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wealth manager

Heritage Planning

By | 2019, Newsletter | No Comments

What Successful Families Do Differently

We all have loved ones who we want to succeed after we have passed on. How do we prepare them to use our hard-earned savings in a healthy way?

Heritage planning encompasses passing on your “wealth” to your heirs without controlling or enabling them. The process begins by redefining “wealth.”

Your wealth is human, intellectual, and financial capital. It is who you are and what you value. You can improve the life of your loved ones by passing these principles to them along with financial assets.

Many people are curious about how to start heritage planning with their families. These are six steps to focus on:

  1. Redefine wealth as financial capital, human capital, and intellectual capital.
  2. Use a 7th generation mentality.
  3. Pass on your values through stories.
    (Above is the word cloud of values from our participants.)
  4. Teach your children to give.
  5. Teach your children how to manage financial risks.
  6. Focus on the qualitative and not on the quantitative.

Please call us if you would like to schedule an appointment to discuss how we can help you get started with heritage planning in your family.

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Is Your Brain Risking Your Financial Success?

By | 2019, Newsletter | No Comments

The world is full of information, yet our brains are only capable of processing a certain amount. If we had to analyze every aspect of every situation or decision, we would never get anything done. In order to cope, our brains have created shortcuts to help us make sense of things. These cognitive shortcuts – known as heuristics – are rules of thumb or educated guesses. In many cases, being approximately right is good enough. However, there are times when these shortcuts are not good. Recognizing when they are creeping into our decision-making will help us determine if they are helpful or hurtful in our current situation. This is critical when it comes to your money.

Overconfidence

While confidence is good, overconfidence exaggerates our abilities and can cause us to underestimate the risk of being wrong. For example, you may pick a stock that is growing. If the stock price continues to go up, you conclude that you have a good strategy or a natural talent. However, when the stock plummets, you distance yourself from the truth, believing it was just bad luck. An overconfident person may even repeat the same mistake over and over again.

Framing

When we have already made up our minds, we place our existing perspective on all new information that comes our way. For example, expecting a drop in the stock market, you put a negative spin on any good news. People who frame eventually get a big surprise when they find out the cost of being wrong.

Anchoring

Every one of us has experiences that form our opinions. When we anchor ourselves to these opinions, we ignore anything that doesn’t fit our views. If you lost money investing in a recession, you might conclude that the stock market is too risky. Even when presented with a better perspective of its potential growth, you may still feel like there is too much risk.

Herding

Have you ever found yourself doing something you would not do on your own? Going along with what a larger group is doing, whether those actions are rational or not, even in the face of unfavorable outcomes is known as herding. You hear that investors are selling, so you sell, or you hear they are buying, so you buy more without considering how it impacts your financial plan.

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IRAs & 401(k)s

By | 2019, Money Moxie, Newsletter | No Comments

Planning for retirement is daunting, especially if you don’t know where to start. In this article, we’ll walk through the basics of two common retirement accounts and two different ways you can contribute to them so you can make a more informed decision.

An IRA (individual retirement accounts) and a 401(k) serve similar purposes. They are both accounts that are used for retirement. They both have penalties for withdrawing money before age 59½ and the option to make traditional or Roth contributions.

So, which should you choose? If you don’t have the option to contribute to a 401(k) then, of course, an IRA is the better choice. However, if you have the 401(k) as an option, that is usually a good option, especially if the company is matching part of your contributions, it is always a good idea to take advantage of an employer match. It’s basically free money!

Another thing to consider is whether to contribute to a traditional account or a Roth account.

The primary difference between traditional contributions and Roth contributions is when they are taxed. Traditional contributions go into the account pre-tax, and everything is taxed as ordinary income when distributions are taken. In Roth accounts, the money is taxed before it is contributed, and the distributions are taken tax-free. Another bonus to Roth accounts, you can pass them to your heirs tax-free as well.

Depending on your personal situation, one account or the other may be more advantageous to you. In simple terms, if you are in a low tax bracket now, contributing to the Roth is a good idea. Tax rates are relatively low right now, and it’s likely that they will be higher in the future. If you pay tax now, while in a low tax bracket, you will benefit from it because you won’t have to pay taxes at the possibly higher rate in the future.

On the other hand, if you are in a high tax bracket now and expect to be in a lower tax bracket in the future, it would be prudent to make traditional contributions. The money will avoid taxes now and will be taxed later when your tax rate is lower.

