A lot has changed in 2020, but contributions limits will remain relatively consistent going forward. The IRS recently announced the 2021 contribution limits. The most notable change specific to retirement plans is that the annual deferred contribution limit will increase from $57,000 in 2020 to $58,000 in 2021.
Here are the applicable updates for the coming year.
Please let us know if you have any questions. We look forward to working with you in 2021. Take good care.
A week ago, I came across a chart that does a nice job representing the call volume we have been experiencing at Human Investing in 2020. While the amount of calls we receive does not equal the amount of times people search for CNBC, the two data points are certainly correlated.
The image is titled, “When Markets Fall, We Search”, and ultimately shows that individuals have been more likely to seek out CNBC (market related news) any time the market has fallen over the last 15 years.
I’d argue that you could replace ‘search’ with ‘speculate’ and both the phrase and the chart would remain true, “when markets fall, we speculate”. Given the state of current affairs and the upcoming presidential election, individuals are worrying about their retirement accounts. A growing number of conversations our team has with individuals inside of retirement plans sound something like this:
Caller: “I’m fearful of (X) candidate winning the election because I’m affiliated with (Y) political party (both sides are saying this). Additionally, there is uncertainty around COVID, and I don’t feel comfortable staying invested during these unpredictable times. I’d like you (Human Investing) to help provide me with a more conservative investment recommendation.”
Before I respond with market research, I want to reiterate that you aren’t alone with your concerns and fear. We hear you. At the same time, before making any decisions related to your portfolio, take the time to think through all the angles of your decision. The rest of this post will hopefully provide some anecdotes in your process. Here are few thoughts about what it looks like to plan for the end of 2020 and into 2021. Remember, it is better to plan than to speculate.
Generally speaking, there is low correlation between political parties and the stock market. However, that statement is easy to say and difficult to live out in practice. Tread lightly when reading articles that try to align which stock/sectors to own with the political party that takes office. This article from 2016 couldn’t have been more wrong prognosticating that energy companies (specifically Exxon Mobile) would be top performers for the proceeding four years. It goes without saying this was a massive miss.
If you think like a speculator, you will make rash decisions around your investment accounts and have no plan for re-entering the market if you move your dollars to cash or to a conservative investment.
If you think like a planner, you will use both quantitative and qualitative measurements to evaluate your decision. For example:
If you have a long-term horizon (greater than 15-20 years), political changes should not impact your investment decisions.
Irrespective of the political environment, review if your account is too aggressive or too conservative for your financial landscape.
Have a clear understanding of both candidate’s tax policies. Changes to the federal tax code should be a factor in your financial planning for the remainder of 2020 and into the future. If you are working with a CPA and/or Financial Advisor, make sure they are staying abreast with any impactful tax code changes.
Trying to time the market when negative news arises (or the anticipation of negative news) is a dangerous game to play. Luckily, we have a recent case study of how dangerous it can be. From January 1st to March 23rd, the stock market fell 30%. Since then, the market has recovered all losses and then some. If you were thinking like a spectator, it would have been easy to create a narrative around mid-March to pull your money out of the market and wait for greener pastures. If an investor did so, most likely that investor is still waiting for the market to dip and has missed out on the recent recovery as indicated by the second chart.
If you think like a planner when the market is more volatile, sometimes taking some form of action itches a behavioral scratch. Here are some ways to take action while not compromising your account:
Raise your contribution in your retirement account to take advantage of a decreasing market (buying more shares at discounted prices).
Open a small “fun money” account to track if your predictions are correct.
If the market does significantly drop, look at converting pre-tax dollars to ROTH.
The concept of thinking like a speculator vs. thinking like a planner represents the cultural moment we are living in right now.
Speculating = headlines, fast moving social media, and the potential for instant gratification.
Planning = well thought out strategies that take time and often require no action.
As we head into this season of elections and COVID uncertainty, I hope this post provides some perspective on how to approach your portfolio. As always feel free to reach out to our team to talk through your thought process. We are happy to help!
Andrew Nelson
Andrew is passionate about diving into the details of organizations and how they serve their employees. Working with companies, increasing the financial literacy of employees and committees and stretching employee benefit dollars are at the core of what Andrew and his team get excited about.
“Am I okay?” Fear ripe in my voice.
We just heard what no climber ever wants to hear: one loud scream, three thuds, then nothing.
At that moment, I was sixty feet in the air doing the routine work of cleaning the anchor, removing all the gear that protected us as we climbed up the route and re-setting the rope to be lowered and move on to the next climb when we heard it.
That sound? It was someone falling. Hard. We didn’t know how far or how badly, but we knew that climb was higher than mine: about eighty feet top to earth.
“I got you!” He called back. “Take a deep breath. Tell me what you’re doing.”
I did. I called out every single step I was taking to clean the anchor and secure the rope back to my harness –triple checked for safety – and he held the rope. Eventually, my feet and wobbling legs arrived safely back on earth.
When you rock climb, there is obvious risk involved. Risk that you accept as the price of admission for moving higher than twenty feet – the height where, if you fall, you most likely will not be fatally injured.
Confidence matters. Confidence in your gear, skill, weather, and your risk tolerance. Yet there is a confidence that is as important – if not more important – than all the confidence inside you: that is confidence in your belay partner.
