How to start a sole-proprietorship business in San Luis Obispo — Quick Start Plan #SanLuisObispo #soleprop #businessownership

I work with a lot of business owners in San Luis Obispo, and being one myself, I thought I’d right a ‘quick start’ tutorial on how to set up the simplest kind of business — a sole proprietorship.

This article is meant to be a nuts-and-bolts, “what’s needed”, general information in order to create a formal sole-prop business in SLO.

  1. Fictitious Business Name Filing

If you are using a fictitious name, or a doing business as (DBA) name, you will first need to file for it with San Luis Obispo County. Here is the 4 step process outlined: https://www.slocounty.ca.gov/Departments/Clerk-Recorder/All-Services/Fictitious-Business-Name-New-Filing.aspx

In short, you’ll need to make sure your fictitious business name isn’t taken then file for the name here: https://crrecords.slocounty.ca.gov/SLOWeb/action/ACTIONGROUP201S3

Then, you need to publish the fictitious business name statement once a week for four weeks in a local newspaper like the tribune. 

Then the newspaper will provide you with proof of publication to the County of San Luis Obispo.

The fee for is about $52. Here’s the link to the county fees: https://www.slocounty.ca.gov/Departments/Clerk-Recorder/Forms-Documents/Fees/Fee-Schedule.aspx

2. Acquiring the City Business License. 

You’ll need complete the business application: https://www.slocity.org/home/showdocument?id=8083

You can mail it to: P.O. Box 8112, San Luis Obispo, CA 93403-8112 or drop it off at: 990 Palm Street, San Luis Obispo, CA 93401-3249 

If your business address is your home, you’ll need to complete this form and submit it along with your business application: https://www.slocity.org/home/showdocument?id=11454

You as the home owner, or your land lord will need to sign it. The city will post a small sign in front of your home for a couple weeks that a business permit is pending. 

The total cost for the business license for a home-based business located within the city limits is $226.96

Here is the cities “How do I get a business license?” page with more info:

https://www.slocity.org/doing-business/doing-business-in-slo/how-do-i-get-a-business-license

3. Setting up separate Business Checking, Savings accounts.

Next, I would go to either the current bank you use, or search for an online business bank to set-up separate business checking and savings accounts. You will need a copy of your business license for this. These accounts will further legitimize your business by keeping all your expenses and revenue separate from your personal bank accounts.

I also like the idea of starting a separate credit history for your business as soon as possible by applying for a separate business credit card with which you can make business expenses with. Disclaimer: if you are not “good” with credit cards, or have a history of not paying your credit card balance off every month, then it’s not a good idea to put yourself in a position to rack up credit card debt through your business. A credit card only makes sense if you pay off the balance every month so as to not subject yourself to any high interest fees. 

Disclaimer: this article is not meant to be specific advice nor recommendations for anybody, rather general information. 

I'm teaching a 'Planning for Financial Independence' course at Cuesta College

Join me this summer as I teach a course on Planning for Financial Independence at Cuesta College.

About the class:

Planning for Financial Independence

We will cover the fundamentals of sound personal financial planning. We will help you chart a course for financial independence according to your values, goals, and targets. We will teach cash flow planning, risk management, investment management, college education savings, retirement planning, and estate planning basics.

Summer 2019

Register Online Here

DATES: Monday & Wednesday, June 3 & 5, 2019

TIME: 6:00 - 8:00pm

FEE: $40 — all proceeds go back to the Cuesta College Foundation

LOCATION: Cuesta College, San Luis Obispo Campus, Room 4760. Physical Address:
Highway 1, San Luis Obispo, CA 93403

INSTRUCTOR: Eric Maldonado, CFP®, MBA

QUESTIONS: Contact instructor at eric@aquilawealth.com or (805) 250-4552

P.s. Feel free to forward this along to a friend.

Don't Live in Fear of an IRS Audit #financialplanning #tax

According to the IRS, the chances of you being audited are about 1 in 160.

You likely live in fear of a tax audit. Here ‘s how to protect yourself.

If the Internal Revenue Service suspects you underreported your gross income by 25% or more, it can challenge your return for up to six years. If the IRS suspects you filed a fraudulent return, no statute of limitations applies.

