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Three Things: November 4, 2019

November 04, 2019
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Another week with more things to read and digest.

Here are a few I wanted to share with you this week: 

Some Thoughts on ComplexityThe "FAANG Factor", andYear-End Tax Tips. 


Adam Harding, CFP / Smartvestor Pro

If this is your first time receiving this email, here's some background: "Three Things" is a quick weekly email to recap some things that stood out to me in the previous week. I try to find inspiration in articles, videos, images, and anything else that I can tie into a financial planning or investment tip. Let me know if there's something you'd like to see covered, or if you happen to spot something interesting which you'd like to share. I hope you find this insightful!

Thing #1: 

Complexity DOES NOT Equal Sophistication

Making smart decisions with money can be overwhelming and complicated. It's not uncommon to find that even everyday financial decisions can quickly reach critical complexity. We initially think a problem is simple, but as we progress through it we unearth endless choices and forks-in-the-road:

Books must be read, videos must be watched, Cryptocurrencies / Beanie BabiesDutch Tulips must be bought or not bought, etc.

For most of our clients, this complexity is the primary reason they seek help from a financial advisor (although perhaps a small % of clients just want to work with us because we share videos like this). 

Unfortunately, the financial services industry often just makes things worse. Wall Street uses complexity as a selling tool and a way to show off our intellect as financial professionals.... The traditional strategy seems to be:

Dig a hole, throw the client in, and then make them feel like we're the only ones with a ladder to climb out. 

Put differently: The wider the "understanding gap" between investors and advisors, the more indispensable the advisors become.

I don't feel like this helps anyone sleep well at night. Alternatively, here's our mission statement:

Our role is not to mask our services in complexity, but rather to provide an objective opinion and process in the pursuit of elegant simplicity. 

If we're using the Digging-A-Hole analogy, then I believe that it's our job to fill in the hole...To simplify the complexity.  

Simplification requires that we dig into problems, consider every angle, every nuance, every rule and exception to the rule. We consider the options and tradeoffs so clients don't have to. 

If we can't explain complex subjects in a way that's easy to digest, then we clearly don't understand them well enough. 

That said, this pursuit of elegant simplicity is an ongoing process in constant refinement

As Antoine de Saint Exupéry said, “perfection is attained not when there is nothing more to add, but when there is nothing more to remove.”... We're working on it. 

Thing #2: 

The FAANG Factor

PDF: How Markets Work and the FAANG Mentality 

FAANG = Facebook. Apple. Amazon. Netflix. Google. 

If you're not familiar with FAANG stocks, that's okay. It's just a catchy acronym used to describe five of the largest US companies which have driven significant stock market returns in recent years. 

Over the last decade (2009-2018), the annualized return of the FAANG stocks was a whopping 30.4% per year!

Observing these massive returns may cause investors to feel regret about not being more invested in these stocks....It may also cause you to think to yourself, Why didn't my advisor buy these stocks for me?  

Believe me, I wish there was a reliable way to identify the FAANG stocks in advance (or whatever the acronym is for the next great stocks), but it just doesn't exist. The long term lack of success within actively managed (stock picking) US stock mutual funds clearly outlines the failure of even the best-and-brightest minds in investing... Even after 20 years, only 23% of active stock mutual funds beat their benchmarks. In other words, the people who have the time, resources, education, and incentives to identify the best stocks rarely are successful (less than 1 in 4). 

So here's the thing: 

It can be enticing to want to pick the next FAANG stocks. But since we know it's unlikely to accurately forecast which companies will be great, we must also recognize what we may be giving up. 

Specifically, what if we buy stocks and don't buy others? Here's some data to explain the potential for mishaps. 

As you can see, if we miss the top 10% of good performing stocks, then the performance is vastly different. It's downright awful if we miss the top 25% of performers. 

The Moral: 

You don't need to pick the FAANG stocks in order to have a good investment experience. A broadly diversified portfolio, decreases the risk of missing out on the good performers (because you'll own everything), and the odds of being able to accurately forecast the top performers is low. 


Make These Tax Moves for 2019 Before It’s Too Late

WSJ ARTICLE: 2019 Tax Tips

When the New Years' Eve ball drops on 12/31/2019, the confetti will pop, your resolutions will be made, and your opportunity to optimize your tax circumstances will have passed. 

Yes, you can make IRA/Roth IRA contributions up until April 15th, 2020, but that's about it. 

Here are some of the things we're helping clients navigate between now and the end of the year: 

  • If you need to open a business retirement account (like a SEP IRA or Solo 401(K)), then this must be done by 12/31. We can fund it up until 4/15 (or 10/15 if an extension is filed), but the plan must be established in 2019. 
  • If you want to perform a backdoor Roth IRA strategy, then it has to be done in this calendar year. 
  • If you're considering a Roth IRA conversion of Pre-Tax IRA assets, then it must be done by 12/31. 
  • Tax loss harvesting and tax gains harvesting also are based on the calendar year. 
  • If you're contributing to a workplace retirement plan and you want to maximize your contributions, this must be done by 12/31. 

*Tax loss harvesting is where you sell an investment that is sitting at a loss, then buy a similar investment so you can capture the loss to offset a future gain. 

The above link from the Wall Street Journal highlights some additional smart strategies for year-end tax planning. 

Many clients have already scheduled a year-end discussion to review tax optimization opportunities. If you haven't yet, use the link below:

For clients: planning

For non-clients (15 minute limit): 

I highly recommend that you schedule this time to see where we can make improvements.

That’s all for now, have great week!


Adam Harding, CFP®