Navigating Investment Risk

an investor doing a tight rope walk while trying to manage risk

Navigating Investment Risk

By Mike Desepoli, Heritage

If we know one thing about stock market investors it’s that the better the market performs, they less and less they think about risk. The first thing every investor should know and accept is that there is no such thing as a surefire investment. Risk is a part of the process. No matter what you invest in, there is always a possibility that you won’t turn a profit – or worse: you can lose some or even all of what you put in to it. You can manage risk, though, with a few proven techniques.

Asset Allocation

The first step in managing risk is to practice asset allocation. This means having your money in a variety of asset classes, which include cash, stocks, and bonds. Doing so is a protective measure – typically when stocks are doing well, bonds aren’t, and vice versa. Having some money in cash (or cash equivalents, which are extremely low-risk investments such as Treasury Bills and money market funds) makes sense, because outside of inflation risk – the slow but steady increase in the cost of living – your money is pretty safe.

Generally speaking, cash is the least risky of the asset classes, then bonds, and then stocks. Where you put your money depends largely on what type of investor you are, so be sure to allocate your funds according to your comfort level and needs:

  • Aggressive Investor. 75% of holdings in stocks, 15% in bonds, and 10% in cash
  • Balanced Investor. 50% of holdings in stocks, 25% in bonds, and 25% in cash
  • Conservative Investor. 25% of holdings in stocks, 25% in bonds, and 50% in cash

Diversification

After you spread risk by investing in different asset classes, you can manage it even further through diversification. There are many different types and classes of stocks and bonds – some are much more risky (but with the potential for greater reward) than others. Therefore it is a good idea to divide your funds among a variety of investment vehicles with different risk and reward potentials.

For example, consider purchasing shares of stock in an assortment of different sectors. A sector is a subset of a market, and stocks are often grouped by the company’s type of business. Sectors include utilities, transportation, technology, health care, energy, and communications services. When you diversify your holdings among sectors, you spread risk – if one sector is doing poorly, another is probably doing well.

An easy way to diversify your holdings is with mutual funds, since they are comprised of many different investment types and classes.

Dollar Cost Averaging

Dollar cost averaging is another way of managing investment risk, and nothing can be simpler to do. You can practice dollar cost averaging by purchasing securities with a fixed amount of money at regular intervals. This way you buy more shares when the price is low and fewer shares when the price is high, thus reducing the over-all cost of the shares purchased.

If you have a retirement account through your employer, you already practice dollar cost averaging. You are having a set amount of money deducted from each paycheck deposited into your retirement account. And whether the mutual fund is doing well or poorly, the same amount of money is being invested. Done over many years, you ride out the highs and lows of the market.

Review and adjust your portfolio (your collection of investments) regularly. Even if you are comfortable with a great deal of risk, the closer you get to retirement, the more conservative your investment portfolio should become. The last thing you want is to have the bulk of your money – cash you are expecting to have when you stop working – in investments that have a high likelihood for loss.

 

The 2018 Personal Finance Roadmap

a map depicting a personal financial roadmap to lead an investor to success

The 2018 Personal Finance Roadmap

By Mike Desepoli, Heritage

Ah Spring time. Warm weather and longer days.

People also tend to be more motivated in the Spring to organize, clean, and go through their stuff.

While it’s always good to get rid of old stuff and clean your house or apartment, I think it’s also a perfect time to leverage your motivation to give your personal finances a good deep cleaning as well.

Regularly checking up on your finances is important. There are many things you can do to improve your personal finances. However, a majority of them are really easy to put on the back-burner. Trust me – “buy life insurance” was on my to do list for two years before I finally got around to it.

Carve out some time this Spring to go through this spring cleaning personal finance checklist. It will help you start doing some things you’ve been meaning to do, as well as give you a check-up on certain things you are already doing to ensure you are still in a good spot.

Check your Net Worth

Checking your net worth can be a painful experience, especially for those who are in student loan or other debt. Even if you fall in this group, though, it’s still better to know where you stand than to be ignorant of your situation.

I have said in the past that for a large majority of people, especially millennials, it’s more important to focus on income than net worth. That’s exactly why it took me so long to get around to utilizing online platforms to track my finances. But once I did it felt good to know exactly where I stand at any point in time.

