Is the Market Overpriced?

Should you make changes to your wealth management strategy based on current market conditions and predictions?

I received this question from a friend recently:

“I am getting very nervous with the current market. I feel like the record highs don’t make any sense with the turmoil and uncertainty in politics, the pandemic and the economy. Does it make sense to adjust to a more conservative allocation for the first half of the year until some of the current events play out? I am thinking any upside to the market is limited while potential downside would be significant.”

Short Answer: Market timing is not a strategy for wealth management

You know the moral of the story with the tortoise and the hare: slow and steady wins the race. You could sprint and make some gains, given you have the endurance and resources to finish the marathon at that pace. Market timing is a difficult strategy for any one investor. It wreaks havoc on your psyche to be constantly questioning “in or out” with an ever changing market. Further,  you won’t know if it was a successful or optimal strategy for many years.

So, does that mean you should ignore valuations, stick your head in your shell and keep your current allocation and pace? Quite possibly, yes. I’ve met great success with buy-and-hold accumulators that invest from paychecks each month, year over year. Steadily saving into a diversified portfolio over a long period of time is absolutely one ideal way to grow wealth.

Perhaps you have amassed a large portfolio and are now retired or close to it, living off of the wealth you steadily gained with your investment strategy. A 30% decline to your wealth in a short period of time is a scary prospect. What should you do? Get out of the market?

Short Answer: Buying in and out of the market is not strategy, it is guesswork

I never advocate selling your investments and exiting the market all together. Why? No one has a crystal ball. What if you sell now and the market continues to go up? How long can you hold steady, waiting for it to fall? What if it doesn’t fall in 2021? And keeps going up in 2022?  

Or, perhaps the opposite holds true and the market crashes because the COVID vaccines don’t work, political unrest disrupts our society, or any number of other unforeseen events occur? When will you buy back in? Did it occur to you, in the midst of a developing pandemic, to buy stocks in March last year? When the unemployment rate soared to record heights, were you focused on your portfolio? It was difficult enough to stay-at-home, mask-up and not let the political turmoil overtake my social and emotional well-being. The point is: don’t play guessing games with your wealth management.

Short Answer: Defense is the best offense when it comes to wealth management strategy

Now is a great time to set up defenses within your portfolio. Hopefully you made some gains from the bull market in 2020. If you invest in a well diversified, index-fund portfolio then now is a great time to shore up your personal balance sheet. Take those gains and pay down some debt. Rebalance your holdings back to your normal allocation or even to a slightly less aggressive portfolio.  

We are in the “sell high” phase of the old adage “buy low, sell high.” Enjoy some gains and get ready for the inevitable stumbles the market will make over the next few years.  

Short Answer: Planning is the only strategy to guarantee success

“My portfolio is usually 80% stocks, 20% bonds – but I’m going to rebalance to 75% stocks and 25% bonds until there’s a 20% decline from an all-time high in the market. At that point I’ll rebalance back to 80/20.”  That’s a plan that you can write down and follow.*

Don’t rely on your emotions to know when to buy and sell: make a plan. As we’ve all learned in this past year, our carefully built house of cards can fall at any time. When that happens, making decisions intellectually can be difficult. You feel like “sell” is the right move, when in actuality, according to your written plan, you should “buy.” Trust in your plan to keep you on track when the proverbial poop hits the fan.

Practice what you preach: Here’s what I’m doing

In the vein of “Don’t tell me, show me,” I am planning to be more defensive in my own wealth management strategy. Nothing drastic, just some tweaks to be ready. Here are a few of my priorities:

  1. Pay off some debt. I’m paying down my HELOC, which has a very low interest rate but still costs me more than the return on any cash in the bank!
  2. Rebalance my portfolio. I’m a pretty aggressive investor, so I am pulling back and changing my investment to 80% stocks / 20% bonds. Once I pay down some debt, my investments will be over 80% in stocks and therefore I need to sell some to rebalance.
  3. Watch the market and stick to my plan. If the market rises, I’ll continue to sell whatever gains the most. I’m very comfortable staying at 80/20 for a long time. If the market falls 20%, 30% or 40% from all-time highs, I will not only rebalance back to 80% equities but also up that to 85%, 90% or 95%. If the market falls drastically, I will also utilize my line-of-credit to fund any lifestyle needs, rather than hold cash in reserve for potential purchases.

So, what’s your plan for 2021?

*If the market goes up 45% from there and then falls 20%, you may buy back in above where you sold. That’s OK: you had a plan and executed it.****And in fact, during that 45% rise hopefully you again rebalanced and “sold high”!

