2 Minutes With Magis Wealth Planning 6/9/17

“2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc. 


  • Through the first five months of the year, almost 50% of the S&P 500 Index’s total return has come from only 14 companies, with the top 5 comprising about 33% of the total return (with AAPL leading the way). Some have said that this is an argument against  However, we agree with a recent article by Bob French at Retirement Researcher that it is, in fact, the exact opposite. Without diversification in a top-heavy market like has occurred this year, you have to be able to correctly predict (or guess) which stocks are going to be the market drivers in that given year.  It seems easy in retrospect – no one claims to be surprised that AAPL is up ~33% year to date.  However, it is actually underweighted in actively traded global mutual funds when taken collectively compared to AAPL’s market capitalization.  So, taken as a whole, professional money managers have been wrong about AAPL this year so far.  Of course, AAPL performed in line with the S&P 500 Index last year and actually underperformed in 2015.  The point is, predicting the future is not easy, and while diversification doesn’t result in homeruns, it ensures you don’t miss out completely.   https://retirementresearcher.com/five-companies-comprise-sp-500-returns-death-of-diversification/


  • It’s not always easy to make the transition from saving for retirement to spending in Many retirees spend less than they can afford in order to avoid dipping into their nest egg for fear of running out of money later in life. Here’s some useful advice from Santa Clara University finance professor Dr. Meir Statman (as penned in his recent WSJ article): Don’t put off spending for enjoyment if you have an adequate retirement portfolio, because most people are less inclined to spend money as they get older due to physical limitations or personal reasons (e.g. illness or death of a spouse). A household headed by an 80 year old spends 43% less than a household headed by a 50 year old, which is why we do a detailed cash flow projection every year with our clients – to help identify if they can (or should) be spending more money. And to provide them with the peace of mind (based on real data) that it’s financially prudent to do so.   https://www.wsj.com/articles/the-mental-mistakes-we-make-with-retirement-spending-1492999921


  • Other nuggets of wisdom from Dr. Statman from the same article: 1) Don’t wait until you’re gone before bequeathing the majority of your estate – this deprives you of the joy of giving.  2)  Don’t try to beat the market – to do so requires a higher risk level at a time when most can’t afford to do so because their working years (i.e. “human capital”) are behind them.  3)  Be careful not to cross the line between frugality and miserliness – it prevents people who have enough money from enjoying it.  4) Young people tend to underestimate their longevity while older people tend to overestimate it.  He cites data that a person reaching age 65 today can expect to live until their mid-80’s with 25% living past age 90 and 10% living past age 95.


  • An article in the June edition of the Journal of Financial Planning cites several alarming statistics, including that 64% of Americans do not have a will and only 71% of Americans do not have either a medical directive or a general power of attorney. These basic estate planning documents are not difficult or very expensive to put in place, but are important to have – but not for you.  These documents go a long way in easing the burden for your loved ones being left behind.


  • The Chart of the Month: This chart shows that while the S&P 500 Index has finished in positive territory about 80% of the time over the last 20 years, it is also very common to have rather large market corrections during the year.

SP500 Dips

2 Minutes With Magis Wealth Planning 5/12/17

“2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc. 

