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11/5/2019

Guessing about the market's future

It is apparently the season when the big investment banks announce their assumptions for how the market may perform over both the next year and the next decade. Both Morgan Stanley and JP Morgan have recently released their forecasts, and I want to take the opportunity to share my views and how DRW Financial intends to work with our clients’ investment needs both now and later.

We know that it is a fraught exercise to try to predict the future with any certainty, no less so when discussing financial markets. With that in mind, I read posts like these from JP Morgan and Morgan Stanley as “informed guesses”, and try to recognize that those firms need some baseline estimates in place to inform the work they do. We also need baseline estimates to help us build portfolios that have a chance of matching up with our clients, their needs, and their goals.

Both JPM and MS are offering fairly constrained guidance for the next 10 years or so, and both focus their explanations on a typical “60:40” portfolio, meaning an asset allocation with 60% of the funds holding stocks and 40% holding bonds. Morgan Stanley’s guess is that this type of portfolio would return approximately 4.1% on average, annually, and JP Morgan puts their number a bit higher at 5.4%. It is worth noting that both numbers are significantly lower than the average over the last 10 years (roughly 10% per year average return on an inflation adjusted basis) or 20 years (roughly 7.2% on an inflation adjusted basis).

The context and “why” of these forecasts may be useful, as well. We find ourselves in a situation where stocks AND bonds have performed pretty well over the last 10 and 20 year timeframes. Since November of 2009, stocks (as represented by the S&P 500 index) have risen about 175% in total, bonds (as measured by the AGG “aggregate bond fund”) have risen about 8% total on price, in addition to their income distributions, and interest rates (as measured by the 10 year treasury yield) have fallen by about 52% — when interest rates fall, bond prices rise. Part of what goes into these market forecasts is a guess about whether trends can continue or not — while there is not technically a cap or ceiling on stocks and their ability to continue to rise, history has shown us that “corrections” occur with regularity (a “correction” is defined as a 10% or greater decline in stock prices); with bonds, there is a more natural cap or ceiling on price increases, as yields approach ~ 0%.

chart generated at https://finance.yahoo.com/

So what do we think here at DRW Financial, and how are we preparing for the next market cycle?

We start with a dose of humility, and recognize that we cannot know precisely what the market will bring.

We follow evidence based best practice in advising clients, not only on their investment choices, but also about their broader approach to financial security.

We choose an asset allocation mix that suits each client’s tolerance for risk, and that matches their specific goals.

We fill that asset allocation with low cost and well managed index funds, and we rebalance and evolve both the allocation mix and fund choices over time as the client’s situation changes and better fund options become available.

To optimize for whatever the market brings, we pay attention to the way our asset allocation choices interact with each other (specifically via correlation, or the way two assets tend to move together or not). We prefer to avoid high correlations within our portfolios so that a shock in one part of the market does not pull the whole portfolio down.

We seek to diversify not only by asset class (stocks, bonds, real estate, etc), but by geography and underlying currency and place within the market (think “small cap” vs “large cap” stocks, or “developed” vs “emerging” international economies).

And then...we wait and see.

If the market does great, we adjust. If the market does poorly, we adjust. If an opportunity arises to take some measure of risk “off the table” and still meet the client’s goal, we do so. So whether the market rises by 5% or 10% next year, or falls by 20% or more, we have a plan in place designed to match the needs of our clients, and informed by the experience and best research we can find.

Resources and references:
A CNBC story about Morgan Stanley's forecasts
JP Morgan release on November 4, 2019 titled "Long-Term Capital Market Assumptions Executive Summary"
10 and 20 year "60:40" data generated at PortfolioVisualizer.com

8/21/2019

ROTH Conversions, RMDs, and Retirement Optimization

Would you benefit from converting some of your “traditional” retirement savings (think 401k or IRA) into a ROTH type IRA? An overview of the strategy may be useful in making your own determination.