Photo by Lucas Clara on Unsplash

The Best Ways to Protect Your Wealth at Every Stage

When you’re young and entering the workforce for the first time, you don’t have a lot to lose. After all, you don’t need to worry about shielding wealth when you live paycheck-to-paycheck, you don’t own a home, and you have only begun contributing to a retirement plan.

But this dynamic tends to change over the years, and that’s especially true if you’re a good steward of your income. If you save and invest instead of burning through every dollar you earn, you’ll eventually begin to build up a stash of assets that you’ll likely want to preserve. And the more your income, your savings, and your net worth grow, the more concerned you’ll become. 

The Best Ways to Protect Yourself As You Grow Wealth

The thing is, the strategies you’ll use to protect your assets can vary a lot depending on where you are in your journey. You may care about entirely different issues when you reach a net worth of $500,000 than you do when your wealth grows to $1 million or more.

Fortunately, there are a variety of products, habits and techniques you can use to preserve and protect your wealth at every stage. Let’s take a look at the steps you should consider as you work toward the financial future and retirement you really want. 

Net Worth of $500,000+

When you achieve a net worth of $500,000, you have plenty to celebrate — and plenty to protect. Your retirement savings are likely beginning to grow right along with your income at this point, and you may even own a home. But, how do you ensure you can maintain the wealth you have managed to grow so far?

First off, you should make sure you have basic homeowners insurance (or renters insurance) and auto insurance coverage with high liability limits. If you own a home with a mortgage or have children in the family, you’ll also want to buy basic term life insurance coverage worth at least 10x your household income. 

Note that, when it comes to the money you have in a savings account, each depositor has protection from the Federal Deposit Insurance Corporation (FDIC) up to mandated imits. Specifically, the FDIC offers insurance for checking accounts, savings accounts, money market accounts and more with limits of up to $250,000 per depositor and per insured institution. 

Net Worth of $1 Million+

Once you have built up a net worth of $1 million or more, you have the potential to grow wealth even faster due to the power of compounding. You’ve probably heard that “the first million is the hardest,” and it’s true, yet the path to wealth gets easier from here. 

Once you reach this threshold, you’ll want to preserve and protect your wealth with an umbrella insurance policy as a starting point. With excess liability coverage from an umbrella policy, you’ll have protection if someone decides to sue you. This coverage provides more protection above the limits of your homeowners or auto insurance policies.

In terms of savings, you may want to move some money. That’s because, as I mentioned already, you get $250,000 in FDIC insurance per depositor, per institution. If you have $500,000 in savings, for example, you could open another high-yield savings account and have the full amount insured. The downside is that it’s a hassle to manage money at multiple institutions.

At this point in your journey, you should also note that employer-sponsored retirement accounts like 401(k)s and pension plans have some protection due to the Employee Retirement Income Security Act of 1974, or ERISA. Thanks to ERISA, these types of plans have unlimited protection in the event of legal liability or even bankruptcy, as do 403(b) plans and 457 plans in most cases. 

On the other hand, IRA accounts (including traditional IRAs and Roth IRAs) are also protected through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Thanks to the BAPCPA, these accounts are protected from bankruptcy up to $1,362,800 through the three-year period that ends on April 1, 2022. 

Net Worth of $2.5 Million+

Once your net worth is $2.5 million or more, you can rest assured that you’ve done quite a few things right. Your investment accounts are likely growing at a steady pace, and you’re building equity in your home and other assets you own. 

At this point, you may want to consider starting a business and transferring assets accordingly. The reality is that, like it or not, most experts believe that you cannot become truly “wealthy” if you’re only working for someone else. With your own business, you have the potential to build more wealth and grow your assets while you sleep, and of course to take advantage of various benefits in the tax code for business owners. 

Other moves you can make when you reach this level of wealth include buying more liability coverage in an umbrella insurance policy, and potentially more life insurance to protect your family in the event of your untimely death. Whole life insurance can even make sense at this point in your journey since this type of coverage allows you to build cash value you can borrow against, and to score dividends that are not taxable. Whole life insurance can also be used to pass on wealth to your beneficiaries on a tax-free basis. 

Net Worth of $5 Million+

Once your assets have grown to the $5 million + range, you have “made it” in a financial sense. But now is not the time to be complacent. If you truly want to protect your wealth, you’ll want to be diligent about using the legal processes available to you.

For example, setting up a trust can help you shield assets for your protection, and for potential tax savings. There are two main types of trusts to consider —revocable and irrevocable. An irrevocable trust is typically set up for estate and tax reasons, and to seamlessly transfer wealth to the next generation. However, you give up ownership of assets with this type of trust, which can be problematic in some cases.

