Category: Investment

How to Determine Your Risk Tolerance Levels

2/27/2021

While everyone’s risk tolerance is different, several factors will help determine your individual risk tolerance—the amount of risk you’re willing to take in your investment strategy.

Time horizon: How old, or young, you are and when you will need or want to use the money is a primary factor in your risk tolerance. Generally, the younger you are, the more time you may have to recover from losses in higher-risk investments. The older you are, the more risk averse you may be, worried that you won’t have time to recover from stock market losses.
Impact on lifestyle: The amount of money you are comfortable allocating to investments will contribute to decisions regarding your personal risk factor. If your lifestyle depends on the money you invest, your risk tolerance will be different from another investor whose money, if lost, won’t alter his or her day-to-day living.
Knowledge of investing: Some riskier investments require an in-depth knowledge of investing and may not be appropriate for someone who has limited knowledge. The more investing knowledge you have, the more comfortable you might be with a more aggressive portfolio.
Personal comfort level: Your natural inclination may be to be more aggressive, or more prudent, which can have an effect on your investment decisions.

Here are some examples of your investment strategies based on risk tolerance levels:

Short-term/No risk: 100 percent cash/bonds
Conservative: 70 percent cash/bonds, 30 percent stocks
Moderate: 40 percent cash/bonds, 60 percent stocks
Aggressive: 15 percent cash/bonds, 85 percent stocks
Ultra-aggressive: 100 percent stocks

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Two ETFs Offer Protection From Inflation

2/24/2021

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If you are concerned about inflation in the coming years, two new ETF products offer protection from inflation, although they take different approaches.

1. IVOL
The Quadratic Interest Rate Volatility and Inflation Hedge ETF uses Treasury-inflation-protected securities, or TIPS, and interest rate derivatives to hedge against inflation and fixed income volatility. While most people first think about TIPS to hedge inflation, the problem with TIPS is their long durations, which means they are prone to lower prices when their yields rise, so IVOL uses fixed income options to counter that duration risk, specifically ones based on the Treasury yield curve (the differences between the two and ten-year notes).

It was launched in May 2019.

2. INFL
The Horizon Kinetics Inflation Beneficiaries ETF concentrates on stocks that might benefit from inflation while generating superior returns over the entire economic cycle. Specifically, the funds emphasizes companies that are capital-light with exposure to hard assets.

These ETFs should be used as a complement to a typical portfolio.

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Creating Alpha Through Regular Tax Loss Harvesting - Part C

2/23/2021

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In last blogpost, we discussed wash sales. Now we will discuss another tax loss harvesting strategy that could create alpha.

Tax Arbitrage
Because the IRS taxes different types of income at different rates, you can utilize tax arbitrage to access lower tax rates.

For example, long-term capital losses are typically used to offset log-term capital gains, allowing you to avoid paying long-term rates (up to 23.8%) on those capital gains. If you can delay realizing those gains, you can let long-term capital losses offset short-term capital gains and ordinary income (up to 40.8%).

This strategy can add tax alpha because any leftover long term capital losses can be deducted against ordinary (up to $3,000 per year). Whenever possible, pairing long-term losses with short-term gains and ordinary income maximizes the value of those losses.

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Creating Alpha Through Regular Tax Loss Harvesting - Part B

2/22/2021

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In last blogpost, we discussed a 4-step approach to do tax loss harvesting.

Wash Sales
A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale, do the following:

Buy substantially identical securities
Acquire substantially identical securities in a fully taxable trade
Acquire a contract or option to buy substantially identical securities

The IRS leaves it up to investors to determine if a position is substantially identical. Here are some good practices you can follow when selecting a replacement security.

For example, if you sell an ETF or index fund, you can replace it with a product that tracks a different index. Most investors consider actively managed funds to be unique enough to be in safe territory.

In next blogpost, we will discuss a tax arbitrage practice.

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Creating Alpha Through Regular Tax Loss Harvesting - Part A

2/21/2021

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Tax loss harvesting is usually done at year end, however, it doesn't have to be. Doing it on a periodic basis (such as quarterly or semi-annualy) might be a better approach.

4-step Approach
First, identify a list of nonqualified accounts to review individually.

Second, look at all the holdings across all the identified accounts, and identify what are the unrealized gains and losses.

Third, once positions have been identified as harvesting candidates, confirm no purchases of the security have been made in any accounts in the past 30 days, including retirement accounts.

Last, decide if you would like to keep the proceeds in cash or invest them in a replacement security. A replacement security is recommended so you can stay in the market instead of timing the market.

There is one thing needs attention - wash sales, we will discuss in next blogpost.

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MLPs - High Yield Plays

2/17/2021

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If you are looking for high yields and could take high risks, Master Limited Partnerships (MLPs) could be the one.

What are MLPs?
MLPs are spin-offs from energy firms nd operate gas or oil pipelines. MLPs pay out most of their income to investors and don't pay corporate income taxes on that income. Those who buy individual MLPs will receive a K-1 tax form, which spells out the income, losses, deductions and credits that the business earned and your share of each.

