How Employees of High-Growth Companies Should Be Thinking About Company Equity

Fastly CEO Artur Bergman and team ring the bell at the NYSE.

Fresh off the heels of Uber Technologies Inc (NYSE: UBER) lockup expiration period last week, another San Francisco based tech company will go through the same on November 13. Fastly, Inc (NASDAQ: FSLY) isn’t a household name like the ride-sharing behemoth. 

Fastly is a content delivery network (CDN). By bringing servers and data centers closer to the end customer, it can provide the end user with a faster, safer internet experience. The CDN business is extremely competitive and investors seem to not know what to make of it. Just four months after its IPO of $16 in May 2019, the stock more than doubled to about $34 per share. A day before it’s lockup expiration day, Fastly is trading for $19 per share.

The volatility of IPO can be tough to stomach but the upside potential is appealing, especially for employees and early investors. There also comes risk. For example, six months removed from its IPO and fresh off its lockup expiration, shares of Uber stock are down 40% from its IPO price.

But six months does not make an investment career. For long-term investors, volatility is the price of admission and should be an after-thought when it comes to obtaining long-term wealth. 

Deciding whether to hold or sell company equity shouldn’t be based on short-term price fluctuations but on financial goals, concentration risk, and company prospects. Let’s take a look at what employees of Uber, Fastly, and other soon-to-IPO companies should think about when deciding what to do when their shares become free.

Swinging for the fences

Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. 

We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

 – Jeff Bezos, 2016 Amazon shareholder letter

Conventional wisdom will tell you to diversify your portfolio. But a part of the intrigue of working at a young tech company is the potential for striking it big. While diversification can preserve wealth, concentration can create it. And create it fast. However, you still have to be smart about risk management.

When it comes to deciding how to divide a cash and investment portfolio, I like to think in terms of building assets into three buckets:

  1. Protective assets – cover necessities and short-term needs such as your home, emergency reserves, medical care, home improvements, and family vacations. Allocate cash to this bucket.
  2. Market assets – covers basic retirement goals, second homes, and college funding. Use a diversified portfolio of stocks, bonds, and real estate for this bucket.
  3. Aspiration assets – buying a dream home on the beach, early retirement, creating generational wealth, leaving a legacy, buying an NBA team, or having your own private jet. This can be your concentrated and high-risk bucket.

Once you know how much to protect and how much you need to put away to cover your basic goals and needs, you can figure out how much to allocate to company stock. 

Know your risks

While the upside of any single position is much higher than a diversified portfolio, the downside is much larger too. A negative corporate event such as bankruptcy, loss of a key person, or criminal activity can lead to permanent losses (remember Enron). With a company like Fastly, which is not a necessary monopoly like PG&E, investors shouldn’t expect a bailout from a negative event such as an unrecoverable security breach. WeWork is a prime example of a company that went from Wall Street darling to pulling out of its IPO, to nearly having to shut its doors. 

While you can swing for the fences, your decision doesn’t have to be all or nothing. And when you do, you don’t necessarily have to think about how your life will be affected if the stock went to zero. Bankruptcies are common but the probability is low. However, you should think about what may happen with a loss of 70%+, especially when it involves a volatile tech company.

Know your biases

Money is emotional. There’s no denying that. Naturally, money decisions are often not based on logic and the best long-term outcome. Knowing your biases will help you overcome or mitigate those emotions. 

Here are some of the common behavioral biases that apply to equity compensation:

  • Overconfidence and familiarity: employees feel that because they work for the company, know the management team, and understand the business, their stock will also do well. They’ll also believe they’ll be the first to know if things are getting worse. The market is very smart. Unfortunately, familiarity and confidence don’t lead to better stock market returns. 
  • Status quo bias: it’s easier to do nothing rather than making a change. This leads to overconcentrated portfolios with outsized risk.
  • Regret avoidance: If the stock goes up, I’ll miss out on my payday and will be kicking myself for the rest of my life.
  • Loyalty effects: the desire to be loyal to your employer or not be seen in a negative light in front of your peers. If you feel this way, keep in mind that your company has an exit plan. You should too.
  • Price anchoring: the stock was worth double a year ago. I’m down 50% and want to gain my money back before I sell.

If you are a victim of any of the above biases, don’t be ashamed. It’s normal. But simply being aware of those emotions doesn’t always lead to an optional outcome. Asking yourself this question might:

“If I received X dollars in cash (amount of equity compensation you have), how would I invest this money?” 

Is your answer going to be 100% in the company you work for? If not, you should consider selling stock when the rules allow for it.

One more important consideration

I’ll dig deeper into this in a later article, but your company’s prospects play a large part in deciding what to do with your company stock. My favorite investor, David Gardner of The Motley Fool, likes to use the finger snap test when deciding if a stock is worth holding. If you snapped your fingers today and the company went away, would people and/or business be disrupted in a negative manner? Is there an alternative? Would that company be missed? 

This isn’t the only criteria. The strength of the management team, company culture, growth in revenue and cash flow, and the strength of its balance sheet also plays a part. In Fastly’s case, founder CEO Artur Bergman owns over 10% of the company. Margins are slowly increasing, and it’s winning some big customers – both signs of a better mousetrap. It’s losing money but it’s growing revenue over 30% year over year.

These are a few of the positives that led me to take a position in Fastly for my personal portfolio along with some of my risk-seeking clients. I expect volatility, especially after the lockup expiration date. However, we are diversified enough that we won’t be looking to take on a side hustle in the circus if the stock goes south. 

Be sure to do the same when deciding what to do with your company stock. 

Disclaimer: Palbir Nijjar and some of his clients own Fastly stock. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.

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Dumping Your Uber Shares? Here are 4 Places to Invest the Proceeds

Sushi chef preparing Uber Eats delivery.