With a revocable trust, on the other hand, you do not give up ownership of your assets. This type of trust is also more commonly used to transfer assets to beneficiaries while the grantor (in this case, you) are still alive.

If you’re curious about the type of trust you should set up, as well as other financial moves you should make with a net worth of $5 million or more, it can be helpful to work with a lawyer or an estate attorney.

Final Thoughts

The path to long-term wealth can be bumpy at times, and it will probably be decades long. However, you can take steps to protect what you have so you don’t have to move backwards all along the way.

No matter what you do, you should make sure to diversify your assets so all your eggs are never in a single basket. Diversify across multiple sectors of the economy, stocks and bonds, real estate, and international markets so your net worth is poised to rebound nicely regardless of which economic crisis comes next.

Photo by Morgan Housel on Unsplash

Understanding Employee Stock Options

My company has granted me several stock options. What are stock options, and what do I need to know about them?

First, you need to know that stock options are a form of compensation so congratulations on earning additional rewards from your employer beyond your base salary. Stock options provide you with the right to purchase a company’s stock. Once you buy the stock, then you own it – just like any other stock that you purchase in your brokerage account. However, with options there are a number of key terms and considerations to familiarize yourself with:

Key Terminology to Understanding Stock Options

  • Stock option grant : Grants are akin to bonuses; companies offer grants to employees as an incentive to keep them within the organization. A single grant is a right to purchase a certain number of shares of company stock at a stated price within a specific period of time. Employees who remain with a company for a long time may have multiple stock option grants.
  • Vesting : In order to incentivize employees to remain with the company, stock option grants are often not yours for the taking immediately.  The company is investing in you, and therefore you must wait until your options are vested before you can exercise them. If you leave your organization before the options are vested, you forfeit them.
  • Stock option exercise : Once your options are vested, you can exercise your right to purchase.  Stock option exercise is the decision to purchase your granted shares of a particular stock option.
  • Strike price : As the name suggests, the strike price (also referred to as the exercise price) is the cost, per share, that you pay to buy the stock.
  • Spread or bargain element : Here is where the bonus comes into play: The strike price of your stock option is likely less than the market value of the stock on the date you exercise your option. Therefore, the spread, or bargain element, is the amount of money you earn on your purchase if you, in turn, sold your stocks.  

There are two popular types of employee stock options available: Non-qualified Stock Options (NQSO) and Incentive Stock Options (ISO).

Non-qualified Stock Options (NQSO) – NQSO, or NSO

Non-qualified Stock Options (NQSON or NSO), are pretty straightforward once you understand the key terms above. When these options vest, you have the right to exercise them, which means you purchase the stock at the given strike price. Once you own the stock, you must decide if you will keep it in your brokerage account with the belief that it will increase in value, or you may sell it and take the cash.  Non-qualified stock options are frequently preferred by employers because the company is allowed to take a tax deduction equal to the amount you are required to include in your incom

Tax Consequences of Exercising and Selling NQSOs

When you decide to exercise the NQSO, the bargain element is additional taxable income.  Put simply, the difference between what you paid and the full market value is treated the same as  a cash bonus.

Case in Point

Jack was granted 1,000 NQSO from his company on January 1, 2019, with a strike price of $20 per share.  One year later, in January 2020, 250 of those options vest.  On March 1, 2020, the shares are trading at $25 per share, so Jack decides to exercise his 250 stock options: he pays $5,000 (250x$20), and now owns 250 shares.  Since the share price is $25 each, his 250 shares are worth $6,250 or $1,250 more than he paid, which is the bargain element.  Jack has to report $1,250 in additional income in 2020.  Jack must now decide if he wants to hold onto the stock or sell it:

  • If he immediately sells the stock, Jack gets $6,250 (having paid $5,000). There is no tax consequence because the $1,250 is already reported as income.
  • Instead, Jack decides to hold the stock for 2 years and then sells all 250 shares for $40 per share, or $10,000.  Jack reports a long-term capital gain of $3,750: the difference between the $6,250 (the market value when he purchased the stock in 2020) and $10,000

Tax Consequences of Exercising and Selling ISOs

Incentive Stock Options (ISOs) provide more tax incentive to employees.  As such, they are more complicated and require the following:

  1. The option must be granted to an employee, meaning independent contractors and non-employee directors are not eligible.  An employee who leaves the company while holding active stock options must exercise them within three months.
  2. The grant period is ten years, so an ISO granted on September 15, 2019, must be exercised by September 15, 2029.
  3. The strike price must be equal to or higher than the fair market value of the underlying stock on the date of the grant.
  4. The employee cannot own more than 10 percent of the company at the time of the grant.
  5. The ISO grant is not transferable, with an exception in the case of death of the option holder.
  6. The value of all grants (strike price of shares) in a single year cannot exceed $100,000.