Review your Budget or Start Budgeting

One of the things I stress in personal finance lunch and learns or coaching sessions is to not only budget, but to regularly review your budget.
If you haven’t started a budget yet, that’s the first thing you should do. Budgeting can be as hands-on or hands-off as you want. Some people hold themselves to a specific spending threshold while others (myself included) just track the monthly trend and make sure they aren’t spending too much on things they don’t care about.

If you already budget, take some time to review your monthly spending. Ask yourself these questions:

• Is my spending in alignment with my values?
• Are there areas I can cut back spending on (i.e. restaurants, cable, cell phone, entertainment)?
• Is my current spending habits allowing me to pay down debt or prohibiting me from paying down or incurring more debt?
• What changes can I make to create more cash flow?

Review your Debt

While Personal Capital does a good job of pulling in your debt, I think it can be valuable to lay out all your debt in a spreadsheet as well.
When I’m looking at my debt I focus on a couple things: what type of debt it is and what the interest rate is?

There are different strategies you can use depending on the type of debt, but the first goal should always be to get a lower interest rate. If you have high interest credit card debt it can make a lot of sense to refinance it through a personal loan. It it’s student loan debt there is also opportunities to refinance at a lower rate.

Debt can be overwhelming, and I always encourage people to be action-oriented with their debt. Sometimes no action is needed, for example if you have it on auto-payment and it will be done at a specific date in the future (assuming you are happy with the interest rate). Others may want to be more proactive, such as refinancing, increasing their income through their 9-5 or a side hustle, or cutting expenses to pay it off faster.
Analyze your Income

It’s easy to get comfortable in a job and lose a pulse on whether or not you are getting paid fairly. Take some time to review your 9-5 income and give your resume a refresh. Some specific things you can do include:

• Review and compare salary data on sites like glassdoor
• Review job listings on an app like indeed to see what sort of skills employers are looking for
• Update your LinkedIn Profile
• Update Your Resume

Perhaps you are happy with where you are at with your 9-5 and the prospect of switching employers – even if it meant a higher pay – isn’t attractive. Or perhaps you are already maxed out at your 9-5 but still want to increase your income.

Check your Emergency Fund

Now you probably don’t need to check your emergency fund. If you have one, you likely know how much it is. If you don’t have one, you also know how much you have.

But when I say check your emergency fund I want you to actually think about whether or not your emergency fund is sufficient. How many months could you live off of it? If your answer was less than three months, it’s time to make building your emergency fund a priority. If you really want to challenge yourself make a plan of hitting somewhere in the six to twelve month range.

Now, if you don’t have an emergency fund then it’s time to get one. I will be the first to admit that building an emergency fund is not easy, especially when you have debt and other things that you want to put your income towards. But I can also tell you that it’s one of the best things you can do for your peace of mind.

Start by setting a realistic goal like saving $100. Then challenge yourself to increase that to $500, and so on. Eventually you will want to have the equivalent of three or more months of monthly expenses set aside. The important thing is to get started.

Review your Retirement & Health Savings Account

Another thing you should review is your retirement and Health Savings Account. A few things to check are:

• Are you contributing up to your company match for your 401k?
• Whether you have a company match or not, how much money are you actually putting into your 401k and/or IRA?
Are you able to contribute more?
• What investments do you haven in your 401k and/or IRA? Do you need to re-balance it?

I’m all about the “set it and forget it” approach to investing, especially when it comes to retirement accounts, but it is important to check up on them every once in a while, even if it’s just once a year.

Review your Insurance

The last thing on the Spring Cleaning Personal Finance Checklist is review your insurance. Insurance isn’t the most exciting thing in the world, but it serves an important function and can protect you from expensive, unexpected bills – or even bankruptcy.

Take an inventory of your current insurance coverage. How much do you pay in premiums? What are you actually getting in return? Is your coverage adequate?

Many times people don’t realize how much they are paying for insurance because it’s baked into their paycheck, mortgage payment, or is on auto-pay. Understanding the true cost of your insurance is important, if not just to have it as a reference point.

