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MC Stories – Poker Play – Optimizing your investment approach

I am fascinated by the markets and all things related to investing. I have always enjoyed solving puzzles and various brainteasers. I enjoy deep-thinking games and activities that involve a constant change of information. One of my favorite games to play is poker. I love the game for the challenge it presents—playing the cards, playing the people, playing the odds—all while not letting emotions get the best of you.

With each round of betting, new information is learned and a new decision tree is spawned. Each hand delivers a range of potential outcomes and, depending on how you play the hand, you can either end up adding chips to your stack or biding your time for a better opportunity. Poker is a game of skill; however, even the best, most disciplined players will not win every time because there is a level of uncertainty with each hand played. Despite that uncertainty in the short term, over the long term the right strategy combined with a disciplined approach often becomes a winning strategy.

In this way, poker is very similar to investing. Having the right investment strategy and staying disciplined often leads to long-term success. In poker, you combine various cards of different suits and numbers to create the best hand. With investing, your “hand” is a diversified portfolio and it contains a combination of various asset classes (stocks, bonds, real estate, etc.). When investing (just like in poker), some combinations are better than others, based on the specific goal. Depending on what type of poker you are playing, sometimes the best hand wins and other times, technically speaking, the worst hand wins (Razz and 2-7 Triple Draw, for instance). Similarly, when it comes to investing, if you do not know the objective or the goal, then it is often difficult to know which “hand” of assets will give you the best chance to achieve the outcome you are seeking.

To have long-term success in poker or investing you must have a disciplined approach. Oftentimes people believe poker to be a game of excitement and thrills; however, those who play poker professionally are affectionately referred to as “grinders” for spending long hours playing through the monotony of poker, hand after hand, in order to make a living. When people think of investing, they conjure images of day traders or getting rich overnight, but, when done correctly, investing is boring. As the renowned investor George Soros once quipped, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” Whether playing poker or investing, making educated decisions based on the information available as well as the probabilities related to historical outcomes is necessary to consistently make decisions with confidence.

In the short term, it is difficult, if not impossible, to consistently predict the outcome. For instance, during a single day, the markets will either be positive or negative, and in poker you can do everything right, with the odds in your favor, and still end up losing a hand. If this continually happens, without a plan or a strategy, it can be frustrating and can sometimes lead to poor decisions driven by emotions. In poker, a player making emotional decisions no longer based on strategy is considered to be playing “on tilt,” whereas an investor making emotional decisions is often acting out of fear—fear of losing in a market downturn or fear of missing out (FOMO) during a market rally. Regardless of the activity, poker or investing, emotional decisions typically lead to poor decisions with unpredictable outcomes.

The goal then is to be aware of these emotions so when they appear you can objectively evaluate your decisions to determine whether the correct action is being taken. How do you do this? In poker, you can work with a coach to evaluate your play and review how you played during specific situations to ensure you are always playing with the optimal strategy. In investing, you can work with an advisor to create a financial plan based on your specific goals to determine your appropriate long-term strategy. Either way, having an independent third party can be a valuable resource to keep you on track.

Uncertainty can be challenging, but it can also create opportunities. Remember this the next time you get together for your monthly poker game or are analyzing your investments. In order to capitalize on an opportunity, you must first identify the goal. Then, with the goal in mind, you can create and implement the correct strategy. That will allow you to stay disciplined and consistently take the appropriate actions. And then, when emotions come into play (and they always will), to improve your chances for long-term success, have a system or person in place to help with decisions to counteract those emotions. Do this consistently and over time you will find success at the tables and in your portfolio.

 

MC Stories – The Technology Age — The Good, the Bad, and a Little Gen Z

Do you remember the time before cell phones, computers, or even televisions?

The generation who might answer “no” to this question, Generation Z, categorized as those born between the years of 1997 and 2015, is also known as the “Smartphone Generation.” According to a 2018 Pew Research Center survey, 95% of 13- to 17-year-olds have access to a smartphone, and a similar share (97%) use at least one of seven major online platforms.1 Teens surveyed have different opinions on whether social media has had a positive or negative effect on their generation. On a macroscale we are learning quickly to deal with the good and bad that is coming from this new Technology Age.

The Good

Staying connected to family and friends is easier than ever. One major cause for the positive impact is that the technologies traditionally used for business purposes, like videoconferencing and screen sharing, are now being brought into the home for personal use. For example, family meetings over Zoom are the new Sunday dinner meetup and grandparents or parents of Generation Z now celebrate birthday parties, baby showers, and graduations virtually. While in-person is preferred, most are happy they can enjoy each other and still maintain safety guidelines during the current pandemic.

Generation Z can also weigh in on the political conversations happening in this crucial election year on platforms such as Twitter and TikTok, even if they are not old enough to vote. Empowering youth to take an active role in their future is the result of independence and resources not afforded to previous generations. Activism is not unique to Gen Z, but this younger generation is sharing opinions of each other at a rapid pace that is affecting their self-worth.

