Personal P&L

Every year, public companies must put together a big report with all their financial information called a 10-K. It’s shared publicly so that investors are informed about company performance and financial standing. Of course internally, companies monitor performance throughout the year, tracking budgets and expectations every month.

So what about you? How often do you evaluate your performance against budgets and expectations? I am not making an indictment against those who don’t have a budget. But I would like to point out that, if you haven’t already, you will soon have to create your own personal financial report in the form of an income tax return, so since you have to do it, you might as well learn something from it.

For starters, do you know how much money you make? Most people at least have a rough idea, but many people don’t know down to the thousand. And if you’re self-employed, chances are even lower. So when your return is complete, look on the first page to see exactly how much money you make and where it all comes from.

Is that more or less than you thought it would be? Does the financial pressure in your life feel commensurate with that level of income? Or is money somehow tighter than it probably should be? It’s easy to get wrapped up in month-to-month living and covering your bills, but when you see your annual income, it’s a good practice to re-examine your lifestyle to see if your monthly expenses are justified.

Now look at your deductions, especially mortgage and student loan interest. You know what’s better than getting a tax deduction? Keeping your money. So what’s your plan to pay down that mortgage and student loan balance? Early payoffs can save you tens of thousands of dollars in interest. Do you know what your interest rates are? Maybe you should consider refinancing.

These questions are just a few that can be easily answered from your tax return—it can give many more insights, so take advantage of the opportunity. No one enjoys the tax filing process, but you should at least learn something from it.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Should You Buy It?

I first heard about Pete Adeney (AKA Mr. Money Mustache), about a year ago, and as with most things that come across as gimmicky, I stayed away. The name alone is absurd, and many of his ideas are presented in a way that are meant to be shocking—living on $25,000 per year, almost exclusively commuting by bike, promoting communal living, etc.

But after listening to an interview with him on the Tim Ferriss Show, I realized that Adeney has an extremely analytical mind and provides some very practical advice. I am not wholesale advocating his cult-like following, but I really liked learning about the process he goes through in decisions to spend money:

Procrastinate

It’s the one time procrastination is a good thing. When you are contemplating a purchase, procrastination buys time to talk yourself out of it. Shiny new things often lose their luster before you even buy them. Technology and styles change so much that you may have moved on to the new, new thing, or you just realize that you didn’t want it that badly in the first place.

That’s why Amazon has one-click purchasing—sure it’s convenient, but it also eliminates those extra fifteen seconds you have to change your mind when it’s queued up in the cart. You see that shipping costs a little more than you thought it would and remember you actually bought something similar last week, then without another thought, you hit ‘Cancel.’

Where will it go and what if it breaks?

When you buy something, it physically comes into your life. It’s not just there when you want it—it’s always somewhere in your house, car, or office. It’s easy to get wrapped up in the idea of something without fleshing out the details, so make sure you have space and are willing to give up that space for a purchase.

Secondarily, are you willing to deal with this purchase if and when it breaks? Will you stay on the phone with customer service, take it to the shop, or pay for replacement parts? Some things just aren’t worth the trouble, so it’s better to never spend the money than have a broken toy that you can’t play with.

Is this removing a negative?

Studies have shown that we gain more “happiness” from removing a negative than we do from creating a positive. So placing greater weight on purchases that eliminate an inconvenience will maximize the happiness money can bring. That sounds counterintuitive, but it actually makes a lot of sense.

For example, if you cannot find anything in your closet or garage, you will probably gain more happiness from spending the time and money to organize it with new shelves and storage containers than you would buying new clothes or tools. Organizing relieves stress and anxiety from being unable to find the things you already own, which is a greater value than just more stuff.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Ego & Money

I just finished Ego is the Enemy by Ryan Holiday, whose work has become extremely influential in the worlds of business and sports. He is one of those college dropout prodigies that went on to amass great success—first as a media consultant, then as an author. In this book, Holiday cuts straight to the heart of how our egos get in the way of success.

Holiday makes great points throughout the book, but one section from the introduction encapsulates his central thesis:  “We can seek to rationalize the worst behavior by pointing to outliers. But no one is truly successful because they are delusional, self-absorbed, or disconnected.” As it relates to money, this statement plays out in two different areas:  spending and investing.

Spending

I have said before that the purpose of money is to enrich your life. You should maximize the happiness that each dollar can bring you. Instead, we tend to spend money on what makes others happy. For example, if your neighbor buys a new Porsche, he’s the outlier—spending money on an exotic car is not a good investment, so don’t buy one out of jealousy.