Tax Consequences of Exercising and Selling ISOs

It pays to know the difference between the types of sale of your stock.  Ideally, you want your bargain element to be taxed at the long-term capital gains rate (typically 15%) by performing a qualifying disposition versus a non-qualifying disposition

  1. qualifying disposition occurs when you sell the stock at least:
    1. Two years after it was granted and
    2. One year after you exercise the option
  2. Otherwise, it’s a non-qualifying disposition and the bargain element is taxed at ordinary income rates which are generally much higher than the capital gains rate.

Another tax consideration is a potential increase in your AMT (Alternate Minimum Tax) calculation.  If you exercise your ISO’s (purchase the stock) but do not sell them in the same calendar year, the bargain element is included as income for calculating your AMT.  If your bargain element is high (excellent bonus for you), your AMT could be higher than the normal tax rate and you’ll owe more to Uncle Sam.  Fear not, you may receive an AMT credit in the future which will help balance the scales.


Jane was granted 1,000 ISO from her company on January 1, 2019, with a strike price of $40 per share.  One year later, in January 2020, 250 of those options vest.  On March 1, 2020, the shares are trading at $50 per share, so Jane decides to exercise her 250 stock options: she pays $10,000 (250x$40), and now owns 250 shares.  Since the share price is $50 each, her 250 shares are worth $12,500 or $2,500 more than she paid, which is the bargain element.  Jane adds $2,500 as income for her AMT, but no tax consequences for her ordinary tax calculation.  After considering the numbers below, Jane decides to hold the stock.  Here’s why:

  • The stock goes to $65 per share 6 months later (Aug 1, 2020).  If Jane sells her 250 shares for $16,250, she makes a total of $6,250 of which she will report $2,500 as ordinary income and $2,750 as short-term capital gains. It would be a non-qualifying disposition.  She pays $2,000 in taxes: since she’s in the 32% tax bracket; (32% x 2,500) + (32% x $2,750) = $2,000
  • Instead, Jane decides to hold the stock for 2 more years and then sells all 250 shares for $65 per share, or $16,250.  Jane reports a long-term capital gain of $6,250 as a qualifying disposition.  She has a total tax bill of 15% x $6,250 = $937.50 – or $1,062.50 MORE in her pocket vs. the IRS.

When it comes to stock options, it pays to understand the details. 

Want to donate your entire salary? 2020 is the year to do it.

Not many people want to donate their salary for the year, but if you do: 2020 is the year to do it.  The CARES Act has a provision in 2020 that allows a deduction for 100% of your income.  This means that you can entirely avoid taxes in 2020 if you want!  Oh yes, there are some details – and some strategies you’ll want to take advantage of – so let’s check them out.

What are the donation limits for 2020?

Charities will accept all sorts of assets including cash, stocks + bonds, art, collectibles, cars, clothing – depending on the charity. There are so many ways to give and help. Most individuals donate cash or appreciated stocks/bonds to get a tax deductions – and that’s a good strategy. The higher standard tax deduction along with lower SALT itemized deduction limits the usefulness of your charitable contributions unless you give away quite a lot. In that case, giving away appreciated stock has a nice double-whammy of a charitable deduction along with avoiding capital gains tax (not selling the stock first).

The IRS has rules about how much you can deduct from your salary based on the type of asset that you give away. Typically the deduction for donating cash is capped at 60% of your salary, stocks/bonds at 50%, and other assets at a lower amount (as you can imagine with the IRS, it can get quite complicated). For this discussion it’s enough to know that you can typically deduct cash up to 60% of your AGI and appreciated stocks/bonds up to 50% of your AGI.  If you donate more than that in a given year, you can carry-forward the donation and deduct it in future years.

However with the CARES Act in 2020 if you donate cash, you can take a deduction of 100% of your adjusted gross income.  For example, if you have income of $180,000 in 2020, you could donate $180,000 (cash) and deduct the entire amount, leaving you with $0 taxable income in 2020.

The other limitation is that the money must go to a recognized charity directly – it cannot be given to your Donor Advised Fund (DAF). The IRS is worried about charitable donations in 2020 and therefore increased the limit with the caveat that the money gets to the charities this year.

Of course, you don’t have to actually donate your income – you can sell some of your portfolio and give away that money all at once and take a deduction on your 2020 tax return for the entire amount.