  • Jack Bogle, the founder of Vanguard and pioneer of index investing, has been a long-time staunch advocate of passive vs. active funds. So he made headlines recently when he said that “if everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”  However, he also said that the chance of everybody indexing is 0%.  He believes indexing could comprise 75% of the market without posing a significant risk, compared to the 20-40% that it comprises today.  https://www.bloomberg.com/news/articles/2017-05-06/bogle-says-if-everybody-indexed-markets-would-fail-under-chaos
  • Leveraged ETFs have been growing in popularity, but most people that own them probably don’t fully understand the associated risks. Leveraged ETFs are exchanged traded funds that provide 2x or 3x exposure to an underlying index or asset class using derivative contracts (called swaps).  In summary, these are extremely complicated financial products that are intended to deliver 2-3x daily returns – and since the leverage gets reset/rebalanced every day, they tend to dramatically underperform the multiple of the index they’re tracking. The bottom line is that leveraged ETFs were created as trading instruments and are not meant to be bought and held, but the vast majority of investors that own them are not aware of this.  Unless of course they read the prospectus – which almost no one does.  https://www.bloomberg.com/view/articles/2017-03-23/sec-may-regret-the-day-it-allowed-leveraged-etfs
  • From the sad but unfortunately true file: We recently received a call from an 89 year old widow after she met with “a very nice man” at a local investment management office.  She owns a small portfolio of stocks and a condo that she currently rents out.  She said this “nice man” advised her to sell all of her stock and her condo “immediately for whatever she could get” – even if she had to take a big loss on the sale.  He then recommended that she invest 100% of the proceeds (or about $300,000) into an annuity.  He did NOT ask to see her tax returns to see if doing so would incur an exorbitant (and unnecessary) tax liability, he did NOT ask about other sources of income, he did NOT ask about her living expenses, he did NOT ask about her estate planning wishes, and he did NOT compare his recommendation to any other alternatives.  He also did NOT tell her that he would likely receive a commission check for somewhere between $15,000 and $30,000 if she took his advice.
  • The Chart of the Month below comes from this article in Bloomberg View which explains that elevated stock valuations aren’t necessarily a signal of a market top in and of themselves. Past market peaks have come at both high and low market valuations, high and low inflation rates, high and low dividend yields and high and low bond yields. But one common thread in 11 of the last 15 bear markets has been a U.S. recession, which is typically only evident after the fact. https://www.bloomberg.com/view/articles/2017-03-06/calling-a-top-in-stocks-has-become-a-cottage-industry
  • Chart of the Month:

Bear Markets Since WWII Source: Ben Carlson; Bloomberg View

2 Minutes With Magis Wealth Planning 4/14/17

“2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc. 

  • With tax day right around the corner, recent IRS data indicates the likelihood of getting audited has decreased for five consecutive years. The IRS audited ~1.2 million individual tax returns, or about 1 out of every 120 of all individual returns filed (i.e. 0.8%) in 2015. Details by AGI are in the Chart of the Month below, but in summary your chances of being audited are less than 1% if your adjusted gross income is above $25,000 and below $200,000.  Over 70% of all audits in 2015 were correspondence done by mail (vs. field audits).  Which brings up a side note – don’t fall for phone scammers claiming to be calling from the IRS.  The IRS does NOT call people!    https://www.irs.gov/uac/enforcement-examinations
  • A recent article in the Wall Street Journal addressed the ongoing debate of whether low cost passively managed investments are as good as or better than actively managed funds. The tone of the article is slanted toward passive and cites recent statistics that indicate 82% of all U.S. funds underperformed their respective benchmarks over the 15 years ending 12/31/16. Obviously we are firm believers in low cost passive investments as our own research suggests actively managed funds have a difficult time overcoming the high fees they charge. But investment advice isn’t free and investment risk and personal goals and circumstances must be factored into the asset allocation process.  An investment plan is not the same as a financial plan.    https://www.wsj.com/articles/indexes-beat-stock-pickers-even-over-15-years-1492039859
  • We mostly agree with another recent article in the Wall Street Journal titled “Why Your Financial Adviser Can’t Be Conflict Free”. The author makes the assertion that all advisers have conflicts (regardless of what they tell you) and he cites several examples to make his case, including that advisers can make more money if they:
    1. advise clients to roll over a 401(k) account instead of leaving it in a former employer’s plan
    2. sell proprietary investment products
    3. recommend borrowing for a large purchase rather than drawing down investible assets
    4. charge higher fees to manage stock vs. bond portfolios

Our thoughts: While these blanket claims are true for the vast majority of investment advisory firms out there, none of them apply to our business model – asset based annual fee (regardless of location), with no other outside compensation. We also think it’s important to note that regardless of the business model, there are many advisers that act ethically and in the best interest of their clients.  The mere existence of inherent conflicts doesn’t prevent someone from doing the right thing, but proper disclosure and client awareness are crucial. https://blogs.wsj.com/moneybeat/2017/04/07/why-your-financial-adviser-cant-be-conflict-free/?emailToken=JRrydf5zYnqSi9Ayb8wW8BgNRINNVr7TFgk

  • Chart of the Month:

IRS Audits by AGI

Source: 2016 IRS Data Book;  https://www.irs.gov/uac/soi-tax-stats-examination-coverage-individual-income-tax-returns-examined-irs-data-book-table-9b


2 Minutes With Magis Wealth Planning 3/10/17

“2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc. 