On the other hand, if you’ve wanted a Porsche your whole life and finally reached a place where you can easily afford one, then buy it guilt free. It would be delusional to think that everyone of a certain status deserves a Porsche, but if you are self-aware enough to understand why you are buying the car and know it’s just for you, then you can indulge yourself and know that you’re not just giving into ego.

Investing

With investing, it’s hard for people to accept that, like most, they are average investors—meaning that market returns is probably as good as they can get. They get excited about the sexier side of investments like using short sales and options, thinking they are the next George Soros or Bill Ackman, but those who find long-term success beating the market are outliers.

They don’t read about the droves of unsuccessful hedge fund managers who have closed their doors in the past few years because that’s not a fun story. The result is what’s known as survival bias, which is a psychological trick that emphasizes those who “survived” over those that did not simply because they are known. So don’t let your ego fool you into thinking you will survive through Mr. Market and become one of the winners.

Ego is the cause of many poor decisions, so it’s always important to keep it in check, especially when it comes to your money.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Invest Internationally

Investment abroad is very much like traveling abroad:  fear of the unknown prohibits many people from valuable enrichment. But what many people don’t realize is that over half of the world’s market capitalization is made up of non-US stock. In other words, if you only invest domestically, you are missing out on half of the world’s innovation.

To that end, let me disabuse you of the notion that international diversification means shaky investments in third world countries. Here are just a few of the top holdings for Vanguard’s Total International Stock ETF:

• Royal Dutch Shell (Netherlands):  oil and gas “supermajor” and currently the fifth largest company in the world
• Nestle (Switzerland):  largest food manufacturer in the world
• Novartis (Switzerland):  one of the largest pharmaceutical companies in the world
• Samsung (South Korea):  multinational conglomerate that includes Samsung Electronics, which is one of the world’s largest tech companies
• Toyota (Japan):  one of the largest automotive manufacturers in the world
• HSBC (United Kingdom):  the world’s sixth largest bank.

These are not exactly rinky dink operations. And although the immediate assumption is that international investment creates greater risk, the truth is the opposite. As the saying goes, don’t put all your eggs in one basket, so if you are only invested in US stock, you are in just one basket, even if you’re invested across a spectrum of industries.

Essentially, international investment adds another layer of diversification. Non-US companies in Europe and Asia experience different economic and market forces, so there is not a perfect correlation between US and non-US market returns. So when things are not going well here in the US, your portfolio will be can be tempered by developed markets abroad.

In fact, over the past several decades, investors with a mix of US and non-US securities would have experienced about the same returns with much lower volatility. A Vanguard study showed that from 1980 to 2008, a 30% allocation to non-US equities would have provided the most volatility reduction and, consequently, the greatest diversification benefit.

The amount of your portfolio allocated to international equities is based on a variety of factors. But it should at least play some role in your long-term investment strategy.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Financial Introspection

Let’s assume you have a financial plan in place. When is the last time you gave yourself a progress report? Just because you created a plan does not mean the plan is working—you may find yourself in the habit of doing the same things over and over again, but it’s just as easy to automate bad habits as it is good. So it’s a healthy practice to engage in financial introspection.

A good example of this practice is a club called Tiger 21, and contrary to what you may be thinking, it’s not a group of financial novices stumbling through their half-thought-out plans. It’s a group of high net worth individuals (investible assets in excess of $10 million) who pay $30,000 a year to be members of this peer-evaluating network.

Tiger 21 is short for The Investment Group for Enhanced Results in the 21st Century, and they meet routinely to allow members to present and defend their investments, charitable giving, and estate planning in front of one another. In other words, this group of already extremely wealthy people pay a lot of money to stand in front of each and have their financial decisions critiqued by one another for improvement.

Now, I don’t know that I can get behind paying $30,000 for this type of experience, but you cannot deny the humility and willingness to improve this group shows. Aristotle said, “Knowing yourself is the beginning of all wisdom,” and I cannot think of a quicker way to really find out what you’re made of than baring all in front of a group of your peers.

Everyone cannot have this opportunity, but that doesn’t mean you shouldn’t make time for your own type of financial introspection. If you are working with an advisor, then they should already meet with you at least once a year to make sure your financial plan is on track. But if you’re not, then you should plan some type of annual financial checkup for yourself—every year ask yourself what’s working and what’s not.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

More Than You Need

You know I liked a book when I get two blog posts out of it, so here are some more thoughts on The Undoing Project by Michael Lewis:

Kahneman and Tversky covered a lot of ground, and one of their areas of study was heuristics, which are mental shortcuts. Often heuristics are very helpful like when you’re driving a car:  your brain reacts to road and car based off experience that frees up the rest of your mind to think about other things.

