How Much Do Knowledge Workers Make?

Peter Drucker coined the phrase "knowledge workers" in his 1957 book The Landmarks of Tomorrow. Examples include software engineers, lawyers and others whose job is to “think for a living.” In his later writings, Drucker felt "the most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity."

If so valuable and productive, how much more are knowledge workers paid relative to people with manual and/or routine jobs?  Knowledge workers like software engineers, data scientists, and lawyers earn approximately $50,000 a year more than truck drivers and construction workers, based on data from Glassdoor, one of the fastest growing jobs and recruiting web sites. As shown in the chart below, the median annual base pay earned by construction workers and truck drivers in the United States was $37,153 and $52,422, respectively. The median wage in the other three occupations was on average about $50,000 a year higher.

This is a meaningful difference, especially as it adds up over a long-term career. But the wage differential for lawyers is much smaller when you factor in the cost of 3 years of law school and the associated forgone income while at school. Software engineers and data scientists, in contrast, do not have to pursue a post-graduate degree to land a high paying job while most truck drivers and construction workers do not need a college degree.

Minerva Wealth Advisory NYC on Knowledge workers

How much of a premium do knowledge workers earn in major cities? Living in New York and San Francisco can be exciting, but expensive. As shown below, people in the three knowledge-based occupations who work in New York City are earning 20 to 35 percent more than the national medians. The premiums are even higher in San Francisco. For example, data scientists are earning a 38.2 percent premium vis-à-vis the national median while lawyers are earning almost 50 percent more. Truck drivers and construction workers in these cities are also earning more, but the size of the wage premiums is lower.

How much do knoweldege workers make according to Minerva Wealth New York Firm


DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

What Every College Student Needs to Know About Jobs and Money

Everyone has their own definition of what it means to be highly paid. But picking the right occupation can dramatically impact your annual earnings: most software developers are highly paid, but not so for marriage and family therapists. The Bureau of Labor Statistics (BLS) collects information on employment and wages by occupation. Let’s look at what this treasure trove of information tells us about jobs and money. It is particularly important for young adults to be aware of this type of information so they can make informed decisions about college majors and career paths.

What does the ‘average person’ make a year? Employees in the United States were paid on average $48,320 in 2015. This includes base salary, bonuses, tips, commissions, or any other incentive pay for which they were eligible. The median annual pay was much less at $36,200. The median is the amount that divides all employees into two equal groups, with half earning more than that amount, and half earning less than it. The median is lower than the average annual pay because a small number of highly paid employees push the average up.

How many jobs are in occupations where most workers get paid at least $75,000? The BLS estimates that 137.9 million people were full-time or part-time wage and salary workers in 2015. But only 15.8 million of them worked in occupations where the median annual income was at least $75,000. Put another way, only 11.4 percent of employees work in high-wage occupations. Because the pool of high-paying jobs is quite small, competition to get one and remain in that occupation is generally quite intense.   

What are the high wage occupation categories? The BLS collects data on over 800 occupations, which aggregate up into 22 top-level occupation categories. The 5 top-level categories with the most jobs in occupations with a median annual income of at least $75,000 are: management occupations; computer and mathematical occupations; architecture and engineering occupations; legal occupations; and life, science, and social science occupations. These 5 categories represent 76 percent of the high-wage jobs. As shown in the chart below, while the other 17 top-level occupation categories employ a lot of people, they are not great places to look for high paying jobs.

What Every College Student Needs to Know About Jobs and Money

Which specific occupations have the most high-paying jobs? There were 122 occupations in the BLS survey were the median annual wage in 2015 was at least $75,000. All of these occupations are included in the PowerPoint presentation included below. It is probably a good idea for parents and grandparents to encourage the young adults in their lives to review this presentation so they can make informed decisions about college majors and which occupations to pursue.

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

 

Holidays and Happiness

Over the Thanksgiving holidays, my husband and I went on a vacation with our children. The trip reminded me how much I prefer spending money on experiences over materials goods. When we returned, the Christmas season was in full swing with its emphasis on shopping and gifts. I decided to investigate what consumer psychologists have to say about the joy of experiences versus material goods.