Most MLP ETFs and mutual funds don't issue a K-1, you will receive a 1099 form reporting the income you received from the funds.

The Risks
In theory, MLPs performances should be independent of oil prices because they collect fees on the amount they move, no matter the price. However, in reality, they are in sync.

Higher production levels should mean a good year for pipeline firms.

The Candidates
Here are just some possible candidates:

Magellan Midstream Partners (MMP)
Alerian MLP ETF (AMLP)
Clearbridge Energy Midstream Opportunity (EMO)

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2 Strategies to Protect Yourself From Fear of Loss - Part C

2/15/2021

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In last two blogposts, we discussed 2 strategies to protect your investment.

Determining which, if either, strategy may make sense for you will depend on a number of factors, including your investing goal, interest rate environment, fees on your investments, your time horizon, and your tolerance for risk. First consider if you might be better off investing in a diversified portfolio, because either of these strategies (anchor or protected accumulation) may limit your upside growth potential—and the diversified portfolio may offer a greater long-term benefit.

You also need to consider when you will need access to these assets, because both strategies might penalize early withdrawals. For instance, redeeming a CD before it matures typically means forfeiting some or all of the interest earned, while annuities may levy a surrender charge representing a percentage of the account value. So if your goal is less than 10 years away, the protected accumulation strategy is not a good fit.

Bottom line:
The decision may well come down to your investor personality. With your principal protected from loss, would you gain the confidence to invest more aggressively than you are today?

The protected accumulation strategy requires little action from you aside from your initial investment and an annual decision whether to lock in any growth.
The anchor strategy requires that you invest the assets that are left over after establishing your anchor.

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2 Strategies to Protect Yourself From Fear of Loss - Part B

2/14/2021

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In last blogpost, we discussed Anchor Strategy. Now we will discuss the second strategy.

2. Protected Accumulation Strategy
The protected accumulation strategy takes advantage of principal protection features on variable annuities. A guaranteed minimum accumulation benefit (GMAB) rider on an annuity is the most basic of these. Your assets are invested in a portfolio that typically has a larger equity position than the roughly 10% stake outlined in the anchor strategy above. For a fee, the GMAB rider guarantees that at the end of the annuity's investment period—typically 10 years—you'll have at least the same asset value you started with.

Another potential benefit is that most GMAB riders let you reset the level of principal protection each year if your investments have grown in value. If you do lock in a higher balance, the investment period resets and your balance is guaranteed for another 10 years. It is possible that your fee may increase if you elect this option and annuity features will vary by the issuing company.

For example, say you originally invested $100,000 in a variable annuity with a GMAB rider. After the first year, the annuity's underlying investments grew to a value of $105,000. Locking in that new balance would guarantee that you would have at least $105,000, regardless of how the markets performed after a new 10-year period. On the other hand, if the underlying investments lost value in that first year, you could be comforted by the knowledge that your original $100,000 was guaranteed.

Please note: If you do decide to implement a protected accumulation strategy, you should do your research as the GMAB terms and fees vary from one product or company to another.

In next blogpost, we will discuss how to determine which strategy is right for you.

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2 Strategies to Protect Yourself From Fear of Loss - Part A

2/13/2021

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Excessive fear of loss causes many investors to act counterproductively. If this sounds like you, you could consider 2 strategies to protect your principal.

1. Anchor strategy
2. Protected accumulation strategy

1. Anchor Strategy
An anchor strategy involves dividing your portfolio into 2 parts, a conservative anchor and more growth-oriented investments. The anchor portion of your portfolio uses investments that offer a fixed return, such as certificates of deposit (CDs) or single-premium deferred annuities (SPDAs). These assets have a set lifespan, and the amount you invest is designed to grow back with interest to your original principal. This portion of your portfolio acts as your anchor, while your remaining assets are invested in more volatile, growth-oriented securities such as stock mutual funds or ETFs.

A true anchor strategy protects your entire starting principal. For example, say you have $100,000 in assets and a 5-year investment period in a tax-deferred account. You could invest $88,400 in a 5-year SPDA yielding 2.50%—leaving you free to invest the remaining $11,600 for growth—because after 5 years that SPDA would be worth $100,016, just over your original principal.

The anchor strategy can remove the negative outcomes cautious investors sometimes fear because even if the markets fall, your anchor makes sure you at least have what you started out with.

Please note, inflation can erode the purchasing power of your original investment over time and this strategy generates taxes each year in a taxable account.

In next blogpost, we will discuss protected accumulation strategy.

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COVID Crisis vs 2008 Global Financial Crisis

2/2/2021

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The analog between the COVID-19 crisis in 2020 and the global financial crisis in 2009 works well, as evidenced in the chart below.

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Where to Find Guaranteed Returns in a Low Yield Environment

1/30/2021

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With Treasury Bills providing a mere single-digit-basis-point yield, money market funds paying so little that most have had to waive some or all of their internal fees to avoid having a negative yield (or have outright closed to new investors), and CDs yielding little more, where to find satisfactory yields?