Six months after its initial IPO, Uber’s (NYSE: UBERlockup expiration date is here. Early shareholders and employees of the ride-sharing company are now able to sell their restricted shares. 

If you are selling all or a part of your company equity, you’re probably not feeling too great right now. After reporting weaker than expected bookings on Monday, Uber stock is now down about 40% from its May IPO price of $45 per share. Nonetheless, you’re still due for a nice payday and it’s time to make the most of it. Let’s take a look at some strategies on how to best utilize your investment proceeds. 

Set aside cash for taxes

Both Uber and Lyft (NASDAQ: LYFT) have a double-trigger vesting schedule with its RSU’s. What this means is that your employee shares are not vested until 2 things occur:

  1. A certain amount of time has passed.
  2. A performance event occurs. In this case, the event was the IPO.

When a stock is on a downward trend, the second trigger can have negative tax consequences. Here’s why:

With RSUs, a tax liability occurs when shares are vested and are available to you. Many tech companies offer annual RSU refreshes as an incentive. In most cases, those RSUs are on a phased vesting schedule over multiple years. Therefore, your income is also phased in, not causing a huge bump in any single year. In Uber’s case, most of the RSUs you were granted over the years are vesting at once. As a result, your income will be much higher than normal this year, bumping you up to higher tax brackets.

Here’s more bad news. Uber shareholders are taxed on their IPO price, not the price at the lockup expiration. Instead of being taxed at $27 per share, which is the price it’s going for today, you will be taxed at $45 per share.

Adding fuel to the fire, the federal withholding rate by the employer on RSUs is 22%. Yet because multiple years of RSU’s are all vesting at once, many Uber employees are going to be in the highest tax bracket which is 37%. Someone with $300,000 of RSUs vesting on November 6, will owe $111,000 in federal taxes. However, only $66,000 was withheld by your employer. To make the IRS whole, you’ll need to fork over another $45,000. Underpayment of taxes can also mean you’ll have to pay penalties and interest. To make sure you don’t fork over more than you need to, be sure to consult with your tax or financial advisor before the end of the year.

There’s no telling where Uber shares will be trading come Tax Day. However, you can set aside cash today to avoid a forced sale in the future at potentially lower prices.

Invest in an index fund

The probability of a loss of at least 20% on any one stock over a one-year period is nearly 30%. For a diversified portfolio, it’s 5%. For Uber, the decline has already doubled this level.

Diversification is the single-most-important tool in the investor toolbox to protect wealth. There’s plenty of stories out there about individuals getting rich off one stock. However, Uber may not be that homerun stock. At a market value of nearly $50 billion, the upside on Uber is probably limited. 

With a globally diverse portfolio of index funds, you will likely earn a reasonable return while significantly reducing risk. You can then supplement the index funds with an allocation towards a portfolio of high growth stocks.

Invest in non-tech stocks

Your job is in tech and your home is in an area dependent on tech jobs. Your company stock is in tech and because you understand the industry so well, your stock portfolio is likely tech-heavy too. This could be a recipe for disaster. The Bay Area has historically gone through major tech booms and busts. The ramifications of a technology recession can be painful. Unemployment, loss of equity in your home, and stock market losses are risks you have to plan for.

One strategy to become more diversified is to invest in low-cost index funds such as the S&P 500 but even that index has 30% of its value tied to the Information Technology and Communications sectors. To achieve true diversification, you have to look at the sectors of the funds and/or stocks you invest in.

Don’t get me wrong. I love technology as an investment. I believe the era we live in today is the technological equivalent of the industrial revolution in the late 1700s. 

However, one should be careful not to have too much of your net worth dependent on a volatile sector.

High-yield online savings account

Are you looking to sock some of your hard-earned money away to buy a home or send your high schooler to college? While the safety of cash is important, there’s little reason to keep your money in a standard checking account. 

While the big banks are paying 0.06% or less on savings account, FDIC insured online banks are paying about 2%. Over a five-year time period, the interest earned in an online savings account could be nearly 5 times that of a big bank. 

A favorite tool of mine to research the latest rates across the country is from Bankrate. Be sure to read the fine print. Many banks offer a teaser rate which drops significantly after the promotional period.

Municipal bonds

While an online savings account is better than cash under your mattress, the interest earned may barely be enough to keep up with inflation. For those in a tax bracket with a willingness to take a small amount of risk, municipal bonds may make sense.

Municipal bonds are issued by states, municipalities, and counties to finance capital expenditures such as schools, bridges, high-speed trains, and infrastructure. If you purchase the municipal bond of the state you live in, the income earned from those bonds may be exempt from federal and state taxes. 

The after-tax earnings from a municipal bond can be quite large. Below are the pre and post-tax yields for someone in the 37% federal and 10.3% state tax brackets.

 Pre-tax equivalent yieldAfter-tax yield
California municipal bond4.74%2.5%
High-yield savings2.0%1.05%
Big bank savings0.5%A waste of time

Of course, there’s no free lunch. Albeit small, there is some downside risk, especially if California goes through a liquidity crisis.

As a proxy, during the financial crisis in 2008, the Barclay’s California Municipal Bond Index had a total return of -4.16%. Assuming this is a worst-case scenario, the value at risk on a $100,000 portfolio is about $4,000. 

So, are muni bonds right for you? You have to ask yourself if the potential of earning 2.5% after-taxes is worth the downside of 4%.

Speak with a financial advisor that understands you

Lockup expiration day is an exciting time for Uber employees. It’s the payoff for the long hours put in from the startup phase. For those who are cashing out, the payoff doesn’t have to stop. By making a few smart moves, you can reduce risk and get even closer to achieving long-term wealth that can be passed down to generations to come.