Your partner is the one on the other end of the rope, your safety line, whose responsibility it is to pay attention, catch you when you fall, and lower you safely from sky to earth. A good belay partner must not only know the mechanics of climbing and safety but must also know you. They communicate clearly and are always paying attention – often mitigating the risks that are out of your control when you chose to leave the earth and head toward the open blue.
At no point after hearing those falling sounds did anything feel ok. My imagination was a wild hostage situation, forcing in front of my focus nightmares of gear failing and my body hurling through space.
But in reality, I was okay. I was safely anchored. We had a plan and practice in place for climbing safely. My belay partner was paying attention, “I got you”. He heard the sounds too, but he did not take his focus off the rope and my safety.
There is risk involved in climbing your portfolio value higher than a modest, though acceptable, goal of beating inflation.
When the market takes a dive and the media heads are talking about total economic fall-out, it sure doesn’t feel okay. Do you have a good partner? A good advisor is a good partner.
Are they paying attention? When you hear the rumble and scary sounds of the market moving and you call out, “Am I okay?”, how does your advisor respond?
Our climbing anchor is the fiduciary standard. Every trade, conversation, and piece of back-office work is done to mitigate unnecessary risk as your portfolio climbs, and it is all done with YOUR best interest in mind.
Our figure-eight is clean and tight. Your financial plan is like tying the climbing rope in to your harness – it is your safety line that serves to mitigate risk by informing how your dollars are invested to avoid and securely catch any falls. When the market crashes, we are on the other end of the line.
Our GriGri is loaded and locked. We have the highest standard in investment tools. We know our tools and we use them well, monitoring the “weather patterns” of the market, watching your portfolio as it climbs and responding as appropriate.
“On Belay? Belay on! Climbing? Climb on!” Before you climb you say to your partner: Are you ready and paying attention? We are paying attention and ready to serve you. There is more than one set of eyes on your accounts – you are more than dollars and stock holdings to us. We will not be distracted by the noise around us.
“I got you!” As with any good partner: We know you. We will respond to fear or a fall. Your time with us is invested in discussing your goals, your values, and your reactions when your portfolio climbs or lurches. We answer when you call, and sometimes we call you first because we also hear the sounds of the news and peers, and it may be scary. But in the end, we “got you.” We will not allow a fall-fear to inflict avoidable loss.
If you would like to talk to an advisor about how to climb your portfolio the Human Investing way, give us a call or send us an email. It would be our pleasure to partner with you.
Alanna Wilson
Alanna serves at Human Investing by coming along side both clients and team members to smooth bumps in the road of paperwork, technology, and human communication. For her work at Human Investing, Alanna draws from her diverse experience in gerontological social work and business management.
Health Savings Accounts (HSA) made the roster of tax-deferred accounts. For this reason, these accounts can be a favorable component in a financial plan both today and in the future (65+ years old). HSA accounts were first introduced in 2003, and since then, their utilization among employees and employers has grown meaningfully. In order to be eligible to participate in an HSA – an employee must be covered by a High-Deductible Health Plan (HDHP) and not be enrolled in Medicare or other health coverage. Like an employer-sponsored retirement plan, a Health Savings Account offers benefits for both employees and employers. As such, their increased popularity is hardly surprising.
While there are many benefits of HSA accounts, we must also recognize that switching from a PPO plan to an HSA often results in more out-of-pocket medical expenses during the year. Yes, we agree that sounds unappealing. However, there is always more to the story.
The account is portable. Contributions to HSA need not be used in the tax year they are made. Additionally, if an employee changes jobs, the account is still accessible.
Health Savings Accounts do not impose income limitations. Unlike IRAs, highly compensated individuals are still eligible to participate in these tax-deferred accounts.
Health Savings Accounts provide a trifecta of tax savings:
Employee contributions are federal-tax deductible.
Federal tax on investment earnings is deferred until withdrawal.
All withdrawals (including earnings) used to pay for qualified healthcare costs are free from federal taxes regardless of when they are made.
Dollars contributed to an HSA are both literally and psychologically compartmentalized for medical expenses.
The time and money employees spend on healthcare is often more efficient with an HSA. This seems intuitive because unlike an FSA, employees have ‘skin in the game’.
Employer contributions to their employees’ HSA accounts are exempt from FICA taxes. In 2020, the combined FICA rate is 7.65% which is not insignificant.
Offering an HSA plan further diversifies the benefit offerings for their employees.
For those with an employer-sponsored retirement plan and an HSA account, there is a hierarchy for where to best save one’s dollars. This hierarchy assumes the employee does not have significant debt and has also created an emergency savings fund.
First Priority: Take full advantage of the 401k employer match. Free money!
Second Priority: Maximize your HSA contributes and invest your dollars for the future.
Final Priority: If you have extra earnings, contribute the maximum to a 401k plan or a Roth IRA.
Here is an example scenario of the three-step hierarchy above:
Sophia’s employer matches 50% up to 6%. Melissa should contribute 6% to her 401k plan, and her employer will contribute 3%. Free money – check.
Next, Sophia should maximize her annual HSA contribution. Trifecta of tax savings – check!
Finally, Sophia can contribute additional funds to her 401k plan to maximize her annual contribution and/or contribute to a Roth IRA.
There are early withdrawal restrictions for Health Savings Accounts to ensure individuals are using their account for the intended purpose: paying for medical expenses. Specifically, HSA’s incur a 20% penalty and income tax on any amount withdrawn before age 65 that is not used for medical expenses. That said, an HSA account should be opened with the pure objective of saving and paying for inevitable health expenses throughout one’s life.
