Category Archives: Investing

The Importance of Return on Equity

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ROE measures how much profit a company generates per dollar of shareholders’ equity.

Return on equity (ROE) is a must-know financial ratio. It is one of many numbers investors can use to measure return and support investing decision. It measures how many dollars of profit are generated by a company’s management for each dollar of shareholder’s equity.

The metric reveals just how well the company utilizes its equity to generate profits.  It reveals the company’s efficiency at turning shareholder investments into profits and explains, mathematically, the ratio of a company’s net income relative to its shareholder equity.

ROE is very useful for comparing the performance of similar companies in the same industry and can show you which are making most efficient use of their (and by extension investors’) money.

Billionaire investor Warren Buffett uses ROE as part of his investment decision making process. Buffet cares deeply about a company that uses its money wisely and efficiently. He believes that a successful stock investment is a result first and foremost of the underlying business; its value to the owner comes primarily from its ability to generate earnings at an increasing rate each year.

Buffett examines management’s use of owner’s equity, looking for management that has proven it is able to employ equity in new moneymaking ventures, or for stock buybacks when they offer a greater return.

What is ROE

Return on equity is a ratio of a public company’s net income to its shareholders’ equity, or the value of the company’s assets minus its liabilities. This is known as shareholders’ equity because it is the amount that would be divided up among those who held its stock if a company closed.

The basic formula for calculating ROE simply is to divide net income from a given period by shareholder equity. The net earnings can be found on the earnings statement from the company’s most recent annual report, and the shareholder equity will be listed on the company’s balance sheet. The specific ROE formula looks like this:

ROE = (Net Earnings / Shareholders’ Equity) x 100 or EPS / Book Value

“ROE tells you how good or bad management is doing with your investment,” says Mike Bailey, director of research at FBB Capital Partners in Bethesda, Maryland. “Higher ROEs generally stem from profitable businesses that enjoy competitive advantages within a given industry.”

A high ROE doesn’t always mean management is efficiently generating profits. ROE can be affected by the amount that a company borrows.

Increasing debt can cause ROE to grow even when management is not necessarily getting better at generating profit. Share buybacks and asset write-downs may also cause ROE to rise when the company’s profit is declining.

On the other hand, idle cash in excess of what the business needs to continue operations reduces the apparent profitability of the company when measured by return on equity. Distributing idle cash to shareholders is an effective way to boost its return on equity.

Key Takeaway

Return on Equity measures how efficiently a company generates net income based on each dollar invested by company’s shareholders.

A steady or increasing ROE is a company that knows how to successfully reinvest their earnings. This is important because most companies retain their earnings in the equity of the business.

A declining ROE is symbolic of executive management that is unable to successfully reinvest their capital in income producing assets. Companies like this should elect to pay most of their earnings to shareholders as dividends.

References:

  1. https://smartasset.com/investing/return-on-equity
  2. https://www.forbes.com/advisor/investing/roe-return-on-equity/
  3. https://www.nasdaq.com/articles/5-ways-improve-return-equity-2015-01-21
  4. https://money.usnews.com/investing/articles/what-is-return-on-equity-the-ultimate-guide-to-roe

6 money myths debunked | Fidelity Investment

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Don’t be bamboozled. Believing these myths could hurt your bottom line.  FIDELITY VIEWPOINTS  – 06/30/2021

Key takeaways

  • Establish good saving habits. Be sure to save some money from every paycheck.
  • Invest your savings appropriately for your goals and time frame.
  • Debt isn’t always bad but must be used responsibly.

There is no shortage of bad information out there—and falling for some of it can cost you money. It could be other people who steer you in the wrong direction, or it could be the things you tell yourself. Whatever the source, believing these myths could be hazardous to your financial health.

Myth #1: It’s not worth saving if I can only contribute a small amount

In reality: If you start early, around age 25, saving 15% of your paycheck—including your employer’s match to your 401(k) if you have one—could help you save enough to maintain your current way of life in retirement. It sounds like a lot, but don’t lose your motivation if you can’t save that much. Don’t be discouraged if you start later than age 25. Beginning to save right now and gradually increasing the amount you’re able to put away can help you hit your goals.

Save as much as you can while still being able to pay for essentials like rent, bills, and groceries. Fidelity’s budgeting guidelines may be able to help determine how much you can afford to save and spend.