Traditional vs ROTH -- what’s the difference?
Contributions to a traditional IRA (or 401k, 403b, 457 plan…) have to potential to lower your taxable income in the year of the contribution, and may defer income taxes on gains while held inside the account. When the funds are withdrawn, they are typically taxed as income at your marginal rate, and if funds are withdrawn before age 59.5, an additional 10% tax penalty may be assessed.

In contrast, contributions to a ROTH are made “after tax”, and so receive no income tax benefit in the year of the contribution. Taxes on gains are deferred as with traditional IRA balances. But when funds are withdrawn, after age 59.5, there is no income tax due.

Let’s talk about RMDs a bit.
The government may be OK deferring income taxes on retirement savings, and offering a tax break in some cases when funds are contributed, but they definitely prefer to get to tax that money eventually. For traditional IRA (and 401k, etc) balances, “required minimum distributions” begin when you turn 70.5. There is a standard calculation that uses the last year ending balance of your funds in all of your traditional retirement accounts and your current age, and kicks out a number that MUST be withdrawn from your accounts and subjected to income taxes. Failure to meet your RMD comes with stiff penalties on top of the regular taxes.

Because ROTH balances are “after tax” already, they are not typically subject to RMDs.

Why would someone convert to ROTH?
The rationale to convert some or all of your traditional retirement savings to the ROTH style will depend on your particular circumstances. Some reasons that may be compelling:

If your income tax rate in the year of conversion is lower than you expect for future years.
In this case, realizing the income “now” and paying tax at the lower rate may work to your overall advantage
If you have substantial traditional retirement balances and recognize that eventual RMDs are going to create significant taxable income in the future.
Strategically converting portions of your traditional balances to ROTH in advance of the RMD years will lower the balances subject to RMD, everything else held equal.
If your particular estate planning suggests that your eventual heirs and estate would benefit from receiving an inheritance of retirement funds in the ROTH form; as with “regular” distributions from a retirement account during your life, your heirs will owe tax on distributions from traditional IRAs but not from ROTH IRAs.
If your heirs are themselves in relatively high tax brackets, you having paid the tax in advance (as with ROTH balances) may be to their advantage.

Some Practical Considerations

If you do not already have a ROTH IRA established, you will need one. This step will typically take one business day, and David & DRW Financial can send the appropriate application via Docusign for digital review and signature.
For traditional IRA balances held at TD Ameritrade and under the management of DRW Financial, and eligible for a partial ROTH conversion, the appropriate form (as of August 2019) is a two page document [TDAI 2424 REV. 11/18] and is available for electronic review and completion via Docusign.

As shown in this image of Section 3 of that form, you will have the option to convert the “entire” traditional IRA balance, or a portion:

In most cases, you are likely to only be converting a portion, and at an amount we determined through examining the expected tax consequences this year.
The process and tax implications will be simplified by converting “cash”, as opposed to securities.

The most immediate and most obvious impact of converting a traditional IRA balance to a ROTH type IRA is that the full amount converted adds to your taxable income for the year. As laid out in Section 4 of the conversion form, you will have the option to select how much, if any, income tax you would like withheld via the conversion process:

Except in cases where you may have considerable cash on hand to pay your eventual tax liability, or if there are special circumstances where you believe the income generated by the ROTH conversion will be offset elsewhere in your tax work, it will likely be best to have taxes withheld at your expected marginal income tax rate.
Your age in the year of the conversion matters. As mentioned above, Required Minimum Distributions begin in the year you turn 70.5, and RMDs must be satisfied prior to converting a traditional IRA balance to the ROTH type.
You will still be able to convert some or all of the remaining balance after the RMD is withdrawn.
It is helpful to know your current marginal bracket. In general terms, income is taxed at progressively higher rates, but only the amount within each bracket is subject to the higher rate. In some cases, I work with clients to see if “filling up” their current marginal bracket with income in the current year makes sense.

DRW Financial provides financial planning services and investment management to clients
per agreement. DRW Financial does not provide professional tax or legal advice, and recommends that people engage a tax or legal professional prior to taking action.

