My Journey to Sustainable Investing | An Advisor’s Perspective

My Journey to Sustainable Investing | An Advisor’s Perspective

 

During my senior year in high school, I was invited to go backpacking in Yosemite with the Yosemite Institute. I had been backpacking many times before with my father all over California. We even climbed the tallest mountain in the continental United States (Mount Whitney) when I was 14. I loved the adventure and challenge of backpacking. In those early years, I didn’t realize the importance of being in nature. It wasn’t until the Yosemite trip that our guides taught us about the history of the national parks in the delicate balance between the visitors and the surroundings. They also taught us the importance of taking care of our planet. When my classmates and I stopped in a McDonald’s on the way home from Yosemite, I remember taking the Big Mac out of the Styrofoam container and asking them to reuse it. Back in the 80s, I don’t think climate change was on many people’s radars. Today, the science of climate change makes me want to do everything possible to care for the planet for the generations to come. I’ve always done my part but drew the line when it came to investing sustainably. My thought has always been to maximize returns in my investment portfolio and give charitably to causes that fight climate change.

I just didn’t believe that I’d be able to diversify enough (too risky). I believed that returns would be lower in part due to higher expenses. I also got confused about the differences between being socially responsible and sustainable investing. There are also a lot of acronyms and terminology to understand, such as SRI (Socially Responsible Investing) and ESG (environmental, social, and governance).

The history of Socially Responsible Investing (SRI) goes back as early as Moses in 1500 BC. In more modern times, the 1950s saw the first mutual fund, the Boston-based Pioneer Fund, to avoid “sin” stocks: companies that dealt in alcohol, tobacco, or gambling.

While I don’t love to support alcohol, tobacco, and gambling, my values aim to focus on investments that help the planet. My values seek to focus on the “E” in ESG: the environment. Doing well while doing good.

Sustainability investing is a choice and investors decide whether aligning their investment decisions with their environmental values is right for them.  At Merriman, we believe that, all else being equal, a sustainability investing strategy should generally reward companies for acting in more environmentally responsible ways than their industry counterparts. This belief is in contrast to many other sustainability investing approaches that exclude entire industries regarded as the worst offenders.  Sustainability strategies place greater emphasis on companies considered to be acting in more environmentally responsible ways while also emphasizing higher expected return securities. This approach enables investors to pursue their environmental goals within a highly diversified and efficient investment strategy.

It feels like we have both been on the same journey to the top of the mountain to build a portfolio that focuses on the environment without sacrificing risk-adjusted returns. Merriman recently announced major changes to our values-based portfolio, and I have moved all of my investments into our new portfolio. When I combine a sustainable portfolio with charitable giving, it is one small way to do my part in “leaving no trace behind.” If you would like to learn even more about our approach, you can read “Incorporating Environment and Social Values into Your Merriman Portfolio”.

 

 

 

Why Do I Need A Financial Plan?

Why Do I Need A Financial Plan?

 

If you fail to plan, you are planning to fail. This adage, generally attributed to Benjamin Franklin, is as true for financial planning as it for other endeavors. At Merriman, we want to help clients meet their financial goals. Any successful goal-setting strategy includes a detailed plan. But this plan is not only helpful for increasing chances of success. It is also one method we use to minimize potential failures.

When you first met your advisor, did you start your relationship and immediately hand over your hard-earned resources to their management, or did they put you through a rigorous due-diligence process to develop an agreed-upon plan before moving forward?

While the latter requires a lot more time and energy upfront from both parties, this hard work pays off and makes the relationship more valuable and more productive in the long-term. (Short-term pain, long-term gain). It can especially add value during times of uncertainty or major life transitions, such as retirement. When the unexpected happens, the plan serves as the basis for deciding how to react. Without a plan, it is easy to act impulsively or without fully considering future consequences. A good plan has already taken into account potential pitfalls or trouble spots and has a strategy to overcome them. With a plan in place, you are able to adjust course, if needed, and ultimately still get to your desired outcomes.

At Merriman, we build a plan together from the beginning of our relationship and stress test your resources to determine the likelihood of achieving your most important financial goals. We start with a discovery meeting where we map out all aspects of your life—financial and otherwise—so we can provide a truly customized plan to help you achieve your goals. To make this meeting as productive as possible, we ask that if you have a spouse or partner, have them join us, as the plan we are building together is for the both of you.

As part of our due diligence, we securely collect important items such as tax documents, insurance statements, estate planning documents, paystubs, budgeting and expenses, financial accounts and retirement income statements, and debts, among other information. This may seem like a lot to ask for at the start, but these documents provide clues to potential weak spots in your plan.

