When it comes to a company’s stock, earnings are at the heart of its value. A company’s earnings represent its profitability—the actual money it makes after covering all costs—and this bottom line directly influences its stock price. Understanding earnings is key for investors because they reveal how well a company is performing today and provide insight into its potential growth. Let’s break down what earnings really mean and how they impact the value of the stocks you own.

What are earnings?

Earnings are the net income or profit for a business. Publicly traded companies report their earnings every three months in a document called the “net income statement,” which they must submit to the SEC (Securities and Exchange Commission). To find a company’s earnings, you can look up their 10-Q or 10-K filings on the SEC website.
 
Earnings are reported quarterly and are typically compared to the previous quarter and the same quarter from the previous year to show how profits are growing or shrinking. Companies will also release annual earnings, summarizing their financial year. There are also earnings calls where company leaders (like the  CEO or CFO) will discuss recent financial results, and provide guidance for the future.

What determines earnings?

Earnings start with total revenue (the money a company brings in). Then, all the costs are subtracted to see how much profit remains. Some of the main cost categories:

• Cost of Good Sold (COGS): Raw materials and labor to make the product

• Sales, General, and Administrative (SG&A): All the costs to keep the company running not involved in making the product. Think human resources, accounting, or marketing

• Depreciation: This tracks the decrease in value of physical items (like machines) over time.

• Amortization: This is the decrease in value of non-physical items (like patents) over time.

• Interest: This is what a company pays on its loans (outstanding bonds)

How should I think about earnings?

Think of earnings as a pie. The total size of the pie represents a company’s total profits. Each slice of the pie shows how much profit belongs to each share of stock. Earnings per share (EPS) measures the profit each share would get if the earnings were divided up evenly. For example, Nike (NKE) had $1.051 billion in net income in August 2024, resulting in EPS of $0.70 per share. Meanwhile Ford (F) had a higher $1.831 billion in net income June 2024. Because Ford has more shares outstanding than Nike, EPS came out lower at $0.456 per share.
 
When evaluating how expensive a single company stock is, investors look at the Price to Earnings (Price/Earnings or P/E) ratio. It’s a measure of how much someone is paying for every dollar of profit at the company. If you expect the company to grow a lot, you should be willing to pay a much higher P/E ratio than for a stable, established company that isn’t expected to grow. Looking at the P/E ratio is a much better way to get a sense of if a company is cheap or expensive. Stock prices reflect both the total earnings and future growth expectations (i.e. the size of the pie) and the number of shares out there (i.e. how big is each piece of the pie).

How do earnings impact stock prices?

Most publicly traded companies have earnings expectations, which is the average of what the professional analysts who track the company expect earnings to be for the next quarter (and beyond). Companies that exceed expectations have a positive surprise, and usually see their stock price go up in response. Conversely, companies that miss earnings (i.e. report lower earnings than expected, or reduce growth expectations) usually see their stock price decline.
 
Stock market reactions to earnings can sometimes seem unpredictable. For example, a company will beat earnings (i.e. report higher earnings than the analysts expected), but they didn’t beat earnings by as much as they did last quarter, so the stock price drops. Expectations can be so low for some companies any positive earnings surprise sends the stock soaring.

Many critique earnings as a measure of stock price. It’s possible to change accounting practices where the reported earnings number is higher, but the increase is more to do with changes in accounting policies than actual business activity. Extreme cases of manipulation can lead to fines and forcing companies to reissue earnings.

What do earnings do for me, the investor?

Earnings represent the company’s profits, which can benefit investors in two main ways:

1. Reinvest back into the company: typically done by growing companies, sometimes the best use for extra cash is to put more money back into the company to grow

2. Payout to investors: typically done by stable, established companies. The stockholders are the owners of the company, so the company returns the earnings to the investors in the form of dividends or stock buybacks

In traditional finance theory, the reason you own stock in a company is that your ownership means you will get the earnings returned to you in the form of dividends. Theoretically, any change in stock price is a change in the expected total dividends you’ll receive over the life of the company. While there can be lots of noise around stock prices (economic outlook, new leadership, etc.), ultimately the expectations around earnings (and thus dividends to investors) is the root of stock price fluctuations.
 
Whether your own stocks individually or through a broadly diversified fund, understanding how earnings impact stock price can be a helpful way to evaluate their long-term opportunity.

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As the person who manages most of the financial decisions in your household, it's natural to want to ensure your spouse is financially secure if you're no longer around. The financial burden on a widow can be overwhelming, especially with the lesser-known tax implications that often follow the death of a spouse. By planning ahead, you can safeguard your spouse from unnecessary financial stress.

Taking a few proactive steps now can help shield your spouse from these challenges and give them peace of mind. This guide will walk you through the financial implications of losing a spouse and what you can do today to ensure you preserve your assets for their well-being.

There are two common tax shocks you want to get ahead of:

Tax shock #1: The “survivor's penalty”

After a spouse dies, the widow is often left facing what’s called the "survivor’s penalty," which refers to higher taxes that result from a change in filing status. While you may currently file taxes jointly as a married couple, your spouse would be required to file as a single taxpayer after your death. This change can increase their tax bill substantially.

Here’s why this matters:

• Higher Marginal Tax Brackets: After your passing, your spouse’s income could fall into a higher tax bracket due to the narrower brackets for single filers compared to married couples.

• Reduced Standard Deduction: In 2024, the standard deduction for married couples filing jointly will be $29,200, but for single filers, it will be just $14,600. This reduction will increase the amount of income subject to taxes.

Looking ahead, it’s important to note that individual tax brackets are set to revert to pre-2018 levels in 2026, further increasing the tax burden on your spouse if you’re no longer here.

Tax shock #2: Hefty taxes on IRA distributions

If your spouse inherits your retirement accounts, such as an IRA, they’ll also face higher taxes due to Required Minimum Distributions (RMDs). These distributions are considered ordinary income, and combined with their new single filing status, could push them into an even higher tax bracket! The larger your IRA, the bigger this tax burden becomes.

What may seem like a well-planned nest egg now could become a source of financial strain later on due to taxes. By understanding this, you can take steps now to lessen the impact on your spouse’s financial future.

