, announced that it was expanding its platform of commission-free ETFs from 100 to nearly 300 funds. Wonderful, right? Not so fast… while the total number of ETFs will increase, they are actually dropping 84 low-cost ETFs, including ALL of the Vanguard ETFs we use for each and every client.

To say that we are disappointed and frustrated is an understatement. We are big fans of Vanguard and have used these funds since we opened three years ago. They are among our largest holdings. Why is TD Ameritrade dropping these funds? Distribution fees. Vanguard does not pay custodians to distribute their funds, but other companies will pay TD Ameritrade to be on their commission-free platform.

As a whole, the changes to the TD Ameritrade platform are appalling to me. We lose low cost ETFs from Vanguard and the iShares Core series, and instead are offered mainly niche ETFs with high expense ratios. Many of the new ETFs are focused on a very narrow area such as the “nasdaq smartphone index” or the “dynamic pharmaceuticals” ETF. This approach is antithetical to our process of diversification. Sometimes being given more options does not mean that you have better choices.

There is one bright spot: they are adding the new SPDR Portfolio Series from State Street. State Street is one of the three largest ETF providers, along with Vanguard and iShares, and is the creator of the original S&P 500 ETF, SPY, which launched the whole ETF movement nearly 20 years ago.

In recent years, State Street has been struggling to keep up with lower cost competition from Vanguard, Schwab, iShares and others. The new Portfolio Series took a handful of their most diversified ETFs, many with track records of over 10 years, and slashed the expense ratios to levels at or below even Vanguard. These will be our new go-to funds.

We can of course, continue to buy and sell the Vanguard ETFs through TD Ameritrade. However, after November 16, those trades will incur a standard commission (as low as $6.95). And that is still a bargain. Should we drop our Vanguard funds in the next month, while they still trade for commission-free?

Here is our plan:

1. In taxable accounts, we may have significant capital gains in our Vanguard positions. It does not make sense to realize thousands of dollars in gains just to avoid a $6.95 commission. (If we had losses, we would harvest those losses, but the market is up nicely this year. I’m not complaining!)

2. Even when there is zero commission, there are still trading costs. Just like stocks, ETFs trade in an auction process where buyers offer a “bid” and sellers request an “ask” price. The Vanguard ETFs are heavily traded, sometimes with multiple trades in one second. The difference between the bid and ask price, the “spread”, is often only one cent.

However, on ETFs that trade less frequently, the spread can be much higher. I looked at a small-cap value ETF this week that had a 14 cent spread. So, even in non-taxable accounts like IRAs, there may still be a hidden cost if we were to sell Vanguard to buy the SPDRs. As trading volume increases, I anticipate bid-ask spreads will tighten on the newly added funds. But for larger positions, selling one ETF at the bid and buying another at the ask could certainly cost more than the $6.95 commission we are trying to avoid.

3. For new purchases, we will use the SPDR Portfolio Series, effective immediately. They trade commission-free and in many cases have a lower expense ratio than a comparable Vanguard Fund. Existing portfolios will continue to hold Vanguard Funds. This means that many portfolios will unfortunately now have some duplication, where for example, we might own a Vanguard International ETF and also own a similar SPDR International ETF. I try to avoid that sort of redundancy, but it does not really cause any harm.

4. In IRAs with smaller positions, we will look to sell Vanguard within the next few weeks and replace those positions with a new commission-free option. We will still be needing to rebalance portfolios annually, in which case, it is nice to be able to do so commission-free. These trades will be done on a case-by-case basis.

Please feel free to email or call me with any questions. This change at TD Ameritrade has created some temporary hassle, and received quite negative press on Wealth Management.com and in a scathing piece by Michael Kitces.

This change isn’t going to detract from our approach or impact our investment process. We start with a top down asset allocation and then choose the best fund to fulfill each segment of our allocation. We certainly don’t limit our search for investments to just commission-free ETFs, and have always also had mutual funds or ETFs that are not on the commission-free platform. As your Fiduciary, we take seriously our responsibility to keep fees as low as possible, but it’s not true that the lowest cost is always the best investment option.