If you are an Uber employee or an employee of a company where equity compensation is a large part of your income, you should speak with an advisor that understands your situation. You can schedule a no-obligation consultation with me here. The initial meeting is free. So is the second meeting where Before you pay me a single dollar, I will present to you a plan that shows exactly how I can help. 

No worries if you aren’t ready to talk. You can sign up for my e-newsletter which includes easy to understand financial planning articles to help you make good decisions with your money.

It’s Open Enrollment Season: Don’t be Terrified by this Misunderstood Health Plan

2 scary pumpkins in the dark

Halloween is approaching and it’s sure to be a scary time. Ghosts, goblins, and ghouls will be knocking at your door, waiting for a trick or a treat. Meanwhile, all the adults can think about is how much to contribute to their Flex Spending Account. 

Okay — probably not. 

Nonetheless, open enrollment season is upon us and some scary decisions have to be made.

Forget witches, monsters, and Dracula. You’re dealing with HSA’s, FSA’s, PPO’s and HMO’s. The endless amount of choices is sure to make you sweat more than visions of a creepy clown. 

The most critical decision you’ll make for your family this fall will be choosing your medical plan. While choices are aplenty, there’s one plan you may not have considered – the high-deductible health plan (HDHP). You may have heard horror stories about high-deductible plans. The out-of-pocket expenses can add up to the thousands – a scary thought when you have two children who get colds in the middle of July. 

But Momma was right. There are no monsters under your bed. It turns out that the high-deductible plan isn’t so freaky after all. Let’s take a closer look at how this often-overlooked plan can actually save you money. 

Key features of a high-deductible plan

If there’s one thing I’ve learned with having kids, it’s that you will use the doctor. A lot. Stomach bugs, broken bones, and ear infections seem to be more common than Reese’s Peanut Butter Cups. And now that I’m 40, chiropractic adjustments seem to be picking up steam. 

These visits aren’t cheap either. A quick glance at the claims tab of my Aetna plan shows that a standard pediatrician visit costs about $300 while x-rays for a broken wrist are closer to $1,000. Given the high out-of-pocket costs of medical care, choosing the medical plan with the lowest deductible appears to be a no-brainer for young families. However, that’s not always the case. In fact, the most cost-effective plan is often a high-deductible health plan coupled with a Health Savings Account (HSA).

How is this so when your doctor sees you so much, he knows what time your dog goes for walks on Sundays?

Since the deductibles on an HDHP/HSA plan are higher than traditional plans, the premiums are often lower than other options. Now, keep in mind that the out-of-pocket costs are higher too. You traditionally have to pay for the full price of care after you’ve reached your deductible. After that, you have to pay co-insurance, which is a shared expense with your insurance provider. Here’s the scary part — the maximum out of pocket expense can be up to $13,800 on a high-deductible plan. 

But there’s good news. Given the competitive landscape for finding talent in the Bay Area, most employers have maximums much below this number. 

Another attractive feature of high-deductible plans is that many employers will incentivize their employees to choose this plan by providing a contribution directly to their HSA plan. This is because HDHPs are typically cheaper for the company as they aren’t on the hook for paying your initial medical costs.  

The tax break on an HSA plan can also be quite large. HSA contributions are tax-deductible at the federal level and state level in California. The most you can put aside in an HSA plan for 2020 is $7,100 for a family. For those in the 41% combined federal and state bracket, that tax benefit equates to nearly $3,000.

A real-life plan comparison

To illustrate the savings from a high-deductible plan, let’s take a look at a comparison chart of the medical plans offered by SAP North America.

Focusing only on the family of four plan for in-network providers, these are some of the details for SAP’s plan:

Monthly Premium$300$525$425
SAP HSA Contribution-$1,200$0$0
Annual Deductible$2,800$600None
Max Out of Pocket$5,600$7,000$3,000
Co-insurance after meeting the deductible90%85%80%
Tax Benefit-$2,420$0$0

Now, let’s take a look at the annual costs on the HDHP 90 plan for three different families:

  • Adams Family: Doesn’t go to the doctor all year except for preventative care.
  • Kreuger Family: Goes to the doctor enough to run up an insurance bill of $10,000.
  • Meyers Family: Has to go to the doctor so much they hit their maximum out of pocket expense.
 Adams (healthy)Kreuger (somewhat healthy)Meyers (cursed)
Annual Premium$3,600$3,600$3,600
Company Contribution-$1,200-$1,200-$1,200
Tax Benefit-$2,420-$2,420-$2,870
Total Medical Costs-$20$3,500$5,580

You’re looking at this correctly. A completely healthy family can actually profit from a high-deductible plan! Of course, this is not a likely occurrence. But even if they frequent the doctor more regularly the HDHP 90 plan is fairly cost-effective. 

Now, let’s take a look at how the HDHP 90 plan compares to the PPO and Kaiser plan?

Adam’s Family (healthy)Kreuger Family (somewhat healthy)Meyers Family (cursed)
HDHP 90-$20$3,500$5,580
Kaiser HMO$5,100$6,600$8,100

In this particular scenario, this high-deductible plan coupled with an HSA is more affordable for the healthy, moderate, and worst-case health scenarios. 

So before blindly choosing the plan with the lowest deductible and out-of-pocket expenses, do the math on if a high-deductible plan makes more sense. I mean, only do that if you like money. 

One size doesn’t fit all

It might not always make the most sense to go with the high-deductible plan. It could turn out that your company doesn’t make a contribution or offers a very affordable HMO plan. Other factors could be at play too — the most critical being your preferred provider.

In the SAP example above, the HDHP allows you to choose the provider of your choice as long as it is in-network. For many, the choice of providers is not important. The Kaiser plan is attractive for those who prefer care under one roof. If you fit under this category, paying $2,500 to $5,000 more for an HMO might be worth it.

