Avoiding the Social Security Tax Trap

taxable social security income table for minimizing taxes

Avoiding the Social Security Tax Trap

April, 2021

Retirees face multiple income traps, and many retired taxpayers will see a portion of their Social Security income make its way onto the taxable income line of their 1040s.

Those who convert their traditional IRAs to Roth IRAs are especially susceptible to this situation. If you happen to exceed the funding limit, the extra income pushes you beyond the income threshold level requiring you to pay tax on Social Security income that you thought was tax-free.

Additionally, a shift in marital status can place you in a higher tax bracket, even because of the death of a spouse.

 Lower- and middle-income retirees get hit by the so-called tax torpedo, as rising income causes their Social Security benefits to be taxed.

 After a one-year hiatus, RMDs will be back when filing 2021 taxes, increasing your income. Thus, it would pay to start thinking about avoiding future RMD-induced tax triggers now.

Options for Lowering Your Social Security Taxes

  • Seniors can take steps to avoid or minimize tax traps. These include delaying spending from one year to the next and judiciously tapping after-tax accounts to lower taxable income.

 

  • Another option would be taking RMDs as a qualified charitable distribution if you don’t need the income. That way, it won’t trigger higher taxes or higher future Medicare premiums.

 

  • Retirees in their 60s often pay little or no taxes before they begin taking Social Security. Many are living off after-tax savings, Roth IRA accounts, or inherited money. The standard advice is to spend this money before tapping tax-deferred accounts. Then, take advantage of their low tax bracket to convert money in tax-deferred accounts to Roth IRAs. 

 

  • Generally, annuities become taxable income when they’re taken as distributions depending on the account type. Virtually any investor who isn’t spending all the interest paid from a CD or other taxable instrument can benefit from moving at least a portion of his or her assets into a tax-deferred investment or account.

 

  • Another possible remedy could be to simply work a little less, especially if you’re at or near the threshold of having your benefits taxed.

 

Know Your Social Security Situation

There are many rules concerning the taxation of income during retirement, and it’s crucial to know your situation to find ways to minimize the impact. As financial professionals, we can help you plan now to protect the retirement nest egg you have worked so hard to build. Call us today at 910.448.1450, and let’s find some options that will work for you.

You can also schedule an initial VIRTUAL MEETING with an advisor by clicking here.

Adapted from Barron’s 1

Adapted from Investopedia 2

By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.

This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results.  Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.

1 https://www.barrons.com/articles/retirees-beware-these-tax-traps-on-social-security-and-medicare-51593707401

2 https://www.investopedia.com/articles/pf/08/social-security-tax.asp

 

2021 Letter to Clients

Investment Advisory Services offered through AlphaStar Capital Management, LLC, a SEC Registered Investment Adviser.  SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.  AlphaStar Capital Management, LLC and Inspire Financial Planning are independent entities.

2021 Letter to Clients

January 29, 2021.

Dear Valued Client,

2020 is behind us. Enclosed you will find your performance reports for the last year. How did you do?

Chances are you did very well this past year. This letter is going out to all of our clients, and I can’t think of one that will be dissatisfied with their personal 2020 investment performance.

Sometimes, the most challenging part of investing is staying invested.

4Front-- New Investment UMA Fund Pre-Launch

In 2021 we will be launching one of our most aggressive portfolios to date ($100,000.00 minimum). While it contains a great deal of risk, it also may deliver a great deal of reward. There are no guarantees.

But at Inspire Financial Planning we believe in a

"buy low and hold forever” philosophy. We believe that “time in, not timing,” is the grand key to success.

Prayer for a Better Year

I know that you’ll join us this year as we pray for our nation, our leaders, and ourselves, so that we can all become closer to God –and closer to one another—which is more in alignment with His goodness.

Even in the darkness, our God is the God who can make water spring forth from deserts.

Thank you valued client for staying the course in such a difficult year. Thank you for your trust in Inspire Financial Planning.

 

Regards,

Jeff

Jeff Headrick

Private Wealth Manager

Retirement Options for the Self-Employed

retirement-options-self employed

Retirement Options for the Self-Employed

January, 2021

This past year highlighted small businesses more than any other. The impact from a struggling economy has not gone unnoticed and the support from local shoppers has made the difference between open and closed for many small business owners. If you own a small business, one thing is certain, the responsibility of retirement planning is square on your shoulders.

