Our spending habits matter, but it’s not just about investing our money. How do we get our time to pay us dividends?
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Tactics
The Joy of Free Wins
People or companies may confer benefits on third parties without cost, as a side effect or byproduct of their actions. Planting a tree improves the neighborhood and provides shade to a neighbor. Keeping bees results in the pollination of nearby crops. Providing first-aid training to workers may save lives outside of work. A video or blog post created for clients might contain an idea that helps people who are not clients.
These are examples of what economists call positive externalities. These things are all good. They make the world a better place.
I believe the concept applies in our interactions with others, as well. Have you ever had your day brightened by the laughter of a group of passersby? Watched someone hold a door for someone with an armload of packages? Overheard a “thank you” being given for an otherwise thankless task?
All of these things are benefits that they produced for free and you enjoyed at no extra cost. They are positive externalities, on the small scale of daily life.
Having a tree planted improves our home as well as the neighborhood, but generating positive externalities can also help us beyond business transactions. Friends and family members respond to the empathy, kindness, and thoughtfulness embedded in any of those little actions we can take. If employed, those in our network are likely to sense the intangibles we add to the workplace environment. Our teammates across the community likely enjoy our interactions more.
Generating positive externalities is not charity. There are no costs involved, only benefits for giver, recipient, and neighbors and passersby. Win-win-win.
The general concept has been around for a long time, and is often expressed more simply. Be kind. Fill up the buckets of others. Do unto others.
Clients, if you would like to talk about this or anything else, please email us or call.
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Play the audio version of this post below:
The Joy of Free Wins – 228Main.com Presents: The Best of Leibman Financial Services
The text of this episode is available at http://www.228main.com.
Dazzled by Diamonds?
No matter how beautiful, some flowers still have thorns. And no matter how flashy, some salespeople will have them too. Remember that not every person you meet will have your best interest at heart. Don’t let any peddlers dazzle you with diamonds! It never hurts to ask for a second opinion.
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Saving Summer?
In the United States, as in most places in the world, we are governed by the Gregorian calendar. But as we flipped the page and entered the “-ber” months, many of us are facing once again the power of the all-important academic calendar.
Children, grandchildren, and neighbors are back to school. Summer is over for most of the country, and it’s got us reflecting. Without school, summer for many families can include more sleepovers or late nights and long chats on the porch. It could mean hours at the city pool or a big vacation.
For some of us, summers have also meant more leisure and more work.
It’s possible that you earned your very first dollar—and then some, hopefully—one summer long ago. Teens are more likely to be employed during June, July, and August than any other time of year. And it makes sense: teens are more likely to have the time and opportunity then, as jobs like lawnmowing, babysitting, and lifeguarding peak each summer.
Clients, if anyone in your household age 18 or under was out making money this summer, consider talking with them about the “Swiss Army Knife of finance”: the Roth IRA.
As long as someone has earned income (and doesn’t make more than the cap), they can contribute to a Roth IRA (up to the maximum amount).
Say your child or grandchild earns $3,000 in the summer: they could contribute up to $3,000 to a Roth. Of course, they may not want to forfeit all their earnings, but if they’re able to, this may be a prime opportunity to impart the value of saving. If you’re feeling nice, you could “gift” them the $3,000 to replace what they saved.
Roth contributions are taxable now and enjoy tax-free future gains. Beyond the magic of compounding, starting a Roth account early has other benefits:
- At any time, you may withdraw contributions without facing a penalty or taxation.
- Beginning five years after the Roth was opened and funded, account holders can take out up to $10,000 (earnings and contributions) to fund the purchase of their first home, tax- and penalty-free.
- Beginning five years after the Roth was opened and funded, account holders can use it to pay for qualified college expenses, penalty-free (earnings will be taxed as regular income).
As children near college age, investors may have questions: the government does not include retirement accounts as assets in the calculation for student aid, so this type of savings vehicle should not impact the availability of federal financial aid.