Strategies when you have no income

If you take a deduction for your entire salary and have no income in 2020, that’s a big win: no taxes!  Since you probably had taxes taken out of your paycheck throughout the year, you’ll end up with a big refund.  Another win.  However, since you have no taxable income in 2020, here are some additional strategies to consider:

  • Roth Conversion : If you have any Traditional IRA balances, or your 401(k) has a Roth option and in-plan conversions – you can use your low tax year in 2020 to convert a large chunk of money from Traditional to Roth and pay the tax on the conversion amount.  Since you have almost no income, you could convert up to the 15% or 22% bracket (up to $170,000 MFJ) and pay a lot less in tax than you would in the future.
    • Don’t have a Traditional IRA?  Many 401(k) plans have a Roth option and will allow for in-plan conversions.
  • Tax Gain Harvesting : Do you have a lot of winners in your taxable portfolio with built-in capital gains?  This would be a great time to sell those allocations and pay 0% capital gains (up to $80,000 MFJ).  You can re-purchase the shares after 31 days to avoid wash-sale rules, or purchase a similar stock/ETF right away. 
    • For high-income earners, you’ll also avoid the additional 3.8% Medicare tax (applied on capital gains if you earn over $250,000 MFJ)
  • Portfolio Re-Allocation : Now is a great time to rebalance your portfolio since you’ll avoid any capital gains on selling / buying.  In addition, if you have been thinking about changes in your portfolio allocation – making it simpler by reducing the number of holdings into some low-cost ETFs, or allocating it more towards ESG / SRI priorities – now is the right time to have a lot of buy/sells and avoid capital gains.
    • Considering investing in socially responsible funds?  Now is a great time to re-allocate funds.

Take Advantage

2020 is a great year to reduce your tax burden with a massive charitable donation. Of course many people do not have the additional funds to donate a year’s salary!  But for those that do and are interested in helping your favorite cause, 2020 is a great year to take advantage.

Can I avoid Capital Gains Tax when I sell my Home?

The answer is typically yes, you can avoid paying capital gains tax when you sell your primary home, up to $250,000 for singles and $500,000 for married couples. In the Taxpayer Relief Act of 1997, Congress allowed those amounts to be exempt from taxation, but there are a couple of details to be aware of.

What is Capital Gains?

The government likes their cut of your income and the money that you make on money (interest, dividends or gains) is also taxed. Capital Gains is the increase in money that you make when you invest in something and then sell it later on. If you bought $100 of Tesla stock in 2019 and sell it for $2,000 in 2020 – then you made $1,900 of gain and that is taxable. The same is true of your house: you bought it in 2005 for $300,000 and now you sell if for $550,000, then you have a gain of $250,000 which is taxable.

How is your home exempt from capital gains tax?

The IRS has ruled that you can entirely avoid the capital gains tax on the first $250,000 (single) or $500,000 (married) of gains from the sale of your primary home. This is fantastic: avoiding taxes is one of the best ways to grow your wealth (it’s not what you make, it’s what you get to keep!).  Keep in mind the following rules:

  1. You must have lived in this home as your primary residence for two of the past five years. So, you can’t purchase a home and flip it a year later and avoid the tax. However, you can live in your home for 2 years, rent it out for the next 2 years and then sell it and still avoid taxes. Make sure that you have documentation that you actually lived there. 
  2. You may only take advantage of this tax-free gain once every two years. So don’t sell two different houses in the same 24-month period.

But I made Home Improvements!

Any home improvements get added to the amount that you paid for your home. This is known as basis. For instance if you purchased a fixer-upper for $200,000 and then completely renovated it for $150,000, you have put a total of $350,000 into your home, which is your basis. When you sell it 3 years later for $500,000 you have a gain of $150,000 ($500k – $350k). Make sure to save documentation on the costs of your improvements.

IRS Rules

As with all things tax related, it’s important that you meet the eligibility requirements of the IRS. Be sure to check the fine print on the official IRS website for more details.

How to Avoid LifeStyle Creep after a Big Payday

Lifestyle Creep – Don’t Let it Happen to You

What happens when you come into money? Whether it’s an inheritance, work bonus, or a sizeable raise, what’s your first instinct?

You want to go out and spend it, right? You feel it’s your right or you just want to celebrate. It may feel good at the moment, but it won’t last long. The after-effects aren’t pretty because they lead to a stage called lifestyle creep.

Creep makes it sound like a slow process, right? It happens faster than you think. Before you know it you’re in the poor house or constantly chasing your own tail trying to get ahead. 

Spoiler alert – you won’t win. 

Understanding Lifestyle Creep

I’m not denying the joy of that big payday and I think you should celebrate it, but not by overspending. 

When you overspend, here’s what happens. Let’s say you decide your large inheritance gives reason to buy a fancier car than you could ever afford. Sure, it helps with you with the down payment or maybe it even pays for the car outright, great. 