How Exercise Can Make You a Better Investor

Posted On October 15, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

There are a lot of parallels between getting in shape and being a successful investor. Both take time and consistent effort to achieve results. We’d love to have overnight, instant results, but that isn’t how life works!

Here are five key factors to an effective exercise program that you can apply directly to helping you achieve your financial goals. If you are already doing great with your workout program, why not apply that same process to getting your finances in shape?

1. One pound at a time. Your goal may be to lose 30 pounds, but you can’t lose 30 pounds at once. You have to take it one day at a time and lose the first pound, then the second, and so on. In investing, everyone wants to be a millionaire, but you have to save that first thousand dollars, then the next thousand and so on. You can’t just wish for it, you have to work for it.

2. Set a goal. Having a specific goal such as “lose 20 pounds by March 1” or “achieve a BMI of 15 by January 1” is better than a vague goal such as “get in better shape”. Otherwise, how will you know if you achieve your goal? How will you know if you are on track? What is your motivation and sense of urgency?

A long-term goal creates short-term steps. If you want to lose X pounds in X weeks, you might use an app like myfitnesspal to calculate how much you need to workout and how many calories you can eat in a day. Your goal determines a path and mileposts. For investing, if your goal is to have $500,000 in your 401(k) at retirement, how much would you need to save from each paycheck to make that happen?

3. Make good choices. When you have a fitness goal, some decisions, like eating half of a cheesecake for dinner, will put you further away from your goals and negate all the hard work you have been doing. Similarly, if you have a financial goal, spending $15,000 on a European vacation may be inconsistent with that goal. When your goal is more important than the eating or spending, you learn to make better choices.

That’s not to say that you can’t indulge from time to time, but you can’t let those choices derail your progress. If you view these choices as a sacrifice or as deprivation, you will resent your fitness or financial goals. You may find it easier to stick to the plan when you observe and celebrate the positive results you are achieving.

4. Create new habits. For a workout program to get results, you have to stick to it and have it become an unchangeable part of your routine. Maybe you workout Monday through Friday at 7:30 am before work. Or maybe you spend your lunch hour on Tuesday and Thursdays at the Gym and then workout on Saturday and Sunday mornings. Maybe you learn to watch TV without eating food at the same time!

The point is that you create new habits that will help achieve your goals. For investors, people are more likely to be successful when they put their saving on autopilot. Have that money come directly out of your paycheck into your 401(k). Start a Roth IRA and establish a monthly draw of $400 from your checking account. Set up a 529 college savings plan and even if you only start with $50 a month, get going today!

5. Human support. You are more likely to succeed in your fitness goals if you are part of a group or have a coach to make sure you actually get to the gym! They can motivate you, applaud your progress, and help you regroup after the inevitable frustration of temporary set-backs. When you go it alone, your weekend choices may not be as good as someone who has a weigh-in on Monday morning with their trainer. Having someone who supports you, who can lend an ear, and can also provide objective guidance will help you get there faster.

When it comes to investing, many people make the same excuses as they have for fitness: I am too busy, exercise is too expensive, it’s so boring, my career/family/hobby is takes all my time… And yet, many of the busiest, most successful people I know manage to find time to workout and stay in shape. When it is an important priority, you figure out how to make it happen.

If you want to get in better shape financially, apply what you know works for exercise. We can help you identify realistic goals and put into motion new habits to help you achieve your objectives. You will learn about finances and you might even find that you enjoy yourself! But most of all, you will know that you are doing the right thing today and that your future self will thank you for not waiting another year to get started. You can schedule your call online here.