When you have your inevitable health care expenses, you can also pay out-of-pocket and keep the receipts for tracking your deductible. From a long-term growth and tax perspective, this may be advantageous if you have extra savings in your bank account.
Most HSA accounts have a minimum cash balance required. Once you have saved the minimum cash balance, the additional dollars can be invested. The investment strategy within your HSA account will vary depending on your financial landscape, but often the investment strategy is aligned with your other retirement accounts – like a 401k or an IRA.
It is absolutely imperative to acknowledge that HSA dollars should be spent on health and wellbeing as needed. As exciting and opportunistic it is to imagine a future tax-deferred balance, health today must be prioritized. We do not work in the health sector, but at Human Investing we have a team of financial advisors who are committed to ensuring your medical costs are accounted for in a strategic manner.
What a season it has been. I hope and pray that each individual and family member receiving this note is healthy and safe. My goal over the coming months is to increase the volume of written communication. These notes will not replace our regular scheduled tax, planning, or portfolio updates. Instead, they will supplement those conversations and provide a financial perspective that can be communicated efficiently in writing. The purpose of this note is to discuss our position on market timing and portfolio rebalancing.
We believe that the financial plan is the seminal document for investors seeking to accomplish long term goals. Each financial plan is prescriptive in the amount of saving and portfolio return that is required to accomplish the goals outlined in the plan. The asset allocation decision is an important one—given it considers risk tolerance, time horizon, and financial goals[1].
The goal of rebalancing is to minimize risk and recalibrate, rather than to maximize return. The process of rebalancing takes the imbalance that is created by certain asset classes over time and recalibrates those asset classes. It takes the asset allocation that was originally prescribed by the financial plan and reorients the portfolio to its intended mix of stocks, bonds, and cash.
For most portfolios, recalibration should occur a few times a year. This is particularly true in retirement accounts, given there is no tax liability for creating gains. In trust accounts as well as individual and joint accounts, there is a sensitivity to tax gains as a possible consequence of rebalancing. Every effort is taken to minimize tax liability in those types of accounts. However, it can be hazardous to let the concern over taxes negate the discipline of regularly rebalancing. I can think of too many instances where a client avoided rebalancing their account out of concerns for taxes—only to have the market go down. The tax liability for rebalancing was ultimately dwarfed by the loss of principle due to the market decline. In short, it is rarely advisable to let the tax tail wag the investment dog.
The most common question I receive is, “when should we sell out?” My typical response is never. If an investor has a financial plan, which accounts for planning-based return expectations and subsequent asset allocation, the portfolio should always be properly positioned for risk and return. If the goal of “selling out” is to reduce risk, the action of selling implies the original allocation was incorrect.
In the past, there have been a few occasions where dramatically reducing risk by selling equities and raising cash makes sense. Or, to sell a portion of the stock investment and place the proceeds in bonds. But those reasons have to do with new information about the client situation, which prompt a change in the asset allocation. As an example, years ago, we had a client let us know that their business was struggling, resulting in the potential that their retirement account would need to be tapped for an emergency. Liquidating equities in their account was a response to a change of plans and circumstances—this is a plan modification and not market timing.
There is ample research dating back to the 1980s which suggests timing the market[2] or being able to predict the direction of the market is challenging at best[3]. Therefore, we believe in rebalancing “to recapture the portfolio’s original risk-and-return characteristics”[4], and we rely on the financial plan as the authoritative document to prescribe the proper mix of stocks and bonds for each client we serve.
[1] Zilbering, Y., Jaconetti, C. M., & Kinniry Jr, F. M. (2015). Best practices for portfolio rebalancing. Valley Forge, Pa.: The Vanguard Group. Vanguard Research PO Box, 2600, 19482-2600.
[2] Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of portfolio performance. Financial Analysts Journal, 42(4), 39-44.
[3] Butler, A. W., Grullon, G., & Weston, J. P. (2005). Can managers forecast aggregate market returns?. The Journal of Finance, 60(2), 963-986.
[4] Zilbering, Y., Jaconetti, C. M., & Kinniry Jr, F. M. (2015). Best practices for portfolio rebalancing. Valley Forge, Pa.: The Vanguard Group. Vanguard Research PO Box, 2600, 19482-2600.
Dr. Peter Fisher
Peter Fisher is the founding partner and CEO of Human Investing, an Oregon headquartered, employee-owned financial management company. Dr. Fisher’s research focuses on consumer financial literacy and behavior. He is the author of Becoming a 401(k) Millionaire (2018), and his doctoral dissertation is titled Financial Literacy and Behavior in Credit Unions.
A credit score can be a helpful tool for your overall financial wellness. Unfortunately, rules and regulations surrounding credit scores can be complex and unclear. Read on to learn the importance of a good credit score, its components, and how to use a credit score to impact your financial health.
Put simply, a credit score is your financial report card. It allows lenders to assess your trustworthiness as a borrower. A good credit score not only grants you easier access to lower interest rates on loans, but it can also help you rent an apartment, finance a car, or pay down a mortgage. In short, your credit score helps you navigate the lending side of the financial world, and even gain greater financial success.
