Tag Archives: Stocks

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

Investing Goals, Time Horizon and Risk Tolerance

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When it involves investing, it’s important that you start with your financial goals, time horizon and risk tolerance.

At times in calendar year 2020, the global economy seemed on the verge of collapse. Risk, ruin and enormous opportunity were the big stories of the year. Overall, the year was marked by change, opportunity, calamity and resilience in the financial markets.

Yet, in the financial markets, winners dramatically outweighed the losers, according to Forbes Magazine. Almost overnight, new winners were born in communications, technology, lodging and investments. Innovative technology companies in the S&P 500 Index propelled U.S. markets higher. And, many industries were more resilient than expected, in part because of an unprecedented monetary and fiscal response from Washington.

In light of the unprecedented upheaval, you, like everyone else, want to see their money grow over the long term, but it’s important to determine what investments best match your own unique financial goals, time horizon and tolerance for risk.

To learn the basics of investing, it might help to start at one place, take a few steps, and slowly expand outward.

Begin by Setting Goals

As an investor, your general aim should be to grow your money and diversify your assets. But your investing can take on many different forms.

For instance, it might help you to decide the investing strategies you intend to follow in order to grow your money. Such as whether you are interested in purchasing assets that could appreciate in value, such as equity stocks and funds, or play it relative safe with bonds and cash equivalents.

If you’re interested in investing in bonds, you will receive a steady stream of income over a predetermined time period, after which you expect repayment of your principal.

You might also be interested in pursuing both growth and income, via dividend stocks.

Learning to invest means learning to weigh potential returns against risk since no investment is absolutely safe, and there’s no guarantee that an investment will work out in your favor. In a nutshell, investing is about taking “calculated risks.”

Nevertheless, the risk of losing money—no matter how seemingly intelligent or calculated your approach—can be stressful. This is why it’s important for you to really get to know your risk tolerance level.  When it comes to your choice of assets, it’s important to bear in mind that some securities are riskier than others. This may hold true for both equity and debt securities (i.e., “stocks and bonds”).

Your investment time horizon can also significantly affect your views on risk. Changes in your outlook may require a shift in your investment style and risk expectations. For instance, saving toward a short-term goal might require a lower risk tolerance, whereas a longer investing horizon can give your portfolio time to smooth out the occasional bumps in the market. But again, it depends on your risk tolerance, financial goals, and overall knowledge and experience.

References:

  1. https://www.forbes.com/sites/antoinegara/2021/12/28/forbes-favorites-2020-the-years-best-finance–investing-stories/
  2. https://tickertape.tdameritrade.com/investing/learn-to-invest-money-17155

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

Staying the Course…Investing | Vanguard

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“The volatility of the financial markets during the first half of 2020, punctuated by the most sudden, steep decline in U.S. market history, tested the mettle of most investors. Despite the gut-wrenching drop of nearly 34% in the S&P 500 Index in just over a month, Vanguard investors held firm, sticking with their plans and, in some cases, rebalancing into equities during the downturn. This discipline ultimately results in better outcomes over the long term.”

Tim Buckley, Vanguard Chairman and CEO

“Stay the course” doesn’t mean do nothing during market volatility or drop. It means stick to your investment plan. If you’re a long term investor or retired, focus on what you can control, such as your spending and asset mix.

A willingness to weather sudden market drops is an important part of long-term investing. Although it is a natural instinct to seek to preserve capital when the market drops precipitously, too often investors remain on the sidelines and miss the inevitable recovery.

Back in March 2020 during the height of stock market volatility and as many retail investors sold stocks in a panic, most financial experts reminded investors to stay the course. They reminded investors that a balanced, diversified portfolio is built to weather tough markets. The majority of investors (83%) held fast from late February to May and didn’t transact. Even better, 9% of their clients rebalanced into the storm, buying equities and regaining their targeted asset allocations. Rebalancing helps mitigate risk, and it is a staple of their advice.

They strongly recommended keeping a long-term perspective and don’t get thrown off by short-term volatility.

Why is staying the course so important? As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Our analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.

Additionally, just as investors should stay even-keeled during stock market downturns, they should ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains from investing in stocks such as Tesla, Apple or SalesForce.

Staying the course isn’t easy. Instead, focus on what you can do during market volatility, and you (and your portfolio) can get through difficult times of market volatility and declines. Nobody wants to spend less because the market is down. But you can control what you spend.