Beware: 2017 Fund Capital Gains Distributions

Posted On October 8, 2017 By Scott Stratton, CFP(R), CFA In Portfolio Management, Tax Strategies /

We are starting to receive estimates for year-end 2017 Capital Gains distributions from Mutual Funds, and no surprise, many funds are having large distributions to their shareholders this year. As a refresher, when a mutual fund sells a stock within its portfolio, the gain on that sale is passed through to the fund owners at the end of the year as a taxable event.

When you invest in a 401(k), IRA, or other qualified account, these capital gains distributions don’t create any additional taxes for you. If you reinvest your distributions, your dollar value of the fund remains the same, and you are unaffected by the capital gain. However, if you are investing in a taxable account, these distributions will cost you money in the form of increased taxes.

A quick look at estimates from American Funds, Columbia, and Franklin-Templeton shows that many equity funds are having capital gains distributions of 3-10% this year. A few are even higher, such as the Columbia Acorn (17-21%) and Acorn USA (23-28%). Imagine if you made a $100,000 investment at the beginning of the year, your fund is up 16% and then you get a distribution for $28,000 in capital gains! Yes, capital gains distributions can exceed what a fund made in a year, when the fund sells positions which it owned for longer.

Capital Gains Distributions create a number of problems:

Even if you are a long-term shareholder, when the fund distributes short-term gains, you are taxed at the higher short-term tax rate.
If you didn’t sell any of your shares, you will need to find other money to pay the tax bill, which can run into the thousands each year if you have even just a $50,000 taxable portfolio.
If you are thinking of buying mutual fund shares in Q4 of this year, you could end up buying into a big December tax bill and paying for gains the fund had 6-12 months ago.
In addition to paying capital gains on fund distributions, you will still have to pay tax when you sell your shares.
Capital gains distributions are in addition to any dividends and interest a fund pays. In general, we want dividends and interest income as additions to our total return. Capital gains distributions, however, do not increase our return and are an unwelcome tax liability.

If you have a taxable account, or both taxable and retirement accounts, we may be able to save you a substantial amount of money on taxes. We can use tax-efficient investments like Exchange Traded Funds (ETFs), which typically have little or ZERO capital gains distributions at the end of the year. This puts us in control of when you want to sell and harvest your gains. When you have multiple types of accounts, we can place the investments into the best account to minimize your tax bill.

If you do presently have mutual funds in a taxable account, it may be a good idea to take a look at your potential exposure before the end of the year so you are not surprised. If you sell before the distribution is paid, you can avoid that distribution. Now that will mean paying capital gains based on the profit you have when you sell. But you definitely want to be planning ahead. When you’re ready to create a tax-managed portfolio that looks at all your accounts together, we can help you do that.

How Much Should You Contribute to Your 401(k)?

Posted On October 1, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning, Retirement Planning /

Answer: $18,000. If you are over age 50, $24,000.

Those are the maximum allowable contributions and it should be everyone’s goal to contribute the maximum, whenever possible. The more you save, the sooner you will reach your goals. The earlier you do this saving, the more likely you will reach or exceed your goals.

At a 4% withdrawal rate in retirement, a $1 million 401(k) account would provide only $40,000 a year or $3,333 a month in income. And since that income is taxable, you will probably need to withhold 10%, 15%, or maybe even 25% of that amount for income taxes. At 15% taxes, you’d be left with $2,833 a month in net income. That amount doesn’t strike me as especially extravagant, and that’s why we should all be trying to figure out how to get $1 million or more into our 401(k) before we do retire.

I’ve found that most people fall into four camps:
1) They don’t participate in the 401(k) at all.
2) They put in just enough to get the company match, maybe 4% or 5% of their income.
3) They contribute 10% because they heard it was a good rule of thumb to save 10%.
4) They put in the maximum every year.

How does that work over the duration of a career? If you could invest $18,000 a year for 30 years, and earn 8%, you’d end with $2,039,000 in your account. Drop that to $8,000 a year, and you’d only have $906,000 after 30 years. That seems pretty good, but what if you are getting a late start – or end up retiring early – and only put in 20 years of contributions to the 401(k)? At $8,000 a year in contributions, you’d only accumulate $366,000 after 20 years. Contribute the maximum of $18,000 and you’d finish with $823,000 at an 8% return.