Unlike an employee who may have access to a 401(k), you’re on your own so you want to put the right plan in place. First, establish your goals for your retirement savings, then work through the options for how to build your savings.

Traditional or Roth IRA

This option is best for anyone just starting out. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA. The contribution limit is $6,000 in 2020 and 2021 ($7,000 if age 50 or older). The tax advantage of this option includes either tax deduction on contributions to a traditional IRA or no immediate deduction for Roth IRA, but withdrawals in retirement are tax-free.

Solo 401(k)

This choice is good for a business owner or self-employed person with no employees (except a spouse, if applicable). The contribution limit is up to $58,000 in 2021 up from $57,000 in 2020 (plus a $6,000 catch-up contribution for those 50 or older) or 100% of earned income, whichever is less. The tax advantage of this choice is that the plan works just like a standard, employer-offered 401(k): You make contributions pre-tax, and distributions after age 59½ are taxed.

SEP IRA

Consider this option if you’re self-employed or a small business owner with no or few employees. The contribution limit: The lesser of $58,000 in 2021 ($57,000 in 2020) or up to 25% of compensation or net self-employment earnings, with a $285,000 limit on compensation that can be used to factor the contribution. The tax advantage to be found is that you can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation—limited to that $285,000 cap per employee in 2020—on your tax return. Distributions in retirement are taxed as income.

SIMPLE IRA

This choice is best for larger businesses with up to 100 employees. The contribution limit is up to $13,500 in 2020 and 2021 (plus catch-up contribution of $3,000 if 50 or older). If you also contribute to an employer plan, the total of all contributions can’t exceed $19,500.

The tax advantage for this choice is contributions are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense.

Defined Benefit Plan

This can be a good option for a self-employed person with no employees, has a high income, and wants to save a lot for retirement on an ongoing basis. The contribution limit is calculated based on the benefit you’ll receive at retirement, your age and expected investment returns. The tax advantage: contributions are generally tax deductible, and distributions in retirement are taxed as income. An actuary must figure your deduction limit, which adds an administrative layer.

Summary

Small business owners have a lot to manage, so you need a partner that can take the burden of managing your savings plan off your shoulders. Contact us at (910)448-1450 and let us guide you in finding the plan that will be best for you in 2021 and forward. You can also schedule an initial VIRTUAL MEETING with an advisor by clicking here.

 

Author Brittany Murray / Adapted from Nerdwallet

https://www.nerdwallet.com/article/investing/retirement-plans-self-employed

Other useful links:

Inspire Financial Planning Home Page

IRS 2020 Tax Tables

 

This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results.  Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.

Retirement Income Planning

retirement income planning

Retirement Income Planning

November, 2020

By: Jeff Headrick, Financial Advisor

Retirement income planning is an important part of preparing for retirement. The amount of income you will need, as well as when and where to withdraw it from, can be one of the hardest tasks in financial planning.

For simplicity, we will examine three key steps to retirement income planning.  

Retirement Income Planning and Social Security

The first step in retirement income planning is to understand social security. You need to determine how much social security you are eligible for, and when to "turn it on." 

Most of the time it is beneficial to wait until you are at full retirement age, which is typically age 66 or age 67.

To receive a detailed report of your social security, simply go to the social security administration link below and sign up to get an update of your options:

Create Your Own Personal Social Security Account Today

If you would like to visit the social security administration offices in your city such as Wilmington, Raleigh, or Charlotte, NC, visit the link below for their location and hours of operation. 

North Carolina Social Security Administration

Retirement Income Planning and your IRA/401(k)

The second step in retirement income planning is to determine withdrawal options on your Individual Retirement Account (IRA).

You cannot draw on these accounts without penalty until 59 1/2. Further, you must begin to withdraw funds no later than age 70 and 1/2.

If you do not, you will be penalized substantially. So, there are a lot of rules that you need to be aware of.

Final Step of Retirement Income Planning

Once you are up to speed on your social security and IRA options, it's time to determine how much money you will need per month.