Insurance isn’t all about cost. You can oftentimes get cheaper insurance, but if the coverage is bare-bones you are going to regret it if something big happens. One of my former manager’s house burnt down right after he switched to a cheaper home insurance company. They ended up being very difficult to deal with and caused much more hassle than a different company likely would have. That’s not always the case, but I think it’s important to balance cost with quality of coverage.

Besides reviewing your current coverage it might make sense to add some additional coverage as well. Up until a little over a year ago I did not have any life insurance, but I decided to open a million dollar policy at age 27. There’s are many reasons to consider life insurance. In general, if others depend on your income and would be impacted if it were to go away, you should look into getting life insurance.

For more info on this topic checkout: (VIDEO) #AskTheAdvisor 55: The 2018 Personal Finance Roadmap

What To Do With Your 401k When Changing Jobs

a plant growing to symbolize the growth of a 401k investment

What To Do With Your 401k When Changing Jobs

By Mike Desepoli, Heritage

Last year, millennials were nicknamed the ‘job-hopping generation’ after a Gallup report revealed that 6 in 10 millennials are open to new job opportunities.

According to this report, millennials have a reputation for job-hopping and are said to move freely from company to company, more so than any other generation.

That being said, I don’t think switching jobs is a trait unique to millennials only, even though they are said to job-hop three times more than other generations.

The job market is ever-changing and is not like it used to be. Fewer companies offer pensions and some entry-level jobs offer very little benefits or stagnant wages. Self-employment, temporary work, and side jobs have all become increasingly popular work options.

Also, there is less loyalty among employees who realize they can be laid off at any given time.

At the end of the day, if you come across a better job opportunity that you think you’ll be happier with and has better pay and benefits, you may feel tempted to switch jobs and there’s nothing wrong with that.

If you have a 401k however, you may be wondering what you can do with it when you do secure another job. You don’t want all the money you saved for retirement to go to waste, so here are a few options.

 

Keep the Money in Your Old 401k

Most companies will let you leave the money you saved for retirement in your 401k where it is. In other cases, there may be a balance requirement.

Employees who move on to another company may choose this option out of default especially if they have no idea what to do with their 401k. The major downside is that you won’t be able to contribute to your 401k anymore and you’ll have to keep track of more than one retirement account.

If you tend to switch jobs every couple of years, you could wind up with multiple 401k plans that you can’t contribute to which is why it’s best to consider some of these other options first.

 

Roll Over Your 401k to Your New Company’s 401k

If you had a good 401k plan with your old employer, you can easily roll it over to your new 401k. Check to see what the investment options are along with the fees with your new company. If you don’t like your current options as much as your old plan, consider rolling it over.

Most employers will accept a 401k rollover. As long as you have at least $5,000 in your account, it’s your legal right to do roll it over. If you have less than $5,000 in your account, your employer will have the option to cash you out of the plan.

If you’re going with this option, always ask for the rules to be clarified since you may have limitations since you’re no longer with the company. For example, you may be charged extra fees since you no longer work there.

Move Your 401k to an Individual Retirement Account (IRA)

This is another option you’ll have especially if you don’t like your new company’s 401k plan or even if they don’t have one. IRAs and Roth IRAs are great options that typically have lower fees and allow you to have more control over your investment options. With an IRA, you will just have more control overall and can choose low-fee investments and won’t be limited to name just your spouse as your beneficiary like with most 401k plans.

Keep in mind that there is a difference between a traditional IRA and a Roth IRA. With a traditional IRA, you contribute pre-tax dollars and pay taxes on the contributions and gains once you start withdrawing the money at age 59 ½. If you withdraw funds before then, you’ll most likely have to pay a penalty fee.

With a Roth IRA, your contributions are taxed when you make them so your earnings will be tax-free along with the withdrawals you make starting at age 50 ½.

There are also income limits to be eligible for an IRA. In 2017, you must earn less than $118,000 if you’re single and less than $186,000 if you’re married. The maximum contribution you’re allowed to make per year is $5,500 and $6,500 if you’re 50 or older.