What happens after that, though? You must keep up with the car’s maintenance and repairs. They likely cost a lot more than your less expensive car. Now you’ve just increased your regular expenses without the means to do so.

It doesn’t stop there. Now you drive this fancy car, so you feel like you need to keep up with the lifestyle. Before you know it, you’re buying fancier clothing, going out for fancier dinners, and living a lifestyle way outside your means.

It has a domino effect – one nice thing in your life makes everything else seem ‘not good enough,’ so you’ll constantly spend more to feel better.

What Should you do Instead?

I’m not saying don’t spend money. Everyone deserves to spend here and there, but rather than running out and splurging on something you think you need, give it some thought. How do you want to spend your limited resources: money, time and energy? What would mean the most to you long-term, not just a ‘quick win’ like the feeling of getting a new car? Sure, you’re on cloud 9 every time you get in and whiff that new car smell, but that only lasts for a week or so – then what?

Figure out where spending your money may add value. Stop trying to keep up with the Joneses’. That only leaves you feeling ‘less than’ and constantly chasing dreams that honestly don’t belong to you.

Before you spend, sit down and think about your goals. What have you always wanted in life that maybe now you can achieve? What will splurging on one item do for you long-term emotionally and financially? If you can’t come up with anything good, it’s not worth it. Instead, work towards your life goals.

Ask yourself this: what is most important to you? Focus your time, energy, and money there. Look at the big picture, not the instant gratification that coming into money creates. When you take your time, you’ll make smarter choices and get out of the rat race of life.

How to stay rich: Protect your money by diversifying

Do you dream of getting rich? For many of us, the pursuit of becoming financially independent is our overall life aim. Yet while striking it rich is undoubtedly a challenge, a far bigger challenge is learning how to stay rich. 

A 2016 study by Cornell University found that over half of all Americans will find themselves in the top 10% of earners at least once in their life, while 11% will find themselves in the top 1%. However, very few can remain there, and the turnover in these categories is huge, with 72% of the top 400 earners retaining their position for just one year between 1992 and 2013. 

So why are so many people struggling to stay wealthy? It’s because getting rich, and staying rich, are two very different skills which require a completely different way of thinking. 

How to get rich

There are many different methods that people use to get rich. The traditional way of working hard in your career, saving your money, and enjoying a comfortable retirement is a clear goal for many Americans. However, it is not always the most effective method for building wealth quickly. That is why there are many different ways to strike it rich, with some of the most common including:

  • Be an Entrepreneur / Start your own business: Working hard, building a successful business, and selling it (or going public) is a fantastic way to make yourself a lot of money. 
  • Investing: Whether you are looking to build an impressive portfolio of stocks and shares or purchasing and developing property, investing is a great way to get your money working for you. 
  • Work hard and save harder: Focusing on your job and working your way up the career ladder, coupled with frugal living and high savings rate, can help you build up a significant pot of money.
  • Real Estate: Start small with a rental property, rehab it, put in some sweat equity and slowly build to another property and bigger properties. Build your fortune with a real estate empire!

How to stay rich

Earning your riches requires some big risks; however, once you have achieved it, staying rich is a different type of challenge. It is only natural that as we become successful at something, the more convinced we are that it is the route to success, meaning we double down on following that same path. 

However, this is not the best solution in this case because the narrowing of focus and doubling-down to build wealth is exactly the opposite approach to keeping that wealth. It becomes easy to get complacent when we are successful, which can have devastating consequences when something unexpected sideswipes your business. The COVID-19 pandemic is a prime example; however, throughout history, there have been many downturns that have seen countless people lose their wealth. 

That is why in order to stay rich, you need to adopt an almost opposite approach to your business decisions. Instead of the high-risk strategy, you need to start taking fewer risks, and the most important thing to do is to start diversifying your portfolio across a variety of types of assets so that no one “thing” can bring you down.

By spreading your wealth, you will be able to insure yourself against any downturn that might come in sideways and wipe your wealth out. Diversifying does not mean you should stop focusing on your skillset and expert domain, instead, it means taking a portion of your wealth off the table and investing it into a different area. 

This could be anything, from investing public and private companies to entering the real estate market. Helping to diversify will spread your savings and ensure that you will not lose your lifestyle no matter what happens. 

If the current global crisis has shown us anything, it is the need to recognize that whatever “got you here” is not necessarily what will “keep you here”, so now is the time to take a different approach and retain your hard-earned wealth.

What I’m doing with my Investment Portfolio

First: I hope that you are well, safe and implementing healthy habits during this unprecedented time. While of course our attention is on the coronavirus, I will focus the remaining of this article on the financial markets. With all that is going on nationally and here in MA, I want to provide you an update on what I’m personally doing with my investment portfolio.