The Bad

The more time teens spend looking at screens, the more likely they are to report symptoms of depression.2 The current circumstances of 2020 may lead you to believe that there is nothing occurring to feel left out of—but not so fast: FOMO, or fear of missing out, still runs rampant due to platforms like Facebook and Instagram, which show us a skewed view of the world and other people’s lives. Young adults who are looking for ways to monetize themselves and make cash fast are using technology to invest more easily which could have a good return or very bad returns depending on the market environment.

New online trading platforms such as Robinhood reported an increase in new accounts, spurred mostly by new investors who saw the market downturn in March of 2020 as an opportunity to start investing. Traditionally, financial professionals who trade stocks are required to pass an exam to obtain their securities license and are regularly monitored according to industry regulations. Millennials and Generation Z, while not as experienced in the investing space, still felt confident buying familiar big name tech stocks.3 If investors employ a buy-and-hold strategy, they may come out successful; but if individuals are allocating mortgage payments or student loan debt to a risky portfolio, they are in for a roller-coaster ride—emotionally and financially.

Generation Z

The Smartphone Generation may be young but they are mighty. They are coming of age during a volatile economy and an unprecedented technology age. The percentage of teens that reported they are online “almost constantly” virtually doubled in 2018 from a couple of years prior. This data makes them prime targets for online advertising and social media campaigns. With the access and speed currently available to this generation, the need to be a prudent investor is even more important. For the parents and other adults affected by this plugged-in generation (i.e., All of Us), it would be advantageous to learn the habits of this new generation and listen to their viewpoints, which are just as bold as past generations but reach much further. Making a wave is much easier with a touch of your smartphone and we are all now finding ourselves in the splash zone.

 

 

1 https://www.pewresearch.org/internet/2018/05/31/teens-social-media-technology-2018/

2 https://www.pewsocialtrends.org/essay/on-the-cusp-of-adulthood-and-facing-an-uncertain-future-what-we-know-about-gen-z-so-far/

3 https://www.cnbc.com/2020/05/12/young-investors-pile-into-stocks-seeing-generational-buying-moment-instead-of-risk.html

MC Stories – Banking 101 – College Edition

Do you remember your first day of college? That feeling of excitement combined with trepidation at the idea of embarking on this new adventure that will eventually lead to a new career as well as financial independence? Now, do you also remember the day you had to open your first checking account – one that did not have your parents as joint co-owners? Well, that day might have been less exciting, but it probably held equal amounts of apprehension. In my first assignment as a branch manager in a small college beach town, they allowed me to work closely with students and I soon realized how ill-prepared they were to be on their own – financially speaking. I too was a college student once and so I wanted to share the top four things a young adult should consider before they open their first bank account.

  • Know what makes each financial institution different. When I started looking for a job in the banking world, I assumed all banks were the same. Most people have the same approach when it comes to doing their banking. Know that you have options! Online tools make shopping for a bank easy. Things you’ll want to research and compare include fees, interest rates, online and mobile monitoring options, branch proximity and ATM locations.
  • Know what fees you can anticipate. Banks charge fees – and lots of them. Using another bank’s ATM? Picked the wrong checking account and now you are paying monthly fees? How about that savings account? There is a limitation to how many withdrawals or transfers you can do a month – the number is six – before fees get assessed. And my favorite… “ I can’t be out of money – I still have checks!” Make sure that when using your debit card or paying your bills online, you do not exceed your ability to pay for them. In the event you forget, the bank won’t and you’ll be charged non-sufficient funds or overdraft fees.
  • Know what you need. Remember that talk your parents had with you about “wants” versus “needs”? Well, that conversation definitely comes into play here. You should only borrow what you absolutely need. The banker will eagerly want to sell you on a credit card, but from my personal experience, stick to a secured credit card as that will not only help build up your credit score but it will also help not overspend due to its small credit line. Most students are not great at budgeting and recovering from bad credit or handling repayment due to high-interest rates is no fun.
  • Know how to pay yourself first. By paying yourself before others, you are building the habits and discipline it takes to gain peace of mind with an emergency fund, saving for large purchases, and invest for long-term wealth building. First, start with a savings account – preferably not at the same bank as the one you have your checking. Next, set up an auto-transfer between your accounts on a monthly basis. This will kickstart your emergency savings account.

Regardless of where you are in this process, I leave you with this: research, read the fine print, and track your spending. Happy Banking!

MC Stories – Eliminating Capital Gain Tax on the Sale of an Appreciated Asset Through the Use of a Charitable Tax-Exempt Trust

For many investors, a barrier to diversifying their portfolio is the impact of losing 25% of their profits if they sell a highly appreciated asset. If you are charitably inclined, that barrier can be eliminated by using a tax-exempt trust, as outlined by the following example:

Let’s assume you have a highly appreciated asset (perhaps stock or real estate) that you paid $200,000 for, and that has a market value of $1,200,000. Your capital gain would be $1,000,000. If you sold that asset, you’d only have about $950,000 to reinvest after paying 25% of your gain in taxes (approximately $250,000). By using a tax-exempt trust you would have the full $1,200,000 to reinvest.