Firsthand example from a retired couple

When Spouse #1 and Spouse #2 file jointly, both receive Social Security and must take Required Minimum Distributions (RMDs) from their retirement accounts. Let’s look at their income and tax bill while filing as Married Filing Jointly (MFJ):

Now, if Spouse #1 passes, Spouse #2 becomes the sole taxpayer, facing a shift to the Single filing status. Spouse #2 is still required to take the same RMD amount as the beneficiary of the retirement accounts and claims Spouse #1’s higher Social Security benefit under the survivor benefit rules. However, Spouse #2 cannot receive both Social Security payments, so Spouse 2’s income is reduced. Here’s what their tax situation would look like:

Despite an almost 16% drop in income, Spouse #2's tax bill increases by over 30%, showing the impact of the survivor’s penalty on income and tax liability.

This example highlights why it’s essential to plan ahead to help lessen the financial burden on surviving spouses.

Four strategies to protect your spouse from a heavy tax burden

Fortunately, there are several strategies you can use to reduce the tax burden on your spouse in the future:

1. Complete Tax Projections: To best plan for the future and make calculated decisions, it’s necessary to understand your expected lifetime tax bill. A comprehensive tax projection will identify your current and future tax rates, potential gaps, and overall lifetime tax obligations. This helps you make informed decisions today.

2. Partial Roth IRA Conversions: Converting part of your traditional IRA into a Roth IRA over time can help reduce the tax impact on your spouse later. While you’ll pay taxes on the conversion now, the Roth IRA’s future growth will be tax-free, meaning less taxable income for your spouse when they inherit it.

3. Take Advantage of the Step-Up in Basis: For non-retirement investments, your spouse can benefit from a "step-up in basis." This allows the cost basis of assets to reset to their value at the time of your death, potentially eliminating capital gains taxes if they were to sell those assets. Understanding this advantage can save your spouse from an unexpected tax bill down the road.

4. Naming Non-Spouse Beneficiaries: Another option to reduce taxes is to name non-spouse beneficiaries for some of your retirement accounts, such as your children and grandchildren. While this can lessen the tax burden for your spouse, it’s essential that these non-spouse beneficiaries understand the new withdrawal rules set by the SECURE Act. This law requires that non-spouse beneficiaries fully distribute inherited IRA funds within 10 years, which could trigger substantial tax liabilities for them if not carefully planned. Additionally, consider adding a qualified charity as a beneficiary to your IRA for a tax-free transfer gift.

You can start planning ahead with your spouse now

Planning for your spouse's financial future can be an impactful gift. While it may be uncomfortable to think about what happens if you're no longer here, taking proactive steps now will ease your spouse’s transition during a difficult time. Here are a few key actions to consider:

Have Regular Financial Discussions: Make sure your spouse understands your financial plan, knows how to manage accounts, and is familiar with where to find important documents.

Work with a Fiduciary Financial Advisor: A financial advisor can help you develop a plan tailored to your family’s situation. By understanding your overall financial situation, an advisor can provide guidance now and assist your spouse when you're no longer there. They can also help with tax projections, Roth conversions, beneficiary updates, and staying ahead of tax law changes.

Create a Clear, Organized Estate Plan: Ensure your estate plan is up to date, including wills, trusts, health care directives, power of attorney, and beneficiary designations. This will help prevent unnecessary complications for your spouse during an already challenging time.

Be Proactive About Taxes: By planning for your spouse’s future tax obligations, you can reduce the “survivor’s penalty” and give your spouse more financial security.

You’ve worked hard to provide for your family, and planning for your spouse’s financial future if something happens to you is a vital part of that legacy. While it may seem difficult to know the "right" time to prepare, we can't predict the future. Whether you're already in retirement or facing a serious diagnosis, projecting out scenarios can make all the difference for your spouse’s security.

Don’t wait until it’s too late—start planning now to protect your loved one from unnecessary financial strain.

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There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, there are many notable changes that will allow investors to save more money.

One important update for 2025 is that under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in eligible retirement plans.

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2025!

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Social Security remains a cornerstone of American retirement planning, yet it’s often shrouded with concern and misinformation. As the dialogue about its future grows increasingly pessimistic, many people question its reliability and role in their retirement income plans. Understanding the current state of Social Security is crucial for making informed decisions about your financial future.

Perception vs. Reality:  The Role of the Trust Fund

Much of the anxiety around Social Security comes from media reports highlighting the shrinking trust fund. This often leads to the mistaken belief that the program is on the verge of collapse. But the real issue isn’t mismanagement—it's demographics. As baby boomers retire and people live longer, benefits are outpacing payroll tax revenues.

Historically, Social Security operated on a pay-as-you-go basis. Since 2010, however, benefits have exceeded payroll tax collections. To bridge the gap, the Social Security Administration (SSA) has been tapping into the trust fund, a practice that will continue until the fund is expected to run out by 2033[i]. While this sounds alarming, it doesn't mean Social Security will vanish.

Misunderstandings About Insolvency

A common misconception is that the depletion of the trust fund means Social Security will go bankrupt and cease to exist. In reality, even after the fund is exhausted, payroll tax revenues will still cover approximately 79% of retirement benefits[ii]. This isn’t a doomsday scenario; it’s a call for strategic policy adjustments.

Fixing the Funding Gap – Potential Reforms

The SSA has proposed several solutions to address Social Security’s funding gap. Here are some of the most viable strategies:

1. Increase Social Payroll Tax – Projections show Social Security's long-run deficit is 3.5% of covered payroll earnings[iii]. Raising payroll taxes by this amount—1.75 percentage points each for employees and employers—could secure full benefits through 2098, with a one-year reserve at the end.

2. Increase the Social Security Wage Base—In 2024, the first $168,000 of earned income is taxed at 6.2% each for employees and employers; self-employed individuals will pay 12.4%.[iv] Increasing the Social Security wage base can help address the shortfall.

3. Increase Full Retirement Age (FRA): Currently set at age 67 for individuals born in 1960 and beyond, the FRA dictates when retirees can claim full retirement benefits without reduction. Each one-year increase in the FRA equates to roughly a 7% cut in monthly benefits for affected retirees. Raising the FRA to 70 would reduce benefits by nearly 20% at any given claiming age.[v] This change aligns with historical precedent, as the FRA was originally 65 for most of Social Security’s history.  

4. Invest in Equities: The SSA could explore investment strategies to enhance returns, following successful models utilized by other countries like Canada or systems such as the US Railroad Retirement System.                    

These measures would require political compromise but could ensure the program’s sustainability and continued support for retirees.

Planning for a Reduced Benefit Scenario

Amid ongoing discussions about Social Security reforms, it’s essential to hope for the best but prepare for the worst—acknowledging the potential for reduced benefits if corrective actions fail to shore up funding. The looming risks of benefit cuts necessitate careful consideration alongside other retirement planning factors, including life expectancy, additional income streams, risk tolerance, inflation, and potential spousal benefits.