9/11/2018

Insights from the bond market

Many investors recognize that the bond market provides an opportunity for asset class diversification, but what may go unappreciated are the insights that bonds can provide for investments in the stock market. There are three data points in particular that can be useful for investors building portfolios in stocks.

Inflation crossover rate

The actual rate of inflation that an investor experiences over their investing timeline has enormous consequences for their economics; at a minimum, investors hope and plan for a return on their money that matches inflation to maintain their purchasing power. When making return projections for a given investment goal, like retirement savings, it generally makes sense to apply an assumption for the rate of inflation over that period. Investors can use historical inflation data, or the most recent measure, or can make a guess about what is likely to happen in the future.

When making a guess about the future, the bond market may provide a helpful insight. The “breakeven rate”, which measures the difference in yield between a point on the yield curve between traditional treasury bonds and inflation indexed treasury bonds, captures in one number the bond market’s anticipated inflation for that period. This image shows the breakeven rate at the 10 year spot on the curve:

Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10YIE, September 5, 2018

The most recent value of 2.08% suggests the bond market currently believes that to be the likely annual inflation rate over the next ten years.

Risk free rate

Approaches to valuation for stocks like the Capital Asset Pricing Model and mathematics to analyze options like the Black-Scholes model require an input for the “risk free” rate. Investor preference can dictate what rate they choose for this purpose; the 3 month T Bill rate is often useful due to the regular supply via Treasury auctions, the minimal duration risk, the high liquidity, and the full backing of the United States government credit quality.

Board of Governors of the Federal Reserve System (US), 3-Month Treasury Constant Maturity Rate [DGS3MO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS3MO, September 5, 2018.

Viewing the change and volatility in the chosen rate over time can also help inform expectations for the stability of the model. For example, in the CAPM calculations, a 3 month T Bill rate at 1% implies a very different value for a subject stock than the same rate at 2%.

Shape of the curve

The “yield curve” is made up of treasury bills, notes, and bonds with maturities ranging from a few days to as much as thirty years. The historically normal shape of this curve slopes upward, with the shortest bonds showing yields that are relatively lower than bonds with longer maturities. There are different theories for why the curve is normally shaped in this way, with implications for investor preference and opinions about risk, but for decades the typical relationship between spots on the curve is that longer maturity bonds yield more than shorter, with the amount of difference rising and falling over time.

When the curve deviates from the historical norm, and either “flattens” to where there is little difference between the yields at different spots on the curve, or “inverts” to where shorter rates yield more than longer rates, there may be serious implications for the economy and for the stock market.

The image below shows the 10 year treasury rate minus the 2 year treasury rate for the last ten years. Over that period, the spread between the two has bounced around a considerable amount, and in the last few months has shrunk to about 0.25%

Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y2Y, September 4, 2018.

Market participants may read many portents into a flattening or inverted yield curve. Some common concerns are that a curve that deviates from the norm in this way suggests that a recession is likely in the near future. A more concrete view is to consider how the actions of the Federal Reserve propagate out through the bond market. In the recent case, the Fed has raised their funds target several times, which led to the short end of the market rising too (see the 3 month Bill rate above). The points on the curve further out, such as at the ten year and thirty year spots, have not yet priced in the likelihood of higher inflation or the Fed funds target to sustain in the current range. So the short end yields are up, but the longer yields have risen less on a relative basis; this leads to a flatter curve.

Notes and disclaimers

The Federal Reserve Bank of St. Louis provides an excellent resource for economic data; the charts and figures for this article are all sourced from FRED.

This article is intended for educational purposes only, and is not a solicitation to buy or sell any security or investment. Investors should consult with a qualified professional, and carefully consider the risks and potential rewards of any investment strategy prior to making an investment.

2/23/2018

On inflation, stocks, bonds, and cash

image from Bloomberg, Feb 23, 2018 https://www.bloomberg.com/quote/SPX:IND

Why did the market "go down" in late January, 2018? There are many possible reasons, and most of the time a substantial move in the market is really about a combination of things (if there is any real reason at all).