I have yet to meet anyone who felt that they had accumulated too much money in their 401(k), but I certainly know many who wish they had more, had started earlier, or had made bigger contributions. Some people will ignore their 401(k) or just do the bare minimum. If their employer doesn’t match, many won’t participate at all.

Accumulators recognize the benefits of maximizing their contributions and find a way to make it happen.

Become financially independent sooner.
Bigger tax deduction today, pay less tax.
Have their investments growing tax deferred.
Enjoy a better lifestyle when they do retire. Or retire early!
Live within their means today.
401(k)’s have higher contribution limits than IRAs and no income limits or restrictions.

Saving is the road to wealth. The investing part ends up being pretty straightforward once you have made the commitment to saving enough money. Make your goal to contribute as much as you can to your 401(k). Your future self will thank you for it!

Equifax and Your Cyber-Security

Posted On September 24, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

You work hard to protect your personal data only to learn that one of the top three credit reporting agencies was hacked and jeopardized private financial information of 143 million Americans. What can you do to safeguard your money, time, and credit score from theft and fraud?

1. Everyone should check to see if they have been impacted by the Equifax breach. Unless you are four years old, you probably have a file at each agency: Equifax, Experian, and TransUnion. To find out if your information was stolen from Equifax, go to this website:
https://www.equifaxsecurity2017.com/am-i-impacted/

2. If you have been impacted, Equifax will allow you to register for free for their protection service, TrustedID Premier. You should do this. Please note that when you request this the first time, it will give you a date to come back and register your membership. After you register, you will later be sent an email with instructions to activate your membership. If you skip these steps, you are not enrolled or protected. It took them two weeks from the time I first applied until my account was activated.

3. Consider putting a credit freeze on your account. This means that if anyone tries to open a credit card or take out a new loan using your identity, that the process will be stopped. That includes yourself – if you go out car shopping and decide to get a new Subaru, your loan will be rejected. You would want to unfreeze your credit a day or two before you do any of these things.

4. Please note that even if you go through this freeze process with Equifax and TrustedID, you may not be 100% safe unless you go through the same steps with Experian and TransUnion.

If you think there may have been unauthorized activity on your accounts, you can also place an Initial Fraud Alert on your account, which is free and lasts for 90 days. By placing an Alert with one agency, they notify the other two.
http://www.experian.com/blogs/ask-experian/what-is-the-difference-between-a-credit-freeze-and-fraud-alert/

5. You should check your credit report at least annually for errors or possible fraud. A free report is required by Federal Law and is available online from each agency at: https://www.annualcreditreport.com/index.action

6. Wallet security: Consider keeping one credit card at home so if your wallet is stolen, you still have one to use. Never keep your Social Security Card in your wallet. If a thief has your credit cards, drivers license, AND social security number, they can do a lot of damage. Keep a photocopy of your credit cards (front and back), drivers license, and passport at home in a safe. If those are lost, you at least know who to call.

7. Online security: Please don’t use passwords that are simple or easily guessed. Don’t use the same password for all accounts. Consider using a password storage software that will generate and store complex passwords for each account. Avoid public wifi when accessing financial accounts. Use two-factor authentication if available.

8. Computer security: 75% of computer breaches are due to “known vulnerabilities”. That means it could have been prevented by an available software update. Each Tuesday night, Microsoft releases patches for security issues. If you are on automatic updates, you are covered. By Wednesday, hackers from around the world try to reverse engineer the patches to uncover how they can break into computers which did not update. Keep your computer updated and use a good anti-virus software. Wipe your hard drives and phones before recycling.

9. Email security: Email is not a secure form of sending information. Avoid emailing your Social Security number, credit card information, tax forms, or account numbers. Hackers have found signatures on emailed PDFs and copied them to “sign” wire transfer requests and steal money from bank accounts.