Withdrawals would be counted in the calculation, but be aware: the FAFSA uses a “prior-prior year” income picture to avoid having to base their decisions on estimations. So, for example, even withdrawals made in a 4-year graduate’s junior year shouldn’t affect their aid eligibility.
The process of getting something like this set up isn’t terribly complicated. It is not necessary for the working person have a W-2, though we do recommend keeping records (think: basic invoices or even simple receipts from the neighbors for those lawnmowing or babysitting services).
Clients, could this be a way to help your children or grandchildren preserve a piece of summer? Call or write, anytime.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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Play the audio version of this post below:
Saving Summer? – 228Main.com Presents: The Best of Leibman Financial Services
The text of this episode is available at 228Main.com.
What’s The Best Time To Start?
“Well begun is half done,” the proverb says. And we tend to agree. Since it’s your journey, we don’t like to sweat the particulars: it’s never too early to start, but it’s also never too late.
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Wellness Wishes from Your Past Self
What would I have to learn if I could talk to my past self? Or my future self?
There are some mental exercises that might help us reflect on our goals, but here’s what I’m wondering: What do truck stop chili dogs have to teach me?
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Changing the Recipe
There are many ways to get the job done. Whether the job is getting dinner on the table or investing for retirement, rarely does it ever come down to an ultimatum, something like, “If you can’t stand the heat, get out of the kitchen.”
What if you just need a different recipe?
Join Billy for a walk, as he shares his thoughts about how to switch things up in this week’s message.
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Looking for Setups in the Setbacks
Time travel is a powerful way to reframe the present. The here and now will always bring its unique challenges and setbacks, but what will this moment mean to you down the road, looking back?
If you’re prone to stay mired in the moment, here’s a game of “I spy” for you: where are the setups among all these setbacks?
You’ve heard it from us before. There’s day-night, day-night. There’s up-down, up-down. Well here’s one for any challenging time: setback and setup.
Challenging times bring tradeoffs, big and small. In some moments, there is less time for work… but more time with the kids. Or less time with the gym buddies… but more time out in the sunshine. Tradeoffs.
In terms of business, our classic principles still apply during challenging times. We seek bargains. Economic activity is always shifting: some areas will slam on the brakes as demand falls off; some areas will be buzzing in a scramble to keep up with demand.
Just like the setbacks in our individual lives, the business setbacks exist alongside potential setups. Part of our job is to take a good look around to try to spot them. No guarantees, but we’re always wondering what future growth is being watered by the current storm.
We don’t ignore a storm. This approach, however, helps remind us of the bigger picture. It’s a more complete way to tell the story of a setback.
Clients, if you would like to talk about this or anything else, please email us or call.
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Play the audio version of this post below:
Setbacks and Setups – 228Main.com Presents: The Best of Leibman Financial Services
This text can be found at https://www.228Main.com/.
When Buying “The Stock Market” May Not Be Optimal
When people talk about “the stock market,” they might actually be thinking of the Dow Jones Industrial Average, or the S&P 500 Index. These lists are what they sound like: averages and indexes of exchange-traded securities.
And one popular school of investing calls for buying index “funds,” collections that offer a slice of what’s happening on one of those lists. The goal is to capture the list’s average return. It’s simple, easy, and relatively inexpensive to seek to replicate those market averages.
But there’s a tradeoff. There have been extended periods when those averages basically went nowhere for many years at a time. The “average” approach means you are by definition going with the crowd. But crowds can become herds, which can turn into stampedes.
This is what happened with the raging Nifty Fifty and again in the Tech Wreck.
Back in 1973, the “Nifty Fifty” stocks were all the rage. Many scrambled to buy and hold these dominating stocks, names like IBM, Xerox, or Coca Cola. One might say there was a stampede into the favored names. Valuations got stretched, the S&P 500 peaked—and proceeded to fall about 50%.
It took until 1982 to regain that 1973 peak, before moving any higher: a decade with essentially no progress.