Consider your Options in an Ever-evolving Social Security Landscape

Despite the challenges and negative perceptions, Social Security is not on the brink of collapse. With informed decisions and potential policy adjustments, the program can continue to support retirees for many years. It's crucial to stay informed and consider the evolving landscape of Social Security in your retirement planning. We’re here to support you. Contact us to meet with an advisor and learn more about your options.

Sources

[i] Social Security Administration. (2024). The 2024 OASDI Trustees Report. https://www.ssa.gov/oact/tr/2024/

[ii] Munnell, Alicia H. 2024. "Social Security's Financial Outlook: The 2024 Update in Perspective" Issue in Brief 24-11. Chestnut Hill, MA: Center for Retirement Research at Boston College.

[iii] SSA, The 2024 OASDI trustees report. p.17.

[iv]Social Security Administration. (2024). Contribution and benefit base. https://www.ssa.gov/oact/cola/cbb.html

[v] Springstead, G. R. (2011). Distributional effects of accelerating and extending the increase in the full retirement age (Policy Brief No. 2011-01). Social Security Administration. https://www.ssa.gov/policy/docs/policybriefs/pb2011-01.html) 

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We’re all familiar with the risk-reward tradeoff: Do I risk injury to compete in a sport I love and feel fulfilled by? Do I risk leaving a stable job to pursue a career that excites me? It’s not surprising that this everyday phenomenon is also very present in our investment portfolios.

For example, there are three asset classes that an investor typically includes in their portfolio: cash, bonds, and stocks. Of the three, stocks can generate the greatest return but also merit the highest risk. On the other hand, a risk-free investment guarantees a future return with essentially no possibility of loss. An example of a risk-free investment is US Treasury bills, as they are backed by the full faith and credit of the US government. If investors are taking on more risk by investing in stocks, they want to know their efforts are worth it. Enter the equity risk premium.

Understanding the Equity Risk Premium

The equity risk premium measures how much more an investor may receive in returns when investing in stocks versus a risk-free investment like T-bills. Basically, it puts a number to the term, “the higher the risk, the higher the reward”.

As we’ve previously written, the fear of financial loss causes many investors to be overly cautious about their investments. ”Myopic loss aversion” is when focusing on avoiding short-term losses in equities leads to poor long-term allocation decisions.  Incorporating bonds into your investment portfolio can serve as  a stabilizer, reducing the payback period to see your portfolio recover from downturns. Many investors own some combination of stocks and bonds to ensure the risk-reward tradeoff is an acceptable range for them, either emotionally or financially (or both). Because of the fear of loss, many investors either avoid or under-weigh equities. How significant is the difference between owning stocks (highest risk), bonds (lower risk), or cash (no risk)?

Risks associated with investing in Stocks

So, why do those who invest in stocks generally receive a greater return? Because of the greater risk they take on by doing so, such as:

Unpredictability: Stocks do not offer fixed payments at specific intervals like bonds.

When an investor buys a bond, they are essentially lending money to a company or a government (see our Bonds 101 blog for a primer on bond basics). Like any loan, bonds have terms outlining specific payment amounts and dates. These payments, known as coupons or interest, are obligatory, with insolvency being the only reason for non-payment.

Conversely, stocks represent ownership in a company and entail greater uncertainty. Returns for stock investors can come in the form of dividends distributed by the company or by selling shares at a higher price in the future. Unlike bond payments, dividends are not mandatory and can be suspended unexpectedly, as seen during the onset of the COVID-19 pandemic. Additionally, the growth of dividends may not meet expectations, even for well-established companies commonly known as “blue chip” stocks (such as Coca-Cola, McDonalds, or Microsoft). Even large and stable companies face challenges that can cause fluctuations in their stock prices. Due to the unpredictability of stock payouts in terms of amount and timing, investing in stocks is inherently riskier and more volatile. As a result, investors demand higher returns from equities as compensation for bearing this additional risk.

Risk of Total Loss: Stockholders can see their investment go to zero more easily than bond investors.

Over the last thirty years, bondholders have frequently recouped 40% or more of their initial investment during bankruptcies, although exact recovery rates can vary[1]. In contrast, equity owners seldom receive any compensation in bankruptcy. The harsh reality is that most companies fail in the long term, and many of these companies made interest payments on bonds throughout their existence, while equity investors ultimately see their investments become worthless. Regardless of whether you’re investing in stocks or bonds, owning a broad index fund provides essential diversification. Owning a basket of companies ensures that even if one fails, the other companies that continue to grow offset your losses so you’re never experiencing a complete wipeout.

The Equity Premium at Play Can Sometimes be a Jackpot

First, a quick note: All return figures mentioned below are based on real returns, or returns after adjusting for inflation. Real returns are the most accurate comparison across different asset classes, reflecting changes in purchasing power over time. Although nominal returns are widely used in the financial world unless otherwise specified, they do not account for inflation and are therefore less accurate in this example. All returns are based on rolling 12-month periods, meaning this is the return if you held the investment for 12 months.

Table 1 - Real returns, rolling 12 month periods - (1926-2023, adjusted for inflation)[2]

When we look at the real returns for the last 97 years between cash, bonds, and equities, it’s clear stocks deliver the highest returns, albeit with the most downside risk. Cash is undeniably the safest asset class but struggles to outpace inflation. Bonds tend to be closer to cash than equities in terms of their risk-return profile.

The Long-Term Power of the Equity Premium for an Investor

While stocks undoubtedly offer the highest returns, it’s essential to grasp their long-term value to investors. To demonstrate this, let’s outline a hypothetical scenario:

• Assume three investors each save $5K annually for 40 years for retirement for a total contribution of $200K per investor.

• We’ll assume each investor owns only a single asset class (cash, bonds, or stocks) for all 40 years of saving.

• We’ll use the real return averages from Table 1 for each asset class.

• We’ll utilize the commonly cited 4% annual withdrawal rate[3] for retirees to determine how much income the portfolio provides in retirement annually.

Table 2 – Portfolio values assuming real returns

The difference in portfolio value, and resulting income possible in retirement, is significant. A pure equity investor ends up with nearly six times the spending power of a pure bond investor after 40 years.

While equity market volatility can be unsettling, exposure to equities can significantly reduce the amount of savings required to achieve your financial goals such as funding retirement. It’s critical to ensure your equity allocation is sufficient to facilitate asset growth yet small enough to prevent panic during market downturns. Striking this balance depends on your emotional risk tolerance and financial capacity for risk.