References:

  1. https://investornews.vanguard/what-stay-the-course-means-if-youre-retired/
  2. https://investornews.vanguard/staying-the-course-really-matters/

Sage Advice: Stay Invested

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“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.” Mark Cuban

The late Jack Bogle was fond of saying, “Nobody knows nothing.”  Which demonstrates that predicting the future is always hard, but 2020 illustrated to us just how difficult it can be. If you would’ve predicted that U.S. domestic stocks would rise over 10% in the same year as a global pandemic, no one would have believed you.  But that’s what makes markets so complex and volatile, especially in 2020, a year unlike any other.

The real problem is that there are too many economic and financial market unknowns to consider in the coming years and decade. And, he says, we, as a nation, are not focusing on what he believes to be the single most important concern in the economy: the “soaring cost of health care”. There is also the soon to be problem of pandemic caused ballooning federal deficits and national debt as a percentage of GDP.

Elected officials seem content to continue to kick the health care cost can down the road. But, with all of the potential economic uncertainty and financial market volatility, it’s hard to know what to do when it comes to investing.

The U.S. stock market is the greatest wealth-creation tool in history.

Investing in the stock market allows you to become a partial owner of thousands of profitable and growing companies. And, when paired with the power of compounding, the market is what allows you to save for retirement.

Below are five pieces of advice for investors who are worried about the turbulent economy and volatile financial markets:

  1. Keep investing. Keep putting money away. Despite fluctuations in the market, Investors should continue to save. And if the market dips? That’s okay since a lower market can be beneficial for funding longer-term goals such as retirement and education. Saving is always a good idea, and if you can add to savings when the market is low, you may be in a better position when the market goes back up.
  2. Pay attention to asset allocation. A good starting point for asset allocation, according to most financial advisors is a portfolio consisting of 65% stocks and 35% bonds. That’s it. “Stay out of the exotic stuff,” he says, however, noting that the allocations of assets may change depending on age and circumstances. If you’re younger, for example, you might skew towards investing more in stocks: you have time to take more risks. However, if you’re older, you might consider putting more in bonds, typically more conservative and consistent. But don’t tilt too far in either direction, he warns, noting that you should pay attention to the norms.
  3. Diversification is the key to any successful portfolio, and for good reason–a well-diversified portfolio can help an investor weather through the most turbulent markets. Diversification is the practice of spreading money among different investments to reduce risk. Historically, stocks, bonds, and cash have not moved up and down at the same time. The rationale is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. Diversification is a strategy that can be neatly summed up as “Don’t put all your eggs in one basket.”
  4. Expect lower returns. For years, the market was flush and paying out significant returns. That’s not going to continue. You should expect to see lower stock returns for the next 10-20 years, noting that 12% returns moving forward isn’t realistic. The same is true when it comes to bonds, he says, claiming that 6% returns are not in the cards. Managing those expectations is key.
  5. Don’t pay attention to fluctuating markets and keep putting money away so long as you are able. Remember that the markets – and your own investment strategy – may change over time. That shouldn’t make you so nervous that you bail. “Stay the course.”

If 2020 taught investors anything, it was, “Nobody knows nothing.”

It’s important to focus on saving and investing. You need to live below your means and invest the difference to accumulate wealth. There’s no backdoor trick around that fact.

References:

  1. https://investornews.vanguard/getting-started-with-investing/
  2. https://www.forbes.com/sites/kellyphillipserb/2016/06/15/vanguard-founder-jack-bogle-talks-about-taxes-investing-and-the-election/

Investing Goals

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“If you avoid the losers, the winners will take care of themselves.”

If you’re new to the world of investing, figuring out how and where to start can be daunting. Investing involves putting your money into an asset with the hope that the asset will grow in value or generate profit over time.

Deciding on which goals, on different kinds of accounts and investments are critical first steps to get you moving in the right direction.

The world of investing can seem vast and overwhelming if you haven’t been a part of it before. But if you take things one step at a time, you can make a plan that’ll get you started on the right path toward your financial goals.

Put your goals first. It’s important to decide what those goals are. Maybe you want to save for retirement.

  • The Joneses are in debt…Make your lifestyle and purchasing decisions based on what you can afford, not what your peers are buying, and instead of coveting thy neighbor’s car, try to feel smug about your fat retirement account, your zero credit card balances, and the car you own free and clear.
  • If it’s good for the planet, it’s usually good for your wallet. Think: small cars, programmable thermostats, compact fluorescent lightbulbs, a garden, refilling your water bottle…the list goes on.