Cash Out Your 401k

This isn’t the best option, but it is an option nonetheless. If you want or need the money in your 401k account to pay bills, meet other expenses you have, or even to reinvest another way, you can simply cash out what’s in your retirement account.

A major downside is that you will have to pay taxes on the money along with a penalty fee so if you cash out a smaller amount, what you receive will be even smaller and if you cash out a large amount, it won’t really be worth it due to your large tax bill.

You could also destroy your retirement nest egg in the process especially if you received a nice 401k company match.

Depending on how many times you switch jobs that provide you with a 401k account, you may need to make the decision of what to do with your old 401k more than once. To determine which option is best for you, determine your current and future needs and consider factors like fees and along with your investment options.

I’m sure everyone wants to retire some day so it usually the better option to keep money from your 401k and roll it over or put it in an IRA.

 

For more info on this topic, check out this cool video: #AskTheAdvisor 54: What to do with your 401k when changing jobs.

4 Ways to ACTUALLY Keep Your Resolutions

new years resolutions written down on yellow post it notes

4 Ways to ACTUALLY Keep Your Resolutions

By Mike Desepoli, Heritage

 

You might know that 41% of Americans make New Year’s resolutions annually. But did you know that out of those, more than 42% never actually succeed, yet continue to make new resolutions every year? As the saying goes, if change were easy, more people would do it.
Fortunately, there are some simple ways for you to set yourself up for success. Read on to explore some of the most common resolutions and how you can actually make them stick.

Resolution: Manage Time better

Most of us can think of some way we’d like to improve our time management. Whatever you want to make room for, there’s a key strategy that can help you actually make it stick.

Success Tip: Name Your Why

You have 24 hours in a day, but old habits can be hard to break. To make a lasting change in how you’re budgeting your time, first establish your “why”.
Let’s say you want to spend more time with family, or spend an hour a day reading. What’s the reason behind your goal? How will it enrich your life? If you review your “why” regularly, you’re less likely to quit when those old habits come calling.

Resolution: Learn a new skill.

Adding new skills can help you maintain a sharp mind and a sense of purpose in life. It can also be a lot of fun! If there’s something you’ve been wanting to learn, the new year is a great time.

Success Tip: Get Classy

You don’t have to go at it alone. Take a class and let an expert show you the way. There are top quality online classes available for everything from tennis to organic farming to screenwriting. Looking for more in-person experience? Check out the offerings at your local community college.

Resolution: Get Healthy

Whether you want to eat better, sleep more, or amp up your exercise regimen, “getting healthy” is one of the most popular wishes at the beginning of a new year.

Success Tip: Partner Up

For better or worse, we often tend to show up for other people more easily than for ourselves.
Doing a cleanse? Checking out yoga? Find a buddy to do it with you. Chances are good that someone you know has a similar goal. With a partner who’s counting on you, you’re more likely to stay accountable and get in great shape.

Resolution: Get Organized

The new year’s invitation for a fresh start also extends to your personal space and working environment. But trading a habitual mess for lasting tidiness can feel like an impossible task.

Success Tip: Start Small

Whether you’re looking to empty an attic, declutter your desk, or finally put all those National Geographic in chronological order, keep it simple and flexible.
To get unstuck, ask yourself: “What is one small thing that I can do today?” Just keep taking one small step each day, and you’ll have the job done before you know it.

For more info on this topic, check out The #AskTheAdvisor Show Episode 53 by clicking here.

How The Senate Tax Bill Affects You

the senate congressional committee holds a press conference about the new tax reform bill

Here’s How Senate Tax Reform Affects You:

The U.S. Senate voted just before 2 a.m. ET Saturday to pass a sweeping tax overhaul worth roughly $1.4 trillion, putting the Trump White House a big step closer to its first major legislative victory – and many Americans closer to a tax cut.
The vote was 51-49, with Republican Bob Corker of Tennessee the only member of the GOP to side with the Democrats in opposition.
The bill is not yet finalized. Saturday’s vote means the Senate and House have passed similar tax reform plans, but negotiators from both chambers will start meeting Monday to agree on a single piece of legislation that both chambers must approve before it is sent to the president for his signature.

Here’s how the latest legislation would affect you:

What deductions can I claim under the Senate bill that just passed?