  • Consider allocating no more than 50% of take-home pay to essential expenses (including housing, debt repayment, and health care).
  • Try to save 15% of pre-tax income (including employer contributions) for retirement.
  • Prepare for the unexpected by saving 5% of take-home pay in short-term savings for unplanned expenses.

Myth #2: The stock market is too risky for my retirement money

In reality: It’s true that money in a savings account is safe from the ups and downs of the stock market. But it won’t grow much either, given that interest rates on savings accounts are typically low. When it’s time to withdraw that money for retirement a few decades from now, your money won’t buy as much because of inflation. The stock market, however, has a long history of growth, making it an important component of your longer-term investment portfolio.

For instance, for a young person investing for retirement, a diversified investment strategy based on your time horizon, financial situation, and risk tolerance could provide the level of growth you need to achieve your goals.

There are a variety of ways to invest. Building a diversified portfolio based on your needs and the length of time you plan to be invested can be as complicated or as simple as you prefer. You can build your own diversified portfolio with mutual funds or exchange-traded funds—or even individual securities.

Even if you choose to manage your own investments, you may not be entirely on your own. 401(k) providers often offer example investment strategies that could give you ideas on how to build a diversified portfolio. You can invest in the funds in the model portfolio in the suggested proportions or you could use the models as a source of inspiration for your own investment ideas.

If you find investing daunting or don’t have the time to figure it out just yet, you might consider a managed account or a target-date fund for savings that are earmarked for retirement.

Myth #3: I’m young, so I don’t need to save for retirement now

In reality: Retirement can feel very far away when you’re young—but having all of those years to save can actually be incredibly powerful. That’s because time and compounding are important factors in a retirement savings plan.

Compounding happens as you earn interest or dividends on your investments and reinvest those earnings. Because the value of your investments is then slightly higher, it can earn even more interest, which is then packed back into the investments, allowing it to grow even more.

Over time, the value can snowball because more dollars are available to benefit from potential capital appreciation. But time is the secret ingredient—if you aren’t able to start saving early in your career you may have to save a lot more in order to make up for the value of lost time.

You can start by contributing to your 401(k) or other workplace savings plan. If your employer matches your contributions, make sure you contribute up to the match—otherwise you’re basically giving up free money. If you don’t have a workplace retirement account, consider opening an IRA to get started.

Myth #4: There’s no way of knowing how much money I’ll need in retirement

In reality: How much you’ll need depends entirely on your situation and what you plan to do when you leave the workplace.

But Fidelity did the math and came up with some general guidelines. Aim to save at least 15% of your pre-tax income every year—including employer contributions. To see if you’re on track, use our savings factor: Aim to have saved at least 1x (times) your income at 30, 3x at 40, 7x at 55, and 10x at 67.* Of course, everyone’s situation is unique and you may find that you need to save more or less than this suggestion.

Read about all of Fidelity’s retirement saving guidelines on Fidelity.com: Retirement roadmap

Don’t worry if you’re not always on track. Saving consistently, increasing your contributions when you’re able, and investing for growth in a diversified mix of investments could help you catch up over time.

Myth #5: All debt is bad

In reality: It’s true that carrying a balance on your credit card or a high-interest loan can cost a lot—significantly more than the amount you initially borrowed. But not all debt will hold you back. In fact, certain types of debt, like mortgages and student loans, could help you move forward in life and achieve your personal goals.

Plus, the interest rates on mortgages and student loans are typically much lower than those on personal loans or credit cards, and the interest may be tax-deductible.

No matter what kind of debt you take on, make sure you shop around for the best rates and never borrow more than you can afford to pay back on time.

Myth #6: Credit cards should be avoided

In reality: As long as you pay off your card balance in full each month to avoid interest, making purchases with credit can be worthwhile. Many credit cards offer a rewards program. If you make all your everyday purchases with your card, you could quickly rack up points you can redeem for cash, travel, electronics, or to invest.

Also, demonstrating that you use credit responsibly can help you increase your credit score, making it easier to buy a car or a home later on. It may even earn you a lower interest rate when you borrow in the future. It can be difficult to dig out of credit card debt, but if you control your spending and pay the card off every month, it could pay you back.

References:

  1. https://esj.seniormbp.com/SeniorApps/facelets/registration/loginCenter.xhtml

Buffett on Inflation

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“Inflation often feels like an abstract concept, but it hits everyday people the hardest.” Warren Buffett

Inflation is when the dollars in your wallet lose their purchasing power — either because the money supply has dramatically increased or because prices have surged, according to Bankrate.com.