“The biggest mistake you can make is to stop laying the foundation of a generational wealth developing portfolio because it feels temporarily monotonous.”

The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation — saving for the future, investing for the long term, and accumulating wealth — than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

Consistency is a key characteristic of successful investors. But as many longtime investors know, it’s hard to stay consistent when volatility whipsaws one’s portfolio, or when losses pile up, or even when one’s portfolio is perceived to trail those of one’s peers. All those factors can drive an investor to abandon their plan and make trades they might one day regret.

  • The secret to successful investing isn’t talent or timing…it’s temperament, according to Jean Chatzky, New York Times Bestselling Author and financial editor at the TODAY Show.. Sad but true–human psychology works against the behaviors that have historically led to good long-term returns.

    • Your goal should be excellence in investing. This means achieving attractive total returns without the commensurate higher risk. Your objective must be to strive for superior investment returns. Your first investment priority is to produce consistency, protect capital, and produce superior performance in bad times.

    It takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk, according to Howard Marks of Oaktree Capital. Thus, you should place the highest priority on preventing losses. Since, it is should be your overriding belief that, “if you avoid the big losers, the winners will take care of themselves.”

    You can have too much of a good thing

    The power of asset allocation is all about building an intelligent portfolio of stocks, bonds, and other asset classes also means you’ll have less to worry about and more to gain. Asset allocation and asset class mix are a few of the most important factors in determining performance. Look at the size of a company (or its market capitalization) and its geographical market – U.S., developed international or emerging market.

    Financial advisory firm Edward Jones recommends that, when owning individual securities, you consider a diversified portfolio of domestic large-cap and mid-cap stocks. For the more volatile international, emerging-market and small-cap stocks, they favor a mutual fund to help manage risk. Remember, while diversification cannot guarantee a profit or prevent a loss, it can help smooth out performance over time since stocks, bonds, real estate, gold, and other investments move in different directions and are influenced by different economic factors. By holding multiple asset classes, you reduce your risk and increase the return you get per “unit” of risk you take on.

    References:

    1. https://www.forbes.com/sites/bobcarlson/2018/05/01/investing-as-a-business-what-the-tax-code-says/?sh=7b1c9f967bc6
    2. https://www.oaktreecapital.com/about/investment-philosophy
    3. https://investornews.vanguard/getting-started-with-investing/?cmpgn==RIG:OSM:OSMTW:SM_OUT:011921:TXL:VID:2MIN$$:PAQ:INVT:GAD:CSD:PRS:POST:GS:sf241078738&sf241078738=1
    4. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html

    Investing in Edge Computing: Cloudflare

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    Cloudflare’s platform helps clients secure and accelerate the performance of websites and applications. Motley Fool

    Cloudflare (NYSE:NET), which completed its IPO in 2019, is a software-based content delivery network (CDN) internet security company that uses edge computing to protect against cybersecurity breaches. The whole premise of edge computing is to bring the access points closer to the end users. Cloudflare has access points at over 200 cities throughout the world, and they claim that 99% of Internet users are close enough that they can access the network within 0.1 seconds or less.

    This internet infrastructure company manages the flow of information online and therefore plays an important role in migrating data from the cloud to the edge. Its platform helps clients secure and accelerate the performance of websites and applications. And, it offers myriad security products and development tools for software engineers and web developers.

    The public internet is becoming the new corporate network.

    Cloudflare is a leading provider of the network-as-a-service for a work-from-anywhere world. Effectively, the public internet is becoming the new corporate network, and that shift calls for a radical reimagining of network security and connectivity. Cloudflare is focused on making it easier and intuitive to connect users, build branch office on-ramps, and delegate application access — often in a matter of minutes.

    No matter where applications are hosted, or employees reside, enterprise connectivity needs to be secure and fast. Cloudflare’s massive global network uses real-time Internet intelligence to protect against the latest threats and route traffic around bad Internet weather and outages.

    Edge computing

    While cloud computing houses data and software services in a centralized data center and delivers to end users via the internet, edge computing moves data and software out of the cloud to be located closer to the end user.