My current vote for the "biggest" reason for this particular fall in the price of stocks is what was happening in the bond market, which was itself reacting to what was happening with the Federal Reserve policy, which was itself...complicated.

Inflation always matters...sometimes, it matters more

In brief, the Federal Reserve in the United States has a few main purposes, which are often reduced to the "dual mandate" of promoting employment and moderating interest rates. The entire financial system relates more or less directly to the cost of money over time (aka interest rates), and inflation is a major consideration in how the markets set appropriate interest rates for a given investment or transaction.

Again, speaking in simple terms here, for an investment to yield an economic gain to the investor, the realized return must be greater than the rate of inflation for the same period. If not, the investor is actually losing "purchasing power". For example, if I have $1 today and a can of soda costs $0.50, I can buy two cans. If I wait a few days, and the price of the soda rises to $0.55 but my $1 is still just $1, I can no longer buy two cans...the purchasing power of my dollar has eroded due to inflation.

In January of this year, two things seemed to come together to jolt the market: (1) the major US stock indices were setting records for the longest period without a "correction"; and (2) the Chairwoman of the Fed was stepping down and aside for her successor. My view is that these two factors were causing the market to process what might happen with inflation, both from pressure of a "hot" stock market, and from the relative uncertainty as to how the new Chairman would respond to that pressure.

The US has enjoyed a very long period of relatively tame inflation, and the prospect of a quicker increase in consumer prices can be unsettling.

Investment options in an inflationary period?

For investors (which includes normal folks looking to properly manage their retirement savings), the task of how to best position themselves in a period of rising inflation can be challenging. Here are a few points to consider:

"Fixed income", as a category, tends to fair poorly in an inflationary cycle. Some potential strategies:
- Longer term bonds tend are generally worse off when inflation strikes, so it may make sense to look at the maturities and duration of the bonds in the portfolio. In the case of bond mutual funds or ETFs, look at the segment of the bond market the fund targets to get an idea of the average maturity or duration; better yet, pull up the details of the individual holdings
- Shorter term bonds and well structured "bond ladders" may still perform as intended in the portfolio; if rates are rising, as the short term bonds come due, it may be possible to reinvest the proceeds into higher yielding options, as appropriate
- Certain sectors and types of bonds are especially sensitive to rising inflation and market rates; "preferred stocks", for instance, tend to exhibit high sensitivity in this type of cycle. Similarly, "zero coupon" bonds, or STRIPS, or even regular bonds with relatively low coupons (think < 2.5% - 3% in the current market) will all take a big hit on value in a rising rates market
- Annuity products with a fixed accrual rate, or a fixed minimum annual "return" may be especially costly when facing inflation. These insurance products tend to come with significant expenses to hold, and don't "mature" in the way that short term bonds do. Depending on surrender periods, the tax impacts of withdrawing, and opportunities to "exchange" into other annuity products, there may be a relatively attractive option to exit a low rate product in an inflationary cycle
- Both the US treasury markets and the corporate bond markets now have "inflation adjusted" bond offerings; these may perform better as a hedge to hold relative value than as a place to find gains, but may play a role within a broader portfolio
Stocks and returns in the stock market are also subject to eroded economic gains if inflation gets out of control
- Some stocks have historically behaved as a sort of proxy for "fixed income"; utility stocks are an example that some investors hold primarily for their relatively steady stream of dividends. The issue here is that many utility companies are not free to raise prices to match inflation, which may limit their ability to raise their dividend payment rate.
- In recent cycles of rising rates, emerging market stocks showed sensitivity to rising rates and Fed policy; it may prove prudent to review the allocation to this sector
- Some companies stand to benefit from rising prices, particularly in industries where the profit margins rise along with prices. It can be useful to consider whether a sector or individual company belongs to that camp, or are in the position of being squeezed on profits when their input prices rise due to inflation.
Over the long term, residential real estate seems to have kept pace with inflation. However, investment products tied to the real estate markets may be complicated by holding exposures to home builders, construction supply companies, etc that draw their own value from economic activity related to real estate and not necessarily from the property values themselves. Further, real estate related investments tend to show some sensitivity to interest rates due to the impact of higher mortgage rates on the ability or desire for people to get a home loan.
Other assets, like gold or various commodities, exhibit complicated relationships with inflation and interest rates that are difficult to model in an actionable way when designing a portfolio
Holding cash into an inflationary cycle may provide an opportunity for tactical allocations into investments that match the investor's goals and risk tolerances; putting "extra" cash to work after a dip in price for those investments could be advantageous. However, holding cash for an extended period while prices are rising will definitely lead to that loss of purchasing power as described above