Guilty Until Proven Innocent

When the IRS challenges your return, the burden of evidence verifying your claims rests entirely with you.

If you haven’t been traumatized by an audit, you probably keep little of your financial documentation. If you have, you’re probably terrified to part with a single receipt. The IRS is one of the few courts where failure to produce proof of your claims results in the assumption that you stand guilty.

Here are ways to protect yourself:

·       Save all financial documents used to create your tax return.

·       Retain a paper copy or receipt of any tax-relevant financial exchange. Scan these documents and archive them electronically or acquire them in an electronic format.

·       If the purchase constituted a business or other deductible expense, record the expense and why it justifies the deduction. Store this information with the receipts.

Know Your Cost Basis

For a mutual fund with years of reinvested dividends, each dividend payment is part of the cost basis. As a result, sometimes you can compute the cost basis only if you access the complete transaction history.

Many custodians keep several years of electronic copies of brokerage statements and must send any known cost basis when you transfer to a new custodian. If your current custodian has the correct cost basis of your securities, you probably no longer need to keep brokerage statements. Better safe than sorry with the IRS, though.

Other Tips

Permanently keep records of nondeductible contributions to your individual retirement account. You may need the records every year in your retirement that you withdraw money to show that a portion of the withdrawal is not tax deductible. To avoid the hassle, consider clearing out nondeductible IRA contributions by converting your IRAs to Roth accounts.

Keep partnership documents, contracts and commission or royalty structures forever. This includes property records, deeds and titles, especially those relating to intellectual property. It also includes transfers of value for estate planning.

Save all your tax returns. After you file, save the paper or electronic copies, or both, with the rest of that year’s documents.

Once a year, scan and compile the records into PDFs and send them electronically to your financial advisor and the certified public accountant who does your taxes. Scanning the information gives you an electronic backup of the paper indefinitely.

#AquilaWealthNewsletter -- Home Ownership vs. The Stock Market and An Under Appreciated Way to Save Money - Your Car(s)

In this week's personal financial newsletter installment, I have a couple articles to highlight from my reading -- Home Ownership vs. The Stock Market and An Under Appreciated Way to Save Big Money -- Your Car(s) 


Home Ownership vs. The Stock Market

https://awealthofcommonsense.com/2019/03/real-estate-vs-the-stock-market/

The age old question, "what's a better investment, owning a home or owning stocks?" is addressed in this article. The article writer, Ben Carlson, is more-so writing a response to a research paper put out by the San Francisco Federal Reserve Bank in March entitled The Risk Premium Puzzle. Like many a research paper that attempt to take on a massive data-set in order to draw out a couple of conclusions, there are some glaring issues with this research paper. Namely, the paper shows real returns of the world wide housing market as pretty much keeping pace with stock market returns going back all the way to 1870. Which could then lead people here in the U.S. to believe that owning a home is as good of an investment as owning stocks, aside from the fact that any world wide housing data going all the way back to 1870 would be fraught with all sorts of questionable data gathering methods. Taking world wide data on housing, and using as a basis for owning a home in a very specific part of the world is obviously flawed. Carlson points a couple other very important items to consider when owning a home which this paper didn't consider, "the leverage involved, the cost of borrowing, the length of time in the home, the imputed rent, the psychic income from home ownership and the fact that you have to live somewhere."

Here are a couple opinions from the article I agree with:
"... comparing your home as an investment to the stock market makes little sense."

"Risk can be exponentially higher in housing for the simple fact that it’s also the roof over your head."

"I’m not saying people shouldn’t invest in real estate ... But before you head down that path, no matter what the historical return numbers show, first understand the risks involved in trying to make the roof over your head the biggest part of your nest egg."

 


An Under Appreciated Way to Save Big Money - Your Car(s) 

https://garrettplanningnetwork.com/articles/an-underappreciated-way-to-save-big-money-117

I like this article because it gives some outside-the-box ideas and resources when it come to saving money and counting the cost of car ownership.