Many experts say that 80% of your pre-retirement income is a place to start, however, I have found that the actual amount is usually less then this. 

The best thing you can do is to simply create a budget (and trust me--Everyone Needs a Budget). This is probably the first step to retirement income planning, but since most folks hate to do it--we made it last! 

Retirement Income Planning Summary

Retirement income planning is not easy.

There are many variables, and in some cases variables within the variables!

However, we believe that by following these core steps, most folks will be able to get a good idea of how to create a good plan.

If you need assistance, give us a call at (910) 726-0858. You can also schedule an appointment for a virtual meeting by clicking the link below.

Schedule a Virtual Get Acquainted Meeting

 

About the Author

Jeff Headrick is an independent financial advisor and private wealth manager with Inspire Financial Planning, LLC.

When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult  financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Invest During an Election: Vote for Your Portfolio

white baseball

Invest During an Election Year: Vote for Your Portfolio

October, 2020

By: Jeff Headrick, Financial Advisor

Learning how to invest during an election year is a worth while pursuit. However, always bare in mind that investing is a long term endeavor.

I played a little baseball as a kid. I can still remember what it felt like to hit the ball on an cold spring day and have the aluminum bat send shock up to my elbows.

But I can also remember games in the summer where I saw my pitch coming  right down the middle, and how wonderful it felt to make a base hit. 

Invest During an Election: Keep Your Eye on the Ball

I remember a lot of yelling in baseball. Do this! Do that! Swing through! And most importantly, keep your eye on the ball! Whether I was running down a flyball or taking a swing at a fastball --one thing I was told repeatedly: Don't. Take. Your. Eye. Off. The. Ball.

In essence, investing in an election year is no different. We simply have to use the companies that we buy as a metaphor for the ball itself. During an election year, we are not buying presidents. We're not buying seats in the house or trying to win a particular electorate.

So, that's why during an election year it's more important than ever to keep your eye on the companies you buy.

Invest During an Election: The Companies You Keep

For example, when I look at Amazon, Microsoft, Tesla, United Health group, Samsung, Toyota, Nestle, and Apple, I do not see companies that are focused on the election.

I would dare say that most of these companies do not have a plan either way for whoever wins the election. So as investors, why should we?   

Furthermore, there should be a huge learning curve for investors during 2020. Here's why:

Investing in 2020: Tumultuous but Profitable to Investors

Our country hasn't been more polarized since the 1960s. In addition, we have had the worst pandemic that we've had in 100 years. Throw in a trade war with China and a contentious election, and you have a recipe for the perfect storm. Or, so you would think. 

Yet when we look at how Amazon, Microsoft, Tesla, United Health group, Samsung, Toyota, Nestle, and Apple have performed in 2020, you will see that they have done extremely well in aggregate.

As evidence, I can say this without pause because when I look at two or our largest equity positions ( VUG, GFFFX) I can see that they have positive returns during an election year. The top ten holdings in these funds are weighted towards the stocks mentioned earlier.  

Source: Y-Charts

Invest During an Election Year: What We've been Doing

In addition to providing daily support to our client's and their investments, we've been exploring more investments and financial planning topics.

We are intrigued by the following:

  • Commodities
  • Faith based funds: See how BIBL has done this year)
  • Technology funds
  • How to create the ultimate annual review experience

In addition, we've been helping clients invest more assets during an election year, not less. Ever heard of dollar cost averaging?

And, when it comes to managing risk, we have made sure we are analyzing our clients long term care plans, life insurance, and disability insurance.

All of these are highly important especially during times of rising unemployment.

Invest During an Election Year: Time to Focus

This election year, keep your eye on the ball. Don't let the political rhetoric cloud your desire to become a great investor.

Great investors focus on companies, not candidates.

Related:

Three Mistakes Investors Make During an Election Year

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult  financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since. Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 

 

 

 

Are Tech Stocks a Good Value?

exploring tech stocks

September, 2020.

By  Jeff Headrick, Financial Advisor

Are tech stocks a good value?

Are tech stocks a good value? Will tech stocks do a nosedive like they did 20 years ago after the recent big run up? If I were to invest in tech stocks which should I choose and how would I blend this new selection into my existing portfolios?