Time to review with a pro?

DRW Financial is happy to provide an initial consultation and portfolio review to residents of Tennessee, Illinois, and Georgia at no cost. Email [email protected] or complete the contact form at this link for more information.

12/15/2017

on bitcoin, the blockchain, and "crypto" currencies

Let's get two things out of the way early: (1) there is a lot of noise in the news right now about Bitcoin and its crypto-cousins (and too little information, in my humble opinion), (2) this post is a contribution to the noise, but hopefully contains a little information relevant to my client base and readers.

the briefest of summaries

There are plenty of articles going around about what crypto currencies are supposed to be, and how blockchain technology is meant to work, so I will keep my comments on this aspect super brief. The blockchain is sometimes referred to as a "distributed ledger" for financial transactions, which can in many ways bypass the existing infrastructure of banks and payment processors and clearance / settlement facilities currently involved in exchanges of value between parties. And while this ledger is maintained and processed in a relatively "public" way by market participants, individual participants are able to act in a relatively anonymous way.
Bitcoin is a medium of exchange on one version of blockchain, and it follows a very specific protocol or set of rules about how new Bitcoins can be introduced to the market and how transactions in Bitcoin between parties can be processed (this activity is collectively referred to as "mining").
Bitcoin itself has "forked" into some new variants that have expanded or refined protocols that attempt to address some perceived challenges with actually using a crypto currency, and there are also different approaches to the blockchain that support other coins, like Ether on the Ethereum network.

so, should you own some?

Chances are decent that you are more aware of Bitcoin and its brethren because the prices of crypto currencies have risen so dramatically in the last year; it is a basic function of a "bubble" or hot market that big gains in value attract attention, which inspires a desire to participate, which pushes prices higher, which causes the cycle to repeat...for a time.
So are crypto currencies in a bubble? Sure. Is that "bad"? It depends on your perspective. The primary aim of this post is to offer a framework for considering an individual investment in Bitcoin or one of the other coins, so I will pivot to that:

A rational investment should be based on an expectation of economic gain
The opportunity to realize an economic gain requires an ability to enter, hold (and collect any distributions like dividends or interest or rent), and/or exit the investment, inclusive of any related costs.
From the perspective of an individual investor, any one investment opportunity should likely be considered within a broader context of their financial circumstances. In the planning profession, we talk about assessing risk tolerance, defining financial goals, identifying available resources, and developing a comprehensive approach that ties all of those facets together into an actionable plan.

Applying those bullet points to Bitcoin (or similar) offers some insights, and raises some additional questions:

Is there a rational expectation of gain for people buying into a given crypto currency coin at present? There seem to be a few schools of thought on what the value proposition is for these coins:
- A "store of value". This line of thinking makes crypto coins analogous to gold, which some market participants have looked to for years as a hedge against fluctuations in their home currency (like the US dollar); the belief here is predicated on an assumption that if there were a major devaluation in the dollar due to macro economic or political shifts, gold may retain more relative value. This belief is highly subjective, and the performance of crypto through cycles that historically benefited gold has yet to be seen.
- "Anonymity". Some market participants desire a means of economic exchange that does not flow through the legacy banking system and is less visible to the government. Crypto coins do seem to offer this opportunity, although there are still points of contact between the legacy systems and the blockchain, the anonymous nature of the system has produced some examples of "wild west" abuses within the system, and legacy banks and governments are making moves to pull the blockchain into alignment with the existing infrastructure.
- A medium of exchange, independent of anonymity. This may be the most prosaic view of the crypto currency future. In this model, one or more of the current coins could turn into the default option for digital exchanges of value, i.e. how you pay for stuff. The total number of Bitcoin that will ever be mined is already set, built into the currency's nature from the beginning. That programmed scarcity has some market participants convinced that there will be a steady demand for coins (or fractions of coins) by people just wanting some to use for quotidian purchases.
  