First consider the actual cost of your car, including: 

  • Insurance

  • Gas

  • Maintenance

  • Registration fees

  • Taxes

  • Depreciation


Nerdwallet has a helpful tool for finding out the real cost of your car per month: https://www.nerdwallet.com/blog/loans/total-cost-owning-car/

The 3 main points listed in the save money category, from most to least obvious & convenient, include:
1. Buy Used
2. Go Down to One Car
3. Negotiate via Email for your next car

On the negotiating via email front, here's a link to an email template: https://www.moneyunder30.com/get-the-best-deal-on-a-new-car

The Most Profitable Companies in the World #SaudiAramco #AAPL

*Graphic shows 2018 net income of publicly listed companies (in billion U.S. dollars)

Apple has long been known as the world’s most profitable company, but those days are over. By preparing to be publicly listed, Saudi state oil company Saudi Aramco had to disclose company reports and was subsequently rated by Moody’s to have earned US$111.1 billion in 2018, far surpassing competitors. https://www.economist.com/business/2019/04/06/saudi-aramco-made-a-111bn-profit-in-2018

In fact, the Saudi company’s net profit equaled that of Apple, Google parent company Alphabet and Exxon Mobil combined, according to Bloomberg. Previously, Saudi Aramco’s accounts had remained mostly secret since the company was nationalized in the 1970s. 

Since profits are known only for publicly listed companies or those planning to become listed on a stock exchange, the earnings of a large number of companies around the world, especially state companies, remain unknown and are not included on the list. Saudi Aramco’s IPO was originally scheduled to take place in the previous year but has been rescheduled for 2021.

Writing Your Own Personal Financial Plan, Part 1 -- Your Values and Your Purpose

In this 3 Part Series I will cover, what I believe to be, the three main elements of a properly built personal financial plan.

The 1st element of a well written personal financial plan is: Your Purpose and Your Values.

We start your financial plan writing process with the question: “What is important to you about money?” And, if you have a significant other, this is a wonderful opportunity to hear from them about what makes money important to them. So you can take turns asking each other “what is important to you when it comes to money and finances?” 


It’s important to start with this type of question before moving on into goals, specific to-do items, or investment techniques, because this focuses the entire personal finance discussion around your core values that you hold to be most important to you. 

Everyone has a story when it comes to money and how it has impacted their life from childhood all the way through adulthood. And this plays a major roll in finding out what you value most when it comes to money and having a plan for your finances. So, a few other really insightful questions to ask of yourself, or for you and your spouse to ask of each other, is “what was money like for you growing up” or “what is your first memory of money’s significance in your life?” The answers to these questions will start to fill in some details as to why you think about money the way you do.

Another great exercise to use in coming up with your highest values or your main purposes when it comes to your finances, is to ask yourself or have some one ask you “why is money important to you?” And the key is to continue asking this question over and over with each new answer that comes to mind, until you come to your highest values or purposes for money. Usually it take 5 to 7 “why’s” until you come to a place where your answer is the most important thing to you when it comes to dealing with money and planning for the future.

For example, someone might answer “providing for my family” to the first question “why is money important to you?”

Then the second “why” question is “why is providing for your family important to you?” And someone might answer, “because I want to make sure I can spend time with my family while we’re healthy and young.”

Then the third “why” question is “why is spending time with your family important to you?” And the answer might be, “because I want to make sure we experience new place around the world”

And (you guessed it) the fourth “why” is “why is that important to you?” The answer, for example, might be “because I want to give and serve people in need with my family?”

The fifth question, “is there anything more important than giving and serving with your family?” Answer, “No that’s the most important thing to me.” 

Another title for this exercise is called “The 5 Why’s.”

Now as the example above shows, this person now has at least one purpose or one highest value for their financial plan, which is "to give and serve those in need with my family.” This then become a driver for the rest of their financial plan and it dictates their main goals.

It helps to frame goals with what you value, and it gives a “true north” when determining if your goals are compatible with what is really important to you. Putting your values and purpose for money in writing also serves as a way of preventing you from setting goals that don’t really jive with what’s important to you and/or your significant other. For example, maybe someone thought their mail goal was to buy a condo in the city, when in reality, after going through this exercise, they actually value most flexibility, space, and travel. So, this allows them to redirect their funds towards these goals that better align with their lifestyle desires.