If you have been investing with me for a while, you will know that I am a predominantly passive investor. I believe that a strategically allocated, highly diversified portfolio is a core component to consistency in the market. (for more on passive investing versus active see: Efficient Market Hypothesis

That being said, while passive portfolios may outperform 90% of the market, there's always that 10% that's in the back of my mind. 10% Of the US stock market is literally thousands of stocks, bonds, funds, and ETFs (exchange traded funds) so it's not exactly like finding a needle in a haystack.

Tech stocks have performed well

In my opinion, tech stocks have performed well when compared to other sectors. In the graph below you can see that over the 10 years tech stocks outperform many other sectors the S&P 500 considerably.

This particular tech stock investment, Technology Select Sector SPDR® ETF (XLK), has a strategy that comprises many tech stocks, but still does not meet the classical definition of a diversified portfolio.

It could have potentially multiplied your investment about +500% over the last decade, versus about +270% if you had invested in the S&P 500.

Technology Stock Growth Graphck//

Source: Y-Charts

Are tech stocks a good value?

But are tech stocks a good value? Are they priced reasonably enough to where one believes that they will increase in value over time? If you are looking for a good value over the next 6 months to 2 years, I would say maybe not. However, if you are purchasing tech stocks Warren Buffet style and planning on holding for the long term (5 to 10 years), then maybe yes, tech stocks may be a good value.

If you would like to discuss tech stocks and how they might fit into your portfolio, feel free to contact me  to schedule a 15 minute virtual meeting. Thanks for reading!

 About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens, his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult  financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since. Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

The content within this article is for educational purposes only and does not represent an offer to purchase, sell, replace or exchange any specific investment. Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Three Ways to Increase Investment Performance

Investment Performance

August, 2020.

By Jeff Headrick, Financial Planner

Investment Performance

What did the investment performance look like in your portfolio last year? Most people don’t know the answer to this question. And since that takes a little time and energy to figure out, why should anyone care?

When it comes to investment performance, I believe that we should care for the following reasons:

  1. It lies within our grasp to know
  2. Because goals that get measured get done
  3. It’s the responsible and stewardly thing to do
  4. It should help us build greater wealth more quickly

#1. Do Your Homework

It may sound intuitive, but not everybody does the proper amount of homework when it comes to constructing their investment portfolio. It’s not something that should be pulled up on YouTube for five or ten minutes before you place your trades, hoping that the video you watched had a strategy that will suit you best.

Investing your hard-earned money deserves as much or more time as say—purchasing a house. In the end, most of us will have far more money in our investment portfolios than we do in our primary residence when we retire. But if I were to take a poll and asked the average person if they spent more time managing their portfolio versus maintaining their home this year, I think we all know what that answer would be.

Doing your homework means reading several books on the subject of investing. It means subscribing to a magazine or two or possibly hiring a professional financial advisor that will perform this sort of necessary diligence for you.

#2. Determine Your Goals

Investment performance is relative. If you have money that you would like to invest for five years and then utilize for a specific purpose, you should have lower expectations with your investment performance than if you had a thirty year time horizon. The reason for this is that the market can be  volatile over short-time periods of less than five years. Therefore, one should probably consider investing conservatively with short-term investments.  

In the graph below, imagine if one had invested in late 2007 for a home down payment targeted for 2009 or 2010. The consequences would have been unpleasant. 

Vanguard Growth ETF

Source: Y-Charts

Investing conservatively (more bonds/less stock) will do two things.

 

1) It will allow you to earn a respectable amount of earnings on your money

2) It should increase the probability that both your principal and gain will be there when you need it

 

My main point here is that we need to be crystal clear as investors and determine our goals first.  Afterward, we can develop a strategy to reach that goal.

#3: Set Your Course. Diversification versus Total Return

In theory a properly diversified portfolio should reduce risk and increase return. We’ve been reading that since Harry Markowitz developed his prestigious modern portfolio theory at the University of Chicago in the 1950s. It is not a new concept.

However, my personal experience with diversification is that it does not increase return over time. It simply makes the ride less bumpy. If you are over the age of sixty, this smooth ride is probably what you need. But you should understand you may be giving up some higher return (more money) in the process.

