Hathaway Financial

Happy holidays! As we head into the holiday season of family, parties and fun, also keep in mind this is the time of year to revisit important personal finance and tax related matters (I know…sorry…but it has to be done). All these areas can be nuanced based on individual circumstances, so if you’re not sure about something, take 15-30 minutes to chat with your financial advisor or tax accountant; a few minutes that could save $1000s. 

401k and IRA Contributions

If you participate in an employer 401k this is generally the time of year to revisit your 401k contributions; raise them to the max if you can. Generally, you want them to be spread out evenly over the course of the year to ensure the maximum employer match. 

You can contribute up to $6,000 annually to an individual IRA. Technically, deadline is April 15, but good to just get it done now. 

This is also the time to review employer provided health insurance and supplemental life insurance plans. 

Charitable Giving

December 31 is the deadline to donate to a charitable cause and still get your tax deduction. But remember the standard deduction for married couples is $24,400 ($12,200 singles) for tax year 2019. So in order to get a tax benefit for charitable deduction, your total itemized deductions, which includes charitable, need to exceed the standard deduction. 

Some people are implementing a “bunching” strategy; that’s where you provide a larger charitable donation every 2 or 3 years, as opposed to annually. So instead of $15,000 per year, you might donate $30,000 every 2 years, which enables you to exceed the standard deduction of $24,400 and receive a larger tax benefit.  

You could also consider a Donor Advised Fund, which would allow you to make a large contribution in one year, take a tax deduction, but then distribute the funds to charities over the time period you desire.  

Gifting or 529 plan contributions

A single person can gift up to $15,000 in 2019 to each person or $30,000 as a married couple. So consider this, if you have 2 children and really want to kickstart their college savings fund you could “gift” $30,000 per child to a 529 college savings plan. A $30,000 gift today would be worth over $50,000 in 10 years (assuming a 6% annual return). 

Gifting is an efficient way to share your wealth in a tax free manner. 

Required Minimum Distributions (RMDs)

If you are age 70 ½ do not forget to take RMDs from your retirement accounts, including 401ks and IRAs (not required for Roth accounts), or incur up to a 50% penalty on the distribution if you forget.

If you are giving to a charity, it is likely advantageous to directly contribute your RMD (up to $100,000) to the charity, then you do not have to recognize any income for the RMD! This is known as a Qualified Charitable Distribution or QCD, and it’s a great deal.  

General

The above items are fairly common, but there may be other issues unique to you and your financial situation. Take a few minutes to think about it prior to year end and don’t forget to grab some exercise between all the meals and holiday cocktail parties.

Questions relating to this column can be directed to Sean Hathaway, Financial Planning and Investment Advisor; (971) 409-4180; or visit: www.HathawayFinancial.com. 

Happy Halloween! What’s Scarier: Sitting in Cash or Investing in the Stock Market?

These days they can both be pretty spooky. Sit in Cash and miss out on a big market gains, like the 21% we’ve seen year-to-date, or Invest in the Stock Market and risk watching 20% of your hard earned cash disappear, like this time last year (Oct 3 – Dec 24, 2018).

(P.S. I’m writing this for the many people I know that are hoarding cash…it’s a real thing).

So what to do at the end of a 10+ year long US Stock market run of 350%? (BTW, that means $100,000 invested 10 years ago at the low would be worth $450,000 today. see graph below)

Cash vs Stock, always resurfaces when the US Stock market is experiencing a long rally, like the 10+ years going now. Many believe it’s time for a pullback, so better to wait and invest in the dip. The problem is that nobody can predict the highs, lows, dips, peaks, bear or bull markets.

Nevertheless, downturns and corrections will occur. So perhaps with crystal ball in hand you Sit in Cash determined to “Buy low” when the market turns. But here is where it gets spooky:

What if the big dip never comes? What if stocks continue to slowly rise for years? When will you give up and jump in? Or, more likely, when the dip comes, how do you know when to buy in? Missing even a day of big gains can have monumental effects on the size of your portfolio years down the road. Take the example above where the recent dip was Christmas Eve 2018. The market jumped 5% the day after Christmas, 15% over the following month and has been steadily rising since.

Could you really have timed that? See Graph below for the effect of missing 2 weeks!

You should expect to double your money every 7-10 years, on average and over time. This surprises most people. Compounding Interest – the 8th wonder of the world. To do this you need to attain 7-10% annual returns, which are very reachable over the long term. However, sitting in cash and missing the 5% up days (see previous bullet) will erode your long-term strategy and returns.