Think of it this way: when you meet with a physician for the first time, do they judge your health based solely on your physical appearance, or do they ask tough questions and run a gamut of tests before providing a diagnosis? The collected samples and information serve as the inputs and the test results are the outputs based on the criteria used in the examination. A financial plan can be thought of the same way.

While test results are useful, they are in themselves really just data. We then interpret this data, informed by our education and experience, to provide comprehensive advice on how best to achieve your financial goals.

Why do you need a financial plan? Because in good times and difficult times, a financial plan is your best opportunity to meet your financial goals. At Merriman, that’s our mission, and that’s why we take financial planning as seriously as we do. You should expect the same attention to detail from anyone with whom you choose to work.

Reach out to us to discuss your specific goals and the necessary next steps to achieve them.

 

Why You Should Consider ROTH Conversions During a Bear Market

Why You Should Consider ROTH Conversions During a Bear Market

 

 

We expect most people have a grasp on how to make money in a bull market, but it can be far more challenging to contemplate how to make money during a bear market, when emotions are running high.  It’s not all about making money, though.  Some of it involves figuring out how to put oneself into a better financial position for the future so that you can heal faster from the losses.  There are a handful of key strategies to engage in during a bear market that will help your finances as much as your future, and one of the most important of these is ROTH conversions.

Believe it or not, bear markets represent the best environment into which to make an IRA-to-ROTH conversion.  The more negative the equity losses are, the more attractive the conversion becomes.  When making a conversion to ROTH, you can either move cash or you can move shares of the stocks or mutual funds that you own in the IRA.  When we make a conversion, we choose to move shares for our client families.  The tactical benefit here is that we actually get to pick the specific funds to move from the IRA to the ROTH.  Whichever funds have the deepest losses for the given year are the ones with the highest priority to move over first.

Think of it this way: if we found ourselves in a sharp bear market, we would expect several equity asset classes to be down, but maybe inside our IRA the US small cap fund went down the most with a -35% loss.  Although it may not feel like it, bear market losses are temporary, so it is important to take action and make the conversion to the ROTH while the markets and the news are negative and remain temporarily distressed.  If we were to hypothetically move $50,000 of the US small cap fund in our example, we would actually be moving shares that were previously 35% higher in value at $77,000.  If we convert the $50,000 of small cap shares right now, we incur the tax liability on those shares on the day they are moved over.  Once the shares have arrived in the ROTH, it then becomes a matter of exercising patience.  It might take six or nine months for the current bear market to pass; but when the economy improves, those distressed shares should bounce back in value.  In a relatively short number of months, the $50,000 that was converted and that you paid tax on might be worth $65,000 or $70,000—but remember, you only paid tax on $50,000.  Much like a spring being compressed and then subsequently released, the idea behind the conversion is to move the shares to the ROTH while the spring is compressed.  Simply put, the bear market represents a tax-savings opportunity in disguise, so acting now is highly important BEFORE things improve in society.  Effectively, ROTH conversions and bear markets coupled together give us a way to legally cheat the IRS out of tax dollars.

The benefits of ROTH conversions are not just effective during a severe bear market but can be utilized nearly every year.  If you employ a highly diversified portfolio with multiple asset classes held in your IRA and ROTH, there are lots of opportunities to take advantage of the up and down stock market movements, as many asset classes move at different rhythms.  There are a host of financial planning advantages to ROTH accounts and gradually converting IRA money into ROTH each year.  Keep in mind, ROTH accounts contain post-tax money; they do not have required minimum distributions, which do apply to traditional IRAs; and all of the future growth on the assets in the ROTH are considered post-tax.  All withdrawals from ROTHs are voluntary, and all of the dividends, interest, and earnings in the ROTH are shielded from taxes.  Another advantage of a ROTH account is that it can be viewed with your IRA using an overall investment approach that we call Asset Location.  Essentially, Asset Location seeks to view the IRA and ROTH accounts as if they were one account holding one investment portfolio but divvies the funds between the accounts to the greatest advantage.  Reach out to your advisor if you are curious about conversions and ROTH accounts and learn more about how we advocate for our families.

Tips for Selling Your Investment Properties

Tips for Selling Your Investment Properties

 

Planning to list your investment property for sale?

Under favorable market conditions, selling your rental property could be lucrative. And you could also have properties in your portfolio that are not performing as you expected. In these cases, putting your investment property up for sale may be a smart step, explains T-Square Real Estate.

Selling this type of property comes with a set of unique challenges. When you plan and strategize in advance, you could save yourself a lot of time and money.