  Do any of these points lead to a rational view that Bitcoin will trend higher from here? Each of those possible vectors for expected growth involves a number of highly subjective assumptions that I am not confident to make at this time.
What about the mechanics of investing in a crypto currency?
- Early adopters in these markets have seen a number of "wallets" and exchanges arise to provide ways to buy, hold, and transact with their coins. While the experience for many has been unremarkable (in a good way), there have also been a number of high profile failures with coins "lost", "destroyed", and stolen in ways that would seem foreign to people whose financial experience is limited to dealing in dollars and with established banks.
  With that in mind, it may be reasonable to assign a "carrying cost" to holding Bitcoin, with the cost less a financial one, and more a percentage chance of losing some or all of the holding due to quirks in the still developing infrastructure.
- The current market in Bitcoin, Litecoin, Ether, etc suggests that there is presently a steady buy side demand for the coins; as mentioned above, this steady demand has been self-perpetuating, as new buyers push the prices higher, attracting new buyers, etc. The sell side of the market, and how the market itself would react to demands for liquidity for future sellers, has been relatively untested -- and this is currently my own, personal preoccupation with these market as a potential "investment". Having watched the stock and bond and real estate markets for a while, in both a personal and professional capacity, I have seen these supposedly mature asset classes go through cycles of paralysis, crisis, and illiquidity. The very nature of the still nascent crypto currency market causes me significant concern about what a liquidity crunch would look like for these coins.
- At present, there do not appear to be any sources of distribution-type returns from simply holding Bitcoin...as with gold, there are no dividends or interest or rents available to owners. That may change in the future (maybe coin holders will be able to "lend" their currency to people who need some for transactions?).
- There ARE transaction costs within the blockchain, and at least with in the example of the Bitcoin blockchain, those transaction costs (and times required to actually complete a transaction) have been rising, from a few pennies each time to as much as $20 or so. These variable costs are in some ways analogous to commissions, and present a source of friction or drag within the network for exchanges of value.
  
  None of the above suggests that the actual process of buying, holding, and selling a crypto coin for a (desired and potential) profit is impossible, just that there are some legitimate challenges in the current scenario.
Now, in terms of how an individual investor might perceive an investment in a crypto coin and place it within their overall investment framework, the thought process can be a bit more straightforward.
For most individual investors, the best practice these days revolves around a basic approach:
- Have an emergency fund in place before risking any meaningful money in the market
- Have a clearly defined budget, and a good understanding of what resources are available to invest toward well articulated goals
- Prioritize among goals, and make use of goal specific strategies for efficiency (retirement accounts for retirement goals, employer match for workplace retirement plans, etc)
- Choose investments based on match to risk tolerance, investment objective, and time horizon, with a focus on low cost and diversity among the investment options
  
  In that framework, if a person were motivated to invest in Bitcoin (or similar), it may be most appropriate to treat it as one component within a larger portfolio, with allocation size determined by desired risk exposure. By way of example, many investors may now focus their stock and bond allocations on internally diversified investment products, like mutual funds or ETFs. A purchase of Bitcoin as an investment, in contrast, would look more like investing in a single company's stock; further, based on the relative volatility, size of the market, and potential liquidity constraints of Bitcoin, the comparison would need to be to a similarly sized and volatile stock...I'm thinking a bio-tech stock whose potential profit is entirely based on the unproven efficacy and eventual approval of a drug might be a reasonable analog. It would be difficult to rationalize an investment allocating a large percentage of an investor's available resources to a highly volatile stock with a non-zero chance of failure and collapse; similarly, it would likely be inappropriate to commit those resources to an investment in a crypto currency, simply based on the risk of loss.

too long, didn't read? (tl;dr)

Everyone's talking about Bitcoin and the other so-called "crypto currencies". Much of the present attention seems to be driven by a fairly typical "fear of missing out" bubble. Investments in crypto coins have both idiosyncratic and traditional considerations for investors. Proceed with caution!