In short, start your financial plan by trying to come up with one or two purposes or highest values for money in your life. This is different than a goal, because goals tend to change based on ages and stages of life, where as, your values and your purpose tend to stay constant and consistent throughout life.  

Putting “your why” to paper, or “your highest values and purposes for money” in writing might sound daunting or even a little too touchy-feely when it come to writing a personal financial plan. However, it’s the most important step of the process. At first it can be slow-going to come up with core values when it comes to money but give it some time and you’ll start to recall pivotal money moments  in your life and you’ll start to have answers to the “why is money important to you?” question.

One of the Most Misunderstood Benefits of the #RothIRA

One of the most misunderstood benefits of the Roth IRA, in short, is FLEXIBILITY.

What do I mean by flexibility. Well, in particular, most people either don’t know or are misinformed about when you can take money out of their Roth IRA free of penalties or taxes. Namely, you can take out the contributions you put into your Roth IRA at any time for any reason without penalties or taxes owed.

For example, if you contribute the maximum amount possible into the Roth IRA in 2019, $6,000, you can take that same amount out the next day or the next year, whenever you like, at any age, for any reason, without being penalized or taxed. 

This is from IRS Publication 590-B:

Are Distributions Taxable? You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). https://www.irs.gov/publications/p590b#en_US_2018_publink1000231057

Now, the main purposed and benefit of contributing money into the Roth IRA is to leave the funds in there to invest and grow for years to come, but it’s important to know your options. My hope is that by knowing all the benefits of the Roth IRA, you’ll become more inclined and feel less barriers to fully funding your Roth IRA every year. My theory is that if you can get yourself to make it a habit of fully funding your Roth IRA each year, then you’re more likely to keep the funds in there for when you need it most — when work is no longer a desired option or a possibility. 

Highlights: Warren Buffett’s 2018 Letter to Shareholders

Chairman and CEO of Berkshire Hathaway, Warren Buffet, released his annual letter to shareholders on February 23rd, 2019.

While the entire 15-page letter is great reading for all investors, here are a few snippets to incorporate into how you think about investing (and maybe even your life). Here’s the link to the full letter: http://www.berkshirehathaway.com/letters/2018ltr.pdf

Not a Fan of All Generally Accepted Accounting Principles

“Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Over time, Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing.”

Stock Price is a Better Measure of Success

For nearly 30 years, Buffet would open his letter featuring the percentage change in Berkshire’s per-share book value. He wants to stop doing that now because he believes that Berkshire’s stock price will provide the best measure of business performance.

On Share Repurchases

“We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.”

Focus on the Forest – Forget the Trees

Buffett knows that Berkshire followers often focus on the many businesses they own – at last count there were 66 operating companies and another 47 investments in other companies – and he calls these companies “trees.”

But then he groups Berkshire’s trees into 5 different groves “of major importance, each of which can be appraised, with reasonable accuracy, in its entirety.”

With respect to each of his trees, he suggests that each is vastly different “ranging from twigs to redwoods.”

Buffet further suggests that a “few of our trees are diseased and unlikely to be around a decade from now.”

Then he adds that “many others, though, are destined to grow in size and beauty.”

Words to Live (Invest) By

Here are some of Buffett’s most thought-provoking quotes, taken directly from his shareholder letter – the words in bold are not Buffett’s but rather just category titles.

True Value Investor. “Abraham Lincoln once posed the question: ‘If you call a dog’s tail a leg, how many legs does it have?’ and then answered his own query: ‘Four, because calling a tail a leg doesn’t make it one.’ Abe would have felt lonely on Wall Street.

I will never risk getting caught short of cash.

My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.

It would be foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale. Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.

At Berkshire, the whole is greater – considerably greater – than the sum of the parts.”

Shareholders First. “For 54 years our managerial decisions at Berkshire have been made from the viewpoint of the shareholders who are staying, not those who are leaving. Consequently, Charlie and I have never focused on current-quarter results.

At Berkshire, our audience is neither analysts nor commentators: Charlie and I are working for our shareholder-partners. The numbers that flow up to us will be the ones we send on to you.”

The American Tailwind. “Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled ‘savings.’ And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.

Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’ The tidy rows of simple white crosses at Normandy should shame those who make such claims.