Thomas Gilovich, a Professor of Psychology at Cornell University, has written extensively on experiential consumption and the pursuit of happiness. He is an engaging writer and speaker, with some practical wisdom for how to increase your overall level of happiness (more on that in a moment).

Gilovich introduced the distinction between material and experiential purchases in a 2003 paper. He defined the former as ‘spending money with the primary intention of acquiring a material possession – a tangible object that you obtain and keep in your possession,” like a chocolate bar, couch, or iPhone. An experiential purchase is ‘spending money with the primary intention of acquiring a life experience – an event or series of events that you personally encounter or live through,’ such as a restaurant meal, live concert, or vacation hike. The distinction between the two is not always clear cut: hiking shoes are a material possession, but a walk in the Cotswold’s wearing them is experiential. The interesting question, however, is the satisfaction that people derive from spending money on material goods versus experiences and what seems to be behind the differences.

Based upon his research and those of other academics, experiences tend to provide greater and more enduring satisfaction for at least 3 reasons:

Consumption treadmill. Academic research on happiness has shown that people have a remarkable ability to adapt so that their emotional response to a frequent stimulus diminishes over time. When it comes to material goods, this capacity for adaption is the enemy of happiness because it creates the need to acquire more and more to achieve the same emotional benefit of previous purchases. But it turns out that people adapt less for experiential purchases than material purchases. For Gilovich, “… the justification that people sometime give for spending money on material possessions rather than experiences – that ‘at least I’ll always have the possession’ but the experience will ‘come and go in a flash’ – is backwards. Psychologically, it is the experience that lives on and the possession that fades away.”

Regrets. People can regret buying something they now wish they hadn’t (action), or regret not purchasing something that they now wish they had (inaction). Gilovich found that people tend to have far more regrets of inaction for experiences than for possessions. “Not going to a concert with friends can stick in the craw for many years after the fact, but not buying a particular coat, table, or automobile is usually forgotten rather quickly. Indeed, people tend to have far more regrets of action when it comes to possessions than when it comes to experiences. Even those concerts, theatrical performances, or vacations that do not turn out as planned are quickly rationalized and made peace with. Disappointing or faulty material goods, in contrast, continue to disappoint and confront us with their shortcomings for as long as we keep them in our possession.”

Relative position. Psychologists have shown repeatedly that someone’s satisfaction with their own life and circumstances is influenced by comparisons they make between what they have relative to others. But when it comes to experiences, comparisons to other people appear to have far less of an impact on how someone feels. This is largely due to it being harder to make comparisons between experiences than for material goods. The difference between a Mercedes and a Chevy is relatively straightforward, but not so for two different Cotswolds hiking trips.   

What advice does Gilovich have for improving our sense of satisfaction and happiness? “These different mechanisms [e.g., consumption treadmill, regrets, and relative position] collude to make experiential purchases more gratifying, on average, than material purchases, a result with a very simple and practical message: tilt one’s spending a bit more in the direction of experiences and a bit less in the direction of material possessions. At least in wealthy societies in which people have a fair amount of disposable income, they can simply choose to spend more on experiences than on material goods. And if they do, the research suggests, they are likely to be significantly happier as a result.”

 

 

 

 

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.  

 

 

 

 

 

 

With Interest Rates So Low and Predicted to Rise, Why Should I Own Bonds?

Owning bonds is primarily about receiving a predictable interest payment on a regular schedule. Bonds can also provide peace of mind in an investment portfolio because they may complement more volatile investments like equities. However, with interest rates at historical lows and investors seeing losses in their bond holdings since July, buying bonds is a fraught topic for many investors.

When someone buys a bond, they lock in current interest rates for the maturity of the bond. For example, if an investor buys $100,000 of a newly issued 10-year U.S. government note yielding 1.85 percent, they will receive interest payments of $1,850 a year. At the end of 10 years, the maturity date of the note, they will get their $100,000 back. Because the U.S. government stands behind the bond, the investor can have confidence they will receive the interest payments and get their principal back.