Now that you’re armed with information, you can make a better decision as to when, where, and how to contribute! Please call us with any questions.

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Don’t Miss Out On Your ESPP

By | 2019, Money Moxie | No Comments

If you have an Employee Stock Purchase Plan (ESPP), you might wonder if it is a good value. An ESPP can be very beneficial, depending on how the plan is written. Check the plan rules to see if it lines up in your favor. If so, then you should (1) participate as much as you comfortably can and (2) cash out each year as soon as you can. Here’s why an ESPP is usually a good deal.

An ESPP allows you to contribute a percentage of your income each paycheck towards the purchase of company stock. The payroll deductions go into an account and are held until the end of the purchase period, typically yearly. At that point, you “purchase” company stock usually at a 15% discount, which is a nice benefit by itself.

If your plan has a “look back” provision, it is a bonus. A “look back” provision gives you the price on either the offering date or the purchase date, whichever is lower. So, even if the company stock is down from the offering price, you still get it at a 15% discount from its lowest price. If the stock is up, you purchase at the lower price and may have significant gains.

These potential gains may make the transaction attractive, but you shouldn’t sink all your money into the ESPP. Participate at a rate that is comfortable and that doesn’t rob your other buckets.

You should always have short-term, intermediate-term, and long-term buckets. Your short-term bucket should be your emergency fund, preferably in a Money Market or short-term CD (i.e. 1 year or less). We like to see an emergency fund of 3-6 months of living expenses.

Your 401(k) and other retirement savings are your long-term bucket. We prefer that clients save 10-15% per year for retirement. If you already have 1-2 months of living expenses in the bank and you are saving for retirement, you could use the ESPP to build the emergency fund and then to build the intermediate bucket for expenses like new cars, buying a home, etc. Once your short-term bucket is full, then participate more fully in the ESPP.

Cashing out immediately when the stock is available is the safest choice because you lock in guaranteed gains. Just be aware that the distribution will be taxable as ordinary income, unless your plan is qualified, which may have a more favorable tax treatment.

You can choose to hold the stock to lower your taxes. However, you must keep it for one year from the purchase date, and two years after the beginning of the offering period. At that point, the gain above the purchase price will be taxed at a long-term capital gain rate, which is always lower than your ordinary income rate. However, it may not be wise to wait a year. Saving taxes doesn’t help if the stock value goes down by more than your tax savings. That is why the safest bet is to sell the stock as soon as it is available. Only hold on to the stock if your other buckets are filled and you are just investing for the future.

ESPP’s can be a great way to save for the future. If you have any questions about your specific situation, please contact one of our wealth managers.

This article is not a solicitation, offer, or recommendation to buy or sell any security. Financial advisory services are only provided to investors who become Smedley Financial clients. Projected returns are not a guarantee of actual performance. There is a potential for loss as well as gain that is not reflected in the information presented. Past performance is no guarantee of future results. This article is not intended as tax advice, and Smedley Financial does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Smedley Financial assumes no responsibility for the tax consequences to any investor of any transaction.

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Deceitful Guise of Financial Demise

By | 2019, Money Moxie | No Comments

Grace Groner was born in Lake County, Illinois, in 1909. She was orphaned at the age of twelve. Although she lived to be 100 years old, Grace never married or had children. Most of her life was lived in a small one-bedroom cottage. She shopped at rummage sales and never owned a car. She worked her entire career as a secretary, earning a modest income.

When Grace Groner passed away in 2010, she left over $7 million dollars to a foundation established for the benefit of students at Lake Forest College. How did she become so wealthy? She invested in stocks at a young age, reinvested her dividends, and stayed invested so compounding interest could work its magic.

Richard Fuscone was an ambitious man. He received an education at Harvard and the University of Chicago. He then went on to become a vice chairman for Merrill Lynch. He was so successful in the investment industry that he retired at the age of 40 to pursue other interests.
Richard owned two homes, one of which carried a mortgage of $66,000 a month. Richard Fuscone declared bankruptcy in the same year Grace Groner donated millions to charity.
Richard had a top-shelf education and an impressive background in finance. Grace had neither. How is that possible?

The answer is behavioral finance. Financial knowledge does not prevent bad financial decisions. Richard had an expert understanding of how markets and investments work, but behavioral finance is an entirely different animal, one he did not understand.

We, as wealth managers, are often judged by our investment management. However, that is only part of our service. The financial and behavioral advice we offer can make a more significant economic impact than people realize.