10. Paper security: Avoid putting sensitive documents in the trash. Buy a shredder. Consider installing a mailbox with a lock.

We take cyber security very seriously and know that fraud and identity theft is a major source of stress. If you have a question about how to best protect your identity and safeguard your money, please give me a call.

Are You Making These 6 Market Timing Mistakes?

Posted On September 10, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management / 1 Comment

Market timing means moving in and out of the market or between assets based on a prediction of what the market will do. Given the extreme difficulty of predicting the future, market timing is frowned upon by most academics. Many studies have shown that the majority of investors who time the market under-perform those who stay invested.

Even though many people know intellectually that market timing is detrimental, it is actually pretty difficult to stay invested and not be influenced by market timing. Even for those who say they don’t time the market, there are a number of ways that investors inadvertently fall into this trap.

1. Being in Cash. “We are going to sit on X% in cash and wait for a buying opportunity.” Seems prudent, right? Except that investors who have been holding out for a 10% or 20% crash for two, three, four years or more have missed out on a huge move up in the market. Yes, there are rational reasons to say that the market is expensive today, but those who have been sitting in cash have definitely under-performed. Will they eventually be proved right? The market certainly has cycles of growth and contraction. This is normal and healthy. So, yes, there will be another bear market. The problem is that trying to predict when this will occur usually makes returns worse rather than better.

2. Greed and Fear. The human inclination is to want to invest when the market has done well and to sell when the market is in the doldrums. I remember investors who insisted in going to cash in November 2008 and March 2009, right at the bottom. In 1999, people were borrowing money to put into tech funds, which had given them returns of 30%, 50%, even 100% in a year. Our natural reaction is to buy high and sell low, the opposite of what we should be doing. It’s only in hindsight that we recognize these trades as mistakes.

3. Performance Chasing. Investors like to switch from Fund A to Fund B when Fund A does better. Who wouldn’t want to be in the better fund? This is why people give up on index funds. Index funds often only beat half of their peers in any given year, so it’s super easy to find a fund that is doing better. However, when we go to a five-year horizon, index funds are winning 80-90% of the time. That’s why switching to a fund with a better recent track record is often a mistake. (And then watch the fund you just sold soar…)

4. Sector and Country funds. Investors want to buy a sector or country fund when it is a standout. This is market timing! You are buying what is hot (expensive) rather than buying what is on sale. I have yet to have any client ever come to me and say “sector X is doing terrible, should we buy?”. Instead, some will ask me about biotech, or India, or some other high flyer. I remember when the ING Russia fund had the best 10-year track record of all mutual funds. If you bought it then, I think you would have regretted it immensely in the following years! When people buy sector or country funds, the decision is almost always a market timing error of extrapolating recent performance into the future, instead of recognizing that today’s leaders become tomorrow’s laggards.

5. Factor Investing. If you haven’t heard of Factor Funds, you will soon! Quantitative analysts look for a set of criteria which they can feed into a computer and it picks the best performing stocks. How do they come up with a winning formula? By back-testing strategies using historical stock prices. This sounds very scientific, and I admit that it looks promising, but there are still some market timing landmines for investors, including:

Historical anomalies. It’s possible that a strategy that worked great over the past 10 years might be a dud over the next 10. It is unknown which factors will perform best going forward and it seems naive to assume that the future will be the same as the past.
Choosing which factor. Low Volatility? Value? Momentum? Quality? Those all sound like good things. There are now so many flavors of factors, you have to have an opinion on the market in order to pick which factor will outperform. And that’s right back to market timing: investing based on your prediction of what the market will do. This isn’t Lake Woebegone, where all the factors are above average. Some factors are bound to do poorly for longer than you are likely to be willing to hold them.
Investor switching. In most single years, a factor does not have very exciting performance. I predict that many investors are going to buy a factor fund, and then switch when they see another factor outperform for a year or two. If you’re really going to buy into the factor philosophy, you need to buy and hold for many, many years. Even in back tests, there are quite a few years of under-performance. It was only over long time periods that factors were able to deliver improved returns.