In this article, we’ll go over the top tips for selling your investment properties. By reading this piece, you’ll gain an understanding of the options you have for wasting less time and closing your sale more profitably.

 

Tip #1: Study the Market Situation

The first step before selling your investment property is conducting thorough research on the local market conditions. When you see great potential in how the market behaves, it’s important to communicate this to prospective buyers.

Map out the employment situation, occupancy rates, and the overall status of the rental market. Real estate investors would see more value in a property that is situated in a district with:

  • Low unemployment rates
  • High occupancy rates
  • Favorable rental conditions

 

Tip #2: Understand the Tax Laws

Taxes on rental property sales differ from residential unit transactions. You need to find ways of utilizing the US Tax Code (Section 1031) in a financially sustainable way.

Making complete sense of these laws is essential for preventing a negative return on investment. It’s possible to defer paying capital gains taxes if you know how to work the regulations to the advantage of your business.

 

Tip #3: Stage Your Rental Property

Maximize the appeal of your rental property by using the services of a professional stager. The difference in perception between staged and unstaged properties may be tremendous.

Here are the main benefits of staging your rental unit:

  • Depersonalization makes the property more appealing.
  • You’ll sell your property quicker.
  • Your stager will emphasize the key positive features of the rental property.
  • Prospects might perceive that your home has a higher value.

 

Tip #4: Reduce Your Investment Property’s Expenses

One way to make your investment property more attractive is by reducing the monthly operating costs. When the cash flow improves, your property gets an instant boost in investor appeal.

There are numerous ways to minimize operating costs. For example, you could upgrade all the major appliances in the unit. Even though this involves an initial expense, the resulting savings are bound to impress your buyers.

 

Tip #5: Find the Right Price

Selling your rental property calls for figuring out the correct price. You want to hit the right spot between too expensive and undervalued. Both of these extremes would work against your best interest.

The groundwork for successful pricing is a comparative market analysis. Without going through with this, you won’t know what the optimal price for your investment property is. This analysis aims to figure out what have been the recent sales prices for similar properties in the same area.

 

Tip #6: Provide High-Quality Visuals

Hiring a professional real estate photographer is the best approach if you want to have high-quality photos accompanying your listing. And there are plenty of reasons to provide these photos.

Your prospective buyers are more encouraged to visit for a showing when they see photos that showcase the property’s selling points. Plus, taking great photos of a property has the potential to sell your rental unit quicker and for more money.

 

Tip #7: Prepare All the Documentation

Investors want to see all the stats linked to your rental property. The most important documents are those that concern the financial health of your unit. Make sure that your prospects have ready access to the budget and expense sheets and income data.

Additionally, hand over complete documentation regarding maintenance and repairs history. This should include a complete overview of capital expenditures. Transparency builds trust and helps your potential buyers to make the final decision.

 

In a Nutshell: Selling Your Investment Properties

Quite a few investment property owners face a big question: should I sell my investment? In many cases, it’s a sound plan that allows you to make further investments or cash out because of necessity.

You can take action to sell your investment property more successfully. Here are our top tips for making a quicker and more profitable transaction:

  • Stage your rental property to improve its appeal.
  • Provide plenty of visual materials in the property listings.
  • Prepare all the documents, including the complete financial history.
  • Understand the market situation and its implications on your sale.
  • Conduct comparative market analysis to find the best price.
  • Study the tax laws and regulations relevant to your situation.
  • Cut the running expenses of your investment property.

 

Written for Merriman by Kellie Tollifson at T-Square Real Estate Services in Seattle.

What Women Need to Know About Working With Financial Advisors | Tip #2

What Women Need to Know About Working With Financial Advisors | Tip #2

 

I want to acknowledge that all women are wonderfully unique individuals and therefore these tips will not be applicable to all of us equally and may be very helpful to some men and nonbinary individuals. This is written in an effort to support women, not to exclude, generalize, or stereotype any group.

 

I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. Having worked in the financial services industry for nearly two decades, this is unfortunately not surprising to me. But it is troubling, largely because it’s so preventable.

Whether you have a long-standing relationship with an advisor, are just starting to consider working with a financial planner, or are considering making a change, there are some simple tips all women should be aware of to improve this relationship and strengthen their financial futures.

Tip #2 – Tell Them What You Want

Studies have shown that women tend to be more goal-oriented than men. I have found it to be true that women are more likely to focus on goals like maintaining a certain lifestyle in retirement, sending children to college, or making sure the family is protected in the event of an emergency, while others may focus more on measuring investment performance.