Many investors today are worried about buying bonds because they feel interest rates are too puny given historical levels. They are also concerned that interest rates may continue to increase, so they may delay buying longer term bonds in hopes of ‘market timing’ their purchases. Let’s explore these topics.

How puny are interest rates? Long term government bond yields have generally declined since 2000, as shown below. While interest rates have fluctuated from year to year, both nominal interest rates (the interest rate received by the investor) and real interest rates (the interest rate after accounting for the effects of inflation) have declined. For example, rates on long-term government bonds were more than 5% for much of 2006, as low as 1.9% in July of this year at the trough in interest rates, and 2.9% more recently on December 6th.

Long term interest rates on US goverment bonds Minerva Wealth Advisory

While there is ongoing debate among policy makers and financial analysts about why rates have been in secular decline, most believe it has been a combination of Federal Reserve actions to lower short-term borrowing costs and investors worldwide investing in US government securities as a safe haven. As investor demand for long-term government bonds increased, bond prices were pushed up, which meant that long-term government bond interest rates declined.

While certainly low in comparison to historical rates, interest rate levels have been rising since July, especially after the election. The long term secular decline in interest rates is widely expected to reverse in the near future because of anticipated tightening by the Federal Reserve and stimulative policies of the Trump administration. However, consensus forecasts have been wrong in the past.

What happens to the value of bonds when interest rates rise? Bond prices and interest rates are inversely related. When interest rates increase, bond prices fall. Moreover, the longer the maturity of a bond or bond fund, the larger the decline in the price. Let’s take a closer look at what has happened so far this year:

Bond Fund Share Prices and Returns Minerva Wealth Advisory

The table above shows that both bond mutual funds suffered losses in the 5-month period this year when interest rates increased. But there are differences: The long-term Treasury fund lost more than 16% over that 5-month period while the total bond market fund with its shorter average maturity lost about 5%.

Is there a difference in how individual bonds and bond mutual funds or ETFs react to interest rate changes? For investors with individual bonds already in their portfolios, bond price declines caused by rising interest rates will not impact the interest rate payments they receive. Those payments were locked in when the investor bought the bonds. However, the decline in the price of bonds will show up in their investment account statements. The decline is real, in the sense that if the investor elected to sell the bonds, they would receive less than before interest rates increased. But if they continue to hold the bonds to maturity, they will not have to realize the loss.

The situation is different for investors who own bonds through a mutual fund or ETF. Just like individual bonds, the value of the fund will decline when rates go up. However, the investor does not have the option to hold the fund until a date like a bond maturity date and receive a pre-determined amount for the investment. A bond mutual fund is always valued at current market prices for the underlying bonds, so it fluctuates in value.

Why should bonds be included in a portfolio? The answer depends on the circumstances of each investor. Other than providing income, the role of bonds in a portfolio is to act as a ‘stabilizer’ to riskier assets such as stocks and a ‘diversifier’ that has low correlation to stocks and other asset classes in a portfolio. Bonds can also provide liquidity when there are buying opportunities in the stock market. The role of bonds as a stabilizer and diversifier continues even when interest rates are low and rising.

For the past few years, many investors have restricted their bond holdings to short term bonds to protect their principal from increases in interest rates. This approach produced lower returns than longer maturity portfolios as interest rates defied expectations and continued to decline. 

Now interest rates have increased with predictions of further increases in both interest rates and inflation brought about by fiscal and monetary policies. However, the expectations about government policies may already be fully 'baked' into bond prices. Also, if the forecasts are wrong, then the recent decline in bond prices will have been a good buying opportunity. Consequently, for investors with a longer time frame, it may be time to consider increasing the average maturity of bond portfolios.

 

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.  

What Are Credit Spreads and Why Is 'Yield Chasing' Potentially Dangerous?

Investors looking for predictable income often make U.S. government and corporate bonds an important part of their investment portfolio. With interest rates so low, many investors consider adding lower quality, higher yielding bonds to their portfolios to increase investment income. But what are the risks associated with chasing yield?

