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All Posts By Michael Lecours, CFP®

Financial Advice for Young People Just Starting Out

Congratulations – You graduated from college and landed your first job. Unfortunately, the party ends shortly after that. According to Zillow, 22.5% of millennials ages 24-36 live at home (roughly 12 million). And of those “Boomeranger”, only 12.5% are unemployed, indicating that the majority choose to stay home for one reason or another. The cause of this could be a number of reasons such as rising costs or low wages. Not to mention crushing debt from student loans and credit cards.

For people just getting out of school and starting to establish themselves, here are six important concepts to keep in mind:

1. Automate your savings: Set realistic goals. Starting small with automated savings is a good place to start, in that case, you won’t feel strapped for cash and it’s much less painful. For example $5 a week. Once you get more comfortable with saving money increase it in smaller increments. Use any number of tools that will do it automatically for you. So you can “save-and-forget”. Over time, you can slowly raise the amount. Starting early and being consistent can have huge implications later in life.

2. Design a budget: Learn from your college years. When it came down to entertainment purchases or gas for your car, it was an easy choice. But now, life is more complicated. You have to save for big expenses (like replacing a car in a few years), paying down debts, and saving for retirement (which seems absurdly far away for a recent grad to consider). The solution is a budget. Start by paying yourself first. By that, I mean save for your future (retirement and major expenses). Then, budget out your most essential day-to-day expenses. Whatever is left can be spent on discretionary expenses (eating out, having fun, etc).

3. Search for less expensive alternatives: Building on the budget concept, there are simple ways to cut costs. Maybe there is a gym in the area $10 less per month, those savings can add up quickly. Review your subscriptions, search for alternatives and calculate the potential savings. Subscriptions have grown in popularity over the last ten years. You’d be surprised how much you can save by eliminating a few subscriptions or finding a cheaper option.

4. Beware of ‘Advertiming’: You’ve just reached a major milestone in your life, and brands also realize that. In fact, they’ve gotten pretty smart. Advertiming is a strategy used in advertising to run adverts to a specific audience at a specific time, (i.e Dunkin Donuts ads during the morning rush hour, AARP magazine in the mail when you turn 50). Audi offers a “College Graduate Offer” for recent grads, they’re trying to hook you early.

5. Don’t buy a brand new car after landing your first job: JD Power discovered that 29% of new vehicles are bought by Millennials. Recent grads might be experiencing the income effect. Imagine going from a college student budget and meal plans to a salary, you feel a whole new level of freedom. It’s important to recognize that the income effect is just an emotional reaction to a major increase in cash flow. You’re not used to it yet.

Kelley Blue Book’s most recent figure for the average price of a new car is $35,285. If the average depreciation of a car is 20% after the first year you should rethink your options. The need for a reliable car could be validated, but that could also be $7,057 towards paying off lingering debt. Instead look for a New-Used car.

6. Ease off the social media: Recent data from Forbes suggests 72% of Millennials have made fashion and beauty purchases influenced from Instagram posts alone. Could the social influence be thinning their wallets? At the very least, it’s important to keep in mind how deeply the consumer culture has worked its way into apps we use every day (like Facebook and Instagram)

Like generations before them, millennials attempt to leave the nest while burdened with rising costs of living, peer pressures and debt. Brands are getting smarter with targeting them at a time when they’re not financially secure to pursue their expensive tastes. Needs for short-term appear more important than the long-term. In essence, it comes down to needs vs. wants. The ability to distinguish between the two is a simple, timeless concept, yet so often overlooked.

Budget, plan, ignore the noise and most importantly, prioritize.

Special thanks to Dan Varghese, our current intern for researching this post.

How Hindsight Bias Impacts Investment Decisions

Picture this. It’s an average summer morning, except it looks a little cloudy outside. You decide to shut off the AC, open a few windows and get the fans going before you head out. On your way home from work it starts to pour. Heavily. You think….I knew it might rain, I should’ve closed the windows! Truthfully, at the time you never really knew it was going to rain, did you? Not to mention, neither did the weatherman.

This is what we call hindsight bias. We believe after a specific event occurred that we had enough knowledge to predict the event.

Investors develop hindsight bias by becoming reactive to any new information they receive. There is a famous story of Sir Isaac Newton who was a victim of hindsight bias. He sold out of an investment thinking he got out at the top. While all of his friends stayed invested, he watched as they double and tripled their original investment. All the while, he was kicking himself for selling out early (Hindsight bias at work). And then he famously bought back into this investment at the very top. It quickly plummeted and left him almost broke. But he didn’t learn his lesson. He went on to make a number of other poor investment decisions that left him penniless.

