By Craig D. Price, Certified Financial Planner®, CEO of Price Wealth Management, Stuart Florida
Focus on What You Can Control – Don’t Stress About the Rest
Hold Your Own Year End Review
Organize a Net Worth Statement and compare it to last year
- Total assets minus total debts
Will you owe taxes on your 2016 investment returns?
- Capital gains or interest income rates?
- Do you own your “most” taxable investments in your IRA or 401K?
Review the investment fees you paid last year
- Check expense ratios on your mutual funds or exchange traded funds (ETFs)
- Check the advisory fee you paid is competitive
Review the performance for each account
- Do different accounts have distinct goals and different return goals?
- Compare your returns to something objective like a market index or the rate of inflation or to your expectations Prepare for Higher Interest Rates
Prepare for Higher Interest Rates
Rising Rates Hurt Certain Investments More Than Others
- Federal Reserve predicts a few rate increases in 2017, data dependent
Do you own Interest Rate sensitive bonds, stocks or funds & ETFs?
- Such as utility stocks, REITs, Energy MLPs, Mortgage companies
- Bonds with >10 years to maturity, bond funds/ETFs with a duration >5 years
Reduce Your Exposure to Rising Interest Rates
- Own floating rate bonds or loans in a low fee fund
- Own some high yield bonds in a low fee fund
- Reduce exposure to utilities, REITs, MLPs, etc
- Own bank and insurance company stocks or a low fee fund in this sector
Lower Your Cost of Investing
Since starting PWM, we have reduced clients’ product-level fees by an average of 0.50% annually versus their previous firms.
- By using low fee Vanguard and Schwab index funds that average 0.05-0.10%
- By replacing actively-managed funds that average 0.97% (Morningstar, 2016)
- By rolling over high fee annuities (>3%) to Vanguard annuity (<1%)
Example of product-level fee savings:
- A $1,000,000 account saving 0.50% per year will save $50,000 in 10 years
If you are employed, check the fees on your 401k plan
- Ask your employer for the fee disclosure they are required to share
Lower Your Income Taxes Several Ways
Save more where you can deduct the savings from your W-2 income
- If working, max out your company retirement plan
- If under age 65 and not on Medicare, open a Health Savings Account
- If you own a family business, add family members to your payroll and fund their 401k plan or SEP or SIMPLE IRA
Buy tax efficient investments such as:
- Municipal bonds (if you are > 25% tax bracket)
- Stock ETFs which seldom pay out capital gains distributions
If required to withdraw from your IRA (>70 ½), donate a portion of your RMD to charity. The donation is excluded from income.
Master your Emotions Around Investing
A large Behavioral Finance study found investors’ returns were usually worse than the investments they bought.
- Human nature makes us Buy High and Sell Low
- Pleasure of making profits is outweighed by the Pain of losing money 3:1
- Fear makes people sell when they “can’t take it” anymore
- Greed makes you invest when you feel increasingly confident the market is going higher and you feel left out if you don’t “buy in”
How to Combat Emotions Around Investing
- Expect yourself to feel uncomfortable at times, but talk about it with someone more experienced than you
- Focus on long term annual results, not daily weekly or monthly results
- Don’t check your investments too frequently or you’ll react incorrectly
Summary Tips for 2017
Objectively Review How You Did in 2016
Prepare for Higher Interest Rates
Lower your Cost of Investing
Lower your Taxes using available deductions
Manage your Emotions around Investments