What are credit spreads? Credit spreads measure how much the investor is being paid to take on the risk associated with the corporate bond issuer making all interest and principal payments. More specifically, a credit spread is the difference in yield between a U.S. Treasury bond and a debt security with the same maturity, but of lesser quality. So if a 10-year Treasury note is yielding 1.85 percent while a 10-year corporate bond is yielding 3.75 percent, then the corporate bond offers a spread of 1.9 percent over the Treasury note.

The chart below shows credit spreads over the course of 2016 for two types of U.S. corporate bonds: bonds deemed by ratings agencies like Moody's and Standard and Poor's to be investment grade, and lower quality, high yield bonds.

US corporate bonds 2016 Credit Spreads by Minerva Wealth Advisory Dalya Inhaber

In October 2016, investors in investment grade bonds were getting about 1 percent point more than owners of U.S. government bonds with a similar maturity, while investors in high yield bonds were getting just shy of an additional 5 percentage points of interest. Relative to the beginning of the year, high yield credit spreads narrowed considerably, by more than 2 percentage points. Many financial analysts believe this narrowing was due to a strengthening in the outlook for the U.S. economy, which reduced the risk to investors of not receiving from the issuer all promised interest payments and principal.

How do credit spreads respond to changes in the economic outlook? Credit spreads have been volatile, especially high yield credit spreads, over the past 10 years (see below). During the financial crisis, for example, high yield credit spreads jumped to more than 20 percent. Investors holding high yield bonds at that time suffered substantial declines in the value of those bonds, while also taking a beating on their stocks.

In the current low interest rate environment, many investors have taken on more risk to get a higher yield on their bond portfolio. They are accepting a lower ‘risk premium’ for holding lower credit bonds, which is reflected in a narrower credit spread. But when credit spreads are so far below historical trends, it is time to ask if lower quality bonds are overpriced.  

Corporate bonds and credit spreads Minerva Wealth Advisory NYC

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.  

 

 

Inspiring words: Truman’s 1945 Thanksgiving Proclamation After the End of WW II

“In this year of our victory, absolute and final, over German fascism and Japanese militarism; in this time of peace so long awaited, which we are determined with all the United Nations to make permanent; on this day of our abundance, strength, and achievement; let us give thanks to Almighty Providence for these exceeding blessings.

We have won them with the courage and the blood of our soldiers, sailors, and airmen. We have won them by the sweat and ingenuity of our women and children. We have bought them with the treasure of our rich land. But above all we have won them because we cherish freedom beyond riches and even more than life itself.

We give thanks with the humility of free men, each knowing it was the might of no one arm but of all together by which we were saved. Liberty knows no race, creed, or class in our country or in the world. In unity, we found our first weapon, for without it, both here and abroad, we were doomed. None have known this better than our very gallant dead, none better than their comrade, Franklin Delano Roosevelt. Our thanksgiving has the humility of our deep mourning for them, our vast gratitude to them.

Triumph over the enemy has not dispelled every difficulty. Many vital and far-reaching decisions await us as we strive for a just and enduring peace. We will not fail if we preserve, in our own land and throughout the world, that same devotion to the essential freedoms and rights of mankind which sustained us throughout the war and brought us final victory.”

 

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

 

How I Became a Financially Responsible Young Adult

Parents everywhere hope to raise their children to become independent and financially responsible young adults. But how do you do it? Minerva Wealth Advisory recently sat down with Rachel, a 27-year-old young professional living in New York City, to talk about her journey with money. We picked Rachel because she is a committed saver, has no credit card debt, and has a healthy relationship with money.  

What are your first memories of money? There was the ice cream truck that would go around the neighborhood and I needed enough coins to buy something. If I was a quarter short, then I was out of luck. At an early age, I remember being motivated to accumulate coins. I wanted to be like Smaug, the dragon from the Hobbit, sitting on top of a giant pile of coins.

When you were in middle school and high school, did you have an allowance? During high school, my parents gave me an allowance every month that I was free to spend on books, clothes, and other incidentals. But I knew that if I ran out of money, they would not replenish it until the next month. That was the reality. There was a budget constraint that I had to live with, unlike most of my friends. It’s not that I wanted for anything. But it was made very clear to me early on that Mom and Dad were not going to pay for me to have an extravagant lifestyle.