However, every shortcut excludes something, which leaves room for error. Kahneman and Tversky explored an idea they called “anchoring and adjustment” in which people take mental shortcuts to answer problems based on their relative starting points. To demonstrate this theory, they gave one group five seconds estimate the product of these numbers:

8 x 7 x 6 x 5 x 4 x 3 x 2 x 1

Then they gave a second group five seconds to estimate the product of these numbers:

1 x 2 x 3 x 4 x 5 x 6 x 7 x 8

The correct answer is obviously the same, so you would expect similar estimates from the two groups. However, the first group gave a median answer of 2,250 while the second group gave a median answer of 512. The difference is the result of a higher “anchor” for the first group where the string of numbers with led with 8 instead of 1.

So what does anchoring and adjustment have to do with your financial life? Virtually anytime you make a purchase, this heuristic plays a role. It’s why the sticker price at car dealerships are so high—everyone knows that’s not what you pay, but it creates a mental anchor. So any price below that point is a mental “win” for you, even if it’s not a good deal.

Another example are signs at the grocery that say something like “Limit 12 Per Customer.” I assure you that the store is not worried about running out—they want to increase your anchor number from zero to twelve. Subconsciously, you want to take advantage of a deal, but in the process, you’ve allowed the grocery to decide how many cans of soup you buy.

There is no way to avoid bias in your purchasing. Some type of heuristic will come into play, but the important thing is to be aware of this process. If you know your brain is trying to take a mental shortcut, compensate by knowing ahead of time what you actually need.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Everyone is Average

I just read The Undoing Project by Michael Lewis, which tells the story of Daniel Kahneman and Amos Tversky, the founders of what we now call behavior economics. Tversky died in 1996, but Kahneman went on to win the Nobel Prize in Economics in 2002. However, neither of these men is an economist—they are psychologists. But it is in the collision of these two fields that we discover why people make decisions that often make little economic sense.

For example, in one series of experiments they discovered that people often rely on certain factors to gain confidence in their predictions that actually lead to less accurate results. In the study, they would tell participants that they have selected an individual’s profile from a group of 100, which is made up of 70 engineers and 30 lawyers. When asked to predict the odds it was a lawyer’s profile, participants correctly answered 30%.

However, when given a detailed yet completely generic personal description of an individual named “Paul,” participants said that there was an equal chance of Paul being a lawyer or engineer. In effect, they completely dissociated their prediction from the known probabilities. Participants felt like they “knew” Paul, which made him special, but Paul had the same 30% chance of being a lawyer as any other profile. In other words, Paul was average.

Now, transfer this insight into how people pick investments. People pour over reports, ratings, and returns, for individual stocks and mutual funds, but at the end of the day, every fund manager is a Paul—they are just average. In the book, Lewis notes that, “Man’s inability to see the power of regression to the mean leaves him blind to the nature of the world around him.”

That’s not to say that there are no great investors. It’s undeniable that someone as consistently successful as Warren Buffett is absolutely a great investor. But there’s only one Warren Buffett, and there are countless fund managers, half of whom will beat the market and the other half won’t. So is it worth the cost of buying expensive and actively traded mutual funds just to have a 50/50 chance of beating the market?

I don’t think so, and neither does Buffett:  In his 2013 annual letter to stockholders, he wrote that, through his will, he has directed the trustee of his estate to invest in S&P 500 index funds. Buffett knows that active fund managers will always talk about “seeking alpha” and their “tactical allocations,” but they will all eventually regress to the mean.

It’s not sexy, and it forces investment managers to admit that we don’t have a crystal ball, but passive investing through a balanced portfolio of low-cost, index funds is the way to go.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Dow: It’s Just a Number

You have probably heard a lot lately about the Dow Jones Industrial Average approaching 20,000. And by the time you read this post, it may or may not have hit that historic mark. But it doesn’t really matter either way because the Dow is a terrible indicator, and here’s why:

Only 30

There are 4,000 stocks traded on the New York Stock Exchange and NASDAQ every day, and the Dow tells us what just thirty of them are doing. That’s less than 1%. Plus, the thirty companies it does represent are mostly older companies like General Electric, Johnson & Johnson, and Exxon Mobil. It does not contain some of the more relevant companies like Alphabet (formerly Google) or Facebook.

Dated Calculation

The Dow is an average of stock prices, which may have been sophisticated back in 1896 when the Dow originated, but stock price only tells half the story—the other half is how many shares of the company are outstanding. The product of those two numbers, share price and number of shares outstanding, is the company’s market capitalization, and that is a much better indicator of a company’s worth.

