Author Archives: Cohen Investment Advisors

Let’s Teach Our Kids About Money

When I was a late teen, my family went through some difficult financial times. I was beginning my sophomore year at Boston University unsure how tuition would be paid. My father’s business took a rapid downturn with the New England economy in the late 1980s, and his plan to cover my higher education expense was no longer an option.

I learned a lot from those years and believe sharing my experience has helped many of my clients avoid the mistakes my father and others made. It is important to prepare your children to survive and succeed on their own and function independently, as my siblings and I did, just in case the plans you have for your children don’t materialize.

One of the most important things to do with children is to talk to them about money. With four kids at home from ages 13 down to 3, I am constantly asked to buy things, especially online virtual things.  Rather than always refusing their requests, I try to limit this type of spending and hope to teach the kids something in the process.

Many experts recommend the principle of delayed gratification. Rather than simply refusing my kids frequent requests for V-bucks on the popular online game Fortnite, for example, I might offer to buy some before an upcoming trip, so they will have them to use on a long drive or flight. Hopefully, this delayed purchase is understood by the kids and at least helps them learn to wait to get something of value.

For more expensive purchases it is recommended to wait at least a day to make sure the item is still wanted before making the purchase. In general, it’s important to teach children why you say no to some things they want now in order to enjoy better things in the future. We shouldn’t only tell a child “no” but should also explain the reason.  When one of my children complains that an item they want is only $10, I let them know that $10 requests on a daily basis add up to over $3,000 per year and with four children that could pay for a very nice trip for the whole family! This helps put the actual value of money in perspective.

Parents should let children make some mistakes with their money. When a child has accumulated some money from birthday or holiday gifts or from a periodic allowance, it is fine to let them make a mistake with their purchase decision. By spending small amounts on a cheap toy that breaks or something that ends up not getting used, they will hopefully learn to make better choices in the future when they are faced with much larger purchasing decisions.

The key here is to let children make some financial decisions on their own, with limited parental guidance. After observing their buying activity, it may be wise to ask kids questions about their experiences with the purchases and let their own answers better inform them. For example, I’m waiting for feedback from my daughter about her recent purchase of highly overpriced designer sneakers to observe if there is any regret.

A weekly or monthly allowance is a great time-tested way to teach children about money and budgeting. Some experts suggest giving an amount equal to a child’s age starting as young as three. So, a three-year-old would get $3 per week to spend on whatever they wanted. They could save up to buy a toy or use the $3 to buy a treat at the grocery store. An unresolved debate among parents is whether an allowance should be tied to doing chores or getting certain grades in school. Most experts agree that it is a mistake to give an allowance for behaviors that are expected of children like being nice to siblings or putting their toys away.

My daughter recently got a raise in her weekly allowance to $20 per week now that she is 13. I decided to give my kids allowances starting at age 10 with $10 per week. For this allowance, they have a list of responsibilities that they need to follow which includes items like keeping their room clean, doing all their homework, and other seemingly simple things that are expected. If they don’t clean their room on occasion that is fine but if it happens consistently then they will lose that week’s allowance. The hope is that each child will learn that getting an allowance, as with a future work paycheck, comes with responsibilities that need to be met.

It is a good practice to supplement the allowance with extra money for chores that might be outside the usual list of responsibilities.  Extra money for washing the family car or babysitting younger siblings are a few examples of bonuses that may be given to a child looking to make a little extra money for something they want or to add to their savings. This practice reinforces the fact that money is earned, and that children, as well as adults, have the opportunity to earn more if they choose to apply themselves.

Since each of our kids was born, we have piggy banks in their rooms and have added birthday and holiday cash gifts to them. Being a financial and investment manager, it has always bothered me a little to leave any amount of money sitting in cash, even though the opportunity lost in the piggy banks isn’t huge since they just hold small amounts.

I make it a point to talk to my children about what I do for a living, and it warmed my heart recently when my seven-year-old son asked me if we could take the money in his piggy bank and invest it to earn interest. With interest rates on savings accounts up significantly in the past year, I thought this would be a good opportunity for my son. We opened the piggy bank and all the bills and coins added up to $498.  We took $450 of that and opened an online savings account which is currently paying almost 2%.  Although he will only earn just under $10 in a year in interest at this rate, he will be learning a valuable savings lesson, and hopefully will be motivated to add to the account as he gets future gifts during birthdays and holidays.