If you are a younger investor, or an inspired investor that truly seeks out maximum investment performance despite volatility, I’m not sure diversification is so critical.

Maximizing Total Return

For example, recently I have been researching tech funds that have averaged +20% per year for the last decade*. This is by no means a short-term time horizon.

The numbers below are indeed provocative for an investor who seeks out maximum investment performance over diversification. This list represents the top ten holdings in Vanguard Information Technology Fund.

And while the holdings below are not technically diversified (this is a tech fund), one may appreciate annual returns in some of these stocks north of +100%.  

Top Ten Vanguard Technology Holdings

Source: Vanguard

Summary: Investment Performance Matters

While diversification and asset allocation are important topics in investment management, investment performance matters as well. If you found this post intriguing, or if you would like to learn more about how to invest with Inspire Financial Planning. Please call us at (910) 448-1450. We are currently accepting new clients. You can also email jeff@inspirefp.net, or schedule an introductory call by reserving a time on your calendar to speak with a professional.

 

* Vanguard Information Technology Fund

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult  financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since. Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

 You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Efficient Market Hypothesis: What is your thesis?

Efficient Market Hypothesis

July, 2020.

By Jeff Headrick, Financial Planner

The efficient market hypothesis is a hypothesis that states that stock markets share prices genuinely reflect the reality of their worth. The assumption with efficient market hypothesis is that the market’s efficiency in valuing stock is laser quick and accurate. By its very nature, hypothetically, the efficient market hypothesis does not permit investors to find value.

In other words, don’t try to outsmart the market. It simply is what it is, and the only way to increase your return is to take on additional risk.

At Inspire Financial Planning, there is a portion of our brains that agree with the efficient market hypothesis. There is certainly a lot of research that indicates that a buy-and-hold approach in a passive portfolio can serve you extremely well over time. Based on my professional  investment experience over the last 20 years I can attest that this mindset can serve you well over time if you stick with it.

The Other Side of the Coin

Opponents of the efficient market hypothesis believe that it is possible to beat the market and that  stock prices can often be found and purchased below their present value. This method of investing is called active portfolio management. With active portfolio management you are using fundamental and technical research and hopefully decades of experience in order to beat the passive portfolios that the efficient market hypothesis aficionados so dearly love.

“Even if you got lucky placing some trades during the Covid crisis back in March, humble yourself enough to know that to keep from getting your portfolio downsized in the future you have to consistently do this sort of spectacular decision-making steadily over time. You can’t screw it up.”

 

With Everything There is Irony

When most people think of passive investing, a company called Vanguard typically comes to mind. One of the greatest investment minds of this century was their founder the late Jack Bogle who was a big fan of the efficient market hypothesis. He used this theory to build Vanguard into a $6 trillion mega investment organization*, largely using either mutual funds or exchange traded funds that have extremely low fees.

What’s interesting is that while Vanguard  leads the industry with their passive methodology and low-cost funds, they began offering active investments about 20 years ago. The irony of the argument is that both strategies can be effective. Even the biggest names in the business can’t decide which is best.

2020 The Year of the Covid-19 Virus

This year in particular has been an interesting year in which to study the efficient market hypothesis. For example, if you were to pull all of your stocks out of the market in search of safety back in March, you would have missed one of the biggest upticks in stock market history. An active market play like that  will get your portfolio trimmed most of the time. That’s why we always advise not to panic when the market starts these gyrations. Any well studied investor should simply know better.

What’s interesting is that that many let their emotions get the best of them-- and then utilize  ridiculously simple technology to perform trades that will inevitably lose them money, as well as a lot of time that will be needed to grow this portfolio back to where it once was.

Final Thoughts on the Efficient Market Hypothesis

The efficient market hypothesis is just that— it’s a hypothesis. No one strategy wins every time. While professional money managers have to work hard to perform, there are always managers that are able to stay ahead of the curve—ahead of the hypothesis. This alpha is usually one or two percentage points over the long-term average of a passive competitor—and even that one or two percent is extremely hard to come by— but it is not an insurmountable goal. It also adds up to substantial ROI over 20 and 30 year time frames.