What did you learn about money in college? I became very aware that money equals freedom. Money buys you time. Money buys you access. Money helps open doors. When I left college, I felt that I would have more freedom the more I earned and saved. 

What are your savings practices today? I was making just enough to get by in my first year after college, but I was not comfortable. I had to think about everything that I bought. A few years later, when I was promoted and eligible for a bonus, I decided to live only on my base salary. My bonus would go into savings. I am religious about not spend a dime of my [after-tax] bonus. It is my way of keeping me honest. In a funny sort of way, my company has made it easy for me to save because of how I am paid. I also signed up for the 401(k) plan when I started working and contribute every year up to the matching level provided by my company. To do otherwise, I would be throwing away free money.

When did you get your first credit card? I was 24 and 2 years out of college. The reason it took me so long was that I do not like debt. For me personally, I hate the idea of owing someone something. I never want to be in debt and unable to live the lifestyle I want because I am paying off debt from the past. It never occurred to me to get a credit card. I was actively against it. But then I realized that I was giving up earning points and I was not building a credit profile. Now I use my credit card to pay for everything so I can earn as many points as possible. 

Do you ever run outstanding balances? No, I never do. I am serious about that. I will not buy more than what I can afford to pay that month out of my checking account. That is the policy that I live by. The interest rates on credit card balances are also absurd. I like to see zero dollars owed on my credit card statement. I pay my balance early in the month, which I know is silly, but it makes me feel good.

Reflecting back on your relationship with money, what do you think were the important factors behind you becoming so financially responsible? Many of my friends have parents who pay their rent. Or perhaps their Mom and Dad share a credit card with them or they pay for all their clothes. That has never been my situation. My parents are as financially successful as my friends’ parents, if not more so, but they have never been willing to support me being spendthrift in any way. That was never on the table. Early on that irritated me, but now I see the method in their madness. It has made me have a very particular relationship with money, which is to say ‘protect that money’. It is an asset that you must earn, protect, and be respectful of. 

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

Diversified Portfolios: Why The Right Thing Can Feel So Bad

Don’t put all your eggs in one basket is the basic principle behind creating diversified investment portfolios. While the right thing to do, some investors are disappointed when they see how their overall portfolio is doing when compared to the best performers in their diversified basket.

By investing in a variety of asset classes, such as stocks, bonds, and commodities, most people hope to earn a reasonable return over time and avoid sharp swings in the value of their portfolio. How investors allocate their investments across different asset class should be based on what they plan to use the money for, when they anticipate drawing down their investment account, and their tolerance for risk. Sound advice.

But after investing the money, it is human nature to compare what was earned on the overall portfolio with what each asset class has returned. Because the portfolio will always do worse than the best performing asset class in the portfolio, people prone to ‘coulda, woulda, shoulda’ may be tempted to market-time their investments. For example, they may reallocate money to the top performing asset class in the belief that short-term movements are a good predictor of longer-term performance. But chasing investment opportunities based purely on gazing in the rear-view mirror is the opposite of what investors should do. We’ve all seen the disclaimer ‘Past performance does not guarantee future returns.’     

How much difference is there year to year in returns by asset class? Minerva Wealth Advisory recently completed a study to measure annual returns across 7 different asset classes since the 2008 financial crisis. The results of the study, summarized in the exhibit below, show just how volatile financial markets can be.

Annual returns by asset class are shown in each column, with the best performing asset class that year at the top, with the other asset classes in descending order. In 2008, for example, investment grade bonds were the best performing asset class, returning 5.2 percent, followed by junk bond investments at -26.2 percent, the S&P 500 at -37.0 percent, all the way to the bottom of the list with emerging market equities returning -53.3 percent. But in 2009, what was at the top of the list in 2008 – investment grade bonds – was now at the bottom of the list. The crazy quilt of colors gives a sense for volatility that occurs year to year in financial markets.

Differences in return by asset class


How do returns on a diversified portfolio compare with returns by asset classes? One simple diversified portfolio would be to invest 60 percent in the S&P 500 and 40 percent in investment grade bonds. The black line in the chart below shows how this portfolio performed over time relative to the 7 asset classes; the number at the bottom of each column shows the return on the diversified portfolio. While a very simple portfolio, it shows how diversification can help reduce volatility over time.