My thirteen-year-old daughter recently celebrated her Bat Mitzvah and decided to take a majority of the money she got as gifts from family and invest that money into stocks for long-term growth.  This was another proud moment for this financial professional father!

For those parents that are also business owners, it is good to talk to kids about business and, without necessarily getting into specifics, the basic finance behind running the business. I explain that my clients pay me an ongoing fee to manage their money and advise them on financial decisions and that is my revenue or income. My business employs a handful of people, pays rent in our office, pays taxes, and has other expenses, and the difference between the revenue and these expenses is the business income or profit. After paying taxes on that income, all the money left over is ours. Understanding what it actually takes to generate net income to live on and invest is very important.

It is good for children, especially as they enter the teenage years and start to think about their future, to think about how they will one day support themselves. Will they be employees and work hard to get annual raises or will they start a business and work to grow that business and draw income from the profits of the business?

A few years ago, my daughter learned to make slime at home. This a mixture of shaving cream, glue, and other things. She then packaged it in zip lock bags and sold the mix to other kids at school. I was so proud of her for starting a business so young. Though her “profits” were only in the hundreds, it was a great experience. There were no business expenses to her as the supplies for the slime were underwritten by dad, but I didn’t complain. This short-term business experience is an invaluable lesson.

When I was young I mowed lawns and did some gardening for neighbors to make money. I didn’t consider it a business while I was doing it, but looking back it was certainly a small business, and I learned from it.

Raising kids is complicated and very few states require personal finance courses be taught in school.  Parents need to start young teaching their children in daily situations and in terms that they can understand.  From the most basic conversation that ATMs don’t hand out free money to the more complicated discussion about investing a teenager’s summer earnings into a Roth IRA, there is a lot of material to cover.

Raising a child that becomes financially independent does a lot of good for that child. It also does a lot of good for the parents as their financial plan remains intact since their child no longer depends on them beyond the college years.

Many books have been written on this topic and I believe that many of our schools could offer more ways to help prepare our children for their futures through improved personal financial education. I plan to share more ideas about best practices for parents in future articles.

Protect Yourself From Identity Theft

Identity fraud is a growing problem and affected more people in the last year than at any time since data started being collected.  The data breach at Equifax last year is the highest profile case since it affected more than 145 million Americans.

Many other major companies have had large-scale data breaches including Anthem Blue Cross, J.P. Morgan, Home Depot, Target, and Sony.  More than 1,000 data breach incidents are reported each year from both large and small companies.  This national problem cost more than $16 billion in losses to businesses and individuals.

If someone is subject to identity theft, there are actions that can be taken to reverse the loss, but it can take a considerable amount of time and effort to fix things.  Following are some things you can do to help protect yourself and your family.

Request copies of your credit report annually.  Federal law requires each of the three national consumer credit reporting companies, Equifax, Experian, and TransUnion, to give you a free report every 12 months if you ask for it.  A website has been set up at to facilitate requesting the report from all three companies.  If not every year, everyone should periodically order their report to make sure there is nothing fraudulent.

Sign up for a credit monitoring and identity theft protection service.  Various companies exist to monitor your credit report and notify you if there are any new entries on your report.  One example is IDShield which not only informs you of any changes to your credit report but will also help fix any problems that occur.  The following hyperlink takes you to their site if such coverage is desired. Simply click IDShield.

Simple things you can do to stay safe… include avoiding clicking links in email messages from unknown sources. Don’t give out your Social Security number if called on the phone, and don’t throw papers with sensitive information out without first shredding them.  Clicking links to familiar websites can also be fraudulent as thieves can set up sites that seem to be authentic but are not.  Phone calls are sometimes made to individuals asking to confirm information from thieves that are “phishing” for your information. Never provide personal data or information to anyone whose identity and credentials are uncertain. Common sense and good judgment would have us err on the side of caution in today’s data-driven environment.

Investing Under the New Tax Laws

There was an endless debate during 2017 about tax reform and who should be the greatest beneficiary of the changes. In the end, tax rates are lower for most individuals and corporate tax rates will be significantly lower under the Tax Cuts and Jobs Act of 2017.

The tax code is still complex, and the changes didn’t do anything to simplify it, which was one of the goals of reform. The immediate response by the markets has been positive and the tax cuts are expected to boost the economy during the year as individuals enjoy more money in their paychecks and companies invest some of their tax savings into growing their businesses and better compensating their workers. Higher dividend payments to shareholders due to the tax savings will also find their way back into the economy.

In general, investment and retirement planning strategies were not significantly changed by the tax reform. However, passive investments in income-producing real estate will greatly benefit as the income generated will qualify for a 20% deduction.