    Edge computing reduces the time it takes to receive information (the latency) and decreases the amount of traffic traveling across the internet’s not-unlimited infrastructure. Businesses that want to increase the performances of their networks for employees, customers, and smart devices can take advantage of edge computing to bring their apps out of the cloud and host them on-site either by owning and using networking hardware or paying for hosting at localized data centers.

    The company recently launched Cloudflare One, a network-as-a-service solution designed to replace outdated corporate networks. Cloudflare One acts as a secure access service edge (SASE). Rather than sending traffic through a central hub, SASE is a distributed network architecture. This means employees connect to Cloudflare’s network, where traffic is filtered and security policies are enforced, then traffic is routed to the internet or the corporate network.

    This creates a fast, secure experience for employees, allowing them to access corporate resources and applications from any location, on any device.

    Enterprise accelerating growth

    Cloudflare has gained hundreds of thousands of users with a unique go-to-market strategy, according to Motley Fool. It launches a new product for free (with paid premium features) to acquire lots of individual and small business customers and then markets its new product to paying enterprise customers.

    Cloudflare has created a massive ecosystem that it can leverage to land new deals and later expand on those relationships. It’s what makes this company a top edge computing pick since businesses and developers continue to flock to the next-gen edge network platform.

    There is increased risk associated with a small-cap, pure-play edge computing company like Cloudflare.

    References:

    1. https://www.fool.com/investing/stock-market/market-sectors/information-technology/edge-computing-stocks/
    2. https://www.cloudflare.com
    3. https://www.fool.com/investing/2021/06/17/forget-amc-this-growth-stock-could-make-you-rich/

    Tax Planning

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    “It may feel good at tax time to get a refund, but remember that the money you’re getting back is money you loaned the government at no interest.”

    Benjamin Franklin famously said, “nothing is certain but death and taxes.” Skip filing your taxes, and the tax agents will come calling. And when they do, you’ll likely face penalties and interest — and even lose your chance to receive a tax refund.

    Unless your income is below a certain level, you will have to file federal income tax returns and pay taxes each year. Therefore, it’s important to understand your obligations and the way in which taxes are calculated.

    Every year, everyone who makes money in the U.S. must fill out a prior calendar year tax return and file it with the IRS by April 15th. The process inspires dread among anyone who performs this task without the help of an accountant. The forms are complicated, and the definitions of terms like “dependent” and “exemption” can be difficult to understand.

    Tax Basics and Taxable Income

    There are two types of income subject to taxation: earned income and unearned income. Earned income includes:

    • Salary
    • Wages
    • Tips
    • Commissions
    • Bonuses
    • Unemployment benefits
    • Sick pay
    • Some noncash fringe benefits

    Taxable unearned income includes:

    • Interest
    • Dividends
    • Profit from the sale of assets
    • Business and farm income
    • Rents
    • Royalties
    • Gambling winnings
    • Alimony

    It is possible to reduce taxable income by contributing to a retirement account like a 401(k) or an IRA.

    A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person’s filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, state and local taxes, charitable contributions, and medical expenses.

    Anyone can make an honest mistake with regard to taxes, but the IRS can be quite strict. And since everyone’s tax situation is a little different, you may have questions.

    Allowed Deductions – Deductions and Tax Exemptions

    The IRS offers Americans a variety of tax credits and deductions that can legally reduce how much you’ll owe. All Americans should know what deductions and credits they’re eligible for — not knowing is like leaving money on the table.

    Most people take the standard deduction available to them when filing taxes to avoid providing proof of all of the purchases they’ve made throughout the year. Besides, itemized deductions often don’t add up to more than the standard deduction.

    But if you’ve made substantial payments for mortgage interest, property taxes, medical expenses, local and state taxes or have made major charitable contributions, it could be worth it to take this step. These tax deductions are subtracted from your adjusted gross income, which reduces your taxable income.

    The government allows the deduction of some types of expenses from a person’s adjusted gross income, or gross income minus adjustments. A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person’s filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, a capped amount of state and local taxes, charitable contributions, and medical expenses.

    Depending on who you are and what you do, you may be eligible for any number of tax deductions and exemptions to reduce your taxable income. At the end of the day, these could have a significant impact on your tax exposure. Starting with the standard deduction, the links below will help you determine how to shrink your income — for tax purposes, of course.

    Common Tax Credits

    Tax credits are also another way to reduce your tax exposure and possibly obtain a tax refund when the dust settles. Many people don’t realize that a tax credit is the equivalent of free money. Tax deductions reduce the amount of taxable income you can claim, and tax credits reduce the tax you owe and, in many cases, result in a nice refund.