Try MYGAs
Based on this article from Advisorperspectives.com, one key option is the use of the ‘traditional’ fixed annuity… specifically, the kind that pays multi-year guaranteed rates, often called MYGAs (Multi-Year Guaranteed Annuity) for short. As in practice, many MYGAs are still paying yields as high as nearly 3%, while even longer-term 5-year CDs are yielding barely over 0.3%.

Of course, the reality is that annuity yields aren’t fully guaranteed, in that there’s a credit risk of the annuity company itself – and a not-surprising risk-based tendency that higher-quality insurers pay lower yields, while the lower-credit-quality (i.e., higher-risk) annuity carriers are the ones offering the highest near-3% yields. In practice, insurance companies have additional backstops (e.g., state guaranty associations), can actually benefit from their illiquidity (i.e., annuities with surrender charges or similar exit fees may be unappealing for some, but actually help ‘lock-in’ the money for the insurance company to be able to offer higher yields, akin to the higher yield for longer- versus shorter-term CDs). And MYGA yields still exceed yields from corporate bonds with similar credit ratings and maturities.

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Why Invest in Bond?

1/29/2021

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With interest rates scraping ever-lower record lows, edging closer and closer to the zero bound, the question is legit - why invest in bond? Since, at best, bond returns are meager and barely better than cash. Yet, in practice the case for bonds (or not) really starts with the intended purpose of bonds.

Feature/Asset Class Stocks Bonds
Income Generation Sometimes Usually
Appreciation Usually Sometimes
Tax Efficiency Yes No
Safety of Principal No Usually

From the above table, it's clear that it’s the stability of bonds and their buffer against the volatility of stocks that is their true value in a (Modern Portfolio Theory) portfolio, and that as a result, it’s just as relevant to hold bonds at today’s yields than it ever was, because it’s not about the low yield on bonds, but their continued ability to buffer against the volatility of stocks, which is just as prevalent a risk as it ever was.

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6 Apps to Help You Manage Your Recurring Services Better

1/28/2021

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There is a growing number of services and apps available as a tool to help us manage (and where appropriate, unsubscribe) from the array of subscription services, here are some major ones:

TrueBill, which parses through connected bank accounts to identify recurring payments, and then assist with the unsubscribe process for any you wish to cancel;
Trim, which is available not only on a smartphone but also a desktop (via a browser), also aggregates spending information and provides a simplified summary of where all your money is going (along with highlighting which are recurring payments in particular);
Clarity Money, which is part of Goldman Sachs’ Marcus bank offering, and thus not only provides spending tips but also nudges to move your money to a higher-yielding bank account (with Marcus!);
Bobby, which is built ‘just’ to keep tabs on ongoing subscriptions (without the ‘distraction’ of more comprehensive money management features);
TrackMySubs, which lets you simply manually add and track your own subscriptions, and provides reminders of them all in one place (and the ability to program reminders when they’re about to renew); and
DoNotPay, which bills itself as a “robo-lawyer” to help everything from canceling digital subscriptions to contesting parking tickets.

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The Hierarchy of Financial Wellness

1/21/2021

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Financial Wellness, based on this financial planning article, implies a holistic combination of health functions beyond just financial projections), it can be viewed as a series of Maslow’s-hierarchy-style needs to build upon, including:

Organizational wellness (i.e., the household’s financial organization and ‘good financial management’ foundation, from recordkeeping of the household’s financial expenses, to the implementation of key foundational documents like Wills and Powers of Attorney);
Physical wellness (what’s the point of having more money if you can’t use it to stay healthy, if only so you can be around longer to enjoy it, which helps to explain why health-related events are persistently the #1 fear in retirement);
Cognitive wellness (where money makes it possible to spend more time with family and friends, engage in creative work, and have purpose and focus, not to mention being prepared for the hazards of cognitive decline in our later years);
Behavioral wellness (being able to engage in the behaviors that maintain and support the rest, and avoid behavioral biases);
Holistic wellness (an overall roll-up of the wellness functions, including being prepared to manage threats to the other parts of the pyramid).

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Barron's Recommend Yield Plays for 2021

1/17/2021

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Below are Barron's picks in 12 income-producing areas of the stock and bond markets, ranked in order of preference.

OIL PIPELINES

AMLP
SMM
EPD

US DIVIDED STOCKS

VYM
INUTX
NOBL

OVERSEAS DIVIDEND STOCKS

IEFA
IEMG
GSK

ELECTRIC UTILITIES

REITS

TELECOM STOCKS

VZ
DTEGY
KT

COVERTIBLES

JUNK BONDS

HYG
ANGL

TAX-EXEMPT MUNICIPAL BONDS

VWITX
EALTX
BTT

TAXABLE MUNICIPAL BONDS

BAB
NBB
MGVAX

PREFERRED STOCKS

PFF
JPC
QRTEP

TREASUIRIES

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Which State Offers the Best 529 Plans?

1/16/2021

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While each state will offer both kinds of portfolio choices, not all are created equal. State 529 plans can vary greatly when it comes to past performance, fees, and the exact investment fund options offered making some clear winners and other duds to avoid.