Favorability of Passive Real Estate Income

Income from passive real estate investments, if structured properly, will be taxed at 20% off one’s marginal tax bracket. Someone in the highest 37% tax bracket will be taxed at 29.6% on their real estate income while someone in the 24% tax bracket will be taxed at 19.2%. These examples apply to passive investors in property as the rules are different for active investors whose primary business is real estate. Everyone should consult their own tax accountant concerning their passive real estate investments as individual situations differ.

This is the first time that real estate income has been taxed at a tax-advantaged rate and real estate investments still get the tax benefits of depreciation deductions and interest expense deductions, both with some limitations.

Favorable to Qualified Dividends

One of the real benefits in the tax code is the treatment of qualified dividends. Shares of companies like Kraft Heinz, Merck, Chevron, Coca-Cola, Pfizer, and Procter & Gamble pay qualified dividends of greater than 3% while companies like Verizon and AT&T pay better than 4%. Those qualified dividends are taxed at a lower rate than one’s ordinary tax rate.  If a single taxpayer earns $50,600, they will be taxed at 12% on their income at that level but dividend income up to that level will be tax-free.

The qualified dividend benefit is meaningful to a retiree that lives off their investment income.  The retiree could put their money in the bank and pay a 12% tax on the interest the bank pays or they could invest in companies that pay qualified dividends and pay no tax up to the $50,600 limit. Above that, the tax rate goes to 15% and at higher income levels goes to 20%. But at all levels of income, qualified dividends are taxed less than earned income or interest income.  Married couples can earn up to $101,200 in qualified dividends and pay no tax on those dividends if that is their only income.

Roth Accounts

The retirement savings system in our country is too complicated with so many types of accounts and choices between traditional retirement accounts and Roth retirement accounts.  With the new lower tax rates, more savers may want to consider Roth contributions as the value of a tax deduction is worth less when tax rates are lower.

Roth contributions don’t get any current tax deduction but all future growth in the account is tax-free when used in retirement. If tax rates go back up in the future, the value of having Roth accounts increases. Just as it is advisable to pay off the mortgage and other debt before retirement, saving more in Roth accounts helps reduce or even eliminate tax liabilities in retirement.

Consider Health Savings Accounts

One account that gets little attention and low participation rates is the Health Savings Account. Health Savings Accounts are still allowed under the new tax code. They allow participants to contribute up to $3,450 for an individual or $6,900 for a family and an additional $1,000 if 50 or older. The contribution gets a tax deduction and any growth in the account will be tax-free if used for medical expenses in the future.

An astute saver will max out the HSA and allow the account to grow to be used in retirement for medical expenses. Just like the Roth IRA, this type of account provides tax-free growth, and in addition, it provides a tax deduction. The accumulated funds in an HSA can be invested in growth-oriented mutual funds. Financial planners should encourage savings in HSA accounts in addition to Roth accounts for those that work for companies that offer one.

Expanded 529 Opportunities for Parents

Many parents have been saving for their children’s college education in 529 Plans. These accounts allow funds to be invested and the growth is tax-free if used for higher education.  Under the new tax code, funds in these plans can now be used for private education for kindergarten through high school. The additional flexibility of the 529 Plans is a welcome change and may encourage more use. Grandparents can also help the next generation by funding 529 Plan accounts. Savings in 529 Plans can be transferred to siblings if necessary.

A Time to Consult the Professionals

There are many more details to what is still a very complicated US tax code. Working closely with your financial and legal professionals is always advisable if not necessary when major changes in tax law such as the Tax Cuts and Jobs Act of 2017 occur.

Keep in mind the tax rate changes that affect individuals expire at the end of 2025. Also, the 3.8% additional tax on investment earnings due to the Affordable Care Act on incomes over $200,000 for single taxpayers and $250,000 for married taxpayers still applies unless the ACA is repealed.

Overall, we’re hopeful. If the intended economic benefits resulting from the taxation side of our fiscal policy come to fruition, it’s likely that more people will participate in the economy not only as producers and consumers, but savers and investors as well.

Retirement Planning Needs Simplification

What is a simple and effective retirement plan?

When you read that question, do you start to think about how different the answer is to every individual? Of course, there are myriad ways to manage your investments to help assure that enough money is set aside for the day you decide to stop working full time or retire from work completely. There are many different investment resources and financial products as well as unlimited ways of combining them into a savings or retirement plan. In short, the choices for how you structure your retirement plan are virtually limitless.