Determining the optimal equity and bond allocation requires careful consideration of factors such as taxes, time horizon, and liquidity needs. If you are seeking guidance in navigating this complex process, please reach out to us at 503-905-3100, or email hi@humaninvesting.com to start the conversation.

Sources

[1] https://www.spglobal.com/ratings/en/research/articles/231215-default-transition-and-recovery-u-s-recovery-study-loan-recoveries-persist-below-their-trend-12947167

[2] These returns are based on an index, do not represent actual investment results, and are not guarantees of future results.

Data based on rolling 12 month returns, with monthly return intervals.

Equity returns utilize the Ibbotson SBBI Large-Cap Stocks Total Return for Jan 1926 to Sep 1989 (data courtesy of CFA Institute), and S&P 500 TR for Oct 1989 to Dec 2023 (data courtesy of YCharts).

Bond returns utilize the Ibbotson SBBI US Intermediate Term Government Bonds Total Return for Jan 1926 to Apr 1996 (CFA Institute), and Bloomberg US Aggregate for May 1996 to Dec 2023 (YCharts).

Cash returns utilize the Ibbotson SBBI US (30-Day) Treasury Bills for Jan 1926 to May 1997 (CFA Institute), and Bloomberg US Treasury Bills 1-3 Month for Jun 1997 to Dec 2023 (YCharts).

Inflation rates for calculating real returns are based on the Ibbotson SBBI inflation for Jan 1926 to Jan 1947 (CFA Institute), and the Consumer Price Index (CPI) for Feb 1947 to Dec 2023 (YCharts).

[3] https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf

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The window is open from August 5-27, 2024

It’s that time of year again where Nike leaders will need to make their annual Nike Stock Choice and select between 100% Stock Options, 100% RSUs or 50/50. 

When comparing Nike Stock Options and Nike RSUs, RSUs are the safer option.  RSUs offer a more secure value and a more moderate level of upside and downside.  Stock Options are more volatile but can also provide significantly more upside over time.

At first glance the decision can feel simple since there are only 3 roads to take, and when in doubt picking the middle road of 50/50 is the easy compromise.  While this can be the right selection for many individuals, it is not always the optimal choice.   While working alongside Nike leaders over many years, we have found that there are 11 crucial questions to answer and consider so that you arrive at that optimal selection for you.

Timing questions: Is it a sprint or a marathon?

Understanding your timeline is one of the most important factors in your choice.  Stock Options do not have any value until the stock price increases, but they do grow at a faster pace than RSUs.  So given enough time, Stock Options can surpass RSUs in value.  This is why timing considerations can be crucial to your decision and you should consider questions like:    

1. What is the purpose of Nike stock for you and your family? 

Does it contribute to longer-term goals like retirement, building wealth, and creating a legacy? Stock Options are more appropriate here. Or is it for shorter-term needs like a second home, more vacations, or education for your kids?  RSUs typically make more sense for these scenarios.

2. How much longer do you think you will work at Nike?

To the best of your ability, you should consider how long you think you will remain at Nike.  Your timeline could be short if you are seriously considering offers from recruiters or think your position could be eliminated.  In those types of considerations, RSUs could make more sense.  Conversely, if you plan to stay at Nike long-term and feel like your position is secure, you have a better chance to participate in the long-term growth of Nike stock.  In this case, Stock Options may be a better fit.   

3. How often do you typically sell Nike Stock to fund purchasing needs?

If you frequently sell your Nike stock grants to fund lifestyle needs, you likely need a more consistent funding source like RSUs since there is not adequate time for the stock to grow and realize the value.  

Behavioral questions: It goes beyond the numbers

As human beings, behavioral and emotional factors often affect our financial decisions.  These types of questions include:

4. What did you select last year, and do you feel like that was a good decision? 

Do you have buyer’s remorse, or do you feel good about that decision regardless of which selection is better at this point-in-time?  It is important to remember that the Stock Choice selection is a long-term decision that should not be overly influenced by recent, short-term results.

5. How much regret would you have if your peers made a more financially successful choice? 

If your peers are all celebrating the success of their selection and yours is different, how much would this affect you?  Everyone has a different level of response in these situations and setting yourself up well to be at peace with your decisions is important to your well-being.

6. How do you currently feel about the long-term growth potential of Nike stock?

Your long-term feelings toward Nike stock potential should be considered since it will better match your expectations and satisfaction regardless of what actually happens with stock performance.    

Risk questions: How much turbulence are you okay with?

7. If stock price dropped by 20%, how would you feel?

It is normal for any stock, including Nike, to experience ups and downs and a 20% drop at some point should be expected.  During these moments, would you be concerned to the point of wanting to sell immediately, not concerned at all, or a little concerned?  If this type of drop would be too difficult to stomach, you may want to lean towards RSUs.  If it is not a concern at all, you may be well-suited for Stock Options.

8. How do you feel about your total exposure to Nike stock?

Does having the bulk of your financial assets tied up in Nike already cause you concern and anxiety, or are you hoping to build up more Nike holdings?  If you are already concerned about your exposure, you will likely be diversifying out of Nike stock.  In this case, it could make more sense to lean towards RSUs.

Quantitative questions: The numbers do matter

9. How is the price of Nike stock valued currently based on its earnings and other factors? 

Is it overvalued or undervalued?  You may want to examine the metrics to see how it currently stacks compared to its historical valuation.  If it is undervalued that could make you lean more towards Stock Options, or if it is overvalued it could make sense to lean more RSUs.

10. What is this year’s Stock Option Ratio?

Each year there is a calculation of how many Stock Options you will receive if you make that choice.  It is a ratio based on the value of the RSU choice.  For the first 4 years, it was a 5:1 ratio (5 stock options for 1 RSU).  Starting in 2022, it shifted to a 4:1 ratio.  We cannot say for sure the reason for this shift, but it would be reasonable to assume it was affected by interest rate changes and stock market volatility as those factors can change the valuation of a stock option.

The 4:1 ratio for Stock Options means that you would receive less Stocks Options and Nike stock price would require additional growth to become more valuable than RSUs.  A lower ratio could mean that you need more time for Stock Options to grow to have a chance to exceed the value of RSUs. 

The overriding ‘special’ question

11. Do you qualify for the Stock Option Special Retirement Vesting?

If you are age 55+ and have worked for Nike for at least 5 years, you qualify for the Special Retirement Vesting of any Stock Options. This is the most important factor in the entire equation to consider. 

