Clients and long-time followers already know one year of performance is really a nano-second of investing time. However, it’s instructive to look back on 2023 to see what happened in that snapshot of time. The US stock market was up 26.1%¹ for the year. Not bad. If you invested $1,000,000 in the US market on January 1st, 2023, fell asleep, and woke up on January 1st, 2024, your account would have a value of $1,261,000. This would have been quite a pleasant surprise to wake up to. However, if you checked your account every month, your experience (mental and financial) was very different. Your portfolio would have lost value in February, August, September, and October. One-third of the months, you would have been frustrated with the returns. From August through October, your portfolio would been down 9.1%! Seeing $1,000,000 fall to $909,000 in a short three-month period may have freaked you out. In October, we got a few calls from newer clients worried about the market and wondering if we should take action.

Then November and December happened. The market ended up returning 15.2% over those two months. 58% of the gain for the year occurred in November and December. If you had sold after the 9.1% market decline, you would have missed over half the entire market premium for the year. Bouncing in and out of the market is a loser’s game. Let me repeat: bouncing in and out of the market is a loser’s game. Staying committed to the long view is a winning strategy over time.

The market behaves unpredictably every year, but two things remain true. First, markets are volatile and can go up and down very quickly. Second, investors are compensated with higher returns by staying invested in the market and observing the risk of volatile equity markets.

Keep in mind that even a one-year time frame is a short period. Equity markets can underperform short-term government bonds for over a decade. Taking the long view means not just staying invested for months or even years, but throughout an investment lifetime.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies.  Investments involve risk and, past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser before implementing any investment strategy

As our compliance leader, I’m usually the one who says what we can’t do. Not this time. Effective immediately, I am pleased to announce a new way to communicate with us.

You can now text message our team anytime!

As always, our goal is to simplify your financial life, allowing you the freedom to focus on what truly matters. Communication is a vital part of our relationship, and we’re breaking down barriers, making that communication as easy as sending a text. Connect with our team effortlessly, anytime, from anywhere.

This innovation is more than a service; it’s a commitment to enhancing your experience with us. Embrace the freedom of effortless communication. Take the long view confidently, knowing your financial journey is constantly supported by a team just a text away.

Add any of these numbers to your phone and shoot us a text to test it out!

314-448-4023

615-369-0690

713-533-1200

Welcome to the third installment of picking up pennies. Last month, we discussed investing fixed income in IRAs and investing equities in ROTH and taxable accounts to minimize taxes and maximize after-tax returns. However, we employ many more tax strategies to reduce the taxes our clients pay each year. This month, we will discuss how Exchange Traded Funds (ETFs) further reduce our clients’ annual taxes.

•   Volume 1 – Keep Cash Balances Low (Better Chance for Higher Returns)
•   Volume 2 – Asset Location (Reduces Taxes)
•   Volume 3 – Using ETFs  (Reduces Taxes)
•   Volume 4 – Trading ETFs in Competition (Reduces Trading Costs)
•   Volume 5 – Number of Funds and Not Auto-Reinvesting Dividends (Reduces Trading Costs)
•   Volume 6 – Tax Lots and Tax Loss Harvesting (Reduces Taxes)
•   Volume 7 – Summary (Total Impact)

What is an ETF?

An ETF is a type of pooled investment vehicle, just like a Mutual Fund. Investors pool their money together and hire an asset manager to invest it toward a common investment goal. ETFs typically invest in publicly traded securities like stocks and bonds. ETFs and Mutual Funds are just “wrappers” for different investment strategies. What do we mean by “wrapper”? You have many choices as you wrap presents for your loved ones this holiday season. You can use wrapping paper, boxes, gift bags, etc. Although these options have different aesthetic appeals and costs, people care about what’s under the wrapping. They care about the gift. The same is true for investments. Investment strategies can be wrapped in an ETF or a mutual fund. You care about how your money is being invested under the wrapping.

Why use ETFs?

Although ETFs and Mutual Funds are very similar, there is one important difference between the two that allows ETFs to provide investors with tax advantages. No matter your investment strategy, you will eventually have to place trades. You will own stock A and want to buy stock B. What mutual fund managers do is sell stock A and then buy stock B. When they sell stock A, they may realize a capital gain. At the end of the year, all of those capital gains from their trades are passed on to the end investors in the mutual fund. Thus, every investor gets a tax bill at the end of the year.

ETFs work differently. An ETF manager can “exchange” one set of stocks for another. So rather than sell stock A and buy B, an ETF manager can go to a market participant and exchange stock A for stock B. Because no cash changes hands, no capital gains are realized. Thus, at the end of the year, no capital gains are passed on to investors. ETFs don’t eliminate the capital gains taxes; they defer them. Thus, you only pay the capital gains when you, the investor, not the manager,  sell the investment. You get to determine when you pay taxes rather than being forced to pay them year after year.

This deferral of taxes provides investors with a lot of advantages. By deferring taxes, you can continue to invest the money you would have paid in taxes and earn a return on it. In addition, if you hold the assets to death, your beneficiaries would get a step-up in cost basis, and you would never pay the taxes. Assuming no step-up, the after-tax return benefit of using ETFs rather than Mutual Funds is ~0.05% per year. Including the step-up at death, the benefit would be ~0.5% per year.

Although these tax savings can be large, trading ETFs can be trickier than trading mutual funds. Next month, we will talk about how we trade ETFs by having market makers compete for our business and lower trading costs for clients. This is yet another way to bring unique value to our clients.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Returns and market information quoted here was pulled from publicly-available, third-party sources believed to be accurate. Investments involve risk and, past performance is not indicative of future performance. Any actual return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser before implementing any investment strategy.