Studies have shown that when people have a decision to make and are faced with too many choices, they tend to make no decision at all! Professor of psychology, Barry Schwartz, wrote about this in his book The Paradox of Choice: Why More is Less. The book is used by marketers when developing their plans to sell more products and consultants when advising their clients how to improve sales.  In one study referenced in the book, researchers set up two displays of gourmet jam at a food store. Ten times more product was sold when the choice was limited to six varieties compared to twenty-four varieties of jam. Could it be that savings levels in our country are too low because there are just too many choices for savers?

Too Many Choices?

Professor Schwartz notes that in planning for the future, we’re faced with so many choices and types of plans, it’s no surprise that so many people have put off decisions and are unprepared for the future. Record levels of cash remain in bank accounts earning almost no interest.  Studies of retirement plans administered by Vanguard found that for every ten mutual funds in a retirement plan, participation rates drop by two percent with some employees even foregoing employer matching contributions.

Because of having so many investment vehicle choices, many individuals end up keeping their money in the bank earning next to nothing. When saving for the future, decisions need to be made whether the funds should be directed toward retirement, education, home improvements or other goals.  When directing funds toward retirement, there is always the concern that the funds would be needed early if there is a loss of job or medical need or another unexpected event.  Moreover, there can be significant tax consequences on decisions as well as potential penalties for withdrawing money prior to certain dates, even in an emergency.

Business owners often want to help their employees save part of their income toward retirement but must choose from among many options including 401(k), Simple IRA, SEP IRA, pension plans, profit sharing plans, and more.  There are different contribution limits for each type of plan and distribution rules are complicated which vary by type of plan.  The cost to administer the complexities of these plans may even prevent some businesses from adopting an employee retirement plan altogether.

Once invested in a retirement plan, there often are hundreds of different types of accounts to choose from. Some plans allow for pre-tax contributions, Roth contributions, and post-tax contributions or a combination of these and some plans allow for in-plan conversion of funds between the accounts. And often, transactions that are made in one plan are not allowed in another plan because the complicated rules relating to retirement plans are interpreted differently by each plan administrator.  There are even some investments in retirement accounts that may cause a tax liability.  Is your head spinning yet?

Increase Savings Rates through Simplification!

As politicians in Washington continue debating the issues of savings and taxation, consumers continue to be confused. As recently as 2014, the government created a new savings account called the myRA.  This account added to the countless choices savers have and was terminated recently. Rather than creating new types of accounts to encourage people to save, why not simplify the system so that we don’t face so many layers of choice which, as demonstrated, actually stagnates savings growth by making investment decisions more difficult. It’s confusing enough trying to pick what type of investments make sense. The type of account should not add further confusion.

A new type of account called a Universal Savings Account has been proposed by several Congressmen.  The plan is simple and anyone over the age of 18 can contribute up to $5,500 per year to the account.  The money can be invested however desired and withdrawn for any reason without taxes or other penalties.  Plans like this have been successful in Britain and Canada with wide adoption by people at all income levels and of all ages.  In the U.S. around twenty percent of people have Roth IRAs but in Britain, 43 percent hold these type of all-purpose savings accounts, and in Canada, the number is 54 percent with more than half of account holders contributing additional funds each year.

Only a quarter of Americans that have Roth IRAs add to the accounts each year. Single purpose accounts like Roth IRAs have many rules for contributions and withdrawals while the all-purpose Universal Savings Accounts, or the British or Canadian equivalents, have no rules on withdrawals.  In the U.S. only 7 percent of those with incomes under $50,000 have Roth IRAs. In Britain, 55 percent of savings account holders have incomes under $25,000.

Many individuals and couples seek the advice of advisors like me because of the complex set of choices they face in making decisions not only how to invest their money but what type of account is most advantageous.  Frequently I meet new clients that have accumulated large sums of money in bank accounts or in their retirement account but have not allocated those funds to an investment.  I am sure the factors that Dr. Schwartz presented in his book about too many choices are the primary reason for this.

Saving and investing need not be so complicated. People save to achieve their personal financial goals rather than get a tax deduction or benefit. A single type of account for all individuals whether they work for a large company, small company, or are self-employed should be created to replace the numerous choices that now exist.

Elements of a truly simple retirement plan:

– Current balances should be allowed to be rolled over into the new plans.

– The plan should allow something like $25,000 in annual contributions which is comparable to the British plan.

– All withdrawal restrictions should be removed so that no one would hesitate to invest.