When you terminate from employment at Nike, you will lose any unvested RSUs and Stock Options.  Additionally, any unvested Stock Options must be exercised within 90 days unless you qualify for the Special Retirement Vesting.  This Special vesting will allow you to keep your unvested Stock Options (held for at least one year).  These will continue to vest over the next 4 years or vest immediately if you are Age 60+.  You will also have more time to exercise your Stock Options instead of being forced to do so within 90 days after termination.    

Since this special vesting is so valuable, anyone that qualifies or will be qualifying for this vesting soon, should strongly consider Stock Options as part of their decision. 

Do you want help putting it all together?

As you can gather from the 11 questions above, there are many different factors that should be considered.  Determining which ones are the most important can be challenging. 

Based on your answers to these questions, you may already feel confident and comfortable with one of the three options.

For those who are still unsure or want to obtain detailed information while deliberating, our team at Human Investing created our own, proprietary scoring tool.  The scoring tool takes the answers to these questions, assigns different weights depending on the importance of each question, and generates a unique score report.    

GET YOUR OWN COMPLEMENTARY SCORE

If you or anyone you know is interested in receiving their own Stock Choice score sign up below. 

Get your score

Lastly, we believe it is important to consider how your Nike stock compensation fits within your overall financial situation.  The questions above and the scoring tool can be helpful, but this Stock Choice decision is best done in coordination with a personalized financial plan.

If you have questions or want to learn more about the Stock Choice, Stock Options or RSUs, please feel free to contact us at nike@humaninvesting.com

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Since the recent Nike quarterly earnings report, the stock price dropped 20% in one day (June 28, 2024) and continues to hover around $72 - $75 per share. This has raised concern for employees as they rely on Nike stock to fund a significant portion of their investment strategy and lifestyle needs.

Below are 4 thoughts on the recent price drop and action items you can implement to move forward during this downtime.

Give yourself time to recover

 It’s easy to lose sight of this when the stock price is rising. The focus goes towards remaining invested for as long as possible so you don’t miss additional investment gains and forget that volatility can disrupt your strategy.

In our blog post from August 1, 2022, we analyzed the recovery period for Nike stock price when there is a 20% downturn. We can’t predict how long this recovery period will take, but history tells us that on average, it takes 339 days.

Action Items:

• Stock options: The most common approach is to exercise and sell your Stock Options by converting it to cash before the expiration deadline. You may want to consider the less common option to exercise and hold the stock. This gives you an indefinite timeline to hold the stock and strategically wait until the right time to sell. For the exercise and hold strategy, you need to have cash to purchase the stock. For example, to exercise and hold 100 shares at $75 per share, you need $7,500 cash to purchase, so plan accordingly.

• Strategically diversify: Diversify new ESPP and RSU purchases. Selling new shares at the time of purchase does a couple of things: (1) Avoids the risk of loss in value, (2) allows you to diversify into a balanced investment portfolio, and (3) gives time for your older Nike stock purchases to recover.   

Strategically raise funds when needed to minimize taxes

Rather than focusing on “how much cash do I need”, look at each of your Nike investment buckets and determine how you can get the cash you need in a tax-advantaged way.

Action Item:

• Tax analysis: For RSUs and ESPP, look at each Lot to determine which holdings would sell at a capital gain and which would sell at a loss. Review critical factors such as (1) how much cash do I need, (2) how much investment will remain, (3) what is the net tax impact of what I’m selling, and (4) how long until I need to raise more funds.  

Re-evaluate your financial plan

When the stock price is down, it’s an opportunity to evaluate whether changes to your financial plan are required to stay on track with achieving your long-term goals.

Action Items:

• Maximize benefits: Specifically ESPP stock while the price is low. At the next ESPP enrollment, consider increasing your deferral percentage to the maximum of 10%. 

• Adjust investment strategy: Evaluate your overall concentration of Nike stock. If Nike stock is a large portion of your overall investment portfolio, consider ways you can maximize your savings going forward into a diversified portfolio to reduce your overall exposure.

• Stock choice: Think about your upcoming Nike stock choice. If you’ve taken 100% RSUs in the past, does it make sense to change your strategy to 50/50 stock options or 100% stock options?

• Prioritize your expenses: Determine which expenses are most important to you. Consider reducing or delaying expenditures that do not align with your highest priorities. This approach can feel difficult at first, but the more you buckle down during this season, the greater impact it will have on your financial plan.

Re-visit your college savings plan

Many Nike employees rely on their stock options to fund their kid’s college expenses. If this was your strategy, your options are underwater unless you have grants from 2014 (which expire soon) – 2017.

Action Items:

• Evaluate other funding sources: Do you have other investment levers that can be used to fund college expenses?

• Cash flow: How much cash flow do you have within your annual budget to fund college expenses? Will this be sufficient to cover part or all of the expected cost?  

• Deferrals: If you reduce your retirement deferrals, will this increase your cash flow enough to fund annual college expenses?

• Prepayments: If you are pre-paying any loans (ie: paying extra on your monthly mortgage), consider paying the minimum to free up cash flow for college expenses.   

• Grants and scholarships: Are there opportunities to explore this further?

• Adjusting expectations: Does this prompt a discussion with your kids around sharing the cost of college expenses?  

Consider your timeline. When Nike stock is increasing, it’s easy to lose sight of your timeline because the focus is not missing out on the appreciation. The recent volatility is a reminder that time is the most valuable asset when investing. The action items above are the starting point to navigate through the volatility. Please reach out to us so we can continue the discussion and help implement these strategies to remain on track with your long-term financial goals.

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As the golden years approach, retirement promises relaxation and newfound freedom. However, during this period of life, there's an often misjudged financial responsibility - Required Minimum Distributions (RMD). Despite an investor saving diligently to tax-deferred accounts like pre-tax 401(k)s or traditional IRAs for retirement tax advantages, higher tax rates often blindside retirees due to these distributions.

Failure to prepare for RMDs can lead to a substantial increase in your retirement tax bill.

Fortunately, strategic retirement planning and foresight offer avenues to mitigate the impact of an inflated tax bill. By reducing your taxes, you gain the flexibility to allocate your funds where they matter most – be it for personal expenses, supporting loved ones, or giving back to charitable causes.

Understanding RMDs

RMDs are mandatory withdrawals from tax-deferred retirement accounts starting at age 73 (or 75 for those born in 1960 or later). These withdrawals aim to ensure you pay taxes on the money you've saved.

Each year, individuals can calculate their RMD by dividing the total amount in their eligible retirement accounts at year-end by a factor determined by the IRS, derived from their life expectancy which is listed in the Uniform Lifetime Table.