For example, take two different companies with the same market capitalization of $100, but Company A has 100 shares outstanding valued at $1 while Company B has just 2 shares outstanding at $50. Now, say both companies increase in value by 10%, so they’re both worth $110. Company A’s stock will increase just $0.10 per share while Company B’s stock will jump $5 per share.

So even though both companies have experienced the same growth, Company B’s stock would have 50 times the effect of Company A’s on the Dow because it only looks at share price and doesn’t account for market capitalization. As a result, there are distortions in the Dow’s movement. In fact, 24% of the Dow’s 1,600 point rally at the end of 2016 can be contributed to one company—Goldman Sachs, the most expensive stock in the index.

If the Dow Jones Industrial Average is such a terrible metric, why is it quoted so often? Name recognition. People have heard of it because it’s been around the longest, so the financial media keeps reporting it. You should not track daily movements of your investments anyway, but if you feel the need, use the S&P 500 or Russell 3000. They are a much more accurate benchmarks for the overall US stock market.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

I Don’t Understand

When it comes to money, people are terrified to utter the phrase ‘I don’t understand.’ For some reason, there is an illogical level of shame attached to it, but it’s derived from the assumption that every adult with a good education and successful career knows about money. However, that’s just not true.

Maybe it was 100 years ago when “times were simpler,” but now, anyone with any significant level of income faces complex financial decisions that are beyond the scope of common sense and intuitive financial savvy. You could easily make the argument that our financial lives shouldn’t have to be so complex, but the reality is that they are.

So how should you manage?—ask questions, even when you think you should already know the answer. Did you learn about interest rates, asset allocation, and taxes in school? Doubtful. There are plenty of finance majors walking around that know little to nothing about those things, so I know you liberal arts majors are lost, which begs the question:  why would you be embarrassed to say, “I don’t understand?”

Voltaire famously said, “Judge a man by his questions rather than by his answers,” which I take to mean that you shouldn’t always have to know the answer but be willing to find out. Now, I won’t go all the way and say that there are no stupid questions—there are. But personal finance is complicated enough that you should feel safe asking anything you want.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Money Confidence

Recently, I read an article in Fast Company Magazine by Michael Thompson entitled “What I’ve Learned in 38 Years of Surrounding Myself with Confident People.” In that article, the author explains that he is not naturally confident, but after years of surrounding himself with people who are, he has acquired many of their characteristics to become more confident himself.

So what does this have to do with personal finance? Many people lack confidence in the financial decisions they make. Even those with a lot of money carry a great deal of anxiety about what to do with it—how to invest it, what to spend it on, how much of it they will need in retirement, etc. So I’m going to break down two characteristics from the article that directly apply to having confidence with money.

They Persevere (Intelligently)

Thompson writes, “Confident people know what they want, and they have the gumption to keep fighting for it, even when the odds are stacked heavily against them.” If you’re confident with your money, you have clear objectives with a clear plan. You may have lofty goals that seem impractical or ridiculous to others, but if you have developed a plan, have confidence that you will succeed.

However, they do not charge forward blindly. Their confidence stems from fully understanding their plan, which means they also ask a lot of questions. If you work with a financial advisor and you don’t understand their recommendations, ask a million follow up questions until you do. And if they get frustrated with you, find another advisor.

They Don’t Seek Others’ Approval

Confident people accomplish goals for themselves and not for anyone else. So if you’re killing it at work and you’ve reached a place financially that you have been working toward for years, then that’s awesome. But don’t waste it all trying to impress everyone else. Enjoy your money—create a plan that includes spending on what makes you happy—but don't expect happiness to come from a lavish lifestyle.

At the same time, if your income is capped so you have really cut back your spending, stuck to a lean budget, and made significant headway toward your financial goals, don’t expect a pat on the back from friends and family (except from your financial advisor). It’s like crossfit—no one else cares, and that should be totally fine with you.

Confidence comes from gaining knowledge and having a plan. It’s worth equipping yourself with these tools to know that you are set to accomplish your financial goals.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Better to Give: Tips for Charitable Giving

It is officially giving season. In December, people start writing checks to their favorite charities, participating in local toy drives, or at the very least, throwing some change into Salvation Army buckets. The holidays just seem to bring out a giving spirit.

And helping others should always remain the objective, but even the most charitable of givers can tailor their contributions to provide the best tax and financial result. So when you give this holiday season (and you should give), keep these strategies in mind.

Gift Appreciated Stock

Most charities are set up to receive stock transfers, and with the Dow up over 10% this year, it may be an especially wise choice for 2016. Why give appreciated stock instead of cash? You are not taxed on the gain and you still get credit for the fair market value on the date of the gift. It’s the best of worlds.