– The accounts should be as simple to open as a checking account at a local bank.

Though there is a widespread debate about laws and regulations affecting the environment, healthcare, and banks, I am sure most would agree that the rules affecting individuals and their savings choices should be simplified. As a financial planner, much of my work involves making our clients’ investment decisions simpler or at least more understandable. If the rules affecting investment decisions were simplified, I believe that individuals would more readily choose to save and invest for a better future.

Real Estate Investing: What are the options?

By Daniel Cohen

The market value of all real estate in the world is more than 200 trillion dollars which is more than triple the size of the value of all stocks and almost double the value of all bonds. Considering this staggering value, it may seem unusual that most financial advisors and their clients have little to no money invested in real estate aside from that invested in their own homes. Maybe there are good reasons to avoid most real estate investment offerings. It might also be that most financial advisors have too little experience in the business of real estate and the specialized field of real estate investing to offer the right kind of advice to their clients.

As Seen on TV

Real estate investments can be either active or passive.  A popularized example of active real estate investing is buying a home or condo, fixing it up, and then selling it for a profit. There are all sorts of TV shows popularizing this “flipping” activity and fortunes have been made flipping properties. However, in times of declining home values, big losses can occur with this short term trading strategy, especially if debt is used to buy the property. Don’t give up your day job to become a home flipper unless you have the
capital to get through the down cycles in the market.

Before 2008 many people felt you couldn’t lose with real estate. A recent Morningstar report estimates that the long term return of home values is one percentage point over inflation. So if inflation has been 3%, then home values would have grown by 4%. But keep in mind, this estimate is before factoring in the carrying cost of the property like insurance, maintenance, property taxes, etc. so the actual return on owning a home is likely less than inflation.


Call the Landlord!

Another popular form of active investing in real estate involves buying a home or condo and renting it out for the rental income. The owner is the landlord and is responsible for finding a suitable tenant and handling problems that occur. Unexpected repairs, vacancy, collection problems, and other issues all affect the return of the investment property.

The biggest risk of investing in a single home or condo is losing your single tenant and not being able to re-rent for an extended period of time. In this case, there will be a negative cash flow as the expenses of owning this property must continually be paid. This risk is reduced if the investor owns multiple properties or a multifamily property. Borrowing money to buy the property is common and adds to the risk and bank financing has to be factored in to figure the total return on the investment.

Many people don’t want to be actively involved in property investment management. The good news is there are various ways to invest in real estate without the day to day hassles of being a landlord or the risk of losing the tenant or tenants in your property.

The Risk in REITs

Investing in publicly traded Real Estate Investment Trusts or “REITs” is the simplest and most popular passive alternative. REITs are required to pay out ninety percent of their income to shareholders so they are a good source of stable income. REITs can be diversified into multiple types of properties and can specialize in sectors of real estate like apartments, offices, or storage.  Some diversify geographically while other specialize in certain regions. The potential downside of REITs is that they exhibit much the same volatility and risk as the stock market. A widely held diversified REIT would have lost more than 50% of its value during the 2007 to 2009 selloff in the market.

There are many non-traded REITs and a recent SEC investor alert warned investors about the risks of investing in them. They include lack of liquidity, meaning you cannot sell them when you want to, and high fees – as much as 15% upfront as well as other ongoing costs. Distributions may come from principal rather than income which is misleading to investors. The lack of share price transparency means that you don’t know what your position is really worth, and conflicts of interest may exist among the managers of the REIT and its service providers. For these reasons, it might be wise to avoid non-traded REITs.

Limited Drawbacks in Limited Partnerships

Another passive way to invest in real estate is to participate as a limited partner. The partnership raises money from investors to buy either a single property or a group of properties. The investors are the limited partners and the organizer of the partnership is the general partner. The general partner is responsible for finding the property for the partnership to own and then to oversee the investment. The general partner will report to the limited partners and make income distributions to them. Limited partnerships can focus on any type of property and can target income producing property or property to be developed depending on the goals of the limited partners. These partnerships are not liquid like publicly trades REITs but may provide the stable income and long-term appreciation many investors desire.

Government regulations have placed limits on investment partnerships and who can invest in them. Limited partnership investments are often limited to accredited investors – people with $1,000,000 or more in investable assets or an annual income of $200,000 or more. There have been discussions in Washington about loosening regulations to allow more individuals to participate in these types of private partnerships.