Asset Allocation

Assets are simply things you own that have value: your house, cars, jewelry, business ownership, cash and investments (stocks, bonds, etc). When I use the term Asset Allocation in this article, I’m specifically referring to investments which include cash, stocks and bonds. Within each of those high-level asset classes there are further subdivisions. In Cash you could hold actual dollars (stuffed in your mattress!), savings accounts, checking accounts, and money market accounts. Bonds are “I owe you” loans that can be issued by the government (treasuries, bills, etc), municipalities or corporations. And finally Stocks (or Equities) can be investments in US companies, International companies, in large companies or small companies. There is a whole range of ways to break down the different asset classes into subclasses.

My investment philosophy is to use asset classes and allocate my entire investment portfolio into them on a percentage basis. The idea is similar to the pie chart shown here (though my actual ownership is quite different than this simple example).


When the market goes up or down, the percentages in the overall pie chart change because asset classes (typically) don’t move the same amount in the same direction. Usually this out-of-balance change happens slowly, but over the last month it has come about quite quickly. Say if my bond investments stays the same but my stock investments drop by 20%, then in order to bring my portfolio back to my target percentages, I will need to sell some bonds and purchase some stocks. This is automatically selling high (bonds did not drop in value) and buying low (stocks have lost value). This is exactly what I want to do as an investor.

Therefore, I am taking this market decline as an opportunity to rebalance my own portfolio. Obviously my stock investments are down as are everyone’s and so my portfolio allocation between stocks and bonds has skewed far enough that I can sell some bonds and purchase some stocks at these discounted prices. This is exactly why I recommend owning both stocks and bonds.  By rebalancing I am automatically selling high and buying low: exactly what I want to do.

Adjust Risk

In addition to a rebalancing back to my target portfolio, I am also looking to adjust my goal allocation slightly towards stocks as they continue to become cheaper. The market is putting equities on sale, so this is the time to consider purchasing more.

Although I am personally considering this strategy as stocks continue to fall, two caveats:

  1. Stocks are still not particularly “cheap” by historical standards. They are just no longer very overpriced.
  2. I must be mentally and emotionally prepared for further declines: there is no way to predict the future.

It’s important to have a plan. My plan has always been “when the market declines, I will add to my stock allocation”. Although not set in stone, it roughly looks like this:

  1. If the market pulls back 20%+, add 5-7% to my stock allocation (from say 70% to 76%)
  2. If the market pulls back 30%+, add another 5-7%
  3. If the market pulls back 40%+, add another 5-7%

It is absolutely worth noting that I am a risk-taker as you might know from my background founding two startup companies and starting my own financial planning business. You have to understand your own ability to take on the risk of further market drops.

Have a Plan

Like you, my emotions are telling me that this market has nowhere to go but down: the coronavirus fallout will continue to hit us personally and the businesses that we invest in. The news will get worse each day. With a solid plan, I have a way forward that will buy low, so I can eventually sell high.

If you are worried about your finances, retirement portfolio or the markets, please get in touch. I want to make sure that you are comfortable with your plan and a have a good path forward.

Photo by Carlos Muza on Unsplash unsplash-logoCarlos Muza

Tracking Net Worth is Important and Easy

What is Net Worth?

The formal definition of net worth is the combined value of everythingn you own (Assets) minus the value of everything you owe (Liabilities).  In other words, if you total up your financial life: sell everything that you own and pay off all of your debts, what do you have left over?  

Net Worth = Assets – Liabilities

What I love about net worth is how easy it is to understand and how easy it is to calculate.

Assets are things that you own that have monetary value such as: cash, checking/savings accounts, retirement accounts, houses, cars, personal property, etc.

Liabilities are cash (or value) that you owe to other people or institutions such as: mortgage balance, student loans, car loans, credit card loans or personal loans.

What does Net Worth really tell you?

If you have a positive net worth, that means that you own more stuff than you owe and that’s great!  A negative net worth on the other hands means that you owe more than you have. This is typical when you are young and starting out: you might borrow aggressively in order to fund your future growth. Things like an education (student loans) and a mortgage (to buy a home) might lead to larger debt than you have assets.

When calculating Net Worth periodically (quarterly or yearly), it can be viewed as a financial report card that allows you to easily evaluate your financial health at a glance.  Is it moving in the correct direction (more positively)? And if not, what are the causes?

Like the stock market, your net worth will fluctuate. However, also like the stock market, it is the overall trend that is important. Ideally, your net worth continues to grow as you age: as you pay down debt, build equity in your home, acquire more assets, and so forth. At some point, it is normal for your net worth to fall, as you begin to tap into your savings and investments for retirement income.