Your payment history: Do you have a record of paying your bills, in full and on time? Doing so will boost your credit score. Paying bills on an inconsistent basis (or ignoring them completely) will lower your score. FYI, paying the minimum monthly payment is not paying your bills in full. Paying only the monthly minimum will negatively impact your credit score. Don’t be tricked by that sneaky number. Live within your means and pay your bills on time. Pro tip: Utilize due dates in your calendar, or use the reminders app on your phone, to remind you to pay your bills.
The amount you owe: Do you approach or reach your credit limit each month? The ratio of the amount you spend and the limit on your credit card is called credit utilization. It is best to keep this ratio high (i.e. 1:10 not 1:1). Leaving room between the amount you spend in any given month and the limit on your credit card will boost your credit score, while closely approaching your credit limit each month (or reaching it) will lower your credit score.
The length of your credit history: How long have you had a credit score? The longer the better! If you do not currently have a credit card, make sure you are responsible enough to own one before rushing to get one. Remember, it is better to be a responsible borrower for a shorter period of time than an irresponsible borrower for a longer period of time.
Your credit mix and new accounts: How many accounts do you have? Utilizing a variety of different borrowing options (i.e. a combination of a mortgage, an auto loan, and student loans) isn’t bad if necessary. In fact, it can actually be helpful! Try to keep open accounts to a minimum, even if you only use some accounts sparingly. Opening multiple accounts can cause lenders to be more suspicious, which in turn can lower your score. So, yes, you heard me. You might need to cancel that Hawaiian Airlines card, even if you save $150 every 2 years for your biannual Hawaii trip.
Aside from these factors, lenders may also look at your salary, occupation and job title, and employment history. These additional factors will not actually change your credit score, but they can be used in addition to your credit score to assess your trustworthiness.
By assessing each of these components, a three digit credit score is generated, ranging from 300-850. Any score over 700 is considered a good score.
Sure, this information can be helpful, but how can it be applied to everyday life? Let’s look at an example.
Sophia is a recent college graduate.
She just received her first full-time job and is looking to build her credit score. She applies for a credit card that has a low credit limit and only uses it for her regular monthly payments: gas, Netflix, and her gym membership. She lives within her means, knowing she has other payments to consider, such as her student loans and auto loan.
Sophia gets used to living off of a budget.
Every month, Sophia remembers to pay her credit card bill, and pay it in full. As a young lender, it is important for her to stay on top of her monthly payments.
As Sophia ages, she solidifies her good spending habits.
She opens another credit card account that has a larger spending limit, and uses it conveniently for groceries, bills, and other expenses—still living within her means and paying her bills on time.
Rachelle Top
Passionate about making financial wellness accessible to all through education and advocacy, Rachelle draws from her background in psychology and experience in the financial services sector to serve our credit union clients. She loves connecting with others and learning about their story.
All her daily money habits pay off.
Her credit score has deemed her a trust-worthy lender, and she is able to lock-in favorable rates for the mortgage of her first home!
Every four years, our clients are eager to talk about the election’s influence on their portfolios and the broader economy. And, as has been consistent over the last 20+ years, our response is dreadfully dull. Let me explain.
Generally, the stock market is apolitical, showing no preference to either Republicans or Democrats (Li & Born, 2006). Historically, Democratic administrations are associated with more expansionary policies. With a more inflationary approach in mind, Democratic administrations are also more inclined to juice the economy with Gross National Product expanding at 5%, versus 1.2% for a Republican administration in their first two years (Alesina & Sachs, 1988).
The market cares little about the president, the Senate, or the House. As Figure 1 below highlights, an investor who placed $1,000 into the stock market beginning January of 1926 amassed significant wealth, regardless of the political leanings and party affiliation of the President.
Figure 1
You might be thinking, “but this time, it’s different”. Probably not. The chart above includes years with impeached presidents, wars, crisis, and plagues, and as you can see by growth over time, the stock market cares minimally about these events. Don’t just take my word for it. Read history and periodically look at Figure 1 as a reminder.
The data we have reviewed suggests that there is almost no evidence connecting stock market performance (good or bad) with a president and their political affiliation. Consequently, households should focus on their financial plan and the rate of return necessary to achieve their goals, and less about the election and its impact on the market.
References
Alesina, A. and J. Sachs, 1988, Political parties and the business cycle in the United States, 1948–1984, Journal of Money, Credit and Banking, 63–82.
Li, J., & Born, J. A. (2006). Presidential election uncertainty and common stock returns in the United States. Journal of Financial Research, 29(4), 609-622.
Dr. Peter Fisher
Peter Fisher is the founding partner and CEO of Human Investing, an Oregon headquartered, employee-owned financial management company. Dr. Fisher’s research focuses on consumer financial literacy and behavior. He is the author of Becoming a 401(k) Millionaire (2018), and his doctoral dissertation is titled Financial Literacy and Behavior in Credit Unions.
Life Happens. Be prepared and consider buying life insurance.
But what kind? How does one navigate through the many types and attributes of life insurance products? To make things more complicated, high commissions create an unavoidable conflict of interest for life insurance agents, which can muddy the waters and lead to further consumer uncertainty.
To provide clarity, we will explore what life insurance is and provide a broad overview of the different policies that can be purchased. Someone’s lack of understanding should not get in the way of life insurance being a part of their financial plan.
Life insurance is an important tool to protect loved ones and/or business relationships. Most people should have some form of life insurance to provide cash flow in case of the inevitable.