Current and prospective clients of DRW Financial should feel free to email or call David with questions on how or if it is appropriate to incorporate an investment of this sort within their overall plan.

11/27/2017

budget trouble? check your ego

Many of the posts I write are as much for me as for anyone out there looking for new insights on their financial condition. Today's is one such post.
I have written elsewhere about how our money choices reflect on our values, and that when there is conflict between what we say we value and how we live our values, there is an opportunity for self-reflection and a choice to align the two.

you probably don't need that...

But where does ego fit into this discussion of values and money? One example within my own budget and experience involves technology, specifically smartphones and computers.
I use an Android based phone and a Chromebook for my work and personal computing needs. These choices were originally at least a bit driven by economics: iPhones are expensive and in the early days just having an iPhone required a specialized phone plan that cost more than average; similarly, a decent Chromebook costs around $200, while a similarly featured Windows machine might cost twice as much (or more), and a Mac might cost 3x - 4x just to get started.
But even though I may have started out with fiscal discipline in mind, what happened over time is that at each opportunity to replace or upgrade my equipment I would inevitably spend some time looking at the "nicer" options available. A $200 Chromebook has proven to be sufficient, but the $600 one may be prettier and have some snappier specs... The $150 - $200 "mid range" Android smartphone does 95%+ or more of what the current "top end" phone may offer, but there is always that voice in the background saying "wow, that fancy phone is cool!"

Examine, don't justify

This is where the budgeting rubber meets the road. When faced with an option to spend more or less for essentially the same experience, it is crucial to be honest. When explaining (to yourself or others) why you want the more expensive option, choose to have enough perspective to examine those reasons objectively. It is so easy to justify a choice that we want to take, but it can be hard to be honest about the quality of those justifications.
Shopping while under the influence of vanity or with a heightened sense of your needs can lead to some financially unsound decisions.

3/23/2017

who needs investment management?

Some folks don't have any investments. Others are in a situation where their circumstances dictate a very "keep it simple" approach. But for much of the rest the population, there may be value in working alongside a professional investment manager in pursuit of an "optimal" investing approach for their specific needs.

we follow a fee-only, "fiduciary" approach

DRW Financial offers investment management solely on a fee-only basis and as a Registered Financial Adviser. This means our only compensation comes from providing advice, not by commissions on transactions. We believe this allows us to offer that advice with fewer conflicts of interest and to act as a fiduciary for our clients.

do you have...?

A retirement account left behind at an old employer (401k, 403b, 457, etc)?
A current retirement account that you set up and haven't looked at in a while?
Or one invested in a way you aren't sure matches your needs?
Persistent issues with owing more taxes than you think reasonable?
Questions about the costs implicit in your current portfolio?
Worries about making your savings last through your retirement?
A desire to address inter-generational financial concerns?
A small business or self-employed income and want a more sophisticated approach to managing those finances?

These are a few examples of issues and areas where we have helped others improve their understanding and their approach to investing. DRW Financial works with artists and engineers, physicians and educators, "millenials" and retirees.

are we a fit?

For a quick and "no cost" consultation to evaluate our "fit" for working with you on investment management, email [email protected]

3/23/2017

do you need financial planning?