    Here’s how it works:

  1. You establish this trust prior to selling the asset. The terms and provisions of the trust are established at its inception. Prior to selling the asset, you transfer the asset to the trust. You and your spouse (if married) become income beneficiaries for your lifetimes to the trust. The IRS sets a range of “approved interest rates”; let’s say 5% per year.  So, in year 1, the trust will distribute an income to you of $60,000 ( 5% of $1,200K). If the trust earns a return of greater than 5%, your income the next year will go up. But the big advantage is that you have $1,200,000  to invest, rather than the $950,000. Additionally, you can be your own trustee, so that the investment decisions and control of the assets are retained.
  2. Why does this trust qualify to be tax-exempt? Primarily there are 2 reasons:
    1. The trust is irrevocable, so once established, it cannot be modified.
    2. A t the death of the last income beneficiary, the remaining balance of the trust is paid to a 501c3 charitable organization (the legal name of this trust is a Charitable Remainder Trust). An additional benefit is that upon transferring the asset(s) to the trust, you receive an immediate charitable income tax deduction for the “present value of the future interest” of the “gift”. Depending on the age(s) of the income beneficiary and the established interest rate, the deduction can be in the range of 25% of the gift. So, in this example, instead of paying $250K in capital gain taxes immediately, you’ll SAVE $100K in income taxes as a result of the charitable deduction.

   The main disadvantages of this arrangement are:

  1. Lack of liquidity. You do not have access to principal; only the income that the trust distributes. If you are dependent on the principal from the sale proceeds for your lifetime/retirement, this may not be the best strategy for your cash needs.
  2. At the death of the last income beneficiary, the money is not retained by your heirs. That “negative” can perhaps be eliminated through the use of a life insurance policy (the premium will be substantially less than the capital gains taxes you, otherwise would have paid). However, for those investors where this trust makes sense, this technique allows them to fulfill their charitable wishes, and normally, this is only a “piece of their estate” so the balance of their net worth will be distributed to their chosen heirs.
  3. While the earnings and gains in the trust are tax-exempt, the income that is distributed from the trust to the income beneficiaries is generally taxed.

The above is only meant to be a concise summary of this strategy. You should consult your financial advisor, tax professional or attorney to obtain more information. Tax rates used in this article are for illustrative purposes only and may not apply to your unique situation.

 


Disclosures:

This information is presented for educational purposes only, is hypothetical in nature and does not represent actual clients. The information presented is not written or intended as financial, tax or legal advice, and may not be relied on for purposes of avoiding any federal tax penalties under the Internal Revenue Code. Use of this information is not a substitute for legal counsel, and Morton Capital makes no warranties with regard to information contained herein. You are encouraged to seek financial, tax and legal advice from your professional advisors before implementing any transactions and/or strategies concerning your taxes or estate plan.

MC Stories – Wearing Multiple Hats

If I were to ask you how many hats do you wear, what would your answer be? For me, I wear the hats of wife, mom, Associate Advisor, and student. Unfortunately, time does not expand the more hats you wear. So how can we juggle the different roles that we are in? It is important to have separate environments for each of the roles that you have. One of the hardest things to do is to keep work at work. Not all our jobs allow us to take our work hat off completely. However, it is important that when we work from home, we have a dedicated space for doing so. Even though it is easy to take a laptop from room to room, it blurs the lines between roles.

I have found the following tips useful in helping me be fully present in each role:

  • Have separate spaces: It is important to have separate environments for each of the roles that you have. One of the hardest things to do is to keep work at work. Not all our jobs allow us to take our work hat off completely. However, it is important that when we work from home, we have a dedicated space for doing so. Even though it is easy to take a laptop from room to room, it blurs the lines between roles.
  • Dedicate your time specifically: This advice has been the most helpful for me. If you look through the pictures of this post, I shared my schedule. On weekdays, I dedicate my mornings to my family, 9am-5pm to work, 5pm-7pm to my kids before they go to bed, then I have time for school. This way, I can focus on each role individually rather than being overwhelmed with everything that needs to get accomplished in each role all at once. 
  • Communicate your schedule and ask others to hold you accountable: Unless I have a meeting or school assignment that takes me out of my normal scheduled time, my family knows that when it’s 5 o’clock, they can come into my office and help me transition to family time. I think this is important because it makes them feel just as important as the work I was doing during the day. I also set these guidelines with my peers at work so they are confident that I will be responsive and reliable during my work hours. 
  • Schedule things to look forward to in each role: Sometimes our schedules can become monotonous. It is important to schedule things to look forward to in each role. My oldest daughter and I have hot chocolate every Saturday morning. When I am bogged down by a busy work week or demanding school assignment, the thought of Saturday morning helps me push through it.

Many of us may not realize how many hats we truly wear. However, the current environment is challenging the “norm” and highlighting the different roles we all play.  What hats do you wear? Which of these tips do you think would be useful for you? The next time you start feeling overwhelmed by how much is on your plate, take a moment, breathe, and make sure you aren’t wearing too many hats at once.