Cost Transparency is Key

It’s crucial to know exactly what all of your investment costs are. Many limited partnerships have been organized by a small group of related individuals and the costs are kept to a minimum. However, there are partnerships formed by firms that require a high cost to participate. The types of fees to watch out for include acquisition fees, asset management fees, service fees, distribution fees, performance fees, and disposition fees. Some general partners charge a combination of these fees while others charge all of them. Therefore, it can be prohibitively expensive to participate in certain partnerships, so beware of all the upfront and ongoing costs before investing. You and your financial advisor or accountant should review the offering and figure out the total cost before committing to invest.

For investors with a relatively small amount to invest, the best choice to get exposure to real estate investing may be to accept the general market volatility and invest in a broadly diversified, publicly traded REIT. For larger investors who qualify as accredited investors, you may want to consider a limited partnership if you can find one with a reasonable fee structure and a general partner you can trust.

Saving for College? The Virginia 529 Plan gets Morningstar’s Gold Rating.

Cohen Investment Advisors believes strongly in the value of a higher education and we help our clients plan for the future cost of funding education for their children. 529 plans provide a tax-advantaged way for parents and grandparents to save funds for college expenses. These plans are offered in every state and the decision can be confusing since there are so many choices. The Virginia 529 Plan is the primary choice for our clients.

Morningstar recently gave the Virginia 529 Plan its highest Gold Rating commenting that, “the plan’s sensible approach and strong underlying manager lineup has long made it a compelling option for investors. With fee cuts over the last year, the plan also looks attractive from an expense standpoint, and it now represents one of the best choices available to college savers. Both residents and nonresidents will find plenty to like with this plan.” Read the Morningstar 529 Plan Report.

Cash is NOT King

By Daniel Cohen, CFP®

Since the presidential election, interest rates have been rising but rates paid on savings at banks are still near historic low levels, barely more than zero percent.  Big losses have been suffered on holdings of intermediate and long-term bonds as that is where the rates have risen the most.  Losses on ten-year treasury bonds are approaching ten percent since the election.  Prices on bonds go down when rates go up.  As of this moment the stock market has gained nearly ten percent since the election.

Prior to the election, cash held by portfolio managers stood at levels not seen in more than a decade and month after month that amount was growing.  No one can accurately predict the future, and the outcome of the election was a surprise to most.  Polls prior to the election asked which candidate would be better for the stock market and those polls chose Hillary Clinton.  The expectation was that a continuation of current policy from Washington would keep the bull market going.  So far, the change promised by Donald Trump has sparked the strongest year-end rally in years contrary to what polls led many to believe was likely.  A post on social media the night of the election bragged about selling everything weeks before the election anticipating a Trump victory.  Hopefully, no one took that post as advice to sell the next day.

Imagine having the foresight to invest just before the markets started to rally the day before this recent Election Day and then liquidate all holdings at the peak whenever that day comes.  Or, just before a major losing year in the market like 2008, selling your holdings and waiting until the market hits rock bottom, and then investing to enjoy all the gains you earned.  Market timing like this just never works as there are no reliable indicators that give consistent clues of market tops and bottoms.  Even if the decision to sell prior to a correction is timed right, it is unlikely the decision to buy back in will be well timed.

Not King but Superhero – when Needed!       

Holding cash is the wise move if funds are needed in the near term for a planned purchase like a car, college tuition, or home and holding cash to cover living expenses for the current year or at least part of the current year is not a bad policy.  Holding emergency funds is a common practice.  These are times when risk should be avoided.  But, holding cash for extended periods of time, especially when those funds are not needed in the near term, is a costly mistake.

In practice, many people hold large amounts of their portfolio in cash and in some cases cash is their only investment.  Cash includes liquid money funds, savings accounts, and short term certificates of deposit.  Holding cash in large amounts as an investment applies not only to small investors.  Many banks have divisions to help investors with minimums of half a million or more in cash and some set the minimum at five million or more.  And, record amounts of cash are being deposited in these accounts. Many new client relationships have come to me in the past few years, not out of dissatisfaction with another advisor, but because their portfolio had been at a bank earning next to nothing for too long.

The reason for holding so much cash is usually either fear of losing principal or waiting for the right time to invest.  With proper education, these investors can earn much better rates of return on their money than staying in cash for extended periods of time.