Effectively, inflation occurs when the cost of goods and services in the economy goes up over a sustained period of time. Yet, inflation doesn’t happen overnight, and it also doesn’t happen when the cost of one particular good or service goes up.

From an economics perspective, inflation refers to price increases to the broader economy. And, price increases aren’t always synonymous with inflation — and some economic experts say a little bit of inflation is actually good for the economy. That’s for two main reasons: One, it prevents a deflationary trap, which experts say can be even worse than deflation because money loses value. Another reason is because households make better financial decisions when they expect stable and low prices.

“We may see prices rise on certain things like gas or milk, but it’s not necessarily inflation unless you see prices rising sort of across the board, across many different products and services,” says Jordan van Rijn, senior economist at the Credit Union National Association (CUNA).

The Berkshire CEO described high inflation as a “tax on capital” that discourages corporate investment. The “hurdle rate,” or the return on equity needed to generate a real return for investors, climbs when prices rise, Buffett said. “The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil,” Buffett added.

Buffett pointed out inflation can hurt more than income taxes, as it’s able to turn a positive return on investment into a negative one. If prices have climbed enough, people who make a nominal return on their investment may be left with less purchasing power than before they invested.

Inflation Causes

Given the federal government’s unprecedented loose monetary policy, fiscal spending spree and money-printing splurge over the last year, many economists have warned that such fiscal irresponsibility could result in a destructive wave of inflation.

‘I worry about inflation. I do not believe inflation is going to be transitory.’ Larry Fink, chairman and CEO, BlackRock Inc.

Defenders of federal government pandemic monetary and fiscal interventions have insisted that any resulting price inflation is just transitory. But recent data is showing that price inflation is hitting new highs and many economists believe that inflation is deep rooted and non-transitory.

However, the June’s Consumer Price Index (CPI) shows prices once again sharply on the rise. From June 2020 to June 2021, the data show that consumer prices rose a staggering 5.4 percent. Larry Fink, Chairman and CEO of BlackRock Inc., isn’t convinced by the Federal Reserve’s arguments that U.S. inflation pressures will fade away once supply bottlenecks and other temporary factors resulting from the COVID-19 pandemic fade away.

Economists lump inflation causes into two categories: demand-pull and cost-push inflation.

Cost-push occurs when prices increase because production is more expensive; that can include rises in labor costs (wages) or material prices. Firms pass along those higher costs in the form of higher prices, which then cycles back into the cost of living.

On the flip side, demand-pull inflation generates price increases when consumers have resilient interest for a service or a good.

While price inflation has many causes, much of the current inflation can be traced back to the policy of the Federal Reserve. The Fed essentially created trillions of new dollars to pump into the economy in the name of “pandemic stimulus.”

“The quantity of money has increased more than 32.9% since January 2020,” Federal Economic and Education (FEE) economist Peter Jacobsen explained in May. “That means nearly one-quarter of the money in circulation has been created since then. If more dollars chase the exact same goods, prices will rise.” 

“We are seeing very substantial inflation,” Warren Buffet said at a recent shareholder meeting. “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”

The typical person’s standard of living declines as a result of price inflation, because what really matters is not what number appears on your paycheck but the purchasing power of your paycheck. Working-class Americans suffer tremendously when their energy bill increases by nearly 25 percent in just one year, for example.

It is not a secret that stocks, like bonds, do poorly in an inflationary environment, according to Warren Buffett.

“There is no mystery at all about the problems of bondholders of in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner” Buffet states. “You hardly need a Ph.D. in economics to figure that one out.”

Regarding stocks, the conventional wisdom believes “…that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms; let the politicians print money as they might.”

The main reason it, stocks as a hedge against inflation, do not turn out the way conventional wisdom believed, according to Buffett, is that “stocks, in economic substance, are really very similar to bonds”.

References:

  1. https://www.bankrate.com/banking/federal-reserve/what-is-inflation/
  2. https://fee.org/articles/inflation-just-hit-a-13-year-high-here-s-why-you-should-care/
  3. https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-warned-inflation-prices-tapeworm-investors-businesses-2021-5
  4. https://www.cnbc.com/2018/02/12/warren-buffett-explains-how-to-invest-in-stocks-when-inflation-rises.html
  5. https://fee.org/articles/the-costs-are-just-up-up-up-warren-buffett-issues-grave-warning-about-inflation/
  6. https://fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/
  7. http://csinvesting.org/wp-content/uploads/2017/04/Inflation-Swindles-the-Equity-Investor.pdf

Roth IRA

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“Roth individual retirement accounts were created to help middle class earners set aside money for retirement that they wouldn’t have to pay taxes on at withdrawal.” Barron’s

The Roth individual retirement account (IRA) was created to provide an alternative to making non-deductible contributions to traditional IRAs. Roth IRAs are funded with after-tax dollars, which means at withdrawal at age 59 ½ the money is tax-free. Comparatively, traditional IRAs are funded with pre-tax dollars, so distributions are taxed at withdrawal.