The Senate bill does away with federal deductions for state and local income and sales taxes, but allows deductions of up to $10,000 in local property taxes. The legislation originally eliminated federal deduction for all state and local taxes, but the property tax exemption was later added at the insistence of Sen. Susan Collins, R-Maine, who said she was “delighted” about the change.

What about personal deductions?

Like the House bill, the Senate bill nearly doubles the standard deduction level to $12,000 for individuals (up from $6,350) and $24,000 for couples (up from $12,700).

Any other deductions I could claim?

The Senate bill retains the current limit for the home mortgage interest deduction to interest paid on the first $1 million of the loan. (The House bill reduces the limit to $500,000 for new home purchases.) The Senate version also preserves the deduction for medical expenses not covered by insurance (the House bill does not), but ends deductions for moving expenses and tax preparation.
Why does the Senate bill allow deducting medical expenses not covered by insurance?
Because the Senate bill also repeals ObamaCare’s individual mandate, while the House bill does not. If ObamaCare’s mandate is repealed, thousands of people are expected to drop their health insurance, raising the cost for those who decide to keep it.

And the personal exemption?

The Senate and House bills both eliminate the $4,050 personal tax exemption.

Will the tax brackets change at all?

The Senate bill keeps seven tax brackets, but reduces them to 10, 12, 22, 24, 32, 35 and 38.5 percent. (The current brackets are 10, 15, 25, 28, 33, 35, and 39.6 percent.) The House measure condenses seven brackets to four: 12, 25, 35 and 39.6 percent.
I own a small business. What would this mean for me?
The Senate bill allows owners of so-called “pass-through” businesses (that is, businesses that aren’t incorporated) to deduct 23 percent of their earnings, and then pay at their personal income tax rate on the remainder. This issue was a key concern of Sens. Ron Johnson, R-Wis., and Steve Daines, R-Mont., both of whom announced this week that they would support the bill.

What about corporate tax rates?

Like the House bill, the Senate bill cuts the current 35 percent rate to 20 percent, but the Senate bill calls for a one-year delay in dropping the rate.

When will tax reform take effect?

President Trump and congressional Republicans have vowed to make tax reform law before the end of the year. If that happens, most of the provisions would come into force on Jan. 1.

Will tax reform affect my returns for this year?

The changes will not have any impact on your taxes for 2017, which are due to the IRS by April 17, 2018 (you get an extra 48 hours to file because the traditional April 15 due date falls on a Sunday).

So when will the differences in the bills be hashed out?

The House will vote on a motion to go to conference on the tax bills on Monday evening. The Senate is expected to vote on a similar measure soon after. Congress is scheduled to adjourn for its Christmas break on Dec. 15, but House Speaker Paul Ryan has said he will keep the House in session beyond that date if necessary to get tax reform passed.

Thanks for reading….MD

3 Investing Secrets of the Wealthy

a bulldozer and crane moving around block letters to spell the word wealth

Hey everybody hope you all had a wonderful thanksgiving

I was on the road last week visiting some of our clients, and got an idea of a topic I wanted to blog about. I was down in South Carolina, and having just finished up a client meeting I headed over to a sports bar to watch Thursday Night football. While sitting at the bar I was chatting with the patron next to me. A little small talk about what we do for work, and he decided to share with me some of his successes in life. Turns out this gentlemen was quite the successful entrepreneur, so I decided to pick his brain for some investing wisdom.
I summarized that conversation down into 3 investing serets. There is alot you can learn by studying people who have been successful with money, and we want to share a few ideas with you.

1. They don’t obsess over finding the next big thing. They focus on putting their money to work, not wasting time chasing pie in the sky.

2. They don’t care if their portfolio is sexy. Too many people want to own all the most popular tech stocks because they think it makes them look cool. Newsflash….it doesn’t. As long as you are getting the return on your money that you require, who cares if your stocks are popular or obscure. You know who doesn’t care? Wealthy people.

3. Wealth individuals never panic when the market is selling off. In fact, they usually are looking for bargain buy opportunities, like stocks they believe in long term but have suffered temporary price declines.