Evidence proves that market timing does not work.  And, long-term investors have always been rewarded by prudently participating in the markets.  There are many great investments in companies that pay steady dividends and grow those dividends to keep pace with inflation.  If you are one of those sitting on a large portion of your portfolio in cash thinking “Cash is King,” maybe you want to talk to an advisor to be educated about your options.

experienced-investorsMy advice is that you start investing with the understanding that “Cash Flow is King” instead.  This cash flow comes from dividends paid from individual stocks or interest paid on individual bonds. The income derived from dividends and interest can be reinvested or it can be used for funding various lifestyle needs. Keeping cash “safely” in the bank misses the improved income and growth opportunities that more experienced investors are able to enjoy.

Rethinking the Balanced Approach to Investing

With interest rates remaining at historic lows for an extraordinary length of time, maybe now is the time to rethink how much should be allocated to bonds in a portfolio.  Historically, it has made sense to hold a certain percent of a typical portfolio in stocks balanced with bonds in order to reduce risk.  Stocks have provided the best protection against inflation as dividends generated by stocks have historically grown over time while the value of the portfolio has also grown.  In the previous several decades of declining interest rates, bonds, like stocks, have provided steady, growth-enhanced income to investors because bond values have increased as rates have declined.  However, with rates having nowhere to go from here but up, the past strong returns on bonds are impossible to repeat.

We have all heard the disclaimer, “past performance is no guarantee of future results.”  But, few investors pay much attention to this warning.  With interest rates at historic lows, large amounts of money continue to flow into bond funds.  In the last decade, there hasn’t been a larger demand for bonds relative to stocks than there is today.  The expectation is that global growth and inflation will remain low and monetary conditions will not tighten so that gains in bonds will continue.  But if the global economy improves and monetary conditions tighten, bonds are likely to lose value.  The meager interest rates paid on bonds today will not be able to offset losses.  Moreover, a recent report by consulting firm McKinsey projects that total returns on bonds may be less than 1% over the next twenty years.

In the past when investors wanted to reduce the risk in their portfolio they would add exposure to bonds and reduce their exposure to stocks.  That conventional wisdom is under debate as many agree that the risk to bonds is much greater today that it was in the past.  Many investors, including well-known economist and author of the classic finance book A Random Walk Down Wall Street, Burton Malkiel, recommends substituting high yielding stocks for bonds in a portfolio.  In the most recent edition of this popular book, Malkiel suggests that although stocks are usually riskier than bonds, favoring them over bonds makes sense, even for retired people, due to today’s unusually low interest rates.

Many portfolio managers and investment strategists are reducing or eliminating their exposure to bonds and buying stocks that have a lower level of volatility than the overall market.  These stocks tend to have above average dividend yields and this additional income is a great substitute for the lost income from bonds as rates have dropped so low.  Many retirees who traditionally rely on bank CDs or government bonds for income have also turned to stocks with above-average dividend yields to provide income during their retirement years.  The growing income and share price of stocks has been rewarding for many investors.

Examples of companies that are considered low volatility include US-based firms like Procter & Gamble, AT&T, Johnson & Johnson, Verizon, McDonalds, Exxon Mobil, Pfizer, and Coca-Cola.  Low volatility companies internationally include Novartis, National Grid, GlaxoSmithKline, AstraZeneka, and Diageo.  Yields on these companies have ranged from 2.7% to 5%.

coca-cola-stockA better way to reduce risk in today’s market environment may be to reduce rather than increase your bonds holdings. I believe it makes more sense to add a diversified mix of high-yielding, lower volatility stocks.  The average stock today returns more that government bonds and certainly a lot more than money held in the bank.

A balanced and diversified investment portfolio should probably look quite a bit different today than it did 10 years ago considering the current interest rate environment.  We’ve had close to a decade now of extremely low interest rates.  It may finally be time for people who have relied on bonds for risk reduction to seriously consider reallocating their portfolio.  Consulting with a financial advisor that has investing experience through various stock and bond market cycles may provide the insight you need to achieve your goals in the years and decades to come.

Beware of the Robo-Advisor and Other “Smart” Investment Solutions

By Daniel Cohen

The financial services industry has undergone changes since I entered it more than two decades ago, and it seems to be changing at an accelerated pace in the past few years.  Just like many other industries such as lodging (Airbnb) and transportation (Uber), financial services companies are now competing with technology-based competition from firms like Betterment.

Many of the changes in the financial services industry over the past decades have been to drive cost down.  However, some of the recent changes may actually increase the cost of investing, and many high-cost investments are still popular.