Asset Returns Versus 60/40 Portfolio



How much diversification should an investors have in a portfolio? There is no single answer, because it depends on what they want to do with the money and their time horizon. For example, if they have a 20-year time horizon because the money is going to be used in retirement, then it may make sense to consider diversified portfolios tilted to higher return/higher risk investments. But if their time horizon is 3 years because they plan to use the money to pay college bills, they may want to consider portfolios concentrated in short-term fixed income instruments. 

Note: The following indexes were used to perform the analysis: investment grade bonds (Barclays US Aggregate Bond index), high yield bonds (Barclays US Corporate High Yield Bond index), emerging market equity (MSCI Emerging Markets index), international equities excluding the US (MSCI EAFE index), REITs (FTSE NAREIT All Equity REITs index), commodities (S&P GSCI index), S&P 500 (S&P 500 index). The YTD 2016 numbers are based on data through the middle of September.  

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

 

 

 

Stocks Are Risky – But so Is Avoiding Them

Over the long haul, stocks tend to outperform bonds. But for many people, it’s scary to invest in stocks because they are worried about short-term losses. While putting money to work in equities probably makes sense, they either delay investing the money or under allocate equities in their portfolio.

To help people think about this conundrum, Minerva Wealth Advisory searched third-party investment research to find data that could help frame the issue. One of the best research reports we found was published by Vanguard.Buried inside their report was an interesting chart summarizing the impact of broad asset allocation on risk and return. A simplified version of the Vanguard chart is shown below.

Vanguard Chart Stocks Are Risky But Do Not Avoid Them

In this clever piece of analysis, Vanguard assembled 87 years of data on returns from investing in U.S. stocks and U.S. bonds. They used this data to create portfolios that moved from being entirely invested in U.S. bonds to portfolios entirely invested in U.S. stock, with stops along the way to incrementally increase the portion of the portfolio invested in equities.

As the portion of the portfolio devoted to equities increased, so too did the volatility in annual returns, as evidenced by the longer bars on the right. Volatility is the pain, otherwise known as risk, that comes with the potential to earn higher returns. In the middle of each bar are the average annual returns each portfolio delivered, both nominal returns (which is before accounting for inflation) and real returns (which is the nominal return less the annual rate of inflation). The larger the portfolio allocation to equities, the higher the annual return.

In their report, Vanguard notes:

‘Although the annual returns represent averages over an 87-year period and should not be expected in any given year or time period, they do give an idea of the long-term historical returns and the downside market risk that have been associated with various allocations. Investors should carefully consider [this figure] as they determine how to achieve their investment goals without exceeding their tolerance for risk.'

 

*‘Vanguard’s Framework for Constructing Diversified Portfolios,’ published in April 2013. To read the report, go to https://advisors.vanguard.com/iwe/pdf/ICRPC.pdf

 

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

Why Are My Investment Statements So Confusing?

Many people hate looking at their investment account statements. They are usually page after page of numbers, with little context and liberal use of jargon. The core of the problem, however, is that most statements are not designed to answer the three fundamental questions on the minds of most investors.

Why are my investments statement so confusing by Minerva Wealth Advisory

Most statements are only useful to answer the first question, What Do I Own? While the layout and presentation may not be user friendly, statements do provide detailed information on each security or investment in the account and what it was worth on the date the statement was created. But statements rarely provide clear and useful information on the other two questions: How Are My Investments Doing? And What Am I Paying in Fees? To get these answers, investors generally need to ask their financial advisor for supplementary information and reports. Because it can be time consuming and frustrating to do this, some investors retain independent third-parties like Minerva Wealth Advisory to do this essential work on their behalf.  

How to read your financial statements Minerva Wealth Advisory NYC

While investment account statements may be frustrating to use, there are some important statement features that investors need to be aware of. 