A life insurance policy is a contract between a policyholder and an insurance company. In exchange for payment of premiums, the insurance company will pay a death benefit upon the death of the insured. The death benefit is a tax-free* sum of money paid to the beneficiaries of the policy, which are often family members.
If you have someone who relies on you for financial support, and you cannot self-insure, you need life insurance.
There are numerous different types of life insurance policies. Policies will vary in coverage, premium cost, cash value, investment risk, and flexibility. Of these differences, policies can be divided into two key groups: Term life and Permanent life.
Term — Term life insurance allows the policy owner to pay for coverage for a predetermined number of years, typically 5, 10, 20, or 30 years. For most, a term policy is the least expensive way to purchase a death benefit. The death benefit can be level or decreasing. Some will purchase a decreasing death benefit to match their decreasing mortgage debt.
Permanent — Permanent life insurance is just as it sounds. The policy owner may decide to have their life insurance policy last a lifetime (up to age 120), often requiring a lifetime of premiums payments. There are several types of permanent policies. Popular policies include Whole, Variable (VL), Universal (UL), Variable Universal (VUL), and Indexed Universal Life (IUL).
Key differences between a term policy and a permeant policy include price, length of policy, and a component called cash value. Permanent policies are traditionally more expensive. The higher premiums cover the cost of the death benefit (including administrative fees), and the remainder is added to a cash value.
Traditionally, the death benefit is used at death while the cash value can be used during the policyholder’s life. The cash value of a permanent life policy can be a tax-advantaged savings vehicle for the policy owner. Permanent policies are typically most advantageous once other tax-advantaged savings vehicles like your 401(k), Roth IRA, etc. have been exhausted. The cash value may be available to the policy owner to withdraw or borrow against. The cash value can accumulate in a variety of ways and is often distinguished by the type of permanent policy. See below for differences between common permanent policies and their cash value accumulation.
Whole Life — The insurance company takes on the responsibility to pay out a dividend which is based on the performance of an investment portfolio managed by the insurance company and their ability to keep their business expenses low.
Variable policies (VL & VUL) — The policyholder may invest the cash value in a selection of mutual fund-like sub-accounts. Variable policies provide a “variable” growth (& potential loss) of cash value as sub-accounts are connected to underlying investments.
Index Universal Life (IUL) — The policyholder may earn interest based on the performance of an equity index, think the S&P 500. While there is no actual money invested in the index, interest is credited to the cash value based on the performance of the selected index. IUL’s provide variable growth with a cap on maximum returns (cap rate). There’s also a guaranteed minimum annual return (floor rate often never less than 0). For example, an IUL has a cap rate of 8% and a floor rate of 0%. If the selected index grows by 20%, the cash value is credited a growth of 8% (cap rate), if the index loses value by -5% the cash value does not decrease due to the index (floor rate).
This is our opinion, some life insurance agents and brokers with a conflict of interest may disagree.
You are young — Do you have plans for a family? This may be a great opportunity to purchase a term life policy. The younger you are, the less expensive premium payments will be.
You are the breadwinner — Term life insurance can replace lost income during working years. Life insurance prevents your surviving spouse (and children) to forgo their standard of living and helps meet the family’s financial obligations.
You are a stay-at-home parent — While there is no income number attached to a stay-at-home parent, there is a value associated with the services they provide a family. Term life insurance covering the years when kids are young can help cover the cost of child-care, housekeeping, and other responsibilities taken on by a stay-at-home parent.
You own a home — For many Americans, a home is one of their largest assets and debts. Purchasing a term life insurance policy with coverage lasting the length of a mortgage can cover the remaining mortgage balance.
You are a business owner — A life insurance policy is a multifaced tool for a business owner. A policy can help pay off business debts, pay estate taxes, and fund a succession plan like a buy-sell agreement. There are many variables to consider when choosing between term and permanent policies.
You have maxed out your retirement accounts — If you have maxed out tax-deferred retirement savings vehicles, a permanent life insurance policy can provide another avenue of retirement savings. Permanent policies build a cash value that can be accessed tax-free**. We do not typically recommend this to our clients because permanent policies are often very costly. The larger price tag can include investment costs (we commonly see 1-1.5%), administrative fees, as well as surrender penalties.
You want to leave an inheritance — Do you plan to spend all your retirement dollars, yet you would like to leave heirs with an inheritance? A permanent life insurance policy will provide a lump-sum benefit to your beneficiaries no matter when you pass away (can be up to 120 years).
You have a high net-worth — Permanent life insurance is best for those who are concerned about estate taxes. A lump-sum benefit at death is distributed to heirs to pay estate taxes, rather than selling-off inheritance.
Life is complex. As such, your situation may require multiple life insurance policies for you and your family.
There are many options for life insurance. While Human Investing does not sell life insurance policies, we do help clients find the best policy within their financial plan. Having someone to help you navigate life insurance without incentive to sell you a product has immense value. If you have questions about what type of life insurance may be best for you, or how it fits into your financial plan, please contact us at Human Investing.
*Death benefit will be tax-free if it does not violate the “transfer-for-value” rule.