This fall, Morningstar analyzed 61 plans, representing 97% of the more than $363 billion invested in 529s, and found that only three were worthy of it’s gold medal designation, because they offered: “a well-researched asset-allocation approach, a robust process for selecting underlying investments, an appropriate set of options to meet investor needs, strong oversight from the state and investment manager, and low fees.” (State tax benefits were not considered.)

The highest ranked plans? Illinois' Bright Start College Savings, Utah's my529, and Michigan's Education Savings Program, which charges 0.10% for its target-enrollment portfolios — the cheapest Morningstar rated.

California's ScholarShare College Savings Plan and Virginia's Invest529 were former gold winners, who this year received silver medal designations, but came in right behind the top three. Nine other states received a silver, including: Pennsylvania 529 Investment Plan, New York’s 529 Program, Oregon College Savings Plan, and Ohio’s CollegeAdvantage 529 Savings Plan. (All gold and silver plans were direct-sold options.)

Only eight plans received the failing grade of negative, but all charged high fees and should be avoided, even by in-state college savers hoping to hook a tax benefit, Morningstar concluded.

Six of the negative-rated plans were advisor-sold and include: Colorado’s Scholar’s Choice College Savings Program, Indiana’s CollegeChoice Advisor 529 Savings Plan, Maine’s NextGen College Investing Plan Select, New Jersey’s Franklin Templeton College Savings Plan, South Dakota’s CollegeAccess 529 Plan, and Wisconsin’s Tomorrow’s Scholar 529 plan. The final two were direct-sold plans: New Jersey’s NJBEST 529 College Savings Plan and Nevada’s USAA College Savings Plan.

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Should You Choose In-state or Out-of-state 529 Plans?

1/15/2021

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There are more than five dozen 529 plans in the U.S., each offering its own blend of investment portfolios, fees, and performance history. They take two forms: prepaid tuition plans or education savings plans.

Additionally, more than 30 states across the nation offer their own state income tax breaks to 529 savers, though a majority restrict such generosity to residents who opt for their local plan over another state’s.

For most Americans, there is at least some slight tax advantage to going with the plan offered by their state.

In 34 states and Washington, D.C., residents receive either a tax deduction or credit for sticking with their state’s option, though seven among those offer tax parity, meaning residents can claim the break no matter where they park their college savings. States that offer such parity include: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.
9 states don’t charge any state income tax and, so, do not offer tax breaks for saving. These include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
And finally, 7 states offer no tax benefits, despite levying state income taxes. These are: California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina.

If you live in one of the states offering tax parity or no income tax benefits, the choice to go out-of-state comes down to how well your home plan fares on factors like investment options and fees compared to other available plans.

But for those living in states where tax breaks are dependent on staying with the local 529 plan, the decision is trickier as a tax deduction doesn’t always mean an in-state plan wins, because many in-state plans are mediocre. The superior returns of an out-of-state plan may override any tax benefit received for a home state one.

You can use this formula to determine whether the in-state or out-of-state plan is the right move.

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The Most Important 20 Personal Finance Laws to Live By

1/11/2021

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Below is an article from Fortune, it's mostly common sense, but you will be surprised how many people break these laws!

1. Avoid credit card debt like the plague
The first rule of personal finance is to never carry a credit card balance. Credit card borrowing rates are egregiously high and paying those rates is an easy way to negatively compound your net worth. If you carry credit card debt for a prolonged period of time, you’re not ready to invest your money in the markets.

2. Building credit is important
Likely the biggest expense over your lifetime will be interest costs on your mortgage, car loans and student loans. Having a solid credit score can save you tens or even hundreds of thousands of dollars by lowering your borrowing costs.

3. Income is not the same as savings
There is a huge difference between making a lot of money and becoming wealthy because your net worth is more important than how much money you make. Having a high income does not automatically make you rich; having a low income does not automatically make you poor. All that matters is how much of your income you set aside, not how much you spend.

4. Saving is more important than investing
Pay yourself first is such simple advice, but so few people do this. The best investment decision you can make is setting a high savings rate because it gives you a huge margin of safety in life. You have no control over the level of interest rates, stock market performance or the timing of recessions and bear markets but you can control your savings rate.

5. Live below your means, not within your means
Living within or above your means is how you end up going from paycheck to paycheck without every truly building wealth. The only way to get ahead is by living below your means and setting aside a portion of your income for the future.

6. If you want to understand your priorities look at where you spend money each month
You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. And if you pay yourself first you don’t have to worry about budgeting, you just spend whatever’s leftover on the things that truly matter to you.

7. Automate everything
The best way to save more, avoid late fees, and make your life easier is to automate as much of your financial life as possible. The goal is to make the big decisions up front so you don’t need to waste so much time and energy tending to your finances.

8. Get the big purchases right
I know I shouldn’t be so judgmental but whenever I see $50-$70k SUVs on the road or enormous McMansions the first thing that pops into my head is, “I wonder how much they have saved for retirement?” Personal finance experts love to debate the minutiae of lattes but the most important purchases in terms of keeping your finances in order will be the big ones—housing and transportation. Overextending yourself on these two purchases can be a killer because they represent fixed costs and come with more ancillary expenses than most people realize.