You’re taxed or penalized when you withdraw your Roth IRA contributions and earnings if your Roth IRA account isn’t at least 5 years old or if you’re not yet 59½. The earnings portion of the withdrawal may be subject to taxes and a 10% penalty.

The contribution limit for Roth IRA accounts is $6,000 a year in 2021 (or $7,000 for people 50 and older).

There are also income restrictions for Roth IRA.

  • Single individuals with modified adjusted gross incomes (MAGI) of less than $125,000 in 2021 can contribute up to the limit, but their contributions are phased out if their MAGI is between $125,000 and $140,000.
  • If individuals earn more than $140,000, single taxpayers cannot contribute to a Roth IRA. For married couples filing jointly, the threshold is between $198,000 and $208,000 in 2021. 

Individuals can also use Roth conversions, where they take money from a traditional IRA and move it into a Roth after paying a one-time income tax on the transferred assets since pre-taxed dollars converted to a Roth are taxable at ordinary income rates. These transfers can also be known as a “backdoor Roth,” because they’re working around income limits to push money into these ultimately tax-free accounts. 

References:

  1. https://www.barrons.com/articles/peter-thiel-roth-ira-propublica-51624558641
  2. https://www.edwardjones.com/us-en/investment-services/account-options/retirement/roth-ira

7 Investing Principles

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The fundamentals you need for investing success.  Charles Schwab & Co., Inc

1. Establish a financial plan based on your goals

  • Be realistic about your goals
  • Review your plan at least annually
  • Make changes as your life circumstances change

Successful planning can help propel your net worth. Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.

A financial plan can help you navigate major life events, like buying a new house.

2. Start saving and investing today

  • Maximize what you can afford to invest
  • Time in the market is key
  • Don’t try to time the markets—it’s nearly impossible.

It pays to invest early.  Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.

Don’t try to predict market highs and lows. 2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.

3. Build a diversified portfolio based on your tolerance for risk

  • Know your comfort level with temporary losses
  • Understand that asset classes behave differently
  • Don’t chase past performance

Colorful quilt chart showing why diversification makes long-term sense. The chart shows that it’s nearly impossible to predict which asset classes will perform best in any given year.

Asset classes perform differently. $100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

4. Minimize fees and taxes; eliminate debt

  • Markets are uncertain; fees are certain
  • Pay attention to net returns
  • Minimize taxes to maximize returns
  • Manage  and reduce debt

Fees can eat away at your returns. $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save roughly $13,000.

5. Build in protection against significant losses

  • Modest temporary losses are okay, but recovery from significant losses can take years
  • Use cash investments and bonds for diversification
  • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses

Diversify to manage risk. Investing too much in any single sector or asset class can result in major losses when markets are volatile.

6. Rebalance your portfolio regularly

  • Be disciplined about your tolerance for risk
  • Stay engaged with your investments
  • Understand that asset classes behave differently

Regular rebalancing helps keep your portfolio aligned with your risk tolerance. A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.

7. Ignore the noise

  • Press makes noise to sell advertising
  • Markets fluctuate
  • Stay focused on your plan

Progress toward your goal is more important than short-term performance. Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

References:

  1. https://www.schwab.com/investing-principles

Closing the Black Wealth Gap

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Black families have one-eighth the wealth of white families as a result of economic discrimination and institutionalized racism.

This year marks the 100th anniversary of the Tulsa Race Massacres. Over two days, a white mob in the city’s Black district of Greenwood killed an estimated 300 Black Americans and left nearly 10,000 destitute and homeless. The Greenwood area was known as Black Wall Street, an epicenter of Black business and culture.

The Tulsa Race Massacres is just one many thousands of violent and economic incidents throughout American history that created the wealth gap. As such, the Black wealth gap was created through centuries of institutional racism and economic discrimination that limited opportunities for African-Americans.

Wealth was taken from these communities before it had the opportunity to grow. This history matters for contemporary inequality in part because its legacy is passed down generation-to-generation through unequal monetary inheritances which make up a great deal of current wealth.