**Tax-Free-withdrawals up to basis then gain taken as loan. Also, is not a modified endowment contract.
Will Kellar, CFP®
Will is motivated by the opportunity to serve hardworking people and their financial pursuits, through advocacy, problem solving and great advice. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner who loves the feeling of when our team makes a positive tangible impact in someone's life. He’s also serving as an adjunct professor of Retirement Planning at George Fox University.
One of the interesting subplots in the finance industry during COVID-19 has been the rise of the day trader. Robinhood, an online brokerage and trading platform, acts as a proxy for many investors who are rapidly opening accounts at other brokerage firms including Charles Schwab, E*T, TD Ameritrade, Fidelity, etc.
Our firm works with thousands of employees via their company-sponsored retirement plans and has had many conversations end with a question/comment along the lines of, “What do you think of this Robinhood thing? Is it worth putting some money in there? Seems like (fill in the blank tech company) is making money! Should I buy some?”. So, I felt compelled to address the question(s) and provide some context around where a speculative trading account fits into a greater financial plan.
Source: Piper Sandler
E*TRADE: more users opened accounts in the month of March than any full year on record.
Charles Schwab: 1 million new accounts so far in 2020.
Robinhood: 3 million users opened accounts in Q1 2020. For perspective, there have been 13 million accounts opened at Robinhood since its founding in 2013.
The barrier of entry has never been lower to open an account and buy shares of publicly traded companies. Because many individuals are at home, trading is as cheap and accessible as ever, and some firms have incentive offerings (like a free share of stock when you open an account). Pair that with the stock market reaching its low point for the year on March 23rd and having one of its fastest recoveries ever (in other words the last 5 months have been a winning proposition for many investors), and you get to the point where we are today.
Today could be a euphoric place for an investor owning stocks since March. To me, euphoria looked like TMZ coming out with a trading subscription service… yikes. Stocks have only gone up, and popular tech companies have led the way. Kudos to those who might have doubled their money on a company like TESLA, but the last 5 months do not paint a realistic picture of what investing looks like over the long haul.
When talking about owning a single company, I like this example. Owning a company like Amazon over the last 10 years seems like a no brainer (today). If you had invested $10,000 10 years ago, it is worth over $268,000 today. However, when you see that over the last 10 years, an investor would have had to hold through down periods of -25% over 5 times to get to where the stock is today. In other words, the stock was down 25% of its high over 5 times. Holding a company through those periods can be difficult, emotional, and in my opinion, is an objective way of capturing what owning a stock (even one that has performed as well as Amazon) is like.
Whether you are someone who has already played around, are thinking of dipping your toe in the water, or your ego is already as big as ever because you’ve been a successful trader for the last 5 months, here is some advice on what it looks like to invest in your long-term plan vs. speculating.
Boundaries, Boundaries, Boundaries: If you are going to buy a stock on your own, don’t have it impact your overall investment strategy and long-term plans. What does that mean? Invest a dollar amount that you would feel comfortable taking a 100% loss on.
A positive outcome can mean… many things: Recently the Winklevoss twins (yes those Winklevoss twins) were quoted saying that Elon Musk is going to mine gold on asteroids orbiting the Earth, thus decreasing the value of gold and increasing the value of bitcoin (I promise this isn’t fake). One scenario is that their theory is wrong but in the next 5 years, owning bitcoin could be a profitable trade. In the same light, if you have owned a technology company or a fund that tracks technology companies since March, you have probably made money. Does this make you the next great market predictor? Most likely not. At Human Investing, we have a saying "process over results". So, in these situations, whether or not your account is checking up on your process is equally or more important.
Trading Journal: If you are seriously interested in the market and having a brokerage account, a trading journal is imperative. If you have a prediction, write it down, track it, and review your track record. It’s not a bad idea to do this for a few weeks to test the waters before you open an account.
Small Losses Can Lead to Long-Term Positive Outcomes: Here’s a hypothetical, stay with me. You read this post, you open an E*TRADE account, and deposit $200. You end up buying a few stocks and start following the market. You are following investing influencers on social media, listening to podcasts, and even watching CNBC in the morning. Then life happens. You get a little bored, lose track of your password, reset your password, and lose track again (this version of you doesn’t have LastPass 😊). Six months go by, and you see that your $200 is now $50. As a byproduct of this experience, you realize that you are better off opening up a ROTH IRA at Vanguard contributing $100 a month into an age-based target-date fund because you now care more about retiring comfortably. Your $150 loss on your account made you realize:
You are not interested in picking stocks and it isn’t easy.
You educated yourself about the market, the benefits of a ROTH IRA, and moved the needle on helping yourself retire.
Time will tell if this Robinhood movement is a fad or a long-term trend. Either way, if you have questions, want to grab coffee via zoom and talk markets, or talk longer-term planning, our team is here to be a resource.
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Andrew Nelson
Andrew is passionate about diving into the details of organizations and how they serve their employees. Working with companies, increasing the financial literacy of employees and committees and stretching employee benefit dollars are at the core of what Andrew and his team get excited about.
Do not let your emotions get in the way of making smart investment decisions.
It is difficult to separate emotions from reality. We often view the world through the lens of whatever emotion we are experiencing, and unchecked emotions can give rise to suboptimal financial decisions.
My role as a financial advisor allows me to have many conversations focused around money. Through these conversations over the last 12 months, I have witnessed the gambit of the emotional response to the stock market and its volatility. What I discovered is that an individual’s emotional response tends to be heightened by three things:
The more zeros at the end of their account balance.