Why are we so susceptible to hindsight bias? Psychology tells us that humans have a need to create order. So in a way we are attempting to learn from our mistakes by oversimplifying the causes of a certain outcome. In the real world, there are too many variables to account for. Usually, we pretend like we had the knowledge to make the correct decision at the time when we really did not. This type of bias makes it difficult to learn from our past mistakes, we don’t stop and review what really occurred and why. By believing one’s ability to predict future events, an investor can develop ‘overconfidence’ while attempting to predict future events in the market. Consequences can arise when investors attempt to make informed decisions with an unrealistic view of risk leading to mediocre returns, or worse, losses.

It is important for investors to recognize this bias so they can prevent it from spoiling their judgments while making important investment decisions.

This post was written by our intern, Dan Varghese.

Keeping Tariffs in Perspective

Recently, I was asked about my thoughts on the tariffs and the impact it may have on a portfolio.  What follows is my response:

“I see this as a giant game of chicken between China and the US.  I see this causing a lot of anxiety and volatility in the market, but I’d imagine that someone is going to “blink”, a deal will be struck and no tariffs will be enacted.    There will always be some issue that is of concern that gets blown out of proportion which leads to an overreaction among investors (thanks to the 24/7 media coverage). It could be the possible government shutdown, conflicts in Ukraine, North Korea, Brexit, elections, or rate hikes.  All of these received the same kind of media attention over the last 3-4 years.

It’s hard to separate ourselves from these kinds of issues because we are so close to them. It’s currently happening around us.  It’s on the news. It’s being discussed around the water cooler.  We are seeing it translate to the performance of our accounts.  And that can be scary.

Ultimately, in working with clients, I take a longer-term view on the markets. How will we look back in five years on the impact of these tariffs if enacted?  I can’t help but believe that it would be a foggy memory for most investors, just like Brexit, the taper tantrum, and the government shutdown.  And you take it out to an extreme example, some investors are starting to forget their fears they had during the last recession because they are seeing their account values grow significantly above the pre-recession values.

So in the grand scheme of things, I don’t see the tariffs as having a material impact on your situation in the long term. “

The Psychology of the Tax Refund

The average tax refund is about $3,000. And people do one of two things with it. They either spend it or set it aside for a specific purpose. What’s the distinction between these two groups of people? It all comes down to their expectation.

If the refund was unexpected, chances are it will be spent. This group of people is subject to the Windfall Syndrome in which “found” money is spent more freely than money earned.

If the refund was expected, chances are it will be saved. I’ve heard many people refer to their tax refund as “the money they will use for vacation” or “the money used to pay off last year’s Christmas bills”. This group of people abides by a behavioral finance concept known as Mental Accounting.

The key to all of this is the expectation. It is the single most important factor in determining if the refund will be spent or saved. It just goes to show how powerful a little bit of planning can have.

The Most Unusual Tax Deduction I’ve Ever Heard

What do you do with a house you no longer want? What if it’s a house in bad shape but you love the land?

Up until recently, I would have offered two options: renovate it or knock it down and rebuild.

Turns out there is a very creative strategy. You donate the house to the local fire department, who in turn burn it down for training purposes. You, in turn, receive a sizeable charitable contribution.

It’s common enough of a strategy that the Journal of Accountancy wrote a summary piece on what to be aware of (it’s written for CPAs, so it’s really technical, but the conclusion confirms it).

Analysis of the Tax Cuts

Recently some clients attend a talk on the recent tax law changes by Eliot Bassin of Bregman & Company. I thought it was interesting enough to send the slides out to readers of the blog and newsletter as there were several important take-aways that were new to me.

See the Slides: Analysis of the Tax Cuts Jobs Act

Here are a few slides that jumped out to me:

Slide 10: A comparison of tax brackets and who pays more (Red) and who pays less (green)

Slide 24: A simple impact analysis based on different hypothetical situations

Slides 33-40: a summary of tax changes affecting CT residents

 

The Surprising Superbowl Tax Twist

The following post is written by our current intern, Calvin Nastyn. He is a student at the University of Hartford where he is studying finance. The issue that Calvin digs into is a wonderful (and comical) example of an odd implication associated with state taxation laws.

Benjamin Franklin once said in a 1789 letter that “nothing can be said to be certain except death and taxes.” We are taxed in every aspect of our life. Whether it’s going to the store to buy groceries or even working to make a living, taxes are always going to follow no matter what. With 2017 being the year of tax reform, it is without a doubt that taxes are a complex subject. Those who have filed taxes know that there are hundreds, if not, thousands of different facets and nuances that our federal, state, and local taxes mandate. Anything that has to do with money has its own little (or big) section in the tax code.
Football player Jimmy Garappolo can attest to the fact that taxes are complicated, even though they may have worked in his favor. Long story short: Jimmy Garappolo, a former Patriots quarterback, will end up earning more than Tom Brady from the Super Bowl. Because pay for the Super Bowl extends to former players who played at least 8 games during the season of the Super Bowl, Garappolo will reap earnings from the biggest game of the season in which he and the team he is currently part of is not on the field. But how will he make more than Tom Brady, arguably the best quarterback in history? Minnesota law states that any professional athlete who is a non-resident of the state must pay taxes of his earnings from the team that year multiplied by a fraction that equals (total duty days worked in Minnesota/total days worked in the season). Since Garappolo has no duty days in Minnesota, he would have an effective tax rate of 0% in Minnesota. Rather, he would just be subject to the tax in the state where he lives, which is most likely taxed at a lower rate, given that Minnesota has the 2nd highest income tax rate, following California at number 1.