    The IRS offers a large number of tax credits that encompass everything from buying energy-efficient products for your home to health insurance premium payments to being in a low- to moderate-income household. The key to benefiting from these credits is examining all of the purchases you’ve made throughout the year to see if you are owed money.

    There are 17 tax credits for individuals you can take advantage of in five categories:

    • Education credits
    • Family tax credits
    • Healthcare credits
    • Homeownership and real estate credits
    • Income and savings credits

    Taxes: What to Pay and When

    Most Americans don’t look forward to tax season. But the refund that a majority of taxpayers get can make the tedious process of tax filing worth the effort.

    When you’re an employee, it’s your employer’s responsibility to withhold federal, state, and any local income taxes and send that withholding to the IRS, state, and locality. Those payments to the IRS are your prepayments on your expected tax liability when you file your tax return. Your Form W-2 has the withholding information for the year.

    The U.S. has a pay-as-you-go taxation system. Just as income tax is withheld from employees every pay period and sent to the IRS, the estimated tax paid quarterly helps the government maintain a reliable schedule of income. It also protects you from having to cough up all the dough at once.

    When you file, if you prepaid more than you owe, you get some back. If you prepaid too little, you have to make up the difference and pay more. And, if you’re like most wage earners, you get a nice refund at tax time.

    But if you are self-employed, or if you have income other than your salary, you may need to pay estimated taxes each quarter to square your tax bill with Uncle Sam. You may owe estimated taxes if you receive income that isn’t subject to withholding, such as:

    • Interest income
    • Dividends
    • Gains from sales of stock or other assets
    • Earnings from a business
    • Alimony that is taxable

    So, it’s important to remember that taxes are a pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.

    There are two ways to pay tax:

    • Withholding from your pay, your pension or certain government payments, such as Social Security.
    • Making quarterly estimated tax payments during the year.

    This will help you avoid a surprise tax bill when you file your return. If you want to avoid a large tax bill, you may need to change your withholding. Changes in your life, such as marriage, divorce, working a second job, running a side business or receiving any other income without withholding can affect the amount of tax you owe.

    And if you work as an employee, you don’t have to make estimated tax payments if you have more tax withheld from your paycheck. This may be an option if you also have a side job or a part-time business.

    It may feel good at tax time to get a refund, but remember that the money you’re getting back is money you loaned the government at no interest.

    References:

    1. https://www.nerdwallet.com/article/taxes/tax-planning
    2. https://www.findlaw.com/tax/federal-taxes/filing-taxes.html
    3. https://www.findlaw.com/tax/federal-taxes/tax-basics-a-beginners-guide-to-taxes.html
    4. https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-pay-and-when/L3OPIbJNw
    5. https://www.moneycrashers.com/paying-estimated-tax-payments-online-irs
    6. https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

    ARK’s Cathie Wood

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    “Cathie Wood is a star stock-picker and founder of ARK Invest, which invests in innovations like self-driving cars and genomics.” Forbes

    Cathie Wood founded ARK Investment Management seven years ago in 2014. One of the biggest secrets to ARK’s investment strategy and noteworthy success, according to Wood, is “the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.”

    Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time.

    Thus, Wood isn’t focused on short-term fluctuations. She takes a long term and bold view. “We have a five-year investment time horizon,” she says. Since, the big ideas blossoming todaywere planted 30 years ago, she says: “We are ready for prime time now.

    Additionally, Wood and her team has been early on many themes—they embraced active management when investing seemed inexorably tied to indexing; they implemented stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a novelty, or both.

    Investing in transformative technologies that are going to change the world

    Wood’s focus has been on innovative companies with technology to disrupt the way we live. Her portfolios are loaded with stocks that have skyrocketed—for example, Tesla is a big holding in three of her funds. She is an advocate of a future where technology would make everything better, more productive and profitable.

    As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she believes that five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics—are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins.

    Ark’s ideas start with their research. Wood researched stocks with dogged determination. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management.

    For example, they state that they take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” They believe that they will inevitably run into the companies that not only have good answers, but are leading the charge

    She was on a mission to allocate capital to its best use—transformative technologies. Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years.

    Wood looked at places that other investment analysts ignore. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens.

    Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

    Wood’s believes in transparency when financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. Every Friday morning, she convenes an investment ideas meeting with her analysts and outside experts that’s part business school seminar and part free-form futurist bull session. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, ARK actively shares the knowledge they’re generating.