There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.

Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.”

Love What You Do. “We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused my pulse rate to soar.)

On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.

For 54 years, Charlie and I have loved our jobs. Daily, we do what we find interesting, working with people we like and trust.”

Planning Continues Upon Retirement for Business Owners

As a business owner, you have invested a great deal of time and effort into building your company over the years. You know the amount of planning needed to maintain daily operations and grow your business. Now, you may be ready for retirement. But, the planning does not end. What you do next, and how you navigate potential tax issues and regulatory pitfalls, can make a big difference in the long-term success of your retirement.

Here are some of the more “taxing” concerns you may face associated with retirement:

Early retirement and early withdrawals.

If you take withdrawals from your qualified retirement plan before age 59½, you may be subject to a 10% Federal income tax penalty. There are certain instances in which early withdrawals may be taken without penalty, such as death, disability, or substantially equal periodic payments. Otherwise, at 10%, the penalty tax can be significant, so it is important to plan accordingly.

Waiting too long. You must begin taking required minimum distributions (RMDs) from your traditional Individual Retirement Account (IRA) by April 1 of the year after you reach age 70½. If you fail to do so or do not withdraw enough, you will be subject to a 50% penalty tax, which will be incurred on the difference between your RMD and the actual withdrawal amount. Your RMD amount is based on the previous December 31 balance, divided by your life expectancy (or the joint life expectancy of you and your spouse, if applicable).

Working while receiving Social Security.
If you receive Social Security and also continue to work, a portion of your benefits may be taxable. For more information, refer to Internal Revenue Service (IRS) Publication 915, Social Security and Equivalent Railroad Retirement Benefits, or consult with your tax professional.

You may be subject to the “give-back” if you are under full retirement age (based on the year of your birth), receive Social Security benefits, and earn income. The law requires a give-back of $1 for every $2 earned in excess of $17,040 in 2018 for those individuals between the ages of 62 and full retirement age who are receiving a reduced Social Security benefit.

For the year in which an individual attains full retirement age, the give-back is $1 for every $3 in excess of $45,360 for 2018. Starting in the month in which the individual attains full retirement age, the give-back is eliminated. If you are under full retirement age and thinking about taking Social Security benefits while still working, it is important to understand the potential tax consequences of doing so.

Where you live in retirement matters.
Each state has its own rules on income, estate, sales, and property taxation. Your tax and legal advisors can help you assess the potential tax advantages and disadvantages of your retirement destination.

Planning Continues through Retirement

Your personal retirement plan probably involved building a nest egg with regular savings over decades. Now that you are preparing for retirement, continue with your planning.

College Cost Counsel

Preparing a child for college may be a rewarding, but worrisome, time for you and your family. Although you know that an education is “priceless” you cannot help but notice how large the price tag actually is. This may leave you with many questions regarding college financing for your child. The U.S. government has established an Internet resource for such a need. The website, https://www.ed.gov/college , gives information on college costs, and you can even apply for financial aid online.

Tax Planning for Retirement – Roth Benefits

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you may see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.  

Social Security Benefits

Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.

Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.

Other Income Sources

In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.

Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 70½. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts.

Strategies to Minimize Taxes

Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.

A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs.

Time IN the Market > TimING the Market

The belief that you, or a particularly talented financial manager, can foresee the direction of the stock market is a seductive one. Some investors are confident that, with proper research, they can make money by snapping up equities when prices are low, and shifting their investments into cash or bonds when the market hits its peak. Even worse, they believe they can pay someone else can do it for them. But longitudinal studies have shown time and time again that no one can consistently predict the direction of the market in the short run.

However, many armchair investors persist in the belief that, by carefully following business news and trusting their “gut” instincts, they will be able to beat the market. Some study the stock tips in personal finance magazines, others hope to glean additional insight from analysts’ reports and specialized investment newsletters, and still others attempt to mine all the available data, crafting complex simulations of how the market is likely to behave in the future.