"I don't have any finances to plan"

I hear this pretty regularly. And I get the humor. The reality is that there are valuable opportunities for most people (or families) in going through the process of financial planning. And it is a process; done well, this process can lead to some very positive outcomes:

Clarity around finances enables people to be more intentional with their money choices
- Do you ever feel like you "don't know where it all goes"? Or worry that your spending doesn't match your values? Planning can lead to greater transparency and understanding about your use of money
Clearly articulating financial goals and the obstacles to those allows actionable plans to address the obstacles and achieve the goals
- Thinking about retirement? Planning can lead to knowing "your number" for a comfortable retirement, and actions to take to get there
- Trying to think through whether to pay down debt or save more money? Through planning, you can model multiple paths and see the benefits of each
Having a plan that ties together taxes, investments, estate planning needs, and budget work helps eliminate gaps and prevent unpleasant surprises down the road
Working from a plan uncovers opportunities to be more efficient in applying resources to financial needs

DRW Financial offers financial planning services on a flat fee basis. This means that there is an agreement upfront to address a given scope and scale of planning, and a stated fee that covers a full calendar year of work and revisions to that plan.

We currently price these planning services between $500 and $2500, based on complexity of the case. For more information or a "no cost" conversation about your situation, please email [email protected]

3/20/2017

estimated tax payments?

For many people, paying income taxes is something that happens "automatically" with every paycheck, via the mechanism of payroll deductions. Line items like Social Security, Medicare, and an approximate amount of income taxes owed come out of each paycheck, and the process of completing and filing a tax return in April of the next year results in a reconciliation of that process: did the taxpayer pay "too much" or "too little" over the course of the year, and do they get a refund or a bill for taxes due?

for the self-employed, and...

But for folks who earn income "on the side" or are self-employed, payroll deductions are far less common. For many people in this scenario, the typical approach is to pay "quarterly estimated taxes" via the IRS form 1040 ES.
The general idea here is that the taxpayer will figure out what they are likely to owe for the full year, and make four equal payments by the quarterly deadlines. In reality, for many self-employed people their income does not come in conveniently steady streams, and accurately forecasting their full year income can be difficult. For people in that situation, it may be necessary to make adjustments along the way to get the cumulative tax payments close to the right amount.

"gig economy", "side hustles", investments...

Even for people who get most of their regular income from a salary or W2 paycheck, there may be a need to consider making 1040 ES payments. Drive Uber for extra cash? Rent out a room on AirBnB? Realize some significant investment gains? All of these could potentially raise the tax liability for the year; if the amount paid in along the way is too low, there could be a penalty in addition to the eventual tax owed.

the next due date: april 18, 2017

If any of the above applies to your situation, get ready for the first 2017 quarterly due date in mid April. If this date seems familiar, it's because that's the 2016 personal return filing deadline too!

3/20/2017

social security insights

If you belong to the portion of the population aged 60 or older, you have probably given a good bit of thought to Social Security; if you are much younger than that, the concept is probably not high on your current list of priorities.
But as a financial planner and investment adviser, I routinely find that the various benefits available via the Social Security Administration are an important and often misunderstood part of folk's financial picture.

it's your money, coming back

One thing to understand upfront is that almost everyone earning income in the United States pays a tax into the Social Security fund throughout their earning years. Although Social Security benefits are sometimes described as "entitlements" in a way that suggests otherwise, the money that retirees get back comes primarily from their own contributions and those of their peers and the generations preceding / following them.

spouses and kids can benefit, too

Some of the benefits available via Social Security are available to spouses and children of the income earner who paid into the system. For instance, in a two parent household if one worked outside the home for a wage and the other spent their working years raising kids and caring for the home, the one without an income history may also qualify for a retirement benefit based on the contributions of the working spouse.

check your benefits early and often

The Social Security Administration offers a couple of tools that are really very valuable for gaining a basic understanding of where a given person stands in relation to their potential benefits.

The "Retirement Estimator" does not require a log-in, but does use personal information to generate a current snapshot of assumed retirement income benefits at a few different ages, reflecting the potential value in waiting to begin taking that benefit
The "My Social Security" is a page that does require a log-in, and provides much more information than the estimator, including a history of wages and a measure on whether you have accumulated sufficient "credits" to qualify for Social Security benefits.

Given that there is no cost but meaningful benefits to having this information in hand, it is well worthwhile to take a moment now and regularly in the future to check in on your personal benefits.

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