    Conservative philosophy

    The dawning of a high-tech future is central to Wood’s life philosophy. In starting ARK, her goal was “encouraging the new creation,” by investing in “transformative technologies that were going to change the world.” The triumph of innovation also fits well with her free-market views. To a younger generation tempted by socialism, she’s hoping to show that capitalism can still work its magic.

    She’s conservative, both politically and economically. For decades she’s championed green investments. Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.

    References:

    1. https://www.barrons.com/articles/arks-cathie-wood-disrupted-investment-management-shes-not-done-yet-51614992508
    2. https://www.bloomberg.com/news/features/2021-05-27/cathie-wood-is-a-believer-from-bitcoin-to-tesla-even-as-arkk-fund-stumbles
    3. https://www.barrons.com/articles/tesla-telehealth-and-the-genomics-revolution-power-ark-funds-51603450802

    Investment Risks and Taxes

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    No investment is completely free of risk.

    When it comes to investing, it’s critical to understand that no investment is 100% safe and all investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

    Investing means that you’re putting your money to work into a financial asset in the expectation of getting a positive return. Yet, where there’s the chance of financial gain, there’s always going to be the chance of a financial loss. Investment risk and investment reward are two sides of the same investing coin.

    On the other hand, saving — which is basically parking your money in an account so it’ll keep its value.

    Some investments are considered safer than others, but no investment is completely free of risk, because there’s more than one kind of risk, according to SoFi.

    Different Types of Risk

    Investors who choose products and strategies to avoid market volatility may be leaving themselves open to other risks, including:

    • Inflation risk – An asset could become less valuable as inflation erodes its purchasing power. If an investment is earning little or nothing (a certificate of deposit or savings account, for example), it won’t buy as much in the future as prices on various goods and services go up.
    • Interest rate risk – A change in interest rates could reduce the value of certain investments. These can include bonds and other fixed-rate, “safe” investment vehicles.
    • Liquidity risk – Could an asset be sold or converted if the investor needs cash? Collections, jewelry, a home, or a car could take a while to market—and if the owner is forced to sell quickly, the price received could be lower than the asset is worth. Certain investments (certificates of deposit, some annuities) also may have some liquidity risk because they may offer a higher return in exchange for a longer term, and there may be a penalty if the investor cashes out early.
    • Tax risk – An investment could lose its value because of the way it’s taxed. For example, different types of bonds may be taxed in different ways.
    • Legislative risk- A change in law could lower the value of an investment. For example, if the government imposes new regulations on a business, it could result in higher costs (and lower profits) for the company or affect how it can serve its customers. Or, if taxes go up in the future, savers who put all or most of their money into tax-deferred accounts [IRAs, 401(k)s, etc.] could end up with a hefty tax bill when they retire.
    • Global risk – An investment in a foreign stock could lose value because of currency problems, political turmoil, and other factors.
    • Reinvestment risk – When an investment matures (think CDs and bonds), the investor might not be able to replace it with a similar vehicle that has the same or a higher rate of return.

    Taxes

    “Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.” Jay Leno

    Taxes are a key consideration for investors – and not one that investors might think about when logging into their brokerage account. Yes, $0 trades are exciting, but don’t forget about taxes — which are an investors “biggest expense” or every traders “silent partner”.

    The key to taxes is to not just think about taxes in tax season, because there’s not that much you can do besides contribute to an IRA.

    When it comes to tax planning, most of it has to be done before the year is over. One strategy that’s very useful is tax-loss harvesting. Essentially, it allows investors with any sort of investment losses to use that to offset any gains, reducing the amount of taxes owed.

    Investors can use the tax-loss harvesting proceeds to buy something else, and it can even be very similar. Or they can use the money to rebalance. “Don’t hesitate to take losses and use them to your advantage,” said Hayden Adams, director of tax and financial planning at Charles Schwab. “You’re likely to have losses and tax-loss harvesting is a great way to rebalance to get back to proper risk tolerance.”

    The key for investors is to know the rules and work within them.

    References:

    1. https://www.sofi.com/learn/content/what-is-a-safe-investment/
    2. https://www.businessinsider.com/safe-investments
    3. https://finance.yahoo.com/news/what-new-stock-traders-need-to-know-and-do-before-the-end-of-the-year-192426159.html