But before you write off the high-deductible plan completely, check what medical providers are covered. High-deductible health plans can be HMOs or PPOs. Kaiser may offer an HDHP too. You may be able to have your Kit-Kat and eat it too.

Other factors that come into play are your spouse’s plan. Sometimes employers offer a dirt-cheap or even no-premium plan to their employees but mark the price up considerably for their families. It may make sense to mix and match in this case. 

While high-deductible plans coupled with HSA’s make sense for many, it doesn’t make sense for all. Be sure to do the math or speak with a real financial advisor before making this critical decision. Otherwise, you could be leaving thousands of dollars on the table. 

Now, that’s freaky!

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Breaking the 2-Hour Marathon-Distance Barrier

Kipchoge hugging his family

Early in the morning of a misty October day in Vienna, Eliud Kipchoge of Kenya ran the marathon distance in less than two hours. His time, 1:59:40, is the fastest time that any human has ever covered 26.2 miles, becoming the first runner to ever break the two-hour barrier.

In becoming the first to ever cover the marathon distance in less than two hours, Kipchoge achieved a milestone once-considered impossible to achieve, akin to when Roger Bannister became the first person to break the 4-minute mile in 1954, with a time of 3 minutes and 59.4 seconds.

Critics are quick to point out that Kipchoge, an eight-time major marathon winner and three-time Olympic medalist, did not run under “open marathon” conditions and as such, his feat should not be recognized as an official world record.

But no matter the critics, the accomplishment was one that required an incredible amount of planning and skill, and one that all investors can learn from. Let’s explore.

Kipchoge Had a Very Specific Goal

Kipchoge owns the two fastest times in sanctioned marathons when he posted world-record times of 2:01:39 in Berlin in 2018 and 2:02:37 in London. But he had another goal for his race in Vienna. And it was not to just run a sub-2-hour marathon.

Kipchoge’s goal was to cover the 26.2 miles in exactly 1:59:50. He beat his time by 10 seconds.

Also, Kipchoge added a perspective that further fueled his very specific time goal when he said:

“Berlin was about running a world record. Vienna is about running and breaking history, like the first man on the moon.”

As an investor, how precise are your goals? And remember, saying something along the lines of “I want to retire with more money” is not a goal. It needs to be specific and measurable.

Kipchoge Had a Team Working for Him

Kipchoge did not run alone. In fact, he had one of the most advanced teams a runner could hope for. In addition to corporate support from INEOS, one of the world’s largest chemical producers as well as sports-giant Nike, Kipchoge had a running team designed specifically to help him achieve his goal:

  • He ran behind an electric timing car driving exactly at the speed of 4 minutes and 34 seconds per mile, with a backup car on standby just in case.
  • He had 35 pacesetters with six on reserve and these pacesetters were among the best in the world, including former world and Olympic gold medalists Bernard Lagat and Matthew Centrowitz.
  • He had nutritionists who fed him gels and fluids that were developed specifically for him and delivered at just the right times so his performance could be optimized.

Most importantly, Kipchoge’s pacemakers formed a protective, aerodynamic wedge around him, with five of the pacemakers running in front and two more in the back. These seven pacemakers would be replaced by a new group of seven with fresh legs. Further, they knew exactly where to run thanks to green laser beams projected onto the street by the timing car.

Investors need teams working on their behalf and working specifically toward their goals too. In addition to the need for a financial planner, investors often need a team of experts, including money managers, tax experts, lawyers, and accountants.

Kipchoge Picked the Best Course

Kipchoge just didn’t pick any course to run, he picked a location and course that would be best for him to achieve his goal. He and his team settled on Vienna due to its Goldilocks environment. It wasn’t too hot, too cold or too hilly.

Kipchoge ran a course that was 90% straight with portions of the road painted with lines to highlight the fastest possible path. He didn’t need to think about the running-technique called “running the tangents” at all. He followed the line.

Similar to how investors need to “follow the plan.”

Kipchoge Had a Good Day

Every investor knows that some days are better than others, as are some months and some years. And while we might not ever know for sure, Kipchoge would likely have tried again had he failed. But he didn’t fail.

Long-term investors should heed the words of Jim Ratcliffe, the founder of INEOS, when he told Kipchoge:

“There are no guarantees in sports. You could have had a bad day. But you had a really good day.”

Kipchoge Had the Support of His Family

In a scene that will be replayed millions of times on YouTube, Kipchoge crossed the finish line and excitedly jumped into the arms of his family.

But what most don’t know is that despite all the years of running, all the wins, all the medals, and all the world-records, this was the first time his family had watched him run in person.

Without question, Kipchoge’s family has sacrificed over the years and it was only fitting that they could share the world-stage as a family. And their celebration highlights the importance of planning as a family and celebrating as a family. Because financial planning will require goal-setting and decisions that are best made together.

Kipchoge Had a Dedicated Coach

Most of the stories covering Kipchoge’s incredible feat will pay little attention to an important detail – the fact that Kipchoge had a coach.

Patrick Sang is Kipchoge’s 55-year old, long-time running coach and was also an accomplished runner himself. He ran in college at the University of Texas and won a silver medal at the 1992 Summer Olympics. He does not seek attention or accolades, but he’s very driven to help his athletes achieve their goals and dreams.

Kipchoge summed up the importance of his coach perfectly when he said of Sang:

“He has taught me the morals of life, how to really concentrate and be happy and not go off course. He’s a mentor, a sports coach, and my life coach.”

It sounds a lot like the hallmarks of a great financial planner.

Afraid of a Stock Market Correction? Get a Plan.

