2020 brought many expected and unexpected challenges – on top of a political election year, we faced a pandemic, a challenged economy, and turbulent markets, to name a few.
We don’t yet know what 2021 will bring for the economy, for markets, or for our own lives, but there are still some things we can control.
As we welcome in a new year with hopeful expectations, let’s take a moment to recommit to those factors within our control:
Sharing Our Dreams and Values
As we reflect on the strange and challenging times this year, many find themselves wondering what their families did in the past to get through difficult times. We may remember snippets of stories told by our elders or passed on through our family, but often wish we knew more.
As wealth advisors we know firsthand the importance of legacy planning through legal documents. We also believe in the value of sharing the essence of who you are, your values, and experiences for future generations to come, through the creation of a Family Legacy Letter.
Building Better Financial Behaviors
Too many investors focus on markets when they should focus on themselves, their hopes, their goals, and their dreams. Identifying the choices in our control isn’t just a good financial lesson, it’s a great life lesson dating back to ancient Greece, when the Stoic philosopher Epictetus said:
“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control.”
Understanding Our Biases
Daniel Kahneman and Amos Tversky are famous for their work on human behavior, particularly around judgment and decision making. We can apply much of their discoveries to investor behavior. While we can’t completely eliminate biases, we can learn about them and how they impact our decision making, allowing us to take action to address them and avoid costly mistakes.
May you and your family enjoy the warmth this season has to offer and a new year filled with hope, love and success!
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”.
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.
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.
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.
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.