But if financial professionals struggle to keep ahead of trends, private investors are even less likely to outfox the indexes. As soon as a piece of business or economic news hits the airwaves and the Internet, analysts and brokers react immediately to the information. Because these financial professionals act so rapidly, the stock market almost always reflects all the known information at any given moment in time. And even if an individual investor were able to develop an analytic model with some real predictive value, unexpected events—such as a terrorist attack or a natural disaster, or even a political scandal—could lead to sudden and dramatic market fluctuations that no model based on historical data could have anticipated.

It is only natural that investors would want to find some way to sit out bear markets and get back just in time for the next bull run. It is useful to keep in mind, however, that even the slowest equity markets have some bright spots. A diversified portfolio will help you protect against loss and capture whatever gains might occur in a market downturn.

Investors run a big risk by selling when they believe stocks have reached their peak. They may turn a profit when cashing in their equity holdings, but they could also miss out on some of the market’s best cycles. Being absent from the market for only a few of the days or weeks with the highest percentage gains can decimate a portfolio’s returns over time. Market timers who sell frequently also lose money to transaction costs and taxes, and miss out to a large extent on the compounding effect that benefits investors who remain in the market consistently. Instead of trying to time the market, investing in a properly allocated diversified portfolio driven by a goals-based financial plan is a much better strategy.

Trying to pinpoint the right time to invest in the stock market is an exercise in futility. If you have a longer period to save, owning equities provides the most effective hedge against inflation and taxation available. Since it is impossible to know where the market might go from here, it makes sense to start investing now and continue investing on a regular basis, regardless of market conditions. Remember: long-term investment success is achieved not by timing the market, but by time in the market.

Why Should You Diversify?

As 2019 approaches, and with US stocks outperforming non-US stocks in recent years, some investors have again turned their attention towards the role that global diversification plays in their portfolios. For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%. As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US.

While there are many reasons why a US-based investor may prefer a degree of home bias in their equity allocation, using return differences over a relatively short period as the sole input into this decision may result in missing opportunities that the global markets offer. While international and emerging markets stocks have delivered disappointing returns relative to the US over the last few years, it is important to remember that:

1.  Non-US stocks help provide valuable diversification benefits.

2.  Recent performance is not a reliable indicator of future returns.

Over long periods, investors may benefit from consistent exposure to both US and non‑US equities.

THE LOST DECADE

We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000–2009. During this period, often called the “lost decade” by US investors, the S&P 500 Index recorded its worst ever 10-year performance with a total cumulative return of –9.1%. However, looking beyond US large cap equities, conditions were more favorable for global equity investors as most equity asset classes outside the US generated positive returns over the course of the decade. (See Exhibit 2.) Expanding beyond this period and looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six.[2] This further reinforces why an investor pursuing the equity premium should consider a global allocation. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

[2]. Source: Annual country index return data from the Dimson-Marsh-Staunton (DMS) Global Returns Data, provided by Morningstar, Inc.

PICK A COUNTRY?

Are there systematic ways to identify which countries will outperform others in advance? Exhibit 3 illustrates the randomness in country equity market rankings (from highest to lowest) for 22 different developed market countries over the past 20 years. This graphic conveys how difficult it would be to execute a strategy that relies on picking the best country and the resulting importance of diversification.

In addition, concentrating a portfolio in any one country can expose investors to large variations in returns. The difference between the best- and worst‑performing countries can be significant. For example, since 1998, the average return of the best‑performing developed market country was approximately 44%, while the average return of the worst-performing country was approximately –16%. Diversification means an investor’s portfolio is unlikely to be the best or worst performing relative to any individual country, but diversification also provides a means to achieve a more consistent outcome and more importantly helps reduce and manage catastrophic losses that can be associated with investing in just a small number of stocks or a single country.

A DIVERSIFIED APPROACH

Over long periods of time, investors may benefit from consistent exposure in their portfolios to both US and non‑US equities. While both asset classes offer the potential to earn positive expected returns in the long run, they may perform quite differently over short periods. While the performance of different countries and asset classes will vary over time, there is no reliable evidence that this performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide diversification benefits as well as potentially higher expected returns

Study Shows Delaying Retirement May Increase Longevity, Especially for Men

In October, the Center for Retirement Research at Boston College published a research paper showing how policies in the Netherlands that delay retirement can increase longevity, especially for men. The working paper, “How Does Delayed Retirement Affect Mortality and Health?” was written by research economists Alice Zulkarnain and Matthew S. Rutledge. The authors observed that older Americans have been retiring later for a number of reasons, including because work is becoming less physically demanding, employers have shifted from defined benefit to defined contribution pensions, and Social Security’s incentives are changing. The researchers cautioned, however, that understanding the implications of working longer for mortality and health is complicated, because people who are healthier tend to work longer than people who are less healthy.