  • Warren Buffett’s annual “Letter to Berkshire Shareholders” was published recently and had some interesting food for thought as always. Stick with low cost index funds because actively managed funds rarely outperform them, net of fees – very similar to what we advise our clients. What about the smooth talking “financial advisors” that make a lot of promises about outperformance and recommend “proprietary strategies” and fancy (and expensive) funds? He quotes an appropriate old adage:  “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”  Clink Here to Read Warren Buffett’s Letter
  • Here’s a link to an interesting research paper that explores whether a group of funds that outperform their benchmarks in one period can continue to do so in subsequent periods. Conclusion: Not very likely. Picking fund managers solely on past performance is not a winning strategy.   Click Here for the Research Note
  • The race to the bottom continues: Last month we mentioned that Charles Schwab had lowered its standard commission price to $6.95 per online stock or ETF trade (lowest in the industry at the time). Well, last week they lowered it again to $4.95 per trade, matching Fidelity (who had lowered their trading commission from $7.95 a week prior in response to Schwab).  We suspect this downward spiral will continue – which is good news for investors.
  • If you are or know a teacher or a public employee paying into the state pension system, here’s an interesting article that was recently published in The New York Times which compares the teachers’ pension fund in Puerto Rico to a legalized Ponzi scheme. The article includes an interactive map that compares teachers’ pension plans by state.  Ohio was one of 6 states that received an “F”. Click Here to Read the New York Times Article
  • Chart of the Month: Pie chart that shows the breakdown of federal expenditures according to the Congressional Budget Office (CBO) and how it is expected to change in the next 30 years. Bottom line: Entitlements are crowding everything else out, which suggests that taxes will probably need to go up in the future.  We think this underscores the potential benefit of strategic Roth conversions (e.g. taking advantage of low income years in retirement before RMD’s).

CBO Federal Spending Chart

Source: Wall Street Journal Daily Shot 3.6.17; OFFIT Capital. h/t Anne

2 Minutes With Magis Wealth Planning

2 Minutes With Magis Wealth Planning” is published on the second Friday of every month and includes brief summaries of articles and data points that we’ve come across during the course of our daily reading and research. The focus is on content that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc.  

  • Last week Charles Schwab lowered its standard commission price to $6.95 per trade, which is now the lowest in the industry. Expense ratios are also being reduced on several Schwab mutual funds including the Schwab S&P 500 Index fund (0.03%). This is good news for our clients.  While investors cannot control market fluctuations, they can (and should) control investment expenses – a foundational element of our business model.
  • In January, the U.S. Securities and Exchange Commission fined both Citigroup and Morgan Stanley Smith Barney for overbilling clients. Billing errors aside, a lot of people are paying more for financial advice than they realize. We employ a flat fee retainer model that is easy to understand and we do not sell products or accept commissions, kickbacks or any other sources of income.  Our clients always know exactly what they are paying – because we have nothing to hide!!  https://www.sec.gov/news/pressrelease/2017-12.html     https://www.sec.gov/news/pressrelease/2017-35.html
  • Bloomberg Businessweek magazine published an interesting profile of the founder of “My Pillow” which shows the power of the entrepreneurial spirit…. and a good infomercial. To summarize, Mike Lindell has built a wildly successful business from an idea that came to him in a dream and along the way lost his house, battled drug and alcohol addictions, almost died in skydiving and motorcycle accidents, and was banned from multiple casinos for counting cards at the blackjack table to pay suppliers. https://www.bloomberg.com/news/features/2017-01-11/the-preposterous-success-story-of-america-s-pillow-king
  • Chart of the Month: The Price of Poor Timing. Returns for average investors are lower than market returns (i.e. stock/bond indices) over the past 10 years. Key take away: Don’t try to be a market timer. You have to make two decisions correctly, when to sell and when to buy back in, and that’s a losing proposition.