9. Build up your liquid savings account
Your monthly budget should take into account the fact that there are infrequent, yet predictable expenses you’ll need to take care of on occasion. Weddings, vacations, car repairs and health scares never occur on a set schedule but you can plan on paying for these events by setting aside small amounts of money each month to better prepare yourself when life inevitably gets in the way.

10. Cover your insurable needs
My friend and colleague Jonathan Novy likes to remind me that people buy insurance because there will be a financial impact on their business or family if they were to die or become disabled. The idea is to measure that impact in dollars, and if possible, insure against it.

11. Always get the match
I can’t tell you how many times I’ve talked to people who aren’t saving enough in their 401(k) plan to get the employer match. That’s like turning down a portion of your paycheck each payday. At a minimum you should always save enough to get the match so you’re not leaving free money on the table.

12. Save a little more each year
The trick to saving more money over time is to increase your savings rates every time you get a raise so you’ll never even notice you had more money to begin with. And the sooner you begin setting money aside, the less you end up realizing it never made it to your checking account to be spent in the first place.

13. Choose your friends, neighborhood and spouse wisely
Trying to keep up with spendthrift friends or neighbors is a never-ending game with no true winners. Find people to spend your life with who have similar money views as you and it will save you a lot of unnecessary stress, envy and wasteful spending.

14. Talk about money more often
It takes all of 5 minutes before I hear about politics in almost any conversation these days, but somehow money is still a taboo subject. Talk to your spouse about money. Ask others for help. Don’t allow financial problems to linger and get worse. Money is a topic that impacts almost every aspect of your life in some way. It’s too important to ignore and sweep under the rug.

15. Material purchases won’t make you happier in the long run
Buying stuff won’t make you happier or wealthier because true wealth is all of the stuff you don’t waste money on. Experiences give you a better bang for your buck and time spent with the people you love is one of the best investments you can make.

16. Read a book or 10
There are countless personal finance books out there. This stuff should be taught in every high school and college, but it isn’t. No one is going to care more about your money decisions than you. Invest some money, time, and energy into yourself. It’s the best investment you can make.

17. Know where you stand
Everyone should have a back-of-the-envelope idea of their true net worth. That means adding up all of your assets and subtracting any debts. This way you can set some general expectations about savings rates, market returns and portfolio growth to give yourself some goalposts in the future.

18. Taxes matter
Take advantage of as many tax breaks as you can and always understand your personal tax situation. The biggest lay-ups in this category include taking advantage of as many tax-deferred savings vehicles as humanly possible and keeping your trading to a minimum when investing in taxable accounts to avoid paying higher short term capital gains taxes.

19. Make more money
Saving and/or cutting back is a great way to get ahead, but it’s an incomplete strategy if you’re not trying to earn more by enhancing your career. Too many people are stuck in the mindset that there’s nothing they can do to get a better job, take on more responsibilities or earn higher pay. That’s nonsense. You must learn how to sell yourself, improve your skills and negotiate a higher income over time.

20. Don’t think about retirement, but financial independence
The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore. Retirement is a concept that is still evolving and no one knows how they’ll feel once they reach that age. Becoming financially independent allows you to make decisions about how you spend your time on your own terms.

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Why Buying a Car is Financially Better Than Leasing a Car

1/10/2021

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First, there are caveats for leasing a car:

1) Leases have mileage limits where you’re penalized if you drive over that set amount; these penalties can range from five to 20 cents a mile. It’s important to determine ahead of time how you’ll use the car (for short- or long-distance driving) and what those mileage limits are. A cap of 40,000 miles will allow you more wiggle room than 30,000, but you’ll pay extra up front.

2) A lease allows for normal wear to the car, but if the dealership considers the vehicle to have wear and tear above normal at the end of the lease, they can charge you extra. You can get a better idea of what “normal wear” means by quizzing the car dealership and studying the lease terms.

Now, let's do a comparison between leasing a car versus buying a car, using a 2014 Honda Accord Sedan as an example:

Leasing a Car
After $1,999 down, the lease payments are just $199 a month for a 36-month, 36,000 mile lease. The total cost for three years comes to $9,163. Let’s assume you found a similar lease again for another three years. Your total cost comes to $18,326, or $3,054 a year for six years.

Buying a Car
The same vehicle had a target price of $20,840. If you put the same $1,999 down and financed the car for 48 months at 2.5%, your monthly payment would come to $412.88. At the end of the four-year loan, the total cost to purchase the car (including interest) comes to $21,817. Over six years, your annual cost would come to $3,636 a year.

So far it seems like leasing is way cheaper … by almost $600 a year!

But wait!

After the loan is paid off, you own your car. You have an asset. According to Kelly Blue Book, a 2008 Honda Accord LX in mid-grade condition fetches about $10,000 on the private market. So whether you sell the car or apply the trade-in value toward your next purchase, your actual cost of ownership is reduced to $11,817 or $1,969 a year. That’s a savings of $1,085 a year and $6,508 over six years.

The Bottom Line
Although one of the drawbacks to buying a car is the need for more regular maintenance as it gets older, the savings over leasing should provide plenty of cash leftover.