6. Product development. Asset managers are paid on the assets they manage. It’s a business. They will always be coming out with a new, better product to attract new investors. You are being marketed to every day by companies who want your investment dollar. Many new funds will not survive the test of time and will disappear into financial history. Their poor track records will be erased from Morningstar, which is why we have “survivorship bias”, the fact that we only see the track records of the funds that survive. Please use caution when investing in a new fund. Is this new fund vital to your success as an investor or just a marketing ploy for a company to capitalize on the most recent fad?

At Good Life Wealth Management, we are fans of the tried and true and skeptical when it comes to the “new and improved”. We aim to avoid market timing errors by remaining invested and not trying to predict the future path of the market. We avoid emotional investing decisions, performance chasing, and sector/country funds. For the time being, we are watching factor funds with curiosity but a wait and see attitude.

How then do we choose investments and their weight in our asset allocation? Our tactical models are based on the valuation of each category. This is by its nature contrarian – when large cap becomes expensive, it becomes smaller in our portfolios. When small cap becomes cheap, its weighting is increased. We don’t predict whether those categories will go up or down in the near future, but only tilt towards the areas of better relative value. This is based on reversion to the mean and the unwavering belief that diversification remains our best defense.

If you’d like to talk about your portfolio, I’d welcome the chance to sit down and share our approach and philosophy. What keeps us from the Siren song of market timing is our belief in a disciplined and patient investment strategy.

Floods and Your Insurance

Posted On September 3, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

In the aftermath of Hurricane Harvey, many Texans are discovering that SURPRISE, homeowners insurance doesn’t cover flooding. The damage from Harvey was from torrential rains, not wind, and in most cases will not be covered by insurance. Only those with Federal Flood Insurance will be covered, but most people do not have flood insurance unless you live in a flood zone that requires it.

If you have a mortgage and thought that you’d be covered by your homeowner’s insurance or that the bank would forgive your loan, sorry, but even if your house is a total loss you still owe every penny of your mortgage balance. What can you do? For counties which are declared a disaster area by FEMA, you may be eligible for Federal Assistance.

FEMA’s Individuals and Households Program (IHP) provides grants to those in disaster counties. You can apply online at disasterassistance.gov or by phone at 800-621-FEMA (3362). To apply, you must have already filed a claim with your insurance and been denied. The IHP will not pay for your deductible, if the damage is covered. For those who receive a grant, you must agree to purchase and maintain Federal Flood Insurance on your property going forward.

The IHP offers two types of assistance:

1. Housing Assistance, including lodging expense reimbursement, rental assistance, and repair or replacement of your primary residence. The IHP only covers a primary residence and not a vacation home, rental property, or other type of property.

2. Other Needs Assistance, such as damage to household goods, vehicles, cleanup costs, medical expenses, child care, or funeral expenses.

The IHP is a terrific program to help cover disaster costs which are uninsured, however, the limit is only $33,000 and many homeowners will easily exceed this amount if their home has been sitting in three feet of water. A grant through the IHP is non-taxable and does not have to be repaid.

The Small Business Administration (SBA) offers Home and Property Disaster Loans of up to $200,000 to homeowners – and you do not need to be a small business owner. The loan must be used to repair or rebuild your home after it was damaged.

While homeowner’s insurance does not cover losses from flooding, most auto insurance policies do. Current estimates are that 500,000 cars will be total losses from Hurricane Harvey and most are covered by insurance. Rental companies, insurers, and car makers are already shipping significant numbers of vehicles to Texas to help people get back on the road.

If you’ve been impacted by Hurricane Harvey and have questions, please feel free to call or email me. And if you haven’t been impacted, it might be a good time to actually look at your insurance policies in some detail and figure out what is covered and what is not covered. No one likes surprises when it comes to insurance.