The racial wealth gap is a chasm with Black families owning one-eighth the wealth of white families. According to the Survey of Consumer Finances, in 2019, the median net worth of Black households was $24,000 as opposed to $189,000 for white households. This shortfall in financial wealth creates a cascade of inequalities in education, homeownership, and simply saving for emergencies.

Historically, Blacks were limited to certain neighborhoods and had more trouble borrowing to buy a home than white home buyers. Additionally, Black workers don’t advance to the top positions in companies at a proportional rate as other groups.

Moreover, African American families have had fewer opportunities to build generational wealth through home ownership, investments and inheritance. In this century, many Black families were stripped of their wealth and financial security by by both public and private institutionalized racism whether called Jim Crow or redline policies.

There are other factors: Many African-Americans, particularly older ones, are too conservative as investors. Only 34% of Black families own stocks, while more than half of white families do, according to a Federal Reserve. It is important to help African American investors get more comfortable with owning risk assets such as equity stocks, ETF and mutual funds that build wealth over the long term.

Do not seek shortcuts to build wealth

You must build wealth over time. If you’re saving 15% or 20% of your income over 30 years, there’s a good chance you will be wealthy. These methods truly work whether you’re making $50,000 or making $500,000 a year.

‘We just had an 11-year bull market. If you didn’t take the appropriate amount of risk, you’re significantly behind,” says Malik Lee, an Atlanta financial advisor whose clientele is more than 90% African-American.

American Dream for Black families

The heart of the American Dream for Black families is financial wellness, independence and freedom. There are many ways to express the American Dream, including owning their home, not living paycheck to paycheck, and being able to travel. Today, 69% of African American families are confident the American Dream is still attainable, according to MassMutual’s ‘State of the American Family’ survey.

Financial wellness for most families is the heart of the American Dream. American families tend to view financial wellness in terms of five common financial priorities:

  • Having an emergency fund
  • Feeling confident in both short-term and long-term financial decision making
  • Not carrying a lot of debt
  • Being financially prepared for the unexpected
  • Not living paycheck to paycheck

Black families are taking steps to secure their financial future and dreams, but more needs to be done to keep the American Dream alive. The top financial regret across all consumer groups surveyed is “not starting early enough.”

References:

  1. https://www.barrons.com/articles/this-advisor-wants-to-close-the-black-wealth-gap-accepting-risk-is-key-51625077456
  2. https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Net_Worth;demographic:racecl4;population:1,2,3,4;units:median;range:1989,2019
  3. https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/
  4. https://www.massmutual.com/static/path/media/files/mc1133aa_09248mr-final.pdf
  5. https://www.forbes.com/sites/brianthompson1/2021/06/17/the-key-to-closing-the-racial-wealth-gap-black-entrepreneurship/

Positive Financial Mindset

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A person cannot achieve financial freedom and save by paying themselves first, invest for the long-term and accumulate wealth until they believe they can be financially free and successful.

Carol S. Dweck, Ph.D., a Stanford University Professor of Psychology, who is considered by many the leading expert on mindset and human behaviors, and who wrote the book, ‘Mindset: The New Psychology of Success‘, says people have two core mindsets: a growth mindset and a fixed mindset.

A growth mindset is the belief that our skills and qualities can be cultivated through effort and perseverance: Our abilities are due to our actions. So many people do not obtain financial freedom because they do not have one thing: the right mindset. Everything starts with how you think about money, wealth and success.

Embracing a Positive Mindset

When you begin to embrace a growth mindset, you start to think differently about how you talk to yourself and think about financial success. This leads individuals to focus on saving by paying yourself first, investing for the long-term and accumulating wealth, rather than focusing on expenses, paying bills and paying off debt. Consider this, if you focus solely on paying bills or paying off debt, you’re limiting your ability to save, invest and accumulating wealth; effectively, you’re not focusing on growth.

One common financial myth held by many Americans is that to achieve financial success through saving, investing and accumulating wealth, a person must sacrifice their happiness, their families and often their health for a large paycheck. People must realized that no matter how successful and happy a person masked themselves to look outwardly, it means nothing if he or she wasn’t happy with themselves on the inside. Portraying an outward image of success no matter how one felt on the inside does not equate to wealth. Instead represents a path to misery and unhappiness.

Most people are never able to achieve financial freedom because, for one, either they don’t know it exists or believe it’s possible for them; normally they’re never taught anything about it.