Lately it seems as if every client or potential client I see asks about the possibility of a looming market correction.

Investors are loving these good times, but they’re smart. They know the market runs in cycles, and the good times can’t last forever.

The markets keep hitting record highs. We’re in the second-longest bull run in history. And yet there’s uncertainty, too, globally and in this country with our new president.

When people ask if a correction is coming and what they should do to prepare, my answer for most is: Stay the course.

Whether you’re still working or already retired, consistency pays off. Especially in uncertain times, when a market correction is on many people’s minds, it may be best to stick to your plan. If you  overreact, you could end up making financial decisions that may set you back in your strategy.

Of course, if you’re worried that the plan you have in place is not the best, that’s a different conversation. Then it may make sense to make some changes. If that’s the case, here are a few steps to consider:

1. Get professional advice.

Perhaps you’ve been handling things just fine on your own with your 401(k) or 403(b). As you near retirement, however, it’s time to speak to a specialist who can help you take the focus from accumulation and growth and put it on income planning and asset protection.

Many financial professionals will consult with a potential client once or twice with no obligation, so you can get a feel for whether you’re a good fit. You should ask for an analysis to see if there are any redundancies in your current portfolio, if you are truly diversified and if you are paying any unnecessary fees.

You also should talk about risk — how much you can stomach emotionally, how much you can afford and how much is in your current portfolio. Your financial professional can use a program like Riskalyze to help assess and align your risk. That is especially important if you’re anticipating a market downturn and might be tempted to make trades based on your anxiety.

2. Set up a retirement blueprint.

A lot of people have piles of statements from different accounts, but that doesn’t always mean they have a strategy in place. In retirement, you need a detailed plan for your money. That plan should help give you more confidence that you’ll be OK.

People tend to get out of the market when it’s down, and by then they may have already lost money. Then they may get back in when it’s coming around again … but by then, most of the gains could already have been made. That bad timing can be very costly.

3. Know the difference between a pullback, a correction and a bear market.

Everyone is talking about a coming correction, but what exactly does that mean? It isn’t the same as a pullback — typically defined as a short-term decline of 5% to 9% from a recent high. And it isn’t as menacing as a bear market, which is a downturn of 20% or more that can last for months.

A correction is the middle ground — a 10% to 19% drop from recent highs. It’s a little scarier than a pullback, but it’s still temporary. It is sometimes an indicator that we’re going to have a bear market, but that’s not always the case. It can be an opportunity for investors hoping to get discounted prices. Unfortunately, it’s also when some people go wrong based on their emotions. Fight the instinct to flee.

4. Diversify.

The old-school equation for diversification is a 60-40 split between equities and bonds — and that’s not always a bad scenario. But these days, there are so many more options, both for protection and growth.

If interest rates continue to rise, it could have a ripple effect, and the bond market likely will suffer. In retirement, that may not help you as an inflation hedge, so it’s important to look at alternatives.

Are you ready to make a change or create your first real retirement plan. If so, find a financial professional who is focused on informing and enabling you, not selling you products. And be careful about what you read and hear. It’s good to have information, but what you see in the media isn’t necessarily tailored to your specific needs.

An experienced and knowledgeable financial professional with a retirement focus can help equip you to work toward your goals — while considering uncertainty in the market.



Perspective, Gratitude, and Feeding the Bear

Well, it looks like some normalcy has returned to the markets. After 18 months of steady stock market gains in one of the lowest periods of market volatility in history, we are starting to experience some discomfort. The financial media has been their typical self and have done a good job of reporting just how normal (sarcasm) the downward swings are. Here are some actual headlines over the past week:

  • Dow Experiences Biggest Point Drop in History
  • S&P 500, Dow Suffer Biggest Weekly Decline in More than 2 Years
  • The Dow Jones Industrial Average Crash Raises One Question: Is the World Ending?
  • Market on course for 6% drop, biggest one-week fall since 2008

I don’t want to discount the downturn. Yes, the 1,100-point drop in the Dow on Monday was the largest in history. However, on a percentage basis, which is what investors should be looking at, it was the 538th largest decline in history. This of course, doesn’t make a for a good story. If I was a headline writer, here is what I would have written (and subsequently receive zero clicks, leading to a prompt termination):

  • Dow Experiences 25th Worst Loss since 1960
  • S&P 500 Declines to Levels Not Seen Since November 20th – Yes, 2.5 Months Ago
  • The World Fails to End…Again
  • Market Drops 6% in One Week after Increasing 234% over 9 Years

What happened in the markets over the last week can be scary but it’s also normal. The S&P 500 and Dow has officially reached “correction” level which is defined as a 10% downward movement from peak to trough. A drop of this magnitude in such a short period of time should not be discounted. However, it also need to be into perspective. This is the 91st time a 10% correction has occurred since 1928. If stocks fall another 10%, which is entirely possible, it wouldn’t be outside of the norm either. A 20% drop, officially a bear market, would be the 22nd since 1928.


No panic here

One lesson I learned over the past week is that I have the best group of clients an advisor can ask for. Although small in terms of quantity, they are robust in composure. A parent at my child’s school said to me yesterday, “Man…your phone must be overheating.”




Quite the opposite actually. I didn’t receive one phone call, text, or e-mail. My clients were not worried. Nor were they surprised. In fact, they frankly didn’t care. Instead of worrying about markets they can’t control, they were busy controlling what they could — yelling at their kids, enjoying the perfectly normal February sunshine, and debating what wine to drink with barbeque (Syrah…or better yet, beer). It was the same attitude I had which tells me that I’m blessed to be in a bunch of perfect marriages.