For example, say you own $10,000 of Alphabet (formerly Google) stock that you bought two years ago for $7,000. If you sell it and contribute the cash, you get credit for the $10,000 charitable contribution but you will owe around $600 in taxes. On the other hand, if you just make a stock transfer, you get credit for the full $10,000 contribution but owe no capital gain tax.

Use Donor Advised Funds

I wrote a whole blog post about the advantages of using donor advised funds (DAFs) early in November, but it’s worth reiterating here. DAFs allow you to make contributions that are currently deductible to an account that you can invest for tax-free growth and distribute to charitable organizations in the future.

This type of strategy has been available in the form of private foundations for a while, but the recent popularity of DAFs provides a less expensive and more administratively manageable alternative for charitable planning. Especially for taxpayers with fluctuating income levels, you can make larger DAF contributions to offset high-income years and decide where to give later.

Qualified Charitable Distributions

The IRS will not allow you to keep your retirement account flush indefinitely. When you reach age 70 ½, you must begin taking required minimum distributions (RMDs), which are annual withdrawals based on the account balance and IRS tables estimating the number of years you have left to live. But the IRS will allow you to satisfy the RMD requirement by making a qualified charitable distribution (QCD).

If you make a QCD, the distribution is completely ignored for income tax purposes—there is no charitable deduction but the withdrawal is never counted as income, which is even better. There are several minor requirements when making this type of contribution, but it can be an extremely advantageous strategy for wealthy clients who don’t need to tap their IRA.

Don’t give for tax reasons because that doesn’t make any sense—you’re paying a dollar to save fifty cents. Give to organizations worth supporting, but when you do give, make sure you are taking every tax advantage you can get.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Adjacent Possible

I am currently reading How We Got to Now:  Six Innovations That Made the Modern World by Steven Johnson, and in this book, Johnson explores how incremental advances in science and technology create paradigm-shifting innovations. This process is the same with all long-term goals, but especially in the realm of personal finance—small, daily decisions set you up for long-term success or failure.

Throughout the book, Johnson references a term coined by complexity theorist Stuart Kauffman called the “adjacent possible,” which refers to something that only becomes imaginable after the achievement of something else. In other words, one innovation leads to another, but before that incremental step, it just seems like science fiction.

For example, Dr. John Gorrie invented the refrigerator in 1850. But his invention was based on a number of prior discoveries—In the 1600s, scientists discovered that air is actually made of something. In the 1700s, steam engines created the science of thermodynamics. And soon thereafter, the development of measurement tools and standards allowed for accurate testing.

So without these incremental advances, Dr. Gorrie would not have been successful. Johnson explains, “If you don’t have the right building blocks, you can’t make the breakthrough, however brilliant you might be.” So when there seems to be a paradigm-shifting achievement, it’s really just the result of incremental advances that form the proper “building blocks.”

Your paradigm-shifting achievement is your financial goal, and your building blocks are the details of your financial plan. Now, as you begin saving for retirement or even just getting your financial life in order, success seems unimaginable—it is too far in the distant future. But as you make incremental advances by reaching important milestones along the way, the goal starts to appear achievable.

This whole concept of the adjacent possible is pretty powerful. It essentially implies that you are capable of things you cannot even imagine because you haven’t made the effort to make incremental advances. So the next time you get discouraged about your financial situation, just identify your “current adjacent possible” and what incremental step you can make toward that milestone.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Love the Process

I just finished Mark Manson’s latest book, and I really wasn’t planning on blogging about it because the title is pretty provocative. But the content was so good that I decided to write about it anyway. I’ll shorten the title to The Subtle Art, and you can look it up on your own. But here are a few of Manson’s thoughts, filtering them through the lens of personal finance.

The book’s thesis is that in order to live a happy life you should care about a few things very deeply, but in order to do that you have to let go of everything else. Manson writes, “What I’m talking about here is essentially learning how to focus and prioritize your thoughts effectively—how to pick and choose what matters to you and what does not matter to you based on finely honed personal values.”

In the first part, he addresses prioritizing thoughts, and you would think that our default mindset would be to concentrate on what matters to us, right? Instead, most of us get tripped up on thinking about what matters to everybody else—cars, houses, vacations, etc. So we end up wasting a lot of money and energy seeking things that don’t even matter to us and certainly don’t make us happy.

So what will make you happy? We tend to seek quick and easy answers—McDonald’s, no money down financing, “hot stocks,” etc. But Manson comments, “A question that most people never consider is, ‘What pain do you want in your life? What are you willing to struggle for?’ because that seems to be a greater determinant of how our lives turn out.”