It begins with Mindset

“If you think the amount of money you have (or rather, don’t have) is due to someone else, you need to change your financial mindset.”

The key to saving, investing and accumulating wealth and achieving financial freedom isn’t starting off with a lot of money, it starts with one’s mindset…embracing a positive financial mindset. It all begins with the belief that you can realize and achieve it. Once you believe in your mind that you can, then you need to find a reason to keep this belief as strong as possible; this reason is your “Why?” Without it, at the first sign of adversity or when things begin to get challenging, you will quit.

Deciding to change your attitude regarding personal finance is one of the first steps in shifting your mindset and changing the of your outcome. A growth mindset means that you think with abundance and you believe that resources are not finite and that you can create more. With a growth mindset, you know that resources are infinite and that if you invest wisely, you’ll be able to achieve higher returns.

For example, people who focus on prosperity tend to look at their finances as an opportunity for growth — they focus on the opportunities for growing their income and net worth. But, in order to achieve this growth, you have to be willing to learn new things and step outside your comfort zone. Having a growth mindset with your finances empowers you to want to learn more about investing and ask a lot of questions about money; it helps you think like an investor.

A growth mindset is especially important with personal finances because it lets you accurately assess risk. A growth mindset knows that there’s always more to be made. It’s a prudent approach to savings as well as personal investing.

A person can find evidence of the Law of Attraction in the Bible in several places.  For instance:

“As a man thinks, so is he”-Proverbs 23:7

“A good man, out of the good treasure of his heart, brings forth that which is good; and an evil man out of the evil treasure of his heart brings forth that which is evil: for of the abundance of his heart his mouth speaketh.”- Luke 6:45

“What you decide on shall be done, and light will shine on your ways”- Job 22:28

“Ask, and it will be given to you; seek, and you will find; knock, and it will be opened to you. “For everyone who asks receives, and he who seeks finds, and to him who knocks it will be opened.…”Matthew 7:7-8

“…whoever shall say unto this mountain, be removed, and be cast into the sea; and shall not doubt in his heart, but shall believe that those things that he says shall come to pass, he shall have whatsoever he says”- Mark 11:23

Mindset is the key to changing your financial habits and building wealth. By changing your money mindset, you will be able to achieve your long term financial goals. Essentially, financial success–saving, investing and accumulatin wealth–is a mindset. A perso can’t truly be wealthy until they believe they can be wealthy.

References:

  1. https://theweek.com/articles/728758/how-growth-mindset-revolutionize-finances
  2. https://investmentu.com/how-to-beef-up-your-financial-mindset-for-2021/

Roth IRA Conversion

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A Roth individual retirement account (IRA) is off-limits for people with high annual incomes.

If your earnings put Roth IRA contributions out of reach, a backdoor Roth IRA conversion is an option that lets you enjoy the tax benefits of a Roth IRA. A backdoor Roth IRA is a strategy that helps you save retirement funds in a Roth IRA even though your annual income would otherwise disqualify you from accessing this type of individual retirement account.

Backdoor Roth IRA conversions are mainly useful for high earners whose annual income (plus access to workplace retirement plans) already make them ineligible for tax deductions for traditional IRA contributions.

Who Benefits from a Backdoor Roth?

  • High earners who don’t qualify to contribute under current Roth IRA rules.
  • Those who can afford the taxes for a Roth conversion and want to take advantage of future tax-free growth.
  • Investors who hope to avoid required minimum distributions (RMDs) when they reach age 72.

A general rule of thumb with Roth IRA conversions is that you will owe taxes on any money that has never been taxed before.

Roth IRA Conversion makes little Tax difference f

A Roth conversion will not make a significant difference to your retirement standard of living, according to an exhaustive new study.

The study findings reveal that “…only if you’re in the top 1% of retirement savers will a Roth conversion move the needle more than a little bit in your retirement.” The study, “When and for Whom Are Roth Conversions Most Beneficial?,” was conducted by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

Unlike many previous analyses of Roth conversions, McQuarrie adjusted all his calculations by inflation and the time value of money, likely changes in tax rates, and a myriad other obvious and not-so-obvious factors.

McQuarrie finds that only if you have millions in your IRA or 401(k)—at least $2 million for an individual and $4 million for a couple—will your required minimum distributions in retirement be so large as to put you into even the middle tax brackets.

Only for those select few will the potential tax savings of a Roth conversion be significant. For most of the rest of us, we’ll likely be in lower tax brackets in retirement years, with an effective rate of 12% or less. That almost certainly will be lower than the tax we would pay for a Roth conversion during our peak earning years prior to retirement.