Why is Net Worth Important?

A few reasons that I like tracking Net Worth include:

  • Track your financial progress. It’s quick and easy to calculate your Net Worth each quarter or year. This allows you to measure your progress over time and compare it to previous time periods. You want to see a growing net worth; a decline in net worth means you have more work to do.
  • Look beyond Income. How to grow your income is often a financial focus. But honestly that’s really less than half the equation. The important parts are: how much are you saving (adding to net worth), how much are you investing responsibly (growing net worth) and how much are paying off debt (reducing liabilites = adding to net worth). Even if your income is growing, if your net worth is flat or declining, your financial situation may not be improving at all.
  • Avoid focus on Asset Value. Many people focus on the value of their assets as a measure of their personal financial health. But if you take on a lot of debt to fund many purchases, you’re no better off. Look beyond the positives of assets (the fun stuff!) and make sure to include all of your debts. The good news is that for many debts, the balances are shrinking with those monthly payments and therefore you get positivie reinforcement when including debts along with assets (valuing both equally).
  • Keeps debt level in perspective. It’s natural to get overwhelmed with large debt obligations like a mortgage. But knowing that you have an evern larger asset offsetting that debt can help keep things in perspective.

When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine where you are, and how to get where you want to be. This can give you encouragement when you are heading in the right direction (i.e. reducing debt while increasing assets) and provide a wake-up call if you are not on track.

Ways to Grow your Net Worth.

So how do you effect your Net Worth in a positive direction over time? Recall the equation:

Net Worth = Assets – Liabilities

There are two parts that both effect your net worth in a positive direction:

  1. Increasing asset values
  2. Decreasing liabilities

Take advantage of both of those in order to grow your Net Worth.  Here are some examples

  • Pay down debt. The great news is that those monthly payments are adding to your net worth by paying down the principal balance. Some of the payment is going towards interest (not helping!) but with low-interest loans, much of each payment is going towards the principal. Using your cash flow to pay down debt is one of the best ways to increase your net worth because it focuses you from spending that income on fleeting items that don’t add to your financial life.
  • Be Responsible with Purchases. When you are considering things to buy, are they adding tremedous value to your life? Focus on the items and experiences that add significant value or even add to your net worth (using income to add assets!)
  • Pay Attention to Assets and Liabilities. Make sure to understand both parts of the equation. By watching out for the opposite of net worth (decreasing assets and increasing debt!) – you’ll become more financially aware of your actions.
  • Make a Habit of Tracking. Check your net worth every so often (month, quarter or year). When you pay attention to a number, and the component parts, you will automatically make smarter choices. You are a product of your environment: use it to your advantage! Remind your conscious brain of what’s important and the subconscious will play along.

Photo by Juliane Liebermann on Unsplash

Backdoor Roth: A great option for high income earners

In this video and article I explain how I personally use a backdoor Roth option to save significant money each and every year. 

The quick nuts and bolts

Let’s get to the point and I’ll explain what I do each year:

  • My wife and I each have both a traditional IRA and a Roth IRA at our brokerage.
  • Each year we each contribute the maximum amount to our traditional IRA accounts (currently $6,000)
    • We cannot deduct this contribution on next year tax returns. It’s after-tax money.
  • A few days later once the transfer is complete, I transfer 100% of the money from our traditional IRA to our Roth IRA.
  • I then invest that money per our investment policy (into stocks, bonds, etc)

That’s it. It now grows tax free over the coming years (hopefully!) and it’s 100% all our money (no taxes owed).

It can’t be that easy?

It’s true, I’ve skipped a lot of details in the setup of the above. However, yes it’s that easy each year now. The big caveat and what you’ll find with some online research, is that doing a backdoor Roth requires to take into account all your existing traditional IRA, SEP IRA and Simple IRA accounts. Any money that is in those accounts tax-deferred (you took a tax deduction or it’s had growth) is taken into account during the backdoor conversion to see if you owe current taxes. So, you have to do a big conversion first, partial conversions or some other transfer – and that’s definitely got a lot more tax implications.

If you have no money in a traditional IRA, SEP IRA or Simple IRA – then it’s super easy: you can perform the steps I mention at the outset.

How much is it worth?

Here’s the fun part: you can save a lot of money over the years because a Roth account is 100% your money, you don’t owe any taxes. Let’s make some basic assumptions: 7% growth rate and 24% tax bracket in retirement. By the end of 20 years that $6k has grown to just over $23k. In a traditional IRA, you owe taxes of over $4k, but owe none if that’s in a Roth IRA. That’s the power of doing the backdoor conversion and getting that investment into a Roth IRA. And, if you and your spouse both contribute, that’s double savings!