The amount of negative news consumed.
The greatest of which, whether they have taken the time to build a financial plan.
In his book The Behavioral Investor, psychologist and behavioral finance expert, Dr. Daniel Crosby reminds us that our emotions can’t be trusted when it comes to making investment decisions.
“The fact that your brain becomes more risk-seeking in bull markets and more conservative in bear markets means that you are neurologically predisposed to violate the first rule of investing, “buy low and sell high.” Our flawed brain leads us to subjectively experience low levels of risk when risk is actually quite high, a concept that Howard Marks refers to as the “perversity of risk.” – Dr. Daniel Crosby
Like the stock market, our emotions are cyclical. This cycle of emotions experienced as an investor can range from pure euphoria to utter despondency (lack of hope).
Source: Russell Investments
This emotion is often not dictated by the investor, rather it is the investor’s response to the market. The wild thing is, we have seemingly experienced all of these emotions over the last 12-month period. Compare the cycle of emotion to the S&P 500 over the last year.
It is completely normal to have an emotional reaction to your finances. Your account balances are often in direct relationship to your future financial freedom and well-being. However, it is only when an investor acts on these emotions do they get themselves in trouble.
Investor’s making short term emotional changes to their investments hurt their chances at long-term returns. A study conducted by DALBAR, Inc. discovered that over the last 30 years, the average mutual fund investor underperformed the market by almost 6%! Their finding is that investor’s change investment strategies too often to realize the inherent market rates of return.
Here are some action steps for avoiding emotional investment decisions:
Look inward — Take an introspective look to acknowledge your emotional response over the last 12-month market cycle. Will you emotionally make it through another market drop? Right now is the time to build self-awareness, because the reality of the market is not IF it will have another correction, but rather WHEN.
Look outward — Do you have someone to help you make wise financial decisions throughout life’s many emotions and seasons? Someone, to stand between your emotions and your finances? This is one of the many ways a financial advisor can add value to your comprehensive financial well-being.
Look forward — Does your risk profile align with your financial plan? Are you taking on too much risk (or, too little)? Take some time today to review your holistic investment strategy and consider making any changes while the market has rebounded since its market low on March 23rd.
Our team at Human Investing realizes your family’s financial well-being is just as much “human” as it is “investing”. Let us know how we can help, contact us at Human Investing or call at 503.905.3100.
Will Kellar, CFP®
Will is motivated by the opportunity to serve hardworking people and their financial pursuits, through advocacy, problem solving and great advice. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner who loves the feeling of when our team makes a positive tangible impact in someone's life. He’s also serving as an adjunct professor of Retirement Planning at George Fox University.
Through the end of 2019 and dating back 20 years, the S&P 500 returned 6.1%, as described in Table 1 below. During that same time period, a balanced account consisting of 60% stocks and 40% bonds returned 5.6%, while the “average investor” returned just 2.5%.
Table 1
The “average investor”, according to JP Morgan and Dallbar, is any investor investing in mutual funds. The report shows the flow of mutual fund buying and selling. The use of mutual funds is the best way to perform a field experiment and infer approximate returns for those buying and selling mutual funds.
It is implied that those buying mutual funds are more individuals, households, and smaller institutions. Larger institutional clients typically own the investments directly.
Why don’t more people invest 100% of their money into the S&P 500 or something similar? The short answer is that while any investor can put their money into the S&P 500, few are able to hold through the ups and downs.
Table 2
Looking at Table 2 (using the same 20-year time period), the S&P 500 has seen intra-year drops, that were on average nearly 14%. Investors owning just the S&P 500 would have had to hold tight over those 20 years to achieve the 6.1% return, which is easier said than done. To be sure, there is so much that goes into selecting an allocation for a portfolio. But given the times we are in, I thought it would be useful to lay out a framework for successful investing.
Diversify — In my nearly 24 years of advising clients, I have seen just a few that have been 100% invested in equities. Since 1950, the average all-stock portfolio return was a little over 11%. Interestingly, a 50% stock and 50% bond portfolio for that same period yielded just under 9%. Although an investor may not have the temperament for an all-stock portfolio experience (because of the volatility described in Table 2), they can still save and invest. Through a balanced portfolio, investors can experience a fraction of the expected volatility while still achieving solid returns.
Plan — It baffles me that so many investors focus on the return of the stock market. From my point of view, the only number that should matter is the return an investor needs to achieve their stated goals. Recently, we ran planning calculations for a client that needed 5.5% returns to make all of her financial goals come to fruition. Since working with Human Investing, she has achieved a 6% net return, allowing her to achieve all of her goals. Investors are best off spending time developing a plan and then building a diversified portfolio to achieve those plans.
Stay in the market — Since your financial plan serves as your road map to achieve your financial goals, it is imperative to stick to the plan. Following the plan means staying invested even when the world appears to be falling apart. But, what if you decide not to follow the plan and get out of the market? It may not be so much about the getting out of the market but about getting back in. Table three describes the negative impact of market timing. Although market timing can be costly, the greater challenge may be the decision on when to get back into the market.
Investing is forever — Successful investors have a forever time frame they measure in a lifetime, not a day. The accelerating adoption of day trading, market timing, and other gambling-like tendencies go against everything I have ever read and learned about successful investing. Take, for example, Warren Buffett, whom many consider the greatest investor of our generation. He has amassed 95% of his wealth after the age of 65. Although I would place Buffett near the top of the list as the greatest investor of our generation, a key contributor to his wealth accumulation has been the length of time he has spent investing. This is a crucial lesson for those who look to get rich quickly and bypass the hard work of saving and investing over a lifetime.