Let’s use an individual who is age 73 and had a $1,000,000 IRA balance as of December 31 of the previous year as an example. Their IRS life expectancy factor is 26.5, which means that their RMD for this year will be $37,735.85.

$1,000,000 ÷ 26.5 = $37,735.85

It's crucial to take RMDs on time to avoid penalties. Failure to do so can result in a 25% excise tax on the amount not withdrawn as required.

Don’t Leave your RMDs Unchecked

As each year passes, the life expectancy factor used to calculate Required Minimum Distributions (RMDs) decreases. This results in a larger portion of the investment portfolio needed for mandated withdrawals. Put simply, the older you are, the higher the required withdrawal amount, which in turn increases the associated tax bill.

To illustrate this increase in RMDs over time, let’s consider that someone with a $1,000,000 IRA balance must take approximately $37,736 at age 73, or about 4% of their pretax eligible portfolio. Seventeen years later, at age 90, the required withdrawal amount grows to over $118,000, or about 8% of their qualified portfolio.

This is where the danger of RMDs becomes evident. Left unchecked, RMDs can snowball, leading to an increasingly burdensome annual and lifetime tax bill. Additionally, as your income rises due to RMDs, you may inadvertently trigger additional tax traps such as:

• Taxes on Social Security Benefits: An increase in income can subject a higher percentage of your Social Security benefit to taxes. Whether or not your Social Security benefits are taxed is based on your combined income level and marital status.

• Medicare IRMAA surcharges: These surcharges present another potential financial concern. This can increase monthly Medicare premiums due to the Income Related Monthly Adjustment Amount (IRMAA). If you're enrolled in Medicare or plan to enroll within the next two years, exceeding the income threshold by as little as $1 could result in hundreds of dollars in additional premiums for Medicare Part B and Part D.

Strategies to Mitigate Tax Impacts of RMDs

Although failure to plan for RMDs can cause tax traps, thoughtful strategizing can help. Here are a few ways to mitigate tax impacts of RMDs, so they support your retirement lifestyle rather than cause a headache:

Withdraw more funds than you need

The most straight-forward strategy is to withdraw more funds than you need after age 59½. This age typically marks the earliest point at which you can start withdrawing from a tax-deferred account without facing a 10% early withdrawal penalty. By deliberately withdrawing funds, you can reduce your account balance and, as a result, your future RMDs. This strategy can be advantageous when current tax rates are lower than anticipated future rates.

Utilize Roth Conversions

A Roth conversion involves transferring a portion of funds from a traditional IRA or other tax-deferred retirement account into a Roth IRA. During this process, taxes are paid on the transferred amount at ordinary income tax rates for the year of conversion. The remaining funds are then reinvested in the Roth account.

This strategy appeals to many, especially those aiming to strategically reduce future Required Minimum Distributions (RMDs). Withdrawals from Roth IRAs in retirement are tax-free, and there are no RMD requirements, making this option attractive for minimizing tax obligations.

The rationale behind opting for a partial Roth conversion revolves around managing when and at what rate taxes are paid. By strategically choosing to pay taxes on tax-deferred dollars in a year when you are in a lower tax bracket than when you anticipate withdrawing the funds, you can maximize tax benefits. Additionally, reinvesting dollars into a Roth IRA allows them to continue benefiting from compound growth, with all future growth being tax-free.

Effective Roth conversions should be based on a thorough analysis of both current and future tax brackets, considering potential changes in tax rates and various sources of retirement income. It's crucial to convert just enough to utilize the lower tax brackets, maximizing the advantages of Roth Conversion.

Consider this scenario: you possess a $1,000,000 IRA and have recently consulted with your financial planner for a retirement tax analysis. The analysis suggests that executing a $50,000 Roth Conversion to fill up the 12% tax bracket would be prudent. This strategic move takes advantage of the current lower tax rate, shielding you from potential future tax increases when Required Minimum Distributions (RMDs) come into play. Given the expectation that RMDs will push you into the 25% federal tax bracket in the future, this decision protects you from paying an additional 13% in taxes.

During this conversion process, the $50,000 seamlessly transitions from your traditional IRA to a Roth IRA. Although this amount is subject to ordinary income tax, you have flexibility in managing the tax liability, whether through tax withholding on the Roth Conversion or by utilizing estimated taxes from alternative sources.

It's important to note that any subsequent growth on the converted amount within the Roth IRA remains entirely tax-free for you or your beneficiaries, providing lasting financial benefits.

Make an Impact through Charitable Donations

Another strategy to decrease your tax burden involves donating some of your IRA distributions directly to a qualified charity. Once you reach age 70½, you become eligible to make a Qualified Charitable Distribution (QCD), which is a tax-free transfer of funds from your IRA to an IRS-recognized charity. While these distributions are not subject to taxation, they do count towards fulfilling your required minimum distributions for the year.

Retirees who do not immediately require their RMDs and wish to support their chosen charity or religious institution tax-efficiently should evaluate whether making donations directly from their IRA aligns with their financial goals.

Viewing QCDs as part of a broader tax and charitable strategy is essential. Donating directly from an IRA offers a more significant financial benefit than donating cash or appreciated securities because it reduces your Adjusted Gross Income (AGI). This is particularly advantageous for retirees who no longer itemize deductions and instead choose the standard deduction, maximizing the tax benefits of charitable giving.

Have an RMD Strategy in Place

Grasping the nuances of RMDs is pivotal for retirement preparedness. Neglecting to address RMDs can result in significant tax liabilities, jeopardizing your financial stability during retirement.

By integrating proactive strategies into your retirement planning, you can mitigate the effects of RMDs, maintain control over your tax situation, and align your retirement savings with your lifestyle and legacy goals. Seeking advice from financial experts can offer personalized support in navigating RMDs effectively, empowering you to pursue your retirement aspirations confidently.

For more on retirement strategies, download our 36-page guide here.

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Between Fed Policy and the Presidential election, 2024 has all the makings to derail investors. While these factors introduce volatility and uncertainty, historical insights and a sound financial plan can guide those navigating the financial markets.

The year began promisingly, with the market reaching all-time highs in the first quarter of 2024. However, the start of the second quarter has highlighted the inherent unpredictability of the financial landscape. Beneath these surface-level fluctuations lies a geopolitical landscape marked by pivotal events that demand attention.

Fed policies will continue to impact market dynamics

The Federal Reserve's stance on interest rates emerges as a significant factor shaping market sentiment and performance in 2024. Speculation about potential adjustments in interest rates can significantly influence investor behavior and market dynamics. Lower interest rates can stimulate economic activity and boost equity valuations. However, uncertainties surrounding the timing and magnitude of such policy shifts add complexity to the investment landscape. At the beginning of the year, the Fed indicated it might cut rates at some point in 2024. But with inflation remaining higher than expected, it's now anticipated that there will be fewer rate cuts (if any) than initially predicted.