Trading stocks today costs a fraction of what it did a few decades ago, and funds that track the movement of the broad market have minimal cost. Most of today’s investors probably don’t know that prior to 1975, the government regulated the commission on a stock trade. Because the commissions to traders and fund managers have dropped so much, and trading online has become so easy, there is less opportunity for companies to earn income from trading commissions or from generating investment management fees. Only the largest of money management firms, some having trillions of dollars under management, can achieve the scale necessary to make money on funds with such low cost structures. Investment management firms are always looking for ways to raise revenues, which ironically adds cost to the investor in their low margin industry.

As defined by Investopedia, a robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. These services emerged as a new way to generate advisory fees on a large scale using today’s mobile technology. The focus of robo-advisory firms is purely on investment management and not on financial planning. They invest solely in funds rather than individual stocks.  There is a perception that if a service is automated then it will cost less. Robo-advisory firms actually add an additional fee layer on top of the cost of the funds they are buying for their customers.

“Freeze! No trading!”

Robo-advisors are automated programs.  There is no dedicated advisor to call when the market experiences a high level of volatility. In the recent brief selloff after the Brexit vote, one leading robo-advisory halted trading in their service which prevented customers from getting out of their positions or adding to their positions to take advantage of the correction. The Massachusetts Secretary of the Commonwealth, William Galvin commented that, “these customers were put at a great disadvantage. The precedent this sets is a real bad situation where people are desperate to get liquidity and they can’t.”

The markets quickly recovered after Brexit, but what if the correction was not so brief?  How would these automated programs have handled things?  The history of most robo-advisors is too short to judge whether the extra cost of the service improves performance, even though the services claim to expect better performance than a typical “do it yourself” investor. One study from 2014 showed no better result from the robo-advisors compared with the broad market indexes.

Another recent development in the financial services industry has been the development of many “smart beta” strategies. The strategies attempt to outperform the market indexes by weighting various factors differently than their weight in the index. There are many skeptics of these funds, and they carry additional risk.  Burton Malkiel, the retired Princeton University economist, has been a strong proponent of index investing for many years primarily because of their low cost. He argues that low cost indexes outperform actively managed funds over time because of their low turnover and better tax efficiency.  His book, “A Random Walk Down Wall Street” was first published 43 years ago. In a recent update, he concludes that smart-beta strategies aren’t right for individual investors because they are riskier and have long periods of underperforming the stock market. He says that smart beta is just a new way for fund managers to justify higher fees.

Cost is definitely an important factor in choosing an investment program, and the reduction in the average cost of investment management programs has been generally positive for investors.  However, there are many other factors that help determine the long-term success of a financial plan. For example, tax efficient investing can have a big impact on the performance of an investment program. The particular type of investment account you choose can have a large impact on future retirement income. Taking advantage of the tax benefit of qualified dividends can also make a big difference.

Some people choose to invest on their own without the assistance of a financial planner, and many do it well.  However the typical “do it yourself” investor does underperform the market for a variety of reasons. Many of the mistakes are behavior related, such as buying or selling at the wrong time and emotionally based investment decisions.  A well experienced Certified Financial Planner will keep his or her clients on track to reach their goals and will help avoid those behavioral based investment mistakes.

How do you define “smart” financial service? 

All professions are facing challenges from new technology-based offerings. Even telemedical advice is now being offered by many health plans. Predictably, those professionals that deliver a high value of advice to their clients will not only remain in business but will prosper as the need for customized personal advice is growing. Those that provide a commodity-type service or that fail to monitor and understand dynamic information won’t be able to compete.

In my financial advisory practice, we charge a single, all-inclusive advisory fee which covers comprehensive financial planning as well as investment management.  Our clients primarily own individual stocks, and sometimes the stocks are complemented by low-cost funds for diversification. We avoid the “smart beta” funds and don’t need help from a computer-generated algorithm.

happy retirementOur “smart” approach to investing is evident when I meet with clients who have been with me for many years; people who are living the lifestyle that they set out to enjoy. I feel especially “smart” when talking with my 90-something clients who are still traveling and exercising, and I share their stories and investment strategies with my younger clients so that they will similarly be enjoying their most senior years.

I plan to continue investing in quality dividend paying stocks as well as maintain a low turnover to keep investment and tax cost to a minimum. I’ve always been open-minded about all matters concerning the financial services industry, my business, and what works best for my clients. I pay close attention to new opportunities that may include the use of advanced technologies. That’s why my firm has invested in the latest research, financial planning software, and investment management tools.

We’ll keep an eye on automation, but for now, the early evidence is in which suggests that robo-advisors have limits by which an experienced human being with foresight is unencumbered.