Hope you guys find these tips helpful. Stay tuned, there’s plenty more to come. Until next time, keep on grinding.

-MD

Tax Proposal Leaves 401k Contributions Alone

401k plan contribution limits will remain unchanges in the new tax plan

In the latest development regarding the new tax proposal, the most recent draft bill once again leaves the 401k contribution cap alone. There had been much back and forth recently about potential changes to the cap (currently $18,000), with some suggesting setting the bar as low as $2,400, but it appears for the time being that things will remain as they currently stand. I for one hope they leave the cap alone, we have a big enough issue in this country with many people not sufficiently saving for retirement. Lowering the annual amount individuals can contribute to their retirement just seems like the wrong idea at the wrong time. Stay tuned for what comes next.

-MD

Stop Whining About Your Tech Stocks

picture of a little boy whining on a poster that says stop whining

Happy Monday everybody I hope your week is off to a great start. With Monday comes the start of another week, and a chance to hop back into the money making markets. To bring you up to speed, we are seeing some of the big tech names sell off today, which is a continuation of the trend we saw emerge last week. This is causing many investors to freak out and call for the beginning of the next market crash…….like they do every other time the market does anything but go up. Personally, I sit back and laugh at all these market forecasters because they truly have no idea like the rest of us. But nonetheless it’s used as creative click bait to drive views on their websites. So what should one do? Well, if you have a long term time horizon like me the only thing you should even consider doing (aside from doing nothing) is to considering buying more stock of the companies you own. This pullback will be a great buying opportunity as it has been every other time in the past. Are technology companies trading at a premium? Yes. Does that mean they cant continue to improve operational efficiently and trend higher? No.

Moral of the story, stop whining about your tech stocks being down. You had no problem riding them up to record highs, so toughen up and allow for some volatility.

-MD

What You Need to Know about the Apple Launch

a picture of the flagship apple store before the new product launch

It’s a normal Tuesday in the market but the tech sector is buzzing….the reason? The long awaited Apple product announcement. Apple has a way of adding a sense of flair and excitement to these product debuts, and this latest announcement will be nothing short of spectacular. We are closely following the live feed for developments as they are unveiled, but let’s take a look at the few things we do know. We do expect an announcement regarding the apple watch, however it is unclear if they will introduce a new series or make upgrades to the existing Apple Watch 2. Some potential rumors around the watch include adding 4g capabilities, changing the style from square to round, and adding the ability to independently make voice calls. We also anticipate the release of better health and activity tracking functions.

Related to the Iphone, we are expecting 2 product launches. The much expected Iphone 8, and the exclusive Iphone X. This being the 10th anniversary of the Iphone, the X makes perfect sense. This is largely expected to be the first iPhone to exceed $1,000 on the price tag. A hefty price that’s for sure. Some of the rumored improvements include wireless charging capabilities, a rear facing touch ID sensor, face scanning technology, and a new “all glass” design that will increase the surface area of the screen. All told there is a lot to be excited about, especially for Apple investors. Stay tuned to the blog for the latest updates as they become available.

-MD

Did Someone Say Tax Cuts?

the word tax on a cutting board being chopped in half by a big knife to depict a tax cut

Another day in the markets and this week all eyes are focused on the President’s renewed push for tax reform and a reduction of tax rates. Trump kicked off his tax plan push in the heartland, speaking at a scheduled event in Missouri. Tax reform has been one of the major campaign promises for the Trump administration, and the need to pass it is even more important now with the failure of healthcare reform still in the rearview. The concept of cutting taxes is very much welcomed across the board, and should receive bi partisan support in congress. There is no argument against putting more money in the pockets of the American people, as this additional disposable income will surely create economic growth through spending, investment, and business creation. Additionally, a corporate tax cut will bring America more in line with our global counterparts and finally level the playing field that has been so slanted against our favor for almost 30 years. This won’t be easy, there is no doubt about that. Democrats will bemoan this plan as a hand out to the rich, but anyone that’s ever taken a basic economics course understands that to stimulate growth you need to cut taxes for ALL Americans, not just some. Some assets classes will benefit more than others from tax reform….which ones you ask? You will have to keep following along in our blog to find out!

-MD