The "cost of admission": lessons from decades of market turbulence

Regardless of the headlines, it's fundamental to understand that the path to stock market growth is paved with bumps in the road. The following chart from JP Morgan nicely illustrates how volatile the stock market can be over short periods of time. In the chart, grey bars represent the returns for each calendar year, while red dots show the intra-year declines.

Looking back to 1980, the S&P 500 experienced an average sell-off of 14.2%, while ending positive in 33 of the 44 years measured. This inherent market fluctuation underscores the “cost of admission” for those seeking long-term gains through stock investments.

Insights from past elections: market performance amid political uncertainty

In most years, the stock market experiences growth, and this pattern holds true for presidential election years as well. However, investors should be prepared for increased volatility due to market uncertainty. Over the past four decades, election years have witnessed heightened market volatility fueled by the ambiguity surrounding political transitions. Despite this turbulence, historical data illustrates the market's resilience.

The S&P 500 has delivered a median total return of 11% over the past ten election cycles, inclusive of the 2008 Global Financial crisis. Though slightly lower than the median return of 15% across all years since 1984, this resilience showcases the market's ability to weather political flux.

Despite the uncertainty surrounding elections, historical data indicates that remaining invested through the election has proven advantageous. Once election results are announced, returns often speed up, usually boosting equity valuations and prices post-Election Day regardless of election outcome.

Leveraging a well-crafted plan for stability

During market turbulence driven by factors such as Federal Reserve policies and elections, a well-crafted financial plan acts as a stabilizing force. As we journey through 2024, it's essential to acknowledge that fluctuations are inherent in investing. Stress-testing your financial plan against various scenarios becomes vital, providing resilience in the face of uncertainty. While headlines may evoke strong emotions, maintaining a long-term perspective grounded in a robust plan aids in navigating choppy waters.

As 2024 unfolds, investors are reminded to stay committed to their financial plan's principles. By drawing on historical insights and adhering to a clearly defined strategy, investors can confidently maneuver through market volatility, knowing that their financial plan serves as their guiding star, directing them toward their long-term objectives.

Sources

1. Human Investing. (2024). 2024 Q1 Economic Update: Politics and the Market. Human Investing Blog. Retrieved from https://www.humaninvesting.com/450-journal/q1-2024-economic-update

2. Goldman Sachs. (2024, February 1). Global Macro Research. Retrieved from [https://www.goldmansachs.com/intelligence/pages/2024-the-year-of-elections-f/report.pdf]

3. J.P. Morgan. (2024). Guide to the markets: March 31, 2024.

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If you’re a business owner, own a rental property, or receive self-employment income and are registered with a Secretary of State, you may be subject to Beneficial Ownership Information (BOI) reporting. To provide ownership security to U.S. licensed companies, the U.S. Treasury Financial Crimes Enforcement Network (FinCEN), is requiring initial BOI reports as of January 1, 2024 from domestic and foreign companies who file with a Secretary of State or similar offices in the United States.

Know when to file a report now to avoid headaches later

Whether you are involved in a partnership, LLC, or corporation, the importance of reporting to FinCEN is not just for security purposes. If not filed on time, BOI reporting can become a personal financial burden. There is no fee associated with BOI reporting, however those who fail to report or willfully violate the BOI requirements may be subject to civil penalties of up to $500 for each day the violation continues. Below are deadlines that will help individuals determine when they will need to file a BOI report:

• Entities created or registered on or after 1/1/2024: 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report.

• Entities created or registered before 1/1/2024: Must report an initial BOI before 1/1/2025.

• Entities created or registered after 1/1/2025: 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.

This is a one-time filing, but keep tabs on your future business changes

If changes occur with required information about your company or its beneficial owners, your company must file an updated report no later than 30 days after the date of the change.

Please note, company applicants cannot be removed from a BOI report even if that individual no longer has a relationship with the company.

Any individual associated with the reporting company is eligible to file the report on behalf of that group, but to mitigate any mistakes, seeking out a trusted legal professional such as an attorney, is recommended. Please visit the FinCEN BOI E-filing website and their thorough Q&A section for further information on BOI reporting.

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It’s no secret that Nike has been going through a tough time with the recent rounds of layoffs. This can create concern and uneasiness around a Nike employee’s livelihood and how it may affect their financial picture. As we have been actively guiding our Nike clients through this season, we wanted to share things to consider if you were or will be impacted by these layoffs.

Understand Your Severance Package

Nike has a standard severance agreement and package that includes a one-time payout of cash based on your level and tenure at Nike. This can range from 4 weeks to 48 weeks of salary.

In addition, there is often a continuation of health insurance through COBRA that includes a subsidy of the cost for around 6 months. This provides some time to transition to a different health insurance plan if that is right for you.

If you have any accrued PTO that you haven’t used, this will be paid out to you in cash after officially leaving Nike. This is often extra cash that people are not expecting and can help create some comfort during an uncomfortable time.

Lastly, you may still be eligible for the PSP bonus paid out in August as long as you are still employed anytime in May (the last month of the Fiscal Year).

Create a Strategy for Deferred Comp Distributions

If you contributed to the Nike Deferred Compensation Plan, leaving Nike will typically trigger distributions according to the schedule you designated when enrolling. This can range from a one-time lump sum or installments over 5, 10, or 15 years. For some, this can be a way to supplement income. However, for others who don’t need the funds, these distributions can create a tax issue to strategize around. These payments are sent out quarterly, so if this is needed for cash flow you should plan accordingly.

Plan for your Stock Options and RSUs

Any vested but unexercised stock options typically need to be exercised within 90 days of leaving Nike, unless you qualify for the special retirement benefits at age 55 or age 60 (you keep unvested options and can sell for lesser of expiration or 4 years). At this time, you typically will lose any unvested options or RSUs.

During larger layoffs, there can be enhanced vesting of options and RSUs, where upcoming vests within a year will accelerate and vest. In addition, Nike can also provide you with more time to exercise your stock options like up to 1 year instead of 90 days. When Nike stock price is struggling like it is now, it makes your exercise decisions in a small window difficult. We would recommend working with your financial advisor to determine a defined strategy to maximize the benefit and minimize taxes.

Keep track of your PSUs and ESPP

Normally, you need to be employed at Nike at the vest date to receive your PSUs. In a situation of Reduction in workforce (larger layoffs), you can still receive any PSUs if the vesting date is within one year of termination.

