The stock market has delivered a very volatile week to investors, perhaps striking a nerve not felt since 2008. As I write this, the S&P 500 has dropped more than 5% in a week and almost as much today, causing many investors to recall the sickening downturn of what some called “The Great Recession.”
Since 1980, the average intra-year decline for the S&P 500 has been -14.2%, even though annual returns were positive for 27 of those 35 years, or 77% of the time.
The S&P 500 has more than doubled in value from March of 2009 , and we have gone more than 1,400 calendar days without as much as a 10% correction. This is the third longest stretch in over 50 years without such a decline. Since 1928 the S&P 500 has experienced a 10% correction almost once per year with an average recovery of 8 months.
Corrections of 20% or more for the S&P 500 have historically occurred at the end of market cycles. In the short run the S&P 500 has pulled back 5% an average of four times per year, or about once per quarter. In fact, the S&P 500 has experienced a 5% or greater pullback every year since 1995. Drawdowns of 2%-3% occur far more often, at least monthly on average. As such, pullbacks alone should not be a reason for panic.
In times of increased volatility such as we have experienced, it’s important to revisit these important lessons that are the underpinning of a successful investment strategy. read more…
Merriman Advisor Rebecca Conner recently co-wrote an article with Joe Wallin from Seattle law firm Carney Badley Spellman for Puget Sound Business Journal, about the questions employees should ask to better understand their stock options. Read the entire article here.
At a recent technology event I attended on the Internet of Things, it amazed me how people’s lives will be touched in the future by ‘smart’ systems at home, in the car and on the go. As technology continues to gravitate toward the cloud and social networking, it’s important to look at how your digital property is distributed at the time of your death.
What is digital property?
Digital property includes:
- Computing devices (smartphones, eBook readers, computers, etc.)
- Data storage devices
- Electronically stored information
- User accounts (including email, social networking sites, web blogs, online gaming, etc.)
- Domain names
- Intellectual property rights in digital property
Why does digital property matter?
Digital property is extremely personal and sentimental – this is where many now store pictures, videos and their most prized projects and conversations. Digital property can also be financially valuable – creating worlds or real estate in online games, web presence through blogs and social media, etc.
When privacy laws conflict with helping your family gather pictures and prized possessions from your best and last moments, it can cause enormous stress on your family. read more…
In the start-up world, founders create a company and hire a business attorney to compile incorporation documents. Once the company is formed, if the founders elect to vest into their ownership over time, the attorney will send the founders a reminder email saying, “Don’t forget to file your 83(b) election! You have 30 days to make this happen.” Then a week later, the founders receive another reminder email, and maybe a few more down the road, but they let the chance to file the election pass on by.
So what is all the fuss about?
The 83(b) election is often forgotten or ignored at the critical moment when a startup begins to gain traction. Or, an employee who obtains a stock vesting agreement for the first time can easily miss it. When used wisely and in the right situation, the 83(b) election can be invaluable.
What is it?
The 83(b) election is available in stock compensation agreements with a substantial risk of forfeiture (a.k.a., restrictions). This is usually seen with stock vesting agreements for founders and executives of newly created companies and does not apply to phantom stock (RSUs, phantom units, etc.). Rather than paying tax each year upon vesting, this election allows you to pay all taxes up front based on the value of the stock at the time of award/grant. Then, when you dispose of your stock years later, you will be subject to capital gains tax rates. read more…
Every time I meet with a tech executive or founder holding restricted stock, I ask them if they made their 83(b) election. By this point, many have heard the phrase but few can point to an example that is easy to follow. There are both potential risks and rewards in making this choice.
Example of 83(b) Election in an Optimal Situation
You receive a grant of 90,000 restricted shares vesting over three years. The price per share at grant is $0.01. Assume you hold the vested stock and sell at the beginning of Year 5, your marginal income tax rate is 39.6%, your long-term capital gains tax rate is 20%, and net investment income tax rate is 3.8%.
- End of Year 1, the company received angel investment and the value per share is $1.
- End of Year 2, the company picks up steam and the value per share raises to $5.
- End of Year 3, the value per share is $10 and the company prepares to go the venture capital route.
- Beginning of Year 5, the price per share jumps to $20 due to funding valuation.
Without an 83(b) election, you will recognize taxable income each year on the vested portion. The taxable income will be equal to the fair market value less the grant price. Over time, if the value of the stock increases, you will pay more tax at each vesting event.
Restricted Stock Vesting - No 83(b) Election
|Share Price||Taxable Income||Tax Liability|
|Total Tax Paid||$504,098|
|Grant Date - 12/31/Year 0||$0.01||-||-|
|Vesting - 12/31/Year 1||$1||$29,700||$11,761|
|Vesting - 12/31/Year 2||$5||$149,700||$59,281|
|Vesting - 12/31/Year 3||$10||$299,700||$118,681|
|Sale Date - 2/1/Year 5||$20||$1,320,900||$314,374|
If you make an 83(b) election, you will accelerate your vesting for tax purposes to the current year and realize income on the current value now.
Restricted Stock Vesting - 83(b) Election
|Share Price||Taxable Income||Tax Liability|
|Total Tax Paid||$428,542|
|Grant Date - 12/31/Year 0||$0.01||$900||$356|
|Vesting - 12/31/Year 1||$1||-||-|
|Vesting - 12/31/Year 2||$5||-||-|
|Vesting - 12/31/Year 3||$10||-||-|
|Sale Date - 2/1/Year 5||$20||$1,799,100||$428,186|
This example displays the benefits in an optimal situation. It assumes one income tax rate across multiple years with the sale of stock occurs more than one year after full vesting. Depending on your particular situation, the impact of an 83(b) election may change substantially. Discuss the implications with your tax accountant and/or financial advisor to find out if this option is right for you.
Before I came to Seattle, I had the pleasure of working for an asset management firm with close ties to lead researchers, Nobel Prize winners and economic powerhouses. One day, a dear friend to many in the company passed away and I was amazed at the outpouring of respect and love. Gordon Murray left a legacy with his co-authored book, The Investment Answer, written during his battle with terminal brain cancer.
Instead of traveling the world or living out the remainder of his time on a beach or mountain, Gordon gave the world the gift of what he learned over 25 years working on Wall Street and consulting with financial firms. The book is a light read (around 68 pages) and can be very powerful for those beginning their investment journey. It simply outlines key decisions every investor needs to make on their path to investing.
If you view the market as your ally rather than an adversary that you must time and compete against, give the book a quick read. Gordon and his co-author, Dan Goldie, outline five considerations:
- Decide whether you’ll do it yourself or hire a professional investment advisor.
- Determine what asset allocation between stocks, bonds and cash is best for you.
- Evaluate what specific asset classes you’ll include in your portfolio, and in what ratio.
- Consider whether you believe you can strategically and consistently outperform the market or whether you believe obtaining the market return is most in your favor.
- Create an execution strategy around when you will buy and sell funds from your portfolio. (For example, will you rotate asset classes? Sell based on trend following dynamics? Periodically rebalance on a definite time frame?)
For a little more history on Gordon and why this book was created, check out this NY Times article.