At Merriman, we believe all investing and financial planning should be goal-oriented (hence our tagline: Invest Wisely, Live Fully), but many advisors still set goals that focus on earning a certain percentage each year. This can be especially difficult if your partner focuses on this type of measurement as well. Women (or any goal-oriented investor) can sometimes feel outnumbered or unsure of how to direct the conversation back to the bigger picture. You made 5%, but what does this mean for your financial plan? Can you still retire next year? The issue is not that you don’t understand performance or lack interest in market movements, whether or not this is true. The issue is that the conversation needs to be refocused on the things that matter to you. All of the truly excellent financial planners I have worked with have known this and do their best to help clients identify their goals, create a plan for obtaining them, and then track their progress. If you’re not experiencing this, it’s either time to look for a new advisor or to speak up and tell them what you want. Also, note that speaking up is more easily done when you work with an advisor you like (see tip #1).

There are many different considerations when hiring an advisor: Are they a fiduciary? Do they practice comprehensive planning? How are they compensated? What is their investment philosophy? They may check off all your other boxes, but if you don’t like them, you are unlikely to get all you need out of the relationship. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios.

Be sure to read our previous and upcoming blog posts for additional tips to help women get the most out of working with a financial advisor.

What to Consider Before You Refinance Your Mortgage

What to Consider Before You Refinance Your Mortgage

 

For many people, a home is one of their largest assets. Also, because most people don’t pay cash to buy their home, they need to get a mortgage to finance the purchase. Even though a mortgage is typically 15, 20, or 30 years, that doesn’t mean everything stays the same during that time. What might be a great interest rate at the time of purchase could be considered a high interest rate just a couple years later. This is why millions of Americans choose to refinance their mortgage when interest rates go down. What’s important to keep in mind, though, is that there are many factors besides the interest rate that a homeowner should consider before refinancing. There are seven key considerations that one should review before applying for a refinance.

To help me understand what’s happening in the mortgage market, I reached out to my friend Phill Becraft. Phill is a mortgage advisor with Guild Mortgage and has more than a decade of experience in the greater Seattle area. Phill was able to provide insights into some of the key considerations outlined below.

Key Considerations

  1. Your Credit Score
  2. Refinancing Costs
  3. Home Equity
  4. Debt-to-Income Ratio
  5. Rates vs. Term
  6. Private Mortgage Insurance
  7. Break-Even Point

 

1) Your Credit Score

One of the biggest factors that lenders consider when evaluating an application is a borrower’s credit score. While current interest rates are at historic lows, that doesn’t mean everyone will qualify for these low rates. It’s helpful to know what your score is beforehand so that you’re not surprised when you apply for a refinance. A general guideline for getting the lowest mortgage interest rate is having a credit score of 760 or higher.

Tip from Phill Becraft:

“Online credit check companies are a great tool for consumer lending products, but in the end, they are a for-profit business. Don’t be surprised when a mortgage lender pulls your credit and it’s different by 20–30 points. Mortgage lenders use a more complex FICO scoring system for their reports to supply to their investors. It’s called FICO Score 9, and it’s on a different level than what is used at the online credit check companies.”

2) Refinance Costs (closing costs)

All borrowers should keep in mind that refinancing is not free. Even when lenders offer a “no-cost” refinance, that just means the rate will be higher to cover the costs of the refinance. Typically, a borrower should be prepared to pay 2%–6% of the total loan amount to refinance. That 2%–6% range should make it obvious that not all lenders are the same, and oftentimes it pays to shop around. If you’re worried about out-of-pocket costs, many lenders allow closing costs to be wrapped into the new loan—but you need to have enough equity in your home for this option to work.

Tip from Phill Becraft:

“If you refinance with your current loan servicer, you may not need to reestablish/rebuild an escrow account to ensure your property taxes and insurance are paid. This can lower your upfront or financed loan costs.”

3) Home Equity

If you want to refinance, then you should confirm that your home is worth more than the mortgage amount. The more the better, but a good target is at least a loan-to-value (LTV) amount of 80% or better. In other words, you should try to have at least 20% equity built up in your home.

Quick example: Home Value = $500,000 | 80% LTV = $400,000 | 20% Equity = $100,000

If your home is worth less than your current mortgage, that is considered “underwater.” When a home is underwater, your refinancing options are limited. Most conventional lenders won’t refinance a mortgage if the home is underwater, but a homeowner may be able to qualify with a government program. It’s always best to check with your lender first.

Another reason to have 20% equity is figuring out if you will be required to pay private mortgage insurance (PMI). We’ll discuss this more in a later topic.

Tip from Phill Becraft:

“Many conventional loans make you keep mortgage insurance for the first 24 months regardless if you have enough equity (20%+). Sometimes it’s best to look at a refi to get an updated appraisal to better your LTV or equity position.”