We all want to achieve goals, but achieving a major goal is something that only happens every few years. So in order to be happy, you have to love the process. And that process can be painful. It goes back to old adage that anything worth having is worth fighting for. So when you say you want something, if you really want it, you better enjoy the struggle and daily grind of working toward it.

For example, say you want to retire by the age of 40. Even if you are in your early thirties, that is still several years away, and through all that time, you will have to live well below your means. People will expect you to maintain a certain lifestyle, but you must keep your resolve to prioritize what matters to you and enjoy making those daily decisions to forgo an indulgence you could otherwise afford.

To achieve any major goal, financial or not, you have to prioritize what matters to you and love the process. You have to enjoy the daily sacrifices, knowing that they are made to achieve something that will make you truly happy.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Have Your Cake and Eat It Too: Donor Advised Funds

For the last month, I have been carrying around a bag full of clothes in the trunk of my car. I plan on giving them to the Salvation Army, but I still haven’t done it. So mentally, I’ve decided to give these clothes away, and physically, they are separated from my other things, but obviously, I would get no credit for this gift in the eyes of the IRS.

So what if I told you there is a scenario in which you can do exactly that—separate assets that you plan on giving, count the deduction now, but actually give them away later? Donor advised funds (DAFs) allow you to do exactly that, and they have become extremely popular within the last few years.

Once you donate to the fund, you have technically relinquished legal control of the assets, but they remain in a separate account that you can invest and grow tax-free. When you are ready to give, you can “advise” the DAF on where to make contributions. This timing flexibility allows you to maximize contributions in high income years while maintaining discretion on when the contributions are made.

The largest DAFs are sponsored by brokerage firms such as Schwab or Fidelity. In fact, Fidelity Charitable was the second most funded public charity in 2015. As the “sponsoring organization,” the charitable funds are technically separate 501(c)(3) organizations from the broker, but you can typically invest contributions in as wide array of investments as if they were the same entity.

Some families choose to create a private foundation that allows them to set aside money for future donations. But this type of foundation is tedious to manage and expensive to run, not to mention the deductions are limited to 30% of your adjusted gross income compared to 50% for DAFs. So donor advised funds allow for an extremely attractive alternative.

There are not many circumstances in life, much less with the Internal Revenue Code, that allow you to have your cake and eat it too. But donor advised funds are one of the precious few.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Year End Bonus

Whether your employer gives out year-end bonuses or you work for yourself and have money left in the business at year-end, you should plan now for what you will do with it. You can pay off debt, put it in savings, or spend it; but if you wait until the money is in hand, chances are you will just spend it. That’s why you need to make a plan now that will force you to make good decisions later.

So what to do? You think you’re going to have a chunk of change burning a hole in your pocket come December, and there is a whole litany of things you need/want. Like any other financial decision in your life—prioritize and execute. Decide what your financial priorities are, and then execute a plan to move the needle with those priorities.

At the top of that list should be consumer debt—get rid of that credit card balance. Now, I’m talking about pre-existing debt. Don’t create a problem so that you can hopefully solve it with your year-end bonus. If you assume you are getting a bonus, it is not an excuse to rack up a credit card bill on Christmas shopping that you assume you’ll be able to pay off.

Past that, all other debt—car note, student loans, mortgage—comes into play. You should already have a plan in place to take care of these balances. But anything extra from a bonus will speed up that process and save you money along the way. And you should also save at least part of it, if for no other reason than to reinforce the tough habit of saving.

There is a reason this habit is so difficult. In fact, Prudential did a study and has dubbed it the “longevity disconnect bias,” which is the idea that the reward for saving—enjoying a lifetime of wealth accumulation—seems so far away that it’s almost like giving your money to a stranger. Their study that found 56% of adults views their “future selves” in this way, but don’t buy into this bias.

Finally, you should enjoy the money. If you have taken care of some basic financial priorities like debt and saving, then you should absolutely spend some money on yourself guilt-free. That’s the beauty of having a plan—if you have taken care of the priorities, you are free to use the remainder however you want.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Passive Power

In the early 2000’s, John Bogle, founder of Vanguard, tried to organize index-fund managers and coordinate their shareholder votes to greater impact the companies they owned. At the time, index funds were not very popular, which led other firms to scoff at the idea and recommend that they submit to “the invisible hand of the marketplace.”

Since then, things have certainly changed—as Bogle recently said, “We are the invisible hand of the marketplace.” Index-tracking funds now own 11.6% of the S&P 500, which is considerably more than the 4.6% from ten years prior. More and more individuals are choosing to take advantage of the low fees and passive approach that index funds embody, so money is flowing from active managers to passive funds.