How to Become a Great Investor

To become a great investor, you have to maintain an open mind. Just as importantly and maybe even more so, you have to maintain an elevated level of humility. Even if you got lucky placing some trades during the Covid crisis back in March, humble yourself enough to know that to keep from getting your portfolio downsized in the future you have to consistently do this sort of spectacular decision-making steadily over time. You can’t screw it up.

While the market can be very generous providing quick gains for the aggressive investor, it can be brutally cruel when it comes to crushing these gains in more turbulent times that surely lie ahead.

If you are young you have time to experiment. You have time to make mistakes and learn from them. If you’re over the age of 50 I would recommend that you remain more passive than active-- unless you are using a seasoned financial advisor to guide you between the two.

 

Resources:

https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp

* https://about.vanguard.com/who-we-are/fast-facts/

 https://www.capitalgroup.com/individual/investments/fund/gfffx

Related:

https://inspirefp.net/coronavirus-havoc/

https://inspirefp.net/coronavirus-buy-low-sell-high/

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult  financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since. Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

 You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 

Stand Strong

crisis

June, 2020. 

By Jeff Headrick, Financial Planner

"Preparation is key. It’s a lot easier to stand strong during adversity if you’ve done your homework beforehand."

Stand Strong

Whether I’m running the South End of Wrightsville Beach on a windy fall day, or facing a professional or personal adversity, the following holds true: stand strong.

During a crisis of any kind it is critical that we hold on to our values and core beliefs. In investing and in life, I have found that standing strong and remaining calm is a sound battle tactic.

Preparation is Key

I’ll never forget a guy asking me back in 2008 during the financial crisis— how was I doing? I remember his look of astonishment when I told him I was doing fine and that my clients were generally pretty happy. This was very hard for him to understand so he asked me for an explanation.

The best way I could explain it was this: you prepare for a storm before the storm arrives. Reacting to a storm during a storm may help, but the former is preferable.

While I didn’t realize it at the time, I was preparing for the 2008 crisis in 2005. I was reading books by William Bernstein and Richard Ferri. I was learning institutional styles of diversification based on thoughts by Economic PhDs such as Harry Markowitz. At the time, I was studying these diversification methodologies just to be good at my profession. I also had a love for investing. Looking back, I was just doing what I liked to do!

But when my clients’ portfolios held up better than I had expected, I realized that all this reading and learning was paying off not only for me but for my clients. If you’re going to be a great investor you need to drink deeply from great books. You need to learn the craft or hire somebody that is passionate about learning it for you.

Preparation is key. It’s a lot easier to stand strong during adversity if you’ve done your homework beforehand.

Stick with the Plan

In the world of investing it’s really easy to change your strategy. Actually, it is way too easy to change your strategy. If you have access to a computer and are literate, it is kind of scary realizing how quickly you can mess up a great plan. If your portfolio is diversified and you were comfortable with your stock to bond ratio pre-crisis, it may be advantageous for you to stick with that strategy. If you have just started working with a professional who has new ideas that he or she can substantiate, you may be better off to make some adjustments.

Either way, the books you read and the financial relationship with your financial planner that you had before today should play a huge role in helping you stay the course. If you are not doing your homework and do not work with a professional money manager then you may find it easier to entertain ideas of altering your original plan. This is why I believe wholeheartedly that just about everyone needs to work with a financial professional.

Summary

If you have prepared well and have a good plan, it is often more beneficial to stick with that and to stand strong in order to let things run their course. If you have not prepared well, now may be a wonderful time to find a professional that you respect and trust in order to help get you through the current Covid-19 crisis.

If we can be of service, please call us at (910)448-1450. Or, email us at jeff@inspirefp.net.

Additional Reading:

On the Importance of Budgeting

On the Importance of Employee Benefits

On the Importance of Bonds

On the Importance of Asset Allocation

On the Four Principles of Investing: Start Here!

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult  financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since. Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

 You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Follow the Leader

follow the leader

May, 2020. 

By Jeff Headrick, Financial Planner

 

“Over the last few weeks, I have given some thought about what it means to be a leader. Not just a leader in business, politics, or the championship team, but about what it means to be a leader in my own home, in my interactions with friends old and new, and even how I’m leading myself. This post starts with the family, has the stock market at its core, and ends with a story about a U.S. Marine that is hoping to inspire us all.”