Even if tax rates themselves go up, furthermore, it’s still likely that your tax rate in retirement will be lower than preretirement. That’s because you’ll likely be at your peak earning years prior to retirement, when you might be undertaking a Roth conversion, and therefore in a relatively high tax bracket.

Once you stop working and retire, and are living on Social Security and the withdrawals from your retirement portfolio, your tax rate will most likely be lower—even if the statutory tax rates themselves have been increased in the interim.

Backdoor Roth IRA conversions lets you circumvent the prescribed AGI limits if your annual earnings put direct Roth IRA contributions out of reach.

References:

  1. https://www.forbes.com/advisor/retirement/backdoor-roth-ira/
  2. https://www.marketwatch.com/story/to-roth-or-not-to-roth-11623431970
  3. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3860359

Saving for the Future

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“Saving is about putting aside money for future use. Investing is about putting your money to work for you with the goal of growing it over time.”

Saving money isn’t the easiest thing to do, especially if you’re one of the many of Americans living paycheck to paycheck. But saving for the future remains vitally important — not just to enable you to make large discretionary purchases such as a big screen television or a luxury vacation, but for emergencies, retirement, or buying a home.

  • Saving involves putting aside money for future use.
  • Investing involves putting your money to work for you with the goal of growing it over the long term.
  • To build your financial future, you need to do both, save for the future and invest for the long term.

Unfortunately, many of Americans aren’t where they should be financially. A 2019 Charles Schwab Modern Wealth survey found that about 59 percent of American adults are living paycheck to paycheck.

If you’re having a hard enough time paying the bills and putting food on the table without racking up debt, saving for the future is probably the last thing on your mind. Only 38% of people have an emergency fund, according to Charles Schwab, and one in five Americans don’t have a dime saved for retirement, according to a survey from Northwestern Mutual.

But, being a good saver certainly puts you ahead of the game. And having solid savings’ habits are an important step toward financial security. But saving by itself is not enough. While saving is about accumulating money for the future, investing is about growing your money over the long term. And that can make a huge difference in your financial future.

Begin your savings journey today for a better tomorrow

The hardest part about saving is getting started.

Basically, saving is putting aside money for future use. Think of saving as paying yourself first or an essential expense. From your earnings, you should take out what you intend to save for taxes first, if you’re a freelancer, and then take out 10% to 15% for savings. In other words, before you spend your first dollar on monthly expenses, first you should set aside 10% to 15% of income for your savings.

You can think of it as money you have left over once you’ve covered your essential expenses. Essentially, you should make saving a line item on your monthly budget, so that saving becomes one of your essentials. And, having money tucked away will help you pay for the things you want above and beyond your daily expenses, and also cover you in case of emergency.

Having more month left then money

A savings account is an interest-bearing account that helps you save money and earn monthly interest. Separate from your checking account and long-term investments, savings accounts can grow with regular deposits and compounding interest that you can use for your future, large purchases or emergency funds.

Having a sizeable savings account can help you stay out of debt and give you the cushion you need should you face an unexpected illness, job loss or expense. Plus, when you want something special like a week’s vacation, you’ve got the money.

Building a “cash cushion” is an important step towards financial freedom. In a cash cushion, or emergency fund, you want enough cash on hand to cover three to six months’ essential expenses.

Additionally, a well-rounded savings strategy should focus on both short-term and long-term goals, says personal financial expert, Carrie Schwab-Pomerantz CFP® major moves in order to save money — Those extra dollars are being used in two ways: to pay off debt (credit cards and student loans) and to save for a new home.

Most people keep their savings in a bank account. The upside is that it’s easily accessible and safe; the downside is that it won’t earn very much. Money in savings accounts is not likely to keep pace with inflation. Which means the money you have saved today can actually lose buying power over time. That’s why just saving isn’t enough.

Investing creates the action

Investing, on the other hand, is about putting your money to work for you with the goal of growing it over time. Here’s an example. If you put $3,000 each year in a savings account and earn 1 percent, at the end of 20 years you’d have about $67,000. If you invested that same amount of money and got an average 6 percent return over the same time period, you’d have nearly $117,000. The sooner you start saving the less you may need to save because your money gets to work that much sooner. The more you save, the more you have to invest—and the more those returns can add up.