The Financial Advice Our Parents Yelled At Us

From time to time, all of us probably still have our parents’ “advice” ringing loudly in our ears. Theses reverberations are most likely because the advice was yelled to us repeatedly (and justifiably) when we were kids.

One such piece of sage advice was to “get your priorities straight” – which for today’s kids might mean spending less time on social media and more time reading a good book. For us “grown-ups” it might mean dedicating more time at the gym and less time binge-watching Netflix.

Rest assured, we’re not writing to preach on those personal priority choices.  But we are hoping to emphasize “getting your priorities straight” as it relates to saving, paying down debt and investing.priority-checklist1-resized-600

In short, prioritizing the best use of incoming cash flow can maximize savings, lower taxes and lower interest expense.  This can be optimized by wisely directing income in an order that we view as the most impactful.

So what’s our preferred order?

  1. Emergency Fund: Most people are more interested in “getting in the market” with stocks, bonds or ETFs when in reality, they should first focus on building up an emergency fund to be able to handle true emergencies such as a job loss or uncovered health care expenses.  A good rule-of-thumb is to set aside at least three months of living expenses if your income is generally stable, six months if your income is volatile or uncertain and between eight to twelve months if self-employed.  If it takes a while to save up this amount, a good “band aid” for homeowners with equity is opening a home equity line of credit while this fund is being built up.  The idea here is to avoid the need to sell assets or pull money from retirement accounts for emergencies, which could incur income taxes and penalties.
  2. Maximize “the Match” on employer retirement plans:  While we often preach “there’s no such thing as a free lunch” employers’ matching contributions are as close to free money as most of us will ever see.  At a minimum, you should contribute at least the amount needed to take full advantage of this benefit.  Think of it as an instant 100% return on your money.
  3. Payoff High-Interest / “Unproductive” Debt: Of course the most common boogeyman here is credit card debt which is usually high interest and almost always “unproductive”.  By “unproductive” we mean the debt usually financed a consumable item that’s well past its prime (those trendy shoes or that trip to Vegas) and the interest expense is not tax deductible. If your credit card interest rate is 13% for example, paying off the balance is an instant 13% “return” on your money in the form of avoided interest expense.
  4. Contribute to an HSA Account:  If you have a high-deductible health care plan, very often these are accompanied by a Healthcare Savings Account.  These are fantastic tax deductible contributions (with no income phase-outs) and the funds can be used for qualifying medical expenses without taxes or penalties.  There are contribution limits ($6,750 per family in 2016) and other restrictions to note but we detailed our affinity for these accounts in another post which can be accessed here.
  5. Roth IRA:  As most know, Roth IRA contributions are after-tax and grow tax free without RMDs (required minimum distributions).  There are some limitations however. These include the phase out of eligibility at $184,000 AGI (Married Filing Jointly) and contributions must be “earned income”.  But we love these savings vehicles as a good way to lower your tax base moving toward retirement.
  6. Company 401(k) to Maximum: The next priority should be to maximize your 401(k) contribution ($18,000 or $12,500 if you have a SIMPLE 401(k) to take full advantage of the tax deduction associated with these contributions.  One reason this isn’t higher on our priority list is we’ve seen many, many 401(k) plans with limited fund choices and very expensive fees.
  7. After-Tax Investment Accounts:  After all these savings have been fully funded, excess cash flow can certainly be contributed to an after-tax investment account to allocate in accordance with the broader investment strategy.

Now others might have different priorities and the priorities might change based on tax brackets, self-employment (with different retirement account types) and of course the need for college savings for the kids.

But we believe implementing this type of strategy (along with proper asset allocation, tax planning and other integrated financial planning) will go a long way toward your financial success.

So even if you’ve skipped your evening work-out (again) and you’re on your 4th episode in a row of Game of Thrones, we give you full permission to mentally ignore your parents’ advice to “get your priorities straight” because you can rest easy on your couch knowing at least financially- your priorities are in order.