As a result, we are experiencing new market dynamics. For example, some people worry that the market will not be as efficient, meaning that stocks will be allowed to trade beyond or below their true fair market value for an extended period of time. Currently, we have an abundance of active managers who are always looking for price discrepancies to make a dollar, but a shift could slow down that process.

Right now, we are seeing a power shift on the boards of companies owned by large funds. Active managers who control billions of dollars for pensions and other institutions are typically activist investors, meaning they have large enough positions to get a seat on the company’s board and influence decisions about the company—firing management, corporate restructure, business strategy, etc.

Conversely, their passive counterparts who also manage billions for a growing number of entities are not nearly so bold. Their power is increasing as they control a greater and greater number of shares. However, these managers, like their investors, are long-term holders who believe operational decisions should mostly be left to management.

Now, you can view this shift in one of two ways:  Daniel O’Keefe of Artisan Partners Ltd. Says, “The tyranny of passivity is you have large pools of money that are unengaged in their investments, a far greater risk than the tyranny of activism.” Basically, who will keep management accountable if stockholders are not keeping diligent watch?

But the opposing view would be that companies can finally shift their focus toward long-term goals and long-term growth. Currently, activist investors pressure management to perform better each quarter to protect the stock’s price. But that pressure forces management into the tunnel vision of short-term goals that is often to the detriment of long-term growth. Without that quarterly pressure, management could focus on the company instead of the just the company’s stock.

We really don’t know how this new dynamic will unfold. But my guess is that American ingenuity will continue, markets will adjust, and capitalism will continue to prevail. But only time will tell.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Tools to Judge

I field questions all the time about federal income taxes. Unsurprisingly, people rarely think they should pay more into the system but quickly list off areas of profligate government spending or preferential treatment toward other taxpayers. Of course, there is no clear answer to create a better system, but there are some academic principles that should guide how you form an opinion.

These principles are:  simplicity, efficiency, revenue, fairness, and social policy. Unfortunately, no one system can fully embody all of these characteristics because each one is a tradeoff for one or more of the others. But the goal is to find a healthy balance, so here is an overview of each one:

Simplicity:  A tax system should allow people to easily understand and comply with its rules. It’s safe to say that our current system is not simple. Filing any type of tax return now requires a lot of taxpayer information, and the very existence of tax professionals (CPAs and lawyers) indicates that our system is in fact quite complex.

Efficiency:  If a tax system is efficient, it means that the imposition of a tax does not significantly change the way people behave. In the case of income taxes, do people work more to increase their earnings and offset what they pay in taxes? Conversely, do they work less because the tax burden no longer makes it worthwhile to them? If either result occurs, then the tax is not very efficient.

Revenue:  Obviously, a tax system needs to generate revenue. This is how our government can provide public goods and services such as maintaining roads and bridges, equipping our military, and administering requisite programs.

Fairness:  There are two related ideas about fairness—vertical equity and horizontal equity. Vertical equity is the idea that people with more ability to pay are taxed more. This idea is why we have progressive tax rates that tax higher levels of income at a higher rate. Horizontal equity is the idea that people who are similarly situated should be taxed in the same manner.

Social Policy:  Tax systems can be used to encourage (or discourage) certain behaviors based on social policy. For example, our current system encourages home ownership and charitable contributions by allowing them as itemized deductions. Notably, this tenet is in direct opposition to the tenet of efficiency.

So the next time you engage in cocktail chatter about the emotionally charged topic of tax reform, consider these five tenets and ask questions about how change could affect each of these areas. There is always a tradeoff, and it’s important to understand both what you may gain and lose under a new system.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Cash Happy

Last week I talked about the financial importance of building up a savings cushion. From a practical standpoint, it just makes sense—it safeguards against unexpected expenses and keeps your financial goals on track. This week I want to continue that conversation but focus more on the positive psychological effects that a healthy cash balance can have on your life.

Joe Gladstone, research associate at the University of Cambridge, recently conducted a study that found your bank balance may actually affect happiness more than your total wealth. Gladstone comments, “It goes against the traditional advice a financial advisor might give someone. Advisors might say all money that isn’t invested in something like equities is wasted.” We say that because cash yields no return and inflation slowly erodes the principal.

So it’s true that advisors naturally want to put your money to work even if the extra cash may make you happier. Hopefully, we prioritize a healthy savings cushion like I discussed last week, but his point remains—traditional advice would encourage allocating “excess” savings to investments when you, the client, may feel more comfortable leaving it in savings.