Any ESPP that has been contributed but not purchased yet will be refunded to you. In addition, you have more control over your ESPP shares that you have purchased previously as these can be held as long as you want. This provides an opportunity to be patient and strategic on any sale of this stock.

Prepare to mitigate tax liability

All the benefits outlined above come with tax implications that are not always easy to see. These items can quickly add up to large amounts of taxable income, which can push your income into high tax brackets. In addition, the tax is often under-withheld (22% Federal and 8% State), which can lead to a significant tax bill in April if not accounted for properly.

Know your 401K options

This recommendation depends on each person’s situation. Nike has a strong investment fund lineup, and you should compare that to any other place that would replace it. However, leaving your 401(k) at Nike requires more activity and maintenance since it does not have an auto-rebalancing feature, which would periodically sell funds that drift from their target allocation. For example, if the large company stock fund was targeted at 60% and grew to 64%, you should periodically bring that back to the 60% target to maintain the proper risk/return mix. Another factor to consider is the desire to make Backdoor Roth IRA contributions if you have extra funds for retirement savings.

Support when transitioning into the next job

The cash you receive from benefits like severance, PTO payout, and stock sales can help provide some comfort to your situation. While you are in transition with your job, we recommend creating a system to feel like you are receiving a paycheck replacement with your cash to reduce anxiety and bring normalcy to your day-to-day financial life. An example of this system would be taking your net benefits payout and depositing it in a savings account, then setting up bi-weekly transfers to your checking account to simulate your paychecks.

All these considerations are tied to a person’s long-term financial plan. Through financial planning projections and scenario planning, you can help determine what the next job needs to look like to achieve your goals for retirement, kids’ education, and lifestyle. It can provide you with the information to know if you need a comparable compensation package to Nike or if you could take a job with lesser pay that could be more fun or less stressful.

Being laid off from any job often creates much uncertainty, stress, and concern. With the right preparation, planning, and advice, it can be a smoother transition, and you may end up in an even better place than where you started.

If you have questions about preparing for or navigating a current layoff at Nike, please feel free to contact us at nike@humaninvesting.com.  

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Bonds are a fundamental piece of most investment portfolios, and the basics of bonds can confound even seasoned investors. When testing financial literacy through 5 core questions, bonds are frequently the topic that most commonly trips people up (try the quiz here). We want to make it easier for you to grasp the basics of bonds, whether you're new to investing or just want a quick review.

lend money to companies or the government

At its core, a bond is a type of loan. It's usually issued by governments or companies that need to borrow money. When you buy a bond, you're essentially lending money to the issuer. As the bondholder, you receive interest payments from the borrower.

Bonds are generally considered less risky than stocks, because if the borrower faces bankruptcy bondholders get paid before stockholders. However, the return on bonds is typically lower than stocks, and there's a risk that the borrower might not be able to pay back the debt.

key terms related to getting paid back

The principal value is the amount being borrowed by the issuer. Typically bonds trade in $1,000 increments.

The maturity date is the date the bond will return the principal value (aka face value) to bondholders.

You also receive interest when you lend money. The interest received is usually based on the Coupon rate, which is the interest payments paid to bondholders. Typically as a percentage of face value paid annually. For example, if you have $1,000 of a bond with a coupon rate of 5%, you will receive $50 in interest payments every year until the bond matures. Upon maturity, you will get the $1,000 principal back.

Credit rating is like a credit score for a government or company, indicating how likely they are to make payments. A higher credit rating indicates a higher chance of the issuer making payments.

Imagine if Disney needed to raise money via bonds

When a bond is first issued, the issuer sets the terms like the coupon rate and maturity date. The reality is that interest rates and credit risk (how likely the issuer is to payoff the bond) change after the bond is issued, which causes the bond price to fluctuate.

Imagine if Disney issues bonds paying 5% interest, the current market rate.

You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures.

If interest rates go up, this isn’t good for your bondS

If interest rates rise next year to say 8%, and Disney issues new bonds, they will probably issue them at the new interest rate.

Your neighbor Laura decides to buy $1,000 of the new bonds, and she gets an $80 coupon from Mickey Mouse every year.

Because interest rates rose, the value of your bond paying $50/year goes down in value, less than the $1,000 you purchased it for because the $1,000 could buy Laura’s bond paying $80/month.

The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000. This is why when interest rates rise, bond prices fall.

Think of a teeter-totter: When one side’s down (interest rates), the other side must go up (bond prices).

When your bond is trading below $1,000, it is trading at a discount, typically with a coupon rate lower than current interest rates. If your bond is trading above $1,000 it is trading at a premium, typically with a coupon rate higher than current interest rates.

Timing bond returns

Remember that the bond market is full of smart people looking to try and make money. As a result, all similar bonds are priced so they provide similar returns. For example, if you see a 2 year bond with a 5% coupon, and a 2 year bond with a 3% coupon, the price of the 3% coupon bond will be so much lower than the 5% coupon bond and you will end up making just as much money either way. This is called the yield, or coupon + price return on a bond. Keep in mind if there are differences in bonds (i.e. higher or lower credit risk, time to maturity, other terms of the loan), that can cause differences in yield too.

When should I own bonds?

Long term equities tend to produce higher returns than bonds. However, these equity returns involve higher risk, and some people can’t afford to wait to make their money back. Bonds are an important ballast to ensure you can sleep at night, keeping a portion of your portfolio safe. Bonds can also provide a reliable source of cash flow that can be more reliable than stock dividends.

Finding the right bond for you

Like stocks, there are different bonds. Sovereign bonds (issued by governments) tend to be less risky, providing lower returns because of the lower credit risk. On the other hand, corporate bonds (issued by companies) provide higher returns, with an increased danger of losses due to companies going bankrupt.

At Human Investing, we provide individual treasury ladders for clients. US Treasuries are broadly considered one of the safest investments in the world. By owning individual bonds, you know you will get your principal returned upon maturity. The liquidity of treasuries also allows for flexibility if funds are needed sooner than anticipated.

Alternatively bond funds can be an excellent solution for clients, particularly those seeking growth. By investing in a bond fund, you gain exposure to a diversified range of bonds, enabling you to take on credit risk more effectively than as an individual investor. Much like owning a stock index fund, owning so many different companies debt means even if a few go bankrupt, they are such a small piece of your portfolio you will be okay.

Still have questions, or want to talk to an advisor? Reach out to us at hi@humaninvesting.com, or 503-905-3100.

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