4) Debt-to-Income Ratio

Just because you currently have a mortgage, it doesn’t mean you can simply refinance into a new one. Lenders have not only increased their standards for credit scores, they’ve also become more stringent when it comes to your debt-to-income ratio. Ideally, your monthly house payments should be under 28% of your gross income, and overall debt-to-income should be less than 36%. This means you need to calculate how much your other monthly obligations are, such as car payments, credit card bills, student loans, and other credit lines when figuring out your total debt-to-income ratio. Having a steady job history, a high income, and some money saved are all helpful attributes, and some lenders may allow your debt-to-income ratio to go into the 40%+ range, but you shouldn’t count on that.

Tip from Phill Becraft:

“Childcare costs are not considered when looking at debt-to-income ratios. Also, some lenders can eliminate monthly liabilities like auto loans with less than six payments left.”

5) Rate vs. Term

Getting the lowest possible rate doesn’t always make the most financial sense. Many people looking to refinance put a lot of emphasis on the interest rate, but it’s also important to know the cost of getting lower rates. Make sure you pay attention to the refinancing points that are paid to get a mortgage at a lower interest rate. These points are either wrapped into the closing costs or added to the principal of your new loan.

Another way to get a lower interest rate is choosing a mortgage with a shorter term. A 20-year mortgage will typically have a lower interest rate than a 30-year mortgage. If your goal is to reduce your monthly payments, choosing a shorter-term mortgage will most likely result in a higher monthly payment. If your goal is to lower your monthly payment and pay off your mortgage faster, then you can refinance into a loan with a lower rate and the same term, but keep making the same amount you were paying on the previous mortgage. Let’s use an example:

Original Mortgage: $300,000 | 4.00% | 30 Year Term | Monthly Payment = $2,387

Refinanced Mortgage: $300,000 | 3.50% | 30 Year Term | Monthly Payment = $2,245

In the original mortgage above, the minimum payment of $2,387 is made every month for 30 years until the loan is paid off. Say you refinance into the new mortgage at 3.50%, but instead of making the new minimum payment of $2,245, you keep making the previous mortgage payment from the original loan, $2,387 per month. This strategy “feels” like your monthly payment hasn’t changed, but now your loan will be paid off in approximately 27 years instead of 30 years! You can save 3 years of mortgage payments by simply lowering your interest rate and sticking with your original monthly payment.

It’s important to note this simple example does not take into account closing costs, refinance points, or how long you’ve been paying into the original mortgage, but you should get the point that you can make payments above your minimum monthly payment. This strategy also allows you to reduce your monthly payments back down to the minimum amount during times that are financially challenging.

6) Private Mortgage Insurance

Most lenders require a borrower to have at least 20% equity in their home, otherwise private mortgage insurance (PMI) is required. Lenders will calculate your loan-to-value ratio during a refinance to ensure the mortgage amount will not exceed 80% of the home’s value. The costs for PMI vary and are typically 0.25%–2% of the loan balance per year. This means the higher the mortgage amount, the higher the PMI costs. For many homeowners, putting 20% down at the time of purchase is a big hurdle, so it’s not uncommon for PMI to be added to a mortgage. As home values increase, refinancing may be a way to eliminate PMI and get a mortgage at a lower interest rate. The opposite is also true, though. If your home has decreased in value, a lender may require PMI on a refinanced mortgage if the LTV exceeds 80%.

Tip from Phill Becraft:

“Did you know there are many ways to pay mortgage insurance? Gone are the days of monthly payments! You can choose “split” or “single” paid premium options with most mortgage brokers. Choose a small lump sum down and finance less each month (split) or just pay the single premium up front and don’t have any monthly MI costs!”

7) Break-Even Point

If you are considering refinancing your mortgage, you should at some point ask yourself, “Is it worth it?” This question cuts to heart of making this decision. Ultimately, you need to calculate if the costs to do the refinance will be paid off eventually by the monthly savings.

For example, if your refinance costs are $12,000 and you end up saving $400 per month, then it will take 30 months to “break even.” This means you should plan on staying in your current home for at least another two and half years, or you won’t end up saving anything by refinancing your mortgage.

 

Hopefully these seven considerations have given you enough “food for thought” to realize refinancing a mortgage is complex, and it’s not just about getting the lowest rate. Before you make the decision to start the process, I encourage you to speak with a professional who can help assess your financial situation and determine if now is the right time to refinance your mortgage. Here at Merriman, a Wealth Advisor can assist you with this decision as part of our financial planning process. Reach out today if you have any questions.