The biggest investing mistakes usually made are emotional, all-or-nothing decisions when the market is in free-fall. A necessary part of a good advisors where he or she adds the most amount of value is talking their clients off the ledge. While I’m prepared to have this conversation, given the strong bull market, I haven’t had to. This was my first opportunity and it hasn’t been necessary. In fact, a strong stomach from my clients opens up the door to some tremendous opportunity –taking advantage of a downturn.


Strategy to feed the bear

“We’re rich because we were smart when others were dumb” – Charlie Munger, Vice Chairman of Berkshire Hathaway


The above isn’t an exact quote. I’m paraphrasing something I heard Warren Buffet’s partner say during one of Berkshire Hathaway’s annual meetings. Nonetheless, his point is valid — the best time to buy stocks is during times of panic.


However, this is easier said than done. Buying low makes complete sense and every investor can’t wait to do just that. The reality is that when asset prices fall they become sellers rather than buyers.


A 10% drop from arguably extended valuation levels is not exactly a buying opportunity of a lifetime. That likely occurred in 2008 and 2009 and it’s a market we likely won’t see again during our lifetime. However, today is a better buying point then last week, and the odds that the market will be higher 5 years from now has increased.


According to research from financial columnist Morgan Housel, after a 10% drop from its peak, stocks are higher in five years 86% of the time. The average return during those five years is 51%. After a 20% drop, those numbers increase to 89% and 61% respectively. Logically, the larger the drop, the higher future returns will be. And there’s a higher probability of achieving those higher returns. That’s not a bad deal.

Five years from now, the markets most likely will have made some gains
Source: The Motley Fool


While logic states you should deploy your cash now, the fear of regret is going to overpower logic. Here are some perfectly normal thoughts you may be having right now:


What if the market drops even further? It’s too early to start buying.

This feels a lot like 2000 and 2008. What if we have another crash? I don’t want to feel that pain again.

This time, I’m going to be aggressive when others panic.


The market may continue to fall. It might not. If you invest your reserves now and it falls further, you’ll be kicking yourself. If it doesn’t, and you don’t buy, you’ll be kicking yourself.


To be a successful investor, you don’t need to time the markets. You need to control your behavior. Therefore, you need a strategy that’s rule-based, taking the emotion out of your investing decision. Let’s say you have $10,000 in dry powder that you are ready to invest during a downturn. Instead of investing it all in one chunk or waiting too long, a rules-based strategy on deploying a set amount at various drawdowns is a sound strategy. The approach I’m going to show you is adopted from Morgan Housel who articulates it much better than I in this article. Here is a summary:


Market falls You invest… Historical Frequency
10% $1,000 About once a year
15% $2,000 Every 2 years
20% $3,000 Every 4 years
30% $2,000 Every decade
40% $1,000 Few times in an investing lifetime
50% $1,000 Once in an investing lifetime


With the strategy above, more than half your available funds will be invested after a 20% decline. Larger declines are rarer, so it makes sense to invest sooner rather than later. However, in the event that the market continues its descent, you’ll still be able to take advantage of lower prices.


Significant wealth can be created during bear markets which fortunately, yes fortunately, also occur pretty regularly. We haven’t had a 20% decline since 2009, twice as long as the average frequency. While not predictable, it shouldn’t be surprising if such a drawdown occurs again.


Whether this strategy is followed with the precision of an olympian archer is not important. What is important is prepared and having a strategy. A simple plan will alleviate mental stress which in turn, leads to less hasty decisions and ultimately, better returns.

Allow me to help you create a portfolio built for a bull or bear market. Get started today by clicking the link below for a FREE portfolio review.

2 Last Minute Financial Gifts that Keep on Giving

There are 4 days left until Christmas. You’ve been meaning to shop for your niece but keep ending up buying scarves and gadgets for yourself. Not to worry, there’s still time. You can order the Shimmer and Shine Magical Light-Up Genie Play Set by December 22nd on Amazon Prime and have it shipped to your door by Christmas Eve. However, if your niece, nephew, son, daughter, or grandchild is anything like my children, the joy of a new toy will wear off quick. By mid-January, Shimmer’s palace will look more like a foreclosed apartment and Shine’s teacup will be buried with last year’s Lego set.

This year, why not do something that will last a little longer? Give them a gift they will not care about one single bit. You’ll probably lose your “World’s Greatest Uncle or Aunt” title. However, when they are off to college, starting a family, or looking to buy a home — you will be adored. What is this magical gift?

An iPhone X.

Or not. If you are looking to give a gift that will pay dividends a decade from now, try dividend stocks. If you are looking to provide that special child in your life with the opportunity to become empowered, have a stronger of sense of self, meet lifelong friends, and increase their earnings potential, help pay for their college.

Sure, both ideas aren’t as sexy as a new toy or $1,000 cell phone but they won’t end up in a donation bin either. And best of all, there’s still time to stuff their stockings by December 25.

Purchase brand name dividend stocks

While the price tag of the latest iPhone is $999, the true cost of owning the latest hot gadget from Apple is much more. A data plan will set you back about $70 per month. Then there’s app purchases, music subscriptions, and broken screens. In 2 years, it will be time to fork over another $1,000 to upgrade. Let’s say you buy your 12-year-old a new phone and pay for their service until they are 18 (why couldn’t you be my Mom or Dad). During that time, you paid $1,000 per phone, $70 per month on carrier charges and app purchases, and upgraded twice. Your true cost over 6 years is a whopping $8,040 or $1,840 per year.

Now in typical financial junkie form, let’s look at what happens if you buy them Apple shares or better yet, a basket of brand name stocks with that money every year. Using a conservative rate of return of 6%, investing rather than spending will net your loved one nearly $14,000 over six years. Your child will be better off by $22,000 since you’ll be saving over $8,000 in phone payments — enough for the first-year of tuition at UC San Diego with money to spare for flights back home (or for you to go to the beach).