It happened again from March 2000 to 2013, a time that got the nickname the “Lost Decade.” This time, the mania was internet stocks. Technology and communications companies dominated the S&P 500, and investors got excited. Again, more people stampeded in, valuations got stretched, the S&P 500 peaked—and proceeded to fall about 50%. Not until 2013 did the index begin to make and hold new, higher ground.
So what was problematic about those peaks? The largest companies became a much larger fraction of the total value of the S&P 500. The top companies in 1973 and 2000 had become worth many times the bottom companies combined.
Staying with the crowd—buying indexes and aiming to capture averages—is not the only way to invest. In those episodes from history, some other sectors fared better than the fallen favorites and broad U.S. market averages. There were those smaller companies, value-style investments, and overseas markets that generally went up during the Lost Decade.
At 228 Main, our core investing principles include “avoid the stampede” and “seek the best bargains.” As such, while the largest companies in the S&P 500 are becoming increasingly concentrated at the top—reminiscent of 1973 and 2000—valuations may be getting stretched once again. We are seeking to have more and more of our portfolios invested other places. (Research is a core activity here, a daily discipline, and we invest a lot of time and energy into it.)
That is to say, we’re seeking opportunities outside the averages. We’ve got our eye on value-style companies—those that seem to provide a lot of current profits, or cash flow, or dividends relative to each dollar invested. We’re seeking companies operating in faster-growing economies, the ones that provide food, shelter, transportation, communications, or energy (and are trading at more attractive prices). We want to know what’s happening with smaller companies, the opportunities that don’t fit the profile of those mega-sized names that dominate the market averages today.
There are tradeoffs involved with either approach.
- When we follow the averages, we risk following the crowd straight into a stampede.
- When we buy the bargains, our particular favorites may get cheaper while the darlings of the market are still climbing higher. Our portfolio performance could generally lag a red-hot market.
To be clear, we are still invested in those large U.S. growth companies we’ve mentioned. But, clients, we’re more diversified now than we’ve been at any time since the early 2000s. Even though we may be on the right track for long-term investors, it can be lonely to be contrarian. So it’s times like these that it helps to check in, take the long view, and make sure the methods suit the goals.
And for us, it’s the pursuit of capturing the potential growth, for the long run. No guarantees, but that’s what we’re working toward.
Clients, please call or email us if you would like to talk about this or anything else.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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Play the audio version of this post below:
When Buying “The Stock Market” May Not Be Optimal – 228Main.com Presents: The Best of Leibman Financial Services
This text can be found at https://www.228Main.com/.
Catch-Up > Ketchup
These two terms may essentially be homonyms, but one is so much greater than the other. Kiddos sometimes choose huge portions of the condiment ketchup. But beyond a sugar-fueled addiction for dipping our fries in that one is a great opportunity to “catch up” on our IRA contributions.
In the world of IRAs—Individual Retirement Accounts—we consider the beginning of January through tax filing day “catch-up season.” Whether Roth or traditional, if we are eligible to make contributions, then we can catch up on last year’s contributions even though the last calendar year is over.
Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. Even with the federally-mandated limits, you can contribute thousands of dollars in standard contributions. And for people who turned 50 by year-end, there is an extra “catch-up” contribution option.
Consider even just the standard contribution limits. Imagine if you had $15,000 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for both this year and next year. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money–ever again, for the rest of your life.
If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $60,000 available later with zero tax. After five years your contributions can be withdrawn without tax. At the later of five years or age 59½, the earnings may be withdrawn without tax too. And if you didn’t withdraw it, your beneficiaries would receive it, free of income tax.
No guarantees, of course: the markets go up and down.
There is a maximum earnings limit on Roth contribution eligibility, and there is a whole world of other lifetime tax reduction strategies related to Roth conversions. We’d be happy to visit with you about your eligibility. Simply email us or call if you have an interest in learning more.
For now, happy catch-up season, one and all!
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.
This information is not intended to be a substitute for specific individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend you discuss your specific situation with a qualified tax or legal advisor.
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