There are some exceptions for business owners or others who can deduct certain vehicle costs. For everyone else, leasing a car should be considered a luxury.

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SEC Is Reining Leveraged ETFs

1/9/2021

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Based on Barron's report, the SEC's new rule "18f-4" establishes clear derivatives-exposure parameters for leveraged ETFs - it allows the creation of new funds that have 2X of their underlying benchmark's exposure via derivatives, but forbids any new funds with 3X exposure. It grandfathers in existing 3X funds so they can continue to operate.

Some examples of 3X ETFs are TQQQ (triples the daily performance of the tech-stock laden Nasdaq 100 index), SOXS (triples the inverse of the daily return of the PHLX Semiconductor index).

It should be noted the SEC rule does not apply for ETNs (for example, GDXU - MicroSectors Gold Miners 3x Leveraged), but this gap is expected to be closed soon.

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Will Moving Into Your Rental Property Help You Avoid Taxes?

1/4/2021

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Is it always true that if you owned a rental property for a long time, then you moved in as a primary residence for at least 2 years, then sold it, you could reduce your capital gain tax a lot? The answer is, probably not, especially for rental property that you have owned for a long time, due to depreciation recapture, you might not be able to use any of the tax advantage of selling your primary residence!

For detailed explanations, please see the article from this website, and pasted below:

National real estate prices have been on the rise since 2014, and many investors who jumped into the rental industry since the Great Recession have substantial gains in property values (S&P Dow Jones Indices, 2019). You might be considering selling your rental to lock in profits and enjoy the fruits of your well-timed investment, but realizing those gains could come at a cost. You could owe capital gains tax in addition to potential depreciation recapture on the profits from your rental sale.
One strategy for paying less tax is to move back into your rental and use the property as a primary residence before selling. Living in your rental full-time for at least two years prior to selling can help you take advantage of the gain exclusion of $500,000 ($250,000 if single), which can wipe out all or most of your gain on the property. Sounds easy, right?

Let’s take a look at some of the moving pieces for determining the taxes when you sell your rental. Factors like depreciation recapture, qualified vs. non-qualified use and adjusted cost basis could make you think twice before moving back into your rental to avoid taxes.

Depreciation Recapture
One of the benefits of having a rental is the ability to claim depreciation on the property, which allows you to offset rental income that would otherwise be taxed as ordinary income. The depreciation you take reduces your basis in the property, potentially resulting in more capital gains when you ultimately sell. If you sell the property for a gain, the amount up to the depreciation you took is taxed at the maximum recapture rate of 25%. Any remaining gains are taxed at the lower long-term capital gains rate. Moving back into your rental to claim the primary residence gain exclusion does not allow you to exclude your depreciation recapture, so you might still owe a hefty tax bill after moving back, depending on how much depreciation was deducted. (IRS, 2019).

When the Property Sells for a Loss
Keep in mind that if you sell your home for a loss, whether it’s currently a rental or is now your primary residence, you aren’t subject to depreciation recapture or other gains taxes. However, due to depreciation decreasing your cost basis in the property each year until it reaches zero, it’s more common that sales of former rental homes result in gains.

Note: You can’t claim a loss for tax purposes if the property sold is your primary residence. Read We Sold Our Home for a Loss – Now What? for more information.

Qualified Versus Non-Qualified Use
You might not be allowed to claim all your primary residence capital gains exemption, even after accounting for depreciation recapture. This gets tricky since we have to dig into recent changes with the tax code. Since 2009, the IRS has required your ownership period to be categorized between qualifying and non-qualifying use. Qualifying use is when the home serves as your primary residence and is eligible for the IRC Section 121 gain exclusion for the sale of principal residence. Non-qualifying use is the period where the property is rented out or serves as a secondary home to you, such as a vacation property.

This test applies to ownership periods starting in 2009, and it determines how much of your gain is eligible for the tax-free exclusion and how much is subject to capital gains taxes. Ownership periods prior to 2009 are always considered qualifying use for the purposes of this test.

You may have to prorate your capital gains exclusion based on your number of years of qualifying use of the property. That means if you move back in for two years after renting for seven years, your prorated exclusion limit will equal 2/9 of the gains. If 2/9 is less than the full $500k exemption ($250k for single filers), then you are limited to excluding the lower amount.

Prorating the exclusion only applies where the taxpayer used the residence for nonqualified purposes and then converts the property to a principal residence. The opposite is not true. If the residence was used as a principal residence first and then converted to nonqualified use, the taxpayer may potentially qualify for a full exclusion. The IRS doesn’t want people abusing the five-year rule with rentals that they move back into just before the sale. This creates two examples to consider.

If you live in your home for two years and then rent it out for two years before selling it, you qualify for the full exclusion amount due to meeting the use test by having lived in the home for two out of the last five years before the sale and meeting the ownership test.
If you rent out your property for two years and then move back in for two years before selling it, you must prorate your exclusion because the exception to periods of non-qualifying use only applies to portions of the five-year use test period that occur after the last date that the property is used as a principal residence [26 U.S.C. § 121(b)(5)(C)(ii)(I)].