Follow the Leader 

As a kid I remember playing follow the leader. You may remember that this game required following the leader regardless of where they went. Certainly, a precarious place to be in— but then I guess it depends on the quality of the leadership.

My young son Jeff follows in my footsteps. I am often amazed, sometimes even startled, by the choices he makes based on what he sees me do. It makes me feel both honored and a little scared at the same time. I guess I better watch my step. We are playing a real-life version of follow the leader.

As a business professional I often lead as well. I’m in the business of rendering financial advice, and people tend to put a lot of stock in my ability to lead them. When people sign on with me as a client, they know that they are hiring me to work with them through good times and bad. And it’s during these times of crisis that I try even harder to lead in a way that is steady, consistent, and easy to follow.

Bonds, Bonds

Though I have had many clients debate with me over the years about the wisdom of holding bonds in their portfolio, I’m not hearing many arguments now. This is an area that we have led our clients in that has benefited them even during this current crisis. For example, from January 1, 2020 until April 26, 2020, the seven equity (stock) classes we track were all in the negative. US small caps were down most at -29.64%*. US large-cap growth stocks were down the least at -4.2%.*

On the other hand, of the seven fixed income (bond) asset classes we track, six of the seven were positive over the same timeframe. Long-term treasury bonds were up the most at +25.26%*. Muni bonds were down the least at a manageable -1.09%.

Downturn

We (Inspire Financial Planning) have also been proselytizing the inevitability of a market downturn during the previous two years (See articles below written in 2018 and 2019). While we did not see Covid-19 coming, we let our client base know repeatedly that the time is always “now” (bear market preparation has been conducted at Inspire by investing in a highly diversified global portfolio of stocks and bonds) to prepare for market downturns. Especially after the most recent 12 years of bliss in the stock market. Something just had to give. And it did.

Take this all with a grain of salt. While I have many years of experience in this industry, I can and do make mistakes. That’s why it’s critical for us all to question our leaders from time to time—we all need each other! We all make each other better.

God Isn’t Done with Me Yet

As a believer, my ultimate image of leadership is Jesus. Though I have to admit, this is such a lofty goal sometimes I just settle for using David as an example. Through reading the word it’s easy to get inspired to learn what so many before us have had to endure. And how so many rose above their circumstances to a brighter day.

And though I still make mistakes as I lead, and as God is still crafting me to become the man that he hopes me to be, I take quiet satisfaction in knowing that it’s all going to be okay. Whether it’s a time of harvest, or a time of struggle in the desert, it is all going to be okay.

God Isn’t Done with You Yet

At Inspire Financial Planning, we have clients who are in different seasons of life. Some are prospering right now-- and some may be facing battles that I know nothing about. But regardless of your situation always keep in mind that God is not done with you yet. This is most likely not the end, but simply a season of your life that will soon pass like all else does.

During this season of crisis, I challenge you to examine how you are leading. Sometimes it’s under this lens that we can more clearly see the path we are walking. Start by leading yourself well, then on to those you love, and so on. If you are more prone to follow—and we all are on occasion---examine if you do this with an attitude of grace or resentment. Leading well, and following well are both critical during any season, and particularly so during times of adversity.

Leading and Inspiring Semper Fidelis Style

Finally, you might look to my neighbor if you need inspiration leading or following with grace. His name is Russell Larkins and he just set out to run across America for a worthy cause. Russell is a former U.S. Marine (once a Marine always a Marine), and certainly an inspiration to us all. For more on this story see the video below.

Russell Larkins U.S. Marine, Wilmingtonian, and Runner of many miles

If we can be of service in any way, please give us a call at (910) 448-1450. We are here to serve.

*Investment Sources:

AlphaStar Market Monitor

Previous Inspire Financial Planning Market Downturn/ Bear Market Posts

Three Ways to Prepare for a Market Crash

Bear Market on The Horizon

Stock Market Deja Vu

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have a solid financial plan in place when he died. This left Jeff’s family at a difficult  financial crossroad.

This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.


Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

 You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.