Table 3
Dr. Peter Fisher
Peter Fisher is the founding partner and CEO of Human Investing, an Oregon headquartered, employee-owned financial management company. Dr. Fisher’s research focuses on consumer financial literacy and behavior. He is the author of Becoming a 401(k) Millionaire (2018), and his doctoral dissertation is titled Financial Literacy and Behavior in Credit Unions.
Since Human Investing has shifted to remote work for 5 months, I wanted to peek into what daily life looks like for two of our fabulous and industrious moms. Shelly Chase and Eve Bell are candid, funny, and share some family tips!
JILL: Shelly, you are a seasoned Client Service Specialist, so how has it been working remote these past 4 months while managing your work and your family?
SHELLY: Multi-tasking is key! I’m never far from my computer while working from home, and when the “ding” comes in for an email or message (if I’m not right in front of it), it’s a sprint back to the computer so I don’t miss anything and reply in a timely manner. Of course, I sometimes trip over the dog….
JILL: That is a funny image! I’m sure all dogs—yours included—are wondering why we’re all home, and if it means they get more snacks. Eve, as our Workplace Advisory Administrator and young mom, you have also had a lot going on. What was your before- and after-work routine with your young daughter prior to COVID, and how has that changed?
EVE: Pre-COVID our nanny picked up our daughter every morning, and my husband and I took turns picking her up after work. We were in for a shock when we all went remote on March 15th. Having an active little toddler means my husband and I are re-evaluating routines every few weeks and upping our communication game. Our almost 2-year-old is home most days, so we have to communicate A LOT about our meeting and project schedules, work together to make adjustments, and have at least one parent watching out at all times, so that our toddler isn’t having a tea party with the dog’s food and water.
JILL: What a full plate, Eve! How long did you think you would be working remotely? I would love to hear your initial thoughts.
EVE: I thought it was only going to be for two or three weeks! I knew it was going to be a challenge, but I Pinterest-ed all the DIY toddler activities and bought a two-week supply of snacks (for both my baby and me).
SHELLY: I kept thinking how can I work from home and stay focused….kids’ noise, dog barking, FedEx knocking…how can I work from the dining room and keep my home life under control while serving our clients?
JILL: Let me say you each have done an incredible job and probably did not realize just how much strength you had within you to manage it all.Shelly, with summer in full swing and school on the horizon, how are you working through the options for schooling and what is top priority?
SHELLY: The top priority is what is best for my almost sophomore son. He did okay with ending the school year online, but it did take a lot of coaxing from mom to keep him on schedule and get his work done. It was recently announced that his school will be online until at least October 30th. I better brush up on my US History facts!
JILL: I really admire you parents; whose kids are in grade school or high school. It’s not an easy feat to work and ensure your child learns new things and retain some of what they have already learned! You have seemed to weather this valiantly but being human, we all know we’ve had moments of struggle. What walls have either of you ‘hit’, what has been the biggest thing you have tackled, and how are you rising above it all?
EVE: The first wall I hit was trying to make a typical 8am to 4pm workday schedule work from the dining room table. Once I recognized that my workday would need to look and feel different, I began adjusting to new routines. As a result, both work and family life got a lot easier to navigate. And then prioritizing! I have had to dig deep, practice more patience, and become laser focused. It has been a funny balance of being super chill about some things (who needs an organized Tupperware drawer anyways) while also pushing myself to strategize and implement new ways to serve clients.
SHELLY: I have been really surprised so far. There has been no dead ends and no walls hit. I have tried to stay focused on doing my best to maintain the same work schedule at home as I did in the office. I am working a bit longer each day since I save time without a commute, but I also have more flexibility. I have grown more confident in my ability to be an earner, mom, maid, cook and as of recent, teacher. I remind myself all day long to take deep breaths and take a little time for myself by walking, listening to my favorite music, or making my homemade salsa.
JILL: Such great, practical advice and wise counsel coming from you both! Thanks for taking time out of your busy days to share your experiences with me. And Shelly, what about that homemade salsa recipe?
SHELLY: I am making it every day now and my family still loves it! It is simple and always delicious. I even think the title fits its appeal. I hope you all try it and add your own flair!
Click here for Shelly’s homemade salsa recipe!
Jill has spent over a decade at Human Investing honing her skills in the areas of service, administration, sales, operations and human resources. As a SHRM certified practitioner, Jill now puts all her past experience to work - ensuring that the Human Investing team is cared for and the operations run smoothly.
Eve helps clients navigate the nuanced and complex landscape of qualified retirement plans by providing plan design expertise and advocating for employers and their employees.
Shelly draws from her 20 years in financial services to uniquely care for clients while meeting the administrative needs of their accounts on a daily basis. She strives to always provide personalized, and honest, and up-to-date client service and plans to continue to love, care and serve our clients for the next 10+ years.
Jill Novak, SHRM-CP
Jill has spent her time at Human Investing honing her skills in the areas of service, administration, sales, operations and human resources. As a SHRM certified practitioner, Jill now puts all her past experience to work - ensuring that the Human Investing team is cared for and the operations run smoothly.