Note: If there’s a gain (whether it’s eligible for the gain exclusion or not), depreciation recapture is recognized first, prior to determining how much is tax-free and how much is subject to capital gains taxes.

1031 Exchange of the Non-Qualifying Use Portion
If you’re facing a large tax bill because of the non-qualifying use portion of your property, you can defer paying taxes by completing a 1031 exchange into another investment property. This permits you to defer recognition of any taxable gain that would trigger depreciation recapture and capital gains taxes. More importantly, it allows you to separate out tax-free and taxable portions of the property sale.

Note: Property you convert to a primary residence that was part of a previous 1031 exchange must be held for a minimum of five years to be eligible to receive any of the gain exclusion.

Determining Your Adjusted Basis
Now that we have investigated potential capital gains tax exclusions and issues like depreciation recapture that is recognized first on your rental, we’ll break down how to determine your adjusted cost basis for calculating gains on the sale of your property.

Your adjusted basis is typically the original purchase price of the home, plus improvements made, minus depreciation on the property. An exception is if you converted your home into a rental when the market value of the property was below your adjusted basis per the formula. In that case, your basis decreases to the fair market value of the property at the time it became a rental. This eliminates people’s ability to beat the system by renting out their home for a short period just to be able to take the capital loss, since they can’t take a loss on the sale of a primary residence.

In the examples below, a family purchases a home on January 1, 2013 for $300,000 and makes $75,000 worth of improvements through remodeling the kitchen and bathrooms. Their adjusted basis prior to converting the home into a rental is $375,000. This home is their primary residence for two years.

Scenario 1
The couple then rents out the home starting on January 1, 2015 for four years prior to selling it for $525,000. During the four-year rental period, they take approximately $40,000 of depreciation. When they sell the property on January 1, 2019, its adjusted basis is $335,000 ($375,000 – $40,000 depreciation taken). The gain on the sale is $190,000.

Even though 33% of their ownership period was for qualifying use, they fail the gain exclusion test by one year because the home was not their primary residence for two of the last five years. Therefore, the entire gain is subject to tax.

The first $40,000 of the gain is subject to depreciation recapture at up to a 25% tax rate. The remaining $150,000 of gain is subject to long-term capital gains taxes (plus the 3.8% net investment income surtax if their AGI exceeds the applicable threshold).

Note: The couple could instead complete a 1031 exchange into another investment property to defer recognition of any taxable gains.

Scenario 2
This is the same as Scenario 1, except after the four-year rental period, the couple moves back in full-time for two years prior to selling the home on January 1, 2021. We’ll use the same dollar amounts as above.

Since the couple meets the requirements to use the tax-free gain exclusion, we need to break down the gain based on qualifying use and non-qualifying use:

Qualifying use– The home was their primary residence for four years out of the eight-year holding period, so 50% of the gain is eligible for the tax-free exclusion.
Non-qualifying use– The home was not their primary residence for four years out of the eight-year holding period, so 50% of the gain is subject to capital gains taxes.

Note: Depreciation is recaptured first and then the remaining gain is split between qualifying and non-qualifying use.
Of the $190,000 gain, the first $40,000 is subject to depreciation recapture up to 25%. Since the gain is greater than the depreciation recapture amount, the remaining $150,000 ($190,000 – $40,000) must be allocated between qualifying and non-qualifying use. The $75,000 ($150,000 × 50%) related to the qualifying use part of the gain is tax-free as part of the Section 121 gain exclusion. While the remaining $75,000 related to non-qualifying use is subject to capital gains taxes.

Scenario 3
This is similar to Scenarios 1 and 2, except the couple buys the home on January 1, 2003 and then rents out the home for 10 years starting on January 1, 2005. They move back in full-time on January 1, 2015. They sell the property two years later on January 1, 2017, with depreciation of $70,000 over the rental period.

As a result, the property’s adjusted basis is $305,000 ($375,000– $70,000 depreciation taken). The gain on the sale is $220,000 ($525,000 – $305,000).

Since the couple meets the requirements to use the tax-free gain exclusion, we need to break down the gain based on qualifying use and non-qualifying use:

Qualifying use– The home was their primary residence for four years out of the 14-year holding period. Also, four years of the 10-year rental period are considered qualifying use because they occurred prior to 2009 where all ownership is considered qualifying use for the purpose of this test. Therefore, eight years, or 57% of the gain is attributable to qualifying use and is eligible for the tax-free gain exclusion.
Non-qualifying use– Six years of the rental period is considered non-qualifying use, so 43% of the gain is taxable.

Of the $220,000 gain, the first $70,000 is subject to depreciation recapture at up to 25%. Of the remaining $150,000 gain (appreciation above the original basis), $85,500 ($150,000 × 57%) is considered qualifying use and is eligible for the home sale exclusion and is tax-free. 64,500 ($150,000 × 43%) is considered non-qualifying use and is subject to capital gains taxes.

Scenario 4
This is similar to Scenario 2, except the home sells for $395,000 instead of $525,000. With an adjusted basis of $355,000, this means the property sold for a $40,000 gain.