Nobody knows, especially the talking heads in the financial entertainment media, if the stock market is going up or down tomorrow, much less six months or 12 months from now. Moreover, it should not matter if the market meltdowns one day and melt-up the next. When it goes down, you should invest. And, when it goes up, you should invest. In other words, you must consistently invest in the market. Do not let volatility and market moving news faze you, or cause a bout of investing paralysis.

Investing involves risk

Of course, investing involves risk. And the stock market particularly will have its ups and downs. But there are ‘tried and true’ ways to mitigate that risk. The key to mitigating risk is to diversify by choosing a broad range of investments in stocks, bonds, and cash based assets that aligns with your financial plan asset allocation, risk tolerance and time horizon and never put all your money in one particular stock or asset.

One other important factor is time. To protect yourself against market downturns, a long-term approach is essential. At your age, you have time to keep your money in the market and ride out the inevitable market lows. The trick is to stick with it through those lows, keeping your focus on the potential for long-term gains.

Beginning with your next paycheck, commit to paying yourself first. Develop a budget, evaluate your spending needs, and understand your long-term goals.

References:

  1. www.schwab.com/resource-center/insights/content/youre-saving-should-you-be-investing-too
  1. https://www.bustle.com/life/3-women-share-how-theyre-saving-for-their-big-life-goals
  2. https://content.schwab.com/web/retail/public/about-schwab/Charles-Schwab-2019-Modern-Wealth-Survey-findings-0519-9JBP.pdf
  3. https://news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than-5-000-In-Retirement-Savings

Time in the Market

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Time in the market, not timing the market

Investors have a bad tendency to do the wrong thing at the wrong time with regards to investing decisions. They want to panic sell when the market is getting hit really bad (sell low) or they fear that they’re missing out on the market rally and buy when markets start to go up (buy high). Successful investors know that it is impossible to predict a stock’s outcome. Any stock can result in a potential profit or loss, but the hope of “hitting it big” in the markets has led plenty of investors to try and time the market. Instead, it’s importance of investors to have a clear idea of their goals, as well as the time frame for their financial plan.

 Focus on time in the market – not trying to time the market

Timing the market involves trying to predict the future price trend of a stock and the market. As a result, there is a high probability of failure with this strategy, because no consistently predict the future of the markets. Although it sounds ideal to buy stock at a low price and sell it shortly after at a higher price for a profit, it’s often too good to be true. There are always people who get lucky, but that’s exactly what it is: luck. Essentially, someone may have luck with one stock, but lose it all on the next trade.

“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” John Bogle

It can be tempting to try to sell out of stocks to avoid downturns, but it’s nearly impossible to time it right.  If you sell and are still on the sidelines during a recovery, it can be difficult to catch up. Missing even a few of the best days in the market can significantly undermine your performance.

The most important course of action for investors is patience and maintaining a long-term mindset. History has repeatedly demonstrated the value for investor to stay invested in the market, even during a market sell off. Going back to 1930, if you had stayed exposed to the equity market, your returns would have been around 15,000%.

If you missed the top 10 performing days of each decade since 1930 because of mistiming the market over that period, your returns would be a mere 91%. And missing even a few days as the market rebounds can significantly diminish your returns, research from JP Morgan shows.

Keep perspective: Downturns are normal and typically short

Market downturns may be unsettling, but history shows stocks have recovered and delivered long-term gains. Over the past 35 years, the stock market has fallen 14% on average from high to low each year, but still managed gains in 80% of calendar years, according to Fidelity.

Investors must ignore the urge to panic and sell off their investments. Perspective is what is important during days like these and long term perspective is key. No one can consistently time the market and one of the most important factors in building wealth is time in the market.

Essentially, you don’t want to sell off your stock positions when the market has a bad day. Instead, ride it out. Research indicates that over the long-term, you reap the rewards of the power of compounding by staying invested in the market.

Rather than give in to emotion, stay the course. The wealthy are in the market for the long term. The headlines are scary, but there’s always going to be a new threat to investors, whether it’s election fears or whatever the Fed will do next.

References:

  1. https://www.cnbc.com/2020/03/31/bofa-keith-banks-warns-investors-against-trying-to-time-the-market.html
  2. https://www.prnewswire.com/news-releases/the-importance-of-time-in-the-market-vs-timing-the-market-301113822.html
  3.  The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss. You cannot invest directly in an index. The S&P 500® Index, a market capitalization–weighted index of common stocks, is a registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation.
  4. https://www.fidelity.com/viewpoints/investing-ideas/six-tips