Of course, not everyone is ready to fork over nearly $2,000 a year as a gift for someone else. You can still invest in brands kids love and at much lower price tags. And you can do this by Christmas. By opening a custodian account online for your soon-to-be-rich child, you can be ready to invest in minutes. Many brokers, such as Ally Invest or TD Ameritrade don’t have account minimums. With trading fees as low as $4.95, you don’t need thousands to invest. You can invest as little as $4.95. Of course, that would mean you enjoy throwing money away. A rule of thumb I like to use is not to exceed more than 2% of your trading commissions for any investment. Ally Invest charges a trading commission of $4.95 while TD Ameritrade starts at $6.95. With fees that low, you can get an investment account started for as little as $250.

For $250, instead of a new pair of Jordan’s, you can buy 4 shares of Nike stock. Is your kid a Star Wars fan? Disney, the owner of the franchise, is a great brand that will be around when all of us aren’t. Alternatively, Hasbro, is an incredibly well-run business that licenses Disney characters such as Darth Vader. For $270, you can buy 3 shares of Hasbro and receive a generous 2.5% dividend yield.

The dividend is the gift that keeps on giving. Many online brokers allow you to enroll in a Dividend Reinvestment Program, or DRIP. With DRIP, instead of receiving a payout as cash, dividends are used to automatically purchase more stock. This is a great, hands-off approach to compounding wealth over time.

Many beloved brand names that sell products and services kids love pay dividends and make great long-term investments. Below is a list of how some popular names have performed over the last decade along with their dividend yields.

Company 10-year stock return Dividend yield (TTM)
Activision Blizzard (ATVI) 438% 0.5%
Apple (AAPL) 114% 1.4%
Hasbro (HAS) 253% 2.5%
Nike (NKE) 290% 1.2%
Six Flags Entertainment (SIX) 347% 3.9%
Starbucks (SBUX) 244% 1.8%
Walt Disney (DIS) 240% 1.5%
Source: YCharts and Yahoo! Finance

Not only does buying stock in these brands make money, but it is a great strategy to get young children interested in business and investing.

So, go on. Open an account for your niece, nephew, or child today. Just select the UTMA/UGMA account option which gives an adult custody of the account until the child turns at least 18 and up to 25 in California. You can continue to contribute to their account on special occastions such as birthdays, graduation, Bar Mitzvah, and their Quinceanara. You may not win brownie points today. However, ten years from now, you’ll by far be their favorite relative.

Contribute to a 529 plan

Higher education is priceless. It’s an opportunity for the awkward to become legends. Life-long friendships are created. You may even learn to do laundry. It’s priceless — for an average four-year public, in-state cost of $40,000 of course. Expenses can go up significantly from if a child enrolls in a UC or private university.

Given the rapid increase in college tuition, it’s no surprise that many students are leaving college with insurmountable debt levels. Today, there is $1.5 trillion in student debt outstanding. The average monthly student debt payment for those between 20 and 30 years old is $351. When I was going to college, it wasn’t impossible to pay your own way through college. However, students today have a much tougher road than their parents. Even with a full-time job, it’s tough to escape the student loan trap.

However, you can help fix this national catastrophe by doing one small thing — buy your son a Nintendo Switch.

…or you can contribute to their college savings.

A 529 plan is a tax-advantaged savings plan that is designed to help family members put aside money for college. Nearly every state offers a 529 plan and some states offer tax incentives to invest in their own state’s plan. California does not offer a tax deduction but you are able to invest in any state’s plan. In addition to growing tax-free, 529 plans are low-maintenance, give the owner control of the money, offers automatic investment options, and are easy to set-up.

Despite all the benefits of a 529 plan, researching the one that’s right for your child can be quite a task. An ideal plan should have low fees investment options, strong long-term performance, easy-to-select investment options, and a strong team behind the plans. Fortunately, Morningstar has done some of this research for you. From 2011-2017, these funds have consistently ranked as top-tiered 529 plans:

  • Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • CollegeAdvantage 529 Savings Plan, Ohio
  • CollegeAmerica Plan, Virginia (Advisor-sold)
  • Utah Educational Savings Plan (UESP)

You can’t really go wrong with any of these but my personal favorite is the Utah Educational Savings Plan. It’s where I have both of my children’s college savings invested. Like many plans, the Utah plan allows investors to set it and forget it as investors have four age-based options that get more conservative as the child gets closer to college. UESP also has a solid blend of strong investment performance and low-cost investment options. As an advisor, I favor the Utah plan over others as I can also customize investments for each client. Of course, individual investors can do this on their own too.

The application process to open a 529 plan is simple. You can open an account online in minutes, giving you plenty of time to have it funded by Christmas morning. Your child may not appreciate your generosity today. However, a decade from now, they’ll be singing your praises as they perform their first keg stand.

The holidays are a great time of year for getting together with family and friends. Christmas morning is a memory that will stick with children for the rest of their lives. However, the Grinch would agree with me that memories fade. This year, give the gift that keeps on giving — quality dividend stocks and a contribution to their college savings.

To learn more about custodial accounts, 529 plans, and saving for your child’s future, schedule a complimentary meeting by clicking the icon below. 

ABCs of Estate Planning

The process of estate planning is often misunderstood. In the minds of many people, the term assumes wealth and heirs. Single people of modest means may mistakenly believe they don’t “need” estate planning. However, planning for the disposition of one’s assets upon death offers everyone significant benefits.