Reading your financial statements by Minerva Wealth Advisory Lead financial planning in nyc

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

Postnuptual Agreements: When to Get a Financial Planner Involved

Postnuptial agreements couple with post nup

Marriage is about love, but it is also a state-based contract with laws about how things will be divided up in the event of divorce. Most couples considering marriage don’t know their financial rights and responsibilities in the marriage and its potential dissolution. If they have significant assets or high incomes, they might consult an attorney for a prenuptial agreement (“prenup”). Everyone has heard about prenups: an agreement signed before marriage where both parties agree on how assets and income would be divided up in the event of a divorce or separation. But what if circumstances have changed since the wedding? The couple may consider a postnuptial agreement (“postnup”). In a 2015 survey conducted by The American Academy of Matrimonial Lawyers, half of the divorce attorneys noted an increase in the number of spouses seeking postnuptial agreements.   

What is a postnup? 

A postnuptial agreement is a contract signed by a married couple that details how the couple’s assets and income would be divided in the event of a divorce or separation. The most commonly covered items in postnup agreements, as per the American Academy survey, are property division (90 percent of the postnups), alimony/spousal maintenance (73 percent), retirement accounts (45 percent), and occupancy of the marital residence (30 percent). 

How a Financial Planner Can Help

When couples want to protect their rights to specific assets, the goal of the postnuptual agreement is straightforward, even if the negotiations aren’t. When the agreement addresses several assets and support, a financial advisor may help the client avoid pitfalls. First, not all equally valued assets are equal. For example, assets may produce different amounts of income at different times and the tax treatment of the assets will not necessarily be equal. As examples, an investment portfolio will contain securities with different levels of unrealized capital gains; withdrawals from IRAs are fully taxable as income while withdrawals from Roth IRAs are tax free. 

In addition, assets such as homes, require cash flow to maintain. If the primary residence is sold after a divorce because of a lack of income, the capital gains exemption will now be $250,000 for a single owner instead of $500,000, for a married couple. 

Long term considerations also need to be taken into account. Would the settlement be sufficient to meet the client’s goals through their retirement years, or will it support them only for the next five or ten years?  How will Social Security benefits, which are not negotiable, fit into the overall plan? If a postnup does not provide for a client through retirement, then he or she may need to reassess their career plans.

When should postnups be considered?

  1. Roles or Circumstances Have Changed. As the marriage and the couple mature, their finances may become more sophisticated or one of them would like to take a different role at home or with their career. If one of the spouses does not want to be constrained or surprised by guidelines on division of property or support in divorce law, they may want to consider a postnup. Two examples are leaving the labor to raise children or moving to another country as an expat spouse.
  2. Revisions to prenups. Over the past 30 years, prenups have become much more prevalent across the United States. Circumstances change, which can lead a couple to enter into a postnup to modify prenup contract provisions. For example, at the time of marriage, one party may have felt strongly about keeping a family vacation home as a separate asset. But with the passage of time, they now want the vacation home to be a joint asset.
  3. Infidelity. When discovered, it can raise serious issues about whether the marriage will survive. Some couples use postnups as a healing tool. They recommit to the marriage, but do so with eyes wide open about what will happen if either party elects at some future date to end the marriage.
  4. Financial Infidelity. As examples, one spouse has incurred debts, mortgaged the family home, failed to pay income taxes or invested in risky ventures without the knowledge of their spouse. These actions are usually perceived as betrayals, and a postnup can provide the deceived spouse with some needed reassurance about their financial security if they choose to remain in the marriage.

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

Managing the Financial Affairs of Elderly Parents: Framing the Issues

Managing Financial Affairs of Elderly Parents: Framing the Issues

Many of us are taking more responsibility for the financial affairs of our elderly parents. Some of our parents are now unable to monitor fully their investments and interact with their advisor effectively. The reasons are various, including visual impairments, physical impairments, dementia, or the loss of a spouse who handled the finances.

In the case of dementia, the need for the children to get involved can sneak up on everyone. In one case, the surviving spouse had for years been highly organized and was always on top of household financial matters. But as he got into his mid-80s, he started having more and more trouble sorting through his mail, filing his various financial statements, and throwing out unsolicited requests from nonprofits. Tasks that used to take him an hour started to take half a day, if not more. Soon piles of paper covered the den couch and table tops.   Even financially competent parents are not going to stay financially competent forever.