Why I Do What I Do

For those who have read my prior posts, this article will certainly be a departure from the normal nuts and bolts analysis or commentary on a financial topic.  My intention here is to pull the curtain back, so to speak, and convey the foundational belief system that drives my motivation to be an independent and fee-only financial advisor.   Most who are reading this know what I do.  I think it’s important for people to know why I do what I do.

So the Reader’s Digest version is as follows:  I do what I do because I believe it is the right thing for me to do and the right way to do it.  While that is admittedly vague, it really does capture my manifesto in one sentence.

Before getting into details, I must acknowledge up front the devil’s advocates out there who could and should counter with: “Yeah- but you’re getting paid to do this…” and there is no denying that.  I will fully acknowledge that I certainly want to provide for my family.  However, I can say with certainty that the manner by which I have chosen this line of work (fee-only, self-financed) is not the most lucrative model to employ for a financial advisor and I was certainly making more money in my prior career.  That being said, I believe that negative is vastly outweighed by the fact that my enterprise embodies the perfect mix of factors for me: provide a nice living for me and my family while fully utilizing my God-given skills to help others in a completely independent context.  That’s basically it.

Now, on to the details…..

As noted above, the first portion of my motivation is that I believe my vocation as an independent financial advisor is the culmination of several factors which all center on the concept being “the right thing for me to do”.  Why should you care about that?  Because I believe you want someone working for you who wants to be on the job.

So first, I firmly believe this is the right thing for me to do because at my core, I realize a high degree of fulfillment knowing that I am using my knowledge, passions and skills to serve individuals and families. In practice, this means I am gratified coming to work every day knowing I am helping folks employ prudent financial strategies to help them progress toward their goals while at the same time, reducing the family stress associated with the “great unknowns” such as retirement savings needs, investing strategies, tax efficiency, etc.  As you may have inferred, I also like to write and I don’t mind talking at length about these topics so I feel my role is also as a “translator” of these sometimes bizarre concepts suits both me and my clients well.

Second, this is my passion.  Even as far back as my college-age, I have always been interested in finance, economics and investing and knowing the solid fundamentals and latest developments in these fields, then applying them to helping people, is my dream career.  The flowery self-help industry often asks “If money were no object and you could do anything for a living – what would you do?”  For me, my practice is my answer.  Now admittedly, if money were no object I would not build my practice up to a large scale which takes a lot of time, effort and investment of personal funds.  BUT I would do exactly what I am doing now on a smaller scale, even if I didn’t have to worry about my role as a provider for my family.

Which leads me to the second part of my motivation, “…..the right way to do it”.

I do this because I have found a way to combine the aforementioned fulfillment for helping others in a manner in which I can operate with complete independence.  Years ago, I investigated doing this for a living but what I found was I would clash with the idea of having a sales manager direct my day.  While not having to deal with somebody monitoring my progress on performance metrics sounds great, there’s a price to be paid for that independence and that is self-financing.  Specifically, I receive no “salary”, no commissions- nothing from anyone but my clients, who can plainly see exactly how much their investment advice is costing them by the amount of my annual fee or project fee.  Of course I would argue that my service provides much more of a value than my fee but that’s a topic for another discussion.

The critical component to the story is that what this “expensive” independence buys me is the ability to provide people advice in the manner which satisfies “the right way to do it” and that is with an annual fee for handling a multitude of financial topics without my clients having to worry about who else might be providing me “incentives” to make the recommendations I am making.  (Side note: I must take a moment to acknowledge that there is no doubt in my mind that there are many fine, non-independent financial advisors who are ethical, serve their clients well and do not make recommendations based on incentives.  However, in a planning relationship that is built mostly on trust, I do not want clients questioning my motivations for even one second.) So the way I have chosen is certainly more difficult (especially in the early stages) and the road-less-travelled in this industry but I firmly believe it is the most appropriate model for both me and my clients.

To wrap up, I do what I do because I believe I am fortunate enough to have found a means to make a living that aligns with my passion for personal finances, my strong desire for independence and my satisfaction in knowing I am actually helping real people.

(This post was originally published in July 2013)