The greatest benefit may be in knowing that your wishes will be respected. Naming your heirs and relieving them of unnecessary costs and stress by carefully designating which assets they will receive is far preferable to having a court make such decisions. Estate planning should include not only designating your heirs but also possibly using tools such as trusts to protect your assets. This will help ensure they go to the people you care about rather than to the government. And, in the event of mental or physical incapacity, an estate plan can enable other people to help care for you and your property through a durable power of attorney and a health care proxy. You may also want to include a living will among your estate planning documents so your physician knows your wishes regarding life-saving measures in hopeless situations.

Writing It Down: Begin Here

 A will is the basis of any estate plan, simple or complicated. To draw up your will, you should consider using the services of an attorney qualified to do estate planning. Although you may think you know your own mind and can do it yourself, an estate planning professional will ask you tough questions you may not have considered. Could your elderly parents manage an inheritance if they were to survive you? Do you want to include your children’s spouses in your estate? If your estate could be affected by the death of a child and/or divorce, then you should consider how these two painful situations might affect the distribution of your assets.

Naming Names

 The first name to settle on is that of your executor. Next will be the beneficiaries of your insurance policies. Beneficiaries, and contingent beneficiaries, of assets in retirement accounts, such as pensions, 401(k) plans, and Individual Retirement Accounts (IRAs), are kept on record with the retirement plan administrator, and these nominations take precedence over your will. Retirement plan assets pass directly to the beneficiaries, bypassing probate court unless the estate is named.

Similarly, beneficiaries of mutual funds and other securities holdings are also listed with the custodians who handle these accounts. These listings are made on a transfer on death registration, enabling ownership of the securities to pass directly to the appropriate person. The disposition of other assets, such as real estate and personal property, will also be included in your will.

You’ll want to make sure that you have considered all of your assets when you designate your beneficiaries.

Time for a Trust?

If you find your estate—including your home, pensions, and investments—totals more than $5.43 million in 2015, it may be time for a trust. In particular, an irrevocable living trust (ILIT), which means it cannot be modified or canceled by the creator, is often used to keep assets out of an estate. At its most basic, such a trust allows the transfer of assets to beneficiaries to be treated as a gift— thereby avoiding probate court—which could save your heirs time and money.

Regardless of the level of your net worth, there are a number of reasons why you should consider an estate plan. Take steps now to ensure your wishes will be implemented and followed and that provisions will be made for your dependents and loved ones.

We work with a team of estate attorneys that have your best interest in mind. To learn more about what type of trust might be right for you, schedule a meeting below.

4 Uses of an Advisor

What is the value of a financial advisor? The personal touch. Here are four stories of how flesh-and-blood advisors you meet in person (that’s opposed to a robo-advisor, where your contact is digital or over a phone line) benefited their clients.

These good advisors helped clients to overcome emotionally based decisions, stop them from making mistakes, figure out whether to make a big purchase and decipher arcane retirement plans. We’ll have separate articles throughout the summer describing in greater detail how they helped their clients.

Planning is so very vital for your future. According to a study by insurer Northwestern Mutual, a large majority (72%) of U.S. adults believes that the economy will suffer future crises. But two-thirds of them don’t have a financial plan. Plans are not static. Once you have a plan in hand, ongoing contact with your advisor is vital to make the plan work.

In our four cases, the advisor:

Prevented an emotional decision. A client of Nicholas Atkeson and Andrew Houghton, the founding partners of Delta Investment Management in San Francisco, feared that the stock market was getting too frothy recently and it was time to sell. No one can predict the market, and the wisest course is to have a well-diversified portfolio that you stay true to through good and bad times. There is room for rebalancing, certainly, but panicked decisions are almost always bad ones.

“Our role as financial advisors is to gently guide the client back on the road to smart portfolio management,” Atkeson and Houghton write. “The best deed we have done for a client is simply telling him it is a bad idea to be ruled by emotions.” The client relented from this ill-chosen decision.

Headed off an investment mistake. It’s amazing how often you come across seemingly great investment opportunities. Guess what? They are traps. Karl Schwartz, an advisor with Hewins Financial Advisors in Miami, notes that a client knew “a guy” who could get him into a sure-fire money-making investment, a South African gold mine. Trouble is, there is no such thing as a sure-fire investment. Schwartz managed to convince his client, through patient persuasion, that this great plan simply was not a good one.

When you hear about such bonanzas, Schwartz reports, “you cringe, as you know right away it’s a bad idea for the client.” Gold did well after the financial crisis but has lagged lately. It defines volatile.

Helped make a big purchasing decision. The question of whether to buy or rent is a major item in people’s lives. For many, their home is their largest asset. John C. Fales, lead advisor Allos Investment Advisors, which has offices in Phoenix and Overland Park, Kan., had a client who inherited some money and wanted to know how best to deploy it. He could buy a home for $150,000, or over the next 25 years, could pay out $300,000 in rent.

Fales did the math and figured out that, in this instance, it made more sense to buy. The client likely would have money left over to put into other investments, which would not be so if he were shelling out for rent over the next quarter-century.

Decoded abstruse pension details. A knotty problem confronted a client of Adam D. Koos, founder and president of Libertas Wealth Management Group, in Columbus Ohio. The client, a fireman, had previously been a police officer for eight years. When he quit the force, he collected his pension money as a lump sum. Now in his 50s, he wondered if he could buy back those eight years and thus boost his pension in the state-run pension fund for cops and firefighters.

Koos crunched the numbers and discovered that, for $80,000, the client could buy back the lost time and end up with a pension worth $500,000. As Koos puts it, this gives his client the “confidence that he and his wife will be able to retire on time and spend their later years doing what they enjoy.”

This person-to-person advice is invaluable.

Jobs are plenty, the stock market is hot, and the economy is firing on all cylinders. It won’t always be like that. Find out if you’re prepared for any type of market with a FREE PORTFOLIO CONSULTATION. We can also help with big purchasing decisions like buying vs renting or knowing when to take social security distributions.