We work hard to ensure sound financial decisions are made and protect against bad ones, which are not always obvious and are usually made unknowingly.

We wouldn’t suggest one live like Grace, but we certainly wouldn’t recommend one live like Richard, who might have saved millions with a behavioral financial advisor and some quality advice.

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What is the Risk of being too Conservative

By | 2018, Money Moxie | No Comments

Are your conservative investments at risk? What about the cash you are keeping in your savings account or in the safe downstairs? “No,” you might be thinking, “I keep cash because it’s safe.” If these are your thoughts, I have some bad news. In an effort to avoid risk, you could be taking on a different kind of risk. I’m talking about inflation risk and it’s a silent killer that preys on the innocent.

Inflation can cause damage too small to be seen until it’s too large to be avoided. And the more conservative the investment, the greater the risk. “But wait,” you might be saying, “I thought conservative investments were safer and risk increased only as I invested more aggressively.” That is generally true with market risk, but it does change when considering inflation risk.

According to inflationdata.com, inflation has historically averaged just over 3%. This means on average a dollar will buy 3% less than it did 12 months earlier. A product that costs $100 dollars today will cost over $2,000 dollars 100 years from now. When my father was young, a candy bar cost 5 cents. I remember paying 50 cents as a child. Today, a candy bar is $1.25. That’s inflation.

If our money is not earning at least the rate of annual inflation, our purchasing power is decreasing. My father could’ve bought almost 20 candy bars with a dollar when he was young. With the same dollar, a child today couldn’t even buy one.

As you can see in the Risk vs. Reward graph I’ve provided, the more aggressive the investment, the greater the potential should be for gain, especially over long periods of time. However, I want to call your attention to the left side of the graph, the conservative side. This side of the graph shows little to no risk being taken and yet there is a loss. That is the risk of being too conservative. This loss isn’t a loss of principal, but a loss of purchasing power.

Keeping up with inflation should be an investor’s number one goal, and some conservative investments struggle to do that. Conservative investments do serve an important purpose and are a great choice for short term goals and emergency funds. But if your goal is long-term, adding a little more risk may actually reduce inflation risk. Investing in a diversified portfolio that includes stock market and bond market risk may help protect you from inflation risk.

A real area of concern for inflation risk is in retirement. If these investors don’t keep up with inflation, they could risk living longer than their money. At a 3.5% inflation rate, the cost of goods will double every 20 years. This means an 85 year-old couple who keep their investments in cash will have half the purchasing power they did when they retired at 65. Although the principal amount would be the same, it would be like a 50% loss. That is a risk I hate to see investors take.

For more information on inflation risk, market risk, and the risks taken in your current portfolio, please call us and schedule an appointment. We would love to answer any questions you have and help you to reduce unnecessary risk.

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You Need a Wealth Manager—Now More Than Ever

By | 2015, Executive Message, Money Moxie | No Comments

Dear Valued Financial Partners and Friends,

Now more than ever, most people need a Wealth Manager. While financial conditions are constantly changing, your own financial goals do not. Remember our two guiding principles: “Protect what you have. Then seek to acquire more.” As your Wealth Manager, here are some of the roles Smedley Financial can play for you.

Financial Bodyguard: As your financial bodyguard, we can help protect what you have acquired. Our goal is to prevent clients from making serious and costly financial mistakes. We can serve as a devil’s advocate and sounding board, thus helping you through the process of making wise financial choices.

Financial GPS: With respect to your personal financial goals, you always need to know where you are. As an integral part of your financial GPS system, we can let you know whether or not you are on track.

Financial Lighthouse: You need to know you are headed in the right direction, particularly at difficult times. We can help you maintain a proper course through good times and bad. Naturally, this includes not only bull and bear stock markets, but through your sunny days and, more importantly, through your rainy days and dark nights.

Experienced Guide: With respect to the thousands of financial decisions made during your lifetime, you need an experienced team of certified investment professionals to serve as your guide. While some financial decisions may be changed as circumstances and opportunities present themselves, some financial decisions may be made only once. We can help guide you through the jungle of important financial decisions in your life.

Risk Barometer: With respect to risk management, you need to know when to take risk and how much risk to take. Both of these points are equally important. As your risk barometer or gauge, we help you determine the type and amount of risk you need and want to take. Investment management is all about minimizing your risk taking.

At Smedley Financial, we can play multiple roles for you in our role as your Wealth Manager. Remember, your financial success is our passion!

Bullish Best Wishes,

Roger M. Smedley, CFP®
President

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