While the specifics of when and how you get involved overseeing a parent’s financial affairs are highly situational, the issues you will need to investigate are not. The purpose of this blog post is to frame the issues you need to assess. In future blog posts, I will take these topics and share insight and options you have for addressing them.      

 When you get involved helping to manage the financial affairs of your parents, you will likely need to spend time on some or all of the following eight topics:

1.       Investment portfolio. They are likely to have multiple investment accounts spread across a number of different financial institutions. Getting a bird’s-eye view of the investment portfolio is the first order of business so that you can understand how both the taxable and retirement accounts have been invested. Issues you may find include: excessive fees for actively managed mutual funds, large single stock positions, and inconsistency between the portfolio asset allocation and the likely drawdowns from the accounts.     

2.       Required minimum distributions. When you turn 70 ½, Federal law requires that you start taking what are called required minimum distributions (RMD) from your retirement accounts, i.e., your IRA and 401(k) accounts. Not only do you need to confirm that your parents have been taking these distributions, which are subject to complicated IRS rules, but also that they are taking the money from the right accounts.

3.       Insurance. It is not uncommon to find elderly parents who have accumulated a complicated portfolio of different insurance products: life insurance, disability insurance, long-term care insurance, liability insurance, and auto and home insurance. Often times, the agents they bought these products from have long since retired. Understanding what they have in place, which may have made sense years ago when the products were first purchased, can form the basis for figuring out what should stay, what should go, and what needs to be modified.

4.       Bill paying. Making changes to who and how bills get paid can be a particularly sensitive topic because many elderly parents see bill paying as a way of maintaining control. There are ways to partner up with parents on this fraught topic so that they feel a sense of control, while at the same time, the children can be assured that the bills are being paid and that there are no unauthorized leakages from the accounts. 

5.       Debt. Neither good nor bad: it all depends on the situation and circumstances. For example, if your parents will have a large estate with a lot of low cost basis assets, then it may make sense for them to take on additional debt to finance living expenses, gifts to grandchildren or philanthropy in their lifetimes rather than selling low cost basis assets and incurring capital gains taxes.

6.       Account titles and beneficiaries. It is something you need to be aware of because most of the time they are out of date and will cause a lot of headaches if not corrected before your parents pass. 

7.       Essential documents. There are three important documents that you need to make sure your parents have in place: a power of attorney, a health care proxy, and a will. If your parents have recently moved to a different state to be near relatives or moved into an assisted living facility, they will need new wills and perhaps will need to add revocable trusts to their estate plan.

8.       Working with your parent’s advisor team. Your parents are likely to have long standing relationships with many different advisors: the accountant who prepares their taxes, the lawyer who drafted their will and perhaps a trust, the financial advisor they turned to for investment advice. It is likely, however, that some of the people on the team have inherited the account from colleagues who have since retired. You will need to take a fresh look at how much care is given to your parent’s account and how effectively the team is working together.   

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

The Rise of Manufacturing Entrepreneurs: Time To Be Optimistic About The American Economy?

Manufacturing Entrepreneurs America Ideas To Consider

The loss of middle class manufacturing jobs over the past 30 years has dramatically impacted employment in many industrial cities across the US. But the stories of loss, luckily, are starting to be overshadowed by the rise of manufacturing entrepreneurs. I think it is time to start being more optimistic about the long term potential of the US economy. 

“Startups are beginning to transform manufacturing just as they transformed service industries like taxi-hailing and short-term room lets. New techniques such as 3D printing, combined with a rapid decline in the cost of computing power, are making it easier for small firms to compete with big ones. Crowdfunding sources such as Kickstarter are making it easier for them to raise capital. And big companies such as GE are trying to crowdsource innovation by providing small manufacturing firms with space and seed-money. Exponents of this ‘hardware renaissance’ frequently locate themselves in old industrial towns such as Pittsburgh and Detroit, in part because there is lots of cheap space available and in part because they can draw on established manufacturing skill,” from The Economist Magazine, May 5, 2016.

DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.