The point is that there are times where taxes can sometimes work in your favor or sometimes against it. Investors, in particular, are never certain about what may happen in the markets. They can only control risk. But when its time to cash out, there can be many costly tax implications that can severely hinder gains. You can be the best investor in the world, as Tom Brady is the best quarterback. However, if you don’t know your way around taxes that come along with investing, you can end up earning less than the guy who worked a fraction of what you did.

Source

Stock Market Update

For the first time in close to two years, the stock market is spooking investors. The decline was swift, sudden and unexpected.  It caught many people completely off guard.  A lot of the headlines I read over the weekend, yesterday and this morning were written to evoke more fear.  I’ve pulled together a few good quotes and excerpts to help put recent market events in perspective:
  1. “Don’t be scared, and don’t be impulsive. Be disciplined no matter what the market environment, and keep saving and investing according to your long-term plan,”  Kristin Hooper, chief global strategist at Invesco. Source
  2. “We are reminding clients to keep this in perspective and look to be proactive not reactive to the markets at this time. It is a big emotional test of…risk tolerance; we all want the upside but remember there is downside risk and goals, risk tolerance and time frames must always lead one’s investment decisions.”  Jeff Carbone, Managing Partner of Cornerstone Wealth. Source
  3. On average, there’s been a market correction every year since 1900… Instead of living in fear of corrections, accept them as regular occurrences. Source
  4. What’s more, the abnormal smoothness of the stock market over the past couple of years set investors up for a shock whenever stocks did fall at least 5%, as they did on Monday. As I pointed out last month, in the low-volatility market we’ve seen until recently, “even slight declines are apt to set off talk of Armageddon, and you will need to focus harder than ever on long-term returns to keep short-term losses from rattling you.” Source
  5. The Dow is down -0.4% year to date.  Source
  6. And then some people are selling because they aren’t people at all, but software programs that have been programmed to sell when others are selling. Source
  7. Losses — as in the Dow falling a little more than 7% over the past two trading sessions (including its biggest point drop ever on Monday) — loom larger than corresponding gains, according to those who study behavioral economics. In other words, losing 7% of your money hurts twice as much [as the pleasure of] making 7%. So, it’s normal, it’s human nature, that you’re in panic mode. But don’t act on your panic. Or at least don’t panic sell. Source
  8. “If investors were happy with their asset allocation on Thursday, they should find stocks more attractive today. Of course, investors sometimes are asleep at the wheel and a periodic wake-up call can be useful, but prices are just back to where they were a couple weeks ago, so why panic?,” Source
  9. We’ve had 15 straight months without a monthly loss in U.S. equity markets. Source
  10. The 665-point decline in the Dow Jones Industrial Average on Friday was the largest since June 2016. However, back in 2016, the Dow declined about 5%, and Friday’s drop was 2.5%. Source
  11. And while Monday’s drop was the biggest point drop ever, it still pales in comparison to the largest daily percentage losses: On Oct. 19, 1987, the Dow fell 22.61% and on Oct. 28, 1929 the Dow fell 12.82%. By contrast, Monday’s drop was 4.6%. Source
Still looking for some more perspective?  Consider reading this article written by CNBC a few years ago.
We are closely watching the situation and will act accordingly as the events continue to unfold.

The Usefulness of Market Outlooks

“Who knows” was my answer when I was recently asked about my own outlook on the markets for 2018.

Over the last few weeks, my inbox has been flooded by dozens if not a hundred market outlooks by prominent research firms, economists, and strategists.  And they are all completely different.  Some see significant stock market appreciation while others see little to no growth. Some see more growth in the US than abroad.  Others see more growth in the foreign markets than in the US.  Some see rising rates to be an issue.  Others do not.  And some even predict a negative year for the stock market. Chances are they are all wrong!

They are interesting to skim through to understand what they believe are the biggest issues to occur in 2018.  But it’s just as fascinating to see what is not included in their outlooks.  There are even some research groups that make a living by reading through old Market Outlooks and calling out all the wrong predictions.

Think back to this time last year.  Trump was just sworn into office and it seemed like everyone was waiting for some kind of market correction to occur.  But it didn’t!  Volatility is now way down.  Markets have shrugged off much of the bad news that has come out in recent months (such as North Korea).  Any market outlook that expressed these kinds of views would have been quickly dismissed if written in early 2017.

It’s a reminder to stay focused on your investment strategy.  There is a lot of noise that distracts investors and all to0 often leads them into making poor investment decisions.