Gladstone continues, “That makes sense for the poorest 50% in the study, but it’s surprising that it’s still the case for the richest 50%. Even for a very wealthy person who has lots of savings and investments, having more money in their checking account seems to increase their happiness.” From a practical standpoint, this feeling is unwarranted, but it’s worth acknowledgment because even the very wealthy fear being “cash poor.”

Advisors and clients alike have to maintain some perspective. The “by the numbers” best answer to a situation may not be the best answer for that client. At the end of the day, money is just a tool to make your life better. So if keeping a little more cash on hand than is typically recommended makes a client feel more comfortable, then it’s worth sacrificing a little bit of growth.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Savings Cushion

Think of it as a financial runway. If all goes according to plan, you won’t need it, but having a savings cushion is one of the most fundamental aspects of any financial plan. Not only will it save you money—the next time your AC goes out in the middle of summer you won’t have to carry a balance on your credit card, it will also significantly reduce anxiety in your life.

An emergency fund should be large enough to provide for six months of living expenses. That’s not six months of your average monthly overhead, which would include everything from entertainment to retirement contributions. Your emergency savings is just six months of the essentials—rent/mortgage, food, student loan payments, gas, etc.

Unfortunately, most people don’t save. Even those who contribute to their 401(k) and invest in an IRA never establish a healthy savings cushion. In fact, a recent study of 7,000 Americans by GoBankingRates shows that 69% individuals have less than $1,000 in savings. That means that a majority of Americans cannot financially withstand unexpected expenses.

Interestingly, income has little effect on savings. According to that same survey, almost 50% of earners making between $100k and $150k a year have less than $1k in savings, and 29% of earners making over $150k a year have less than $1k in savings. To put that in different terms:  half of those who make over $100k have less than 1% of their annual income saved.

Obviously, it is most difficult to save if you don’t make enough to provide for basic living expenses. But based on this survey, the actual practice of saving does not become more prevalent with higher earners. So why don’t people save? Essentially, people live outside their means and think of their retirement accounts as savings.

When you make more money, social norms create a tremendous amount of pressure to spend like your counterparts, and it’s a tough cycle to break. Compound that mentality with the incorrect assumption that investment for retirement equals savings, and the result is that people do not make saving a priority.

Retirement accounts are expensive to access—not only do early distributions from retirement accounts generally get taxed and carry a 10% penalty, they also completely disrupt long-term investment. Investing for retirement requires consistency, and if you derail that process for every financial emergency, you will never benefit from long-term growth.

Therefore, creating a financial cushion with savings is vital to financial stability, which is a concept that holds true for both high and low-income earners. Having that reserve will save you money, protect your retirement, and reduce the overall stress in your life.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Why You Take Dumb Financial Advice

Earlier in September, stock-trading newsletter Wealthpire agreed to pay $1.5 million to settle claims of fraud against its subscribers. The company promised triple digit gains without risk, repeatedly mentioning the chance to earn 1,483% returns. If you think that sounds like a good deal, you may also be interested in buying some cheap, ocean front property in Arizona.

We naturally want to believe in extraordinary possibility. Even as kids, we’re raised on the story of Peter Pan, who has the ability to fly… but only if he believes. This natural inclination is the reason why Bernie Madoff could perpetuate a $64.8 billion Ponzi scheme and how Enron executives could convince the world of their unlikely profits—we want to believe the fiction.

In his Wall Street Journal article “Why Getting Rich Quick Doesn’t Sound Crazy” Jason Zweig discusses the Wealthpire case and notes, “It’s yet another reminder that good mental hygiene—deliberately choosing what to pay attention to and what to ignore—is one of the most valuable assets an investor can possess.” If it sounds too good to be true, especially in the financial world, then it definitely is.

So instead of imagining what life would be like after 1,000% returns on your money, ask yourself why anyone who possesses that knowledge would waste time making a newsletter. Basic logic will help you maintain a healthy level of skepticism about any financial endeavor. Push greed aside and use your head to make wise decisions.

Zweig later remarks, “A consistent message can elbow your skepticism aside; clever marketing can administer a kind of investing lobotomy, numbering you to the most obvious warning signs.” Financial salesmen know exactly what to say:  any time you hear the word “guaranteed” in the investment world—run. There are no true guarantees in life, and the ones you can pay for generally aren’t worth it.

For example, some products are contractually required to provide a given level of return (I’m looking at you variable annuities), but they are almost never worth the associated fees and commissions. Regardless, whoever is selling them will repeat the word “guaranteed” over and over… I guarantee it.

“I want to make you rich,” is a euphemism for “I want to make me rich.” Step out of the narrative you’re given, take off the greed blinders, and ask yourself if whatever financial proposition you’re being sold makes sense. That will keep you away from 90% of dumb financial advice.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.