Taking advantage of a natural experiment in which a policy was implemented in the Netherlands that incentivized a broad cohort of early baby boomers in their sixties to delay retirement, the study used Dutch administrative data to explore the links between work and health outcomes related to depression and diabetes, applying an instrumental variable approach that took into account the joint relationship between work and mortality.

The findings showed that delayed retirement reduced the five-year mortality rate for men ages 62-65 by 2.4 percentage points, which represents a 32% reduction relative to the five-year mortality rate for non-working men of the same age. For women, the results were inconclusive.

Moreover, the study found no significant relationship between delayed retirement and health conditions like diabetes or depression, which suggests that these conditions were not responsible for the mortality reduction. The researchers speculated that this could be because depression and diabetes are not as acutely life-threatening as some other conditions, adding that further research is needed to identify the conditions through which the positive effect of working on mortality manifests itself. They also pointed out that the relationship between working and mortality could manifest itself through a variety of conditions, which may make it difficult to find a significant result for any one condition.

In some ways, the U.S. already has a delayed retirement incentive with the Social Security benefits program. That’s because every year someone delays taking their Social Security benefit beyond their stated full retirement age, they get an 8% annual increase every year until age 70.

From a financial planning standpoint, working longer is one of the main ways someone can exercise control over whether or not they outlive their money. One takeaway I offer, is set yourself up to do work you enjoy. It’s much more likely that you will work longer if you have a sense of fulfillment or enjoyment in the work you do. And, if you begin putting steps in place to transition to work you enjoy now, it’s more likely that you will make the leap successfully when the time comes.  

 Seth Godin recently wrote a book entitled This Is Marketing and these are the 5 things that I really liked from reading it. I’ve paraphrased from the book my 5 subtitles.


1. My product is for people who believe ...

I will focus on people who want ...

I promise that engaging with what I make will help you get ...


These three fill-in-the-blank statements are gold for anyone trying or wanting to figure out what their competitive advantage is in the marketplace. This has caused me to take the time to think about who my service is specifically for, what my intended audience actually wants, and what I’ll commit to giving my clients for their benefit. I have so much more focus and direction with my business and service offering by going through this exercise. And the really good news is that this is an exercise I, or anyone, could start at any phase of the business. It’s even a good exercise to do on a regular basis, even annually, to make sure I haven’t veered from my target or to confirm if I need to change my course.

2. Branding vs marketing, strategy vs tactics, and be a farmer not a hunter.

These lines speak to the refreshing wisdom of taking the longview when it comes to serving people and growing a business. Rather than trying to find a hack or a trick to get attention quickly, why not focus on building a strong foundation with fundamentals and principles. I’ve found many business owners must take short cuts and try to fast track revenue because they didn’t do the slow and steady work of saving up a cash reserve and honing their craft over the previous years in order to have a multiple year runway in their business. By runway, I mean the ability to live off of personal savings instead of forcing a business to become a high revenue source of income too soon.

3. Price is a marketing strategy.

This resonates with me because I don’t have to do things the way they’ve always been done when it comes to pricing. For example, just because the financial industry has been known for selling products in the past doesn’t mean I have to do the same. I can price simply and transparently for advice. That in itself can be a big benefit to those whom are looking for the ease of understanding what they’re paying for.

4. Marketers need to spend more time on helping, one person at a time, day-by-day.

This resonates with me because it’s comforting to remind myself that I can’t expect to get there over night. It’s the small incremental actions that make a big difference over time. It’s the compounding interest effect applied to serving clients and helping people one at a time over the long haul. It’s not until a decade down the road that someone can look back and see the mountains they’ve scaled. I also like the emphasis Seth places on taking action rather than coming up with ideas. Both are really good and important things to have as strengths, but it’s showing up with the courage to put yourself out there with a real product or service, day-in and day-out, that creates the real change.