The ownership period was 50% qualifying and 50% non-qualifying and the couple is eligible for the gain exclusion for the qualifying portion, but depreciation recapture is recognized first. Since the gain is $40,000 and the depreciation recapture of $40,000 x up to 25% is paid first, there is no gain left over that’s tax-free or taxable at capital gains rates. It’s important to realize that whether it’s qualifying or non-qualifying, depreciation recapture tax is paid first when there’s a gain.

Recordkeeping
It’s important to keep good records of all improvements you make to the home. Every dollar can help reduce taxes you may owe on the gain one day. For more information, read Why It’s Important to Keep Track of Improvements to Your House.

Moving back into your rental to qualify for the principal residence capital gains exclusion might not help reduce your tax bill much if you have substantially depreciated your property or owned the real estate for mostly non-qualifying use. Other options like deferring taxes with a 1031 exchange could also be more helpful for managing your tax payment than selling your rental outright. Understanding the best approach for your personal situation might not be simple, but we love digging into these questions here at Merriman. Contact the Merriman team if you would like help strategizing the sale of your rental and managing your wealth with an eye for the big picture.

References
Exclusion of gain from sale of principal residence, 26 U.S.C. § 121 (2017). Retrieved from https://www.govinfo.gov/content/pkg/USCODE-2017-title26/html/USCODE-2017-title26-subtitleA-chap1-subchapB-partIII-sec121.htm
Internal Revenue Service. (2019, March 8). Property (Basis, Sale of Home, etc.). Retrieved from https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc-5
S&P Dow Jones Indices. (2019, August 27). Phoenix Replaces Las Vegas as Top City in Annual Gains According to S&P CoreLogic Case-Shiller Index [PDF file]. Retrieved from https://my.spindices.com/documents/indexnews/announcements/20190827-981359/981359_cshomeprice-release-0827.pdf

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An Easy to Follow and Act Upon Financial Plan

1/2/2021

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To make the process manageable, it helps to think of your finances in sections—and then set small goals for each.

Budgeting

Spend less than you earn

Track your spending
Plan for short-term goals

Spend no more than 50% of income on essential expenses

Debt management

Pay off credit card debt

Pay off high-interest loans
Improve your credit score

Explore refinancing of mortgage or student loans
Review debt hierarchy

Saving and investing

Get your full employer match
No workplace savings plan or match? Consider the tax-advantaged accounts available to you

Try to save at least 15%, which includes employer contributions for retirement
Think about saving for college
Invest appropriately for your age, time horizon, and risk tolerance

Review your portfolio annually
Explore tax-efficient investing
Maximize tax-advantaged retirement savings

Protecting what you have

Look into life insurance if you have children
Have adequate health insurance
Save $1,000 for emergencies

Save 3–6 months' salary for emergencies
Get disability insurance

Get a will/assign beneficiaries to accounts
Start planning your estate
Consider other insurance needs
Assign a health care proxy and power of attorney

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How to Balance Yields and Risks in Your Investment Portfolio

12/31/2020

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The forces that drive markets are always in motion. Because market conditions constantly change, the investments that deliver the highest returns today may not be the ones that do so next month or next year. That’s why multi-asset income strategies that can invest across a wide variety of asset classes may be able to deliver more consistent returns and a better balance between risk and return than strategies whose managers have fewer options to choose from.

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8 Actions to Take to Clean Your Financial Closet

12/30/2020

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Below are steps you could consider if you plan to clean your financial closet at the beginning of a new year:

Review your spending and savings
Revisit your investing strategies
Get tax smart on investing and retirement contributions
Get organized with your various financial accounts
Check insurance coverage
Maximize company benefits
Check your credit cards, mortgages, and student loans' terms
Estate planning and other important paperwork

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3 Ways to Get Bitcoins

12/28/2020

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At this time, there is no Bitcoin exchange-traded funds, but you have 3 other options to get Bitcoin:

1. Buy from apps
Apps such as Paypal, Square, and Robinhood could help. They are easy to use. You simply sign up for the app's service and start trading. There is usually be a fee, though, usually from 1.5%, for Paypal and Square, but Robinhood doesn't charges a fee, it makes money by routing customer trades through market makers and taking a cut of the spread between bid and ask prices.

Once you bought the crypto currency, Paypal and Robinhood require you to keep your crypto on the platform and sell out in cash, and Sqaure allows you move your Bitcoin to an unaffiliated wallet which you can use to trade with other people.

2. Crypto focused platforms
The largest is Coinbase, it offers dozens of cryptocurrencies and services like lending that are not available from the other apps. It charges a 0.5% spread on transactions, as well as a fee starting at 1.5%, depending on what source you use to buy in.

3. Through a brokerage account
You can buy Grayscale Bitcoin Trust (GBTC) which is a security created by Grayscale Investments that consists entirely of Bitcoin and is structured as a private placement. GBTC is a trust, not an ETF, the difference is GBTC trades at a substantial premium to its net asset value, so as an investor, you have two potential risks: bitcoin's price drop, or the premium shrinks.

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