5. The goal is to be known by the smallest viable audience.

This to me was the mantra of the entire book. I like this because it forces me as a business owner and financial advisor to be specific in whom I’m serving and why. It’s easy to say I’m going to be the best at everything or that I want to help everyone everywhere, but that’s not really committing to anything or anyone in particular. However, I can make a big impact when I force myself to put detail and commitments behind it all. I need to continually ask myself whom specifically am I best suited to serve and how many people am I capable of serving really well. This can also keep me from chasing distractions and losing focus on what’s really important.

My mission is to help 80 households be more generous over their lifetime. And that’s it. 

What’s a household? Partly it’s a way for me to measure how many people I’m helping. So it’s a family, a unit, it could be a husband and wife and their kids. Or, it could be an individual whose committed to the process of working together to make wise financial decisions. 

Why just 80 clients? There’s not a lot of science that goes into it for me. It’s a feel but also an understanding of my capacity. I want to give my full attention to my clients when they need it. I know I can do that with 80. So I’m capping it there. At least, that’s my conviction now.

I also believe there will be enough of a ripple effect with 80 committed clients working together for the next 5, 10, 15, 20+ years, that I’ll have plenty of reasons to feel like I made enough of a difference in enough people’s lives. Plus, it takes a long time to work one-on-one with clients to get clear on their goals, values, and action items. Then, there’s course corrections that happen as life happens. To do quality work, at some point you have to limit the quantity of work. Unless of course you’re building a corporate empire to scale, which I am not.


Why the focus on generosity? Of course there’s more that goes into a financial plan than being generous, but for me, that’s where all roads have to end up if I’m doing my job properly. 

Let’s take retirement, for example. Why do people want to retire. Well, there’s an infinite number of reasons, but there are a few main reasons. For some people it’s to rest, for others it’s to get away, for some it’s to spend time with family, and yet for others it’s to do nothing but their hobbies and passions. My thing is that retirement ought to be more of a change towards something else rather than an end in and of itself. And, I think the way to get it to be a change towards something new, is to have a reason outside of just making yourself more comfortable. Comfort is important, but at some point you max out on comfort. Then what? That’s where generosity comes in. I think we’re more fulfilled when we have an aim that involves giving something to someone else without expecting payback in return. To me, there’s an endless amount of financial planning work to be done in 80 households’ lives to maximize the generosity in each one, and thus the positive impact all around the world.

 Also, I feel that almost no one has anyone in their life challenging them to be more generous, nor teaching them wise financial principles to get to the point where they feel like they have “enough” or even “extra. For the most part, no one talks about their money at all to other people, let alone their closest family or friends. And it would be far too risky to tell someone what you think they should do with their money. So, that where my calling comes in. I’m not telling people what to do with their money, rather coming along side to provide a personal financial framework for you how and what to do to get the most out of what you have. 

How Bunching Expenses Can Enable Taxpayers to Continue to Itemize

In response to the significant changes to the tax deduction rules under the Tax Cuts and Jobs Act (TCJA), many taxpayers are searching for ways to recover some of the tax benefits associated with itemizing deductible expenses that have been eliminated. Taxpayers who were previously able to lower their tax bills by itemizing may want to consider using a “bunching” strategy, which generally means either accelerating or deferring deductible expenses so that more of these expenses fall in a single tax year rather than in multiple tax years.

Video: A Look at Recent Market Volatility

What should you make of recent ups and downs in the stock market? Here’s helpful context on volatility and expected returns.

While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thoughtout investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.

#AquilaWealth Newsletter -- No. 1 #IRA Mistake, Productivity Recommendation, and Jet Lag

I like to send out a newsletter to my clients and friends every-other week on Thursdays at 2 p.m. PT. I typically include 3 articles with my commentary around the topic of personal finance. Here are the ones I like this week, and I think you will too. (Feel free to email me at eric@aquilawealth.com if you want to be added to my email newsletter list.)

#1 The No. 1 IRA mistake

#2 Productivity Recommendation: Take the Kolbe A™ Index/Instinct Test

#3 The Scientific Secrets to Preventing Jet Lag