The alternative is Investing in the Stock Market, which admittedly can also be scary because you can lose a lot of money fast. Just ask anyone who lived the most recent crash from Oct 2007 to March 2009, an 18-month period where the market fell over 50%. But, and more important, is to keep in mind that it has since rallied over 350%. The stock market ALWAYS bounces back.

So if you had $100,000 in the US stock market on Mar 9, it would be worth $450,000 today (Oct 29, 2019). BUT and even more shocking…. if you waited just a couple of weeks to put that money to work in the market it would only be worth $370,000.

So what is one to do? If you are working, with every paycheck you should be adding to your retirement savings in a diversified tax efficient portfolio of stocks and bonds.

The more difficult question if you’ve been sitting on the sidelines, is how to move your cash to the stock market. Assuming you agree with premises (a) you can’t time the markets and (b) the markets will trend up over time, then you should invest now. If you want to assuage the potential psychological pain, you could adopt a strategy to move your cash to a diversified portfolio incrementally over the next 12 months. If the stock market turns up quickly, you’ll be happy you jumped back in and if the stock market declines over those 12 months, you’ll be happy that you caught some of the low points.

Sean Hathaway is a Financial Advisor and can be reached at sean@hathawayfinancial.com

Day-to-day changes in the stock market (i.e. volatility) are stressful to most people

With the right mentality and investment approach you can be calm and confident

Here’s why and how…

It feels like the stock market is in a perpetual state of enormous flux. Everyday the stock market, Dow Jones and S&P go up and down on headlines of “Global Trade Wars” and “Inverted Yield Curves.”

This scares people for two reasons: 

(1) Uncertainty and confusion from these scary headlines. People don’t like things they don’t understand. Few can explain what either of those headlines really means, and 

(2) Change. Humans loathe change, and change is what’s happening daily in the stock market. Stock market volatility is a measure of how much prices are changing. And most people hate change and so they hate volatility. We prefer “steady as she goes…”

First let’s keep things in perspective. It’s actually been a fantastic year for US financial markets. Trade wars and Trump tweeting notwithstanding, thru Friday Sept 13, the stock market is up 20% and Bonds are up 7%, year-to-date. Those are great numbers; healthy robust returns. 

Hopefully, you didn’t panic and get out of the market too early.

How to calm down and enjoy the ride? 

It’s actually quite simple in 3 steps: Diversify, Rebalance, Plan and enjoy long steady returns. 

Diversification

The importance of diversification can not be overstated. Not only is it supported by Modern Portfolio Theory, Ray Dalio (good article here), and most every financial advisor, but possibly more impactful is the psychological well-being it delivers. If stocks are down 10%, there is nothing more satisfying than seeing your bond portfolio up 10%, even if bonds are only 30% of your portfolio. It feels like a big win. In fact, you feel like you out-smarted the market.

Below is a graphic that you can find all over the internet in various shapes and sizes (and asset class slices), the point of which is to show that every year the relative performance of asset classes moves around. The diversified portfolio virtually guarantees you healthy returns in the long run. It is less jumpy and volatile and is represented by the black line and boxes below.

Rebalance

Rebalancing is a classic investment discipline, a mechanism for buy low sell high, and it will keep you honest and safe in the long-run. Rebalancing is the concept of keeping your portfolio in line with your goals and risk tolerance. So if your optimal balance is 70% stocks and 30% bonds (which by the way is generally a good mix for income generating middle-agers), then you should periodically “rebalance” your portfolio to ensure this allocation maintains. 

Being Diversified and Rebalancing creates win/win scenarios psychologically. This is key for reducing stress and staying positive. 

The stock market and bond markets usually move inversely. So when stocks go down, bonds go up. This is because when investors are selling stocks they are reallocating money to safer assets, like bonds (this is also referred to as “flight to safety”). Supply and demand at work. 

Here is how the win/win scenarios play out: 

I acknowledge that you may not consider it a “win” when 70% of your stock portfolio is down, but consider the following… Between January 2000 and December 2009 the US stock market returned a cumulative -5% (i.e. negative return). This is referred to as the lost decade in the United States, but it was not lost for those with diversified portfolios. 

A diversified portfolio of 70/30 stocks and bonds would have returned 20% over that time period.

The Plan 

You need to be committed to your diversification and rebalancing strategy. It should be on “auto-pilot”. 

    (1) This helps psychologically, because you shouldn’t be burning energy in decision making. 

    (2) It helps financially, because in addition to the benefits listed above, it ensures you that you stick with a certain investment or asset class even when it is low so that you ride it high again. Remember every asset class will rebound, but far too often investors panic and sell low.  

You need a written financial plan. If you are over the age of 30 you should have a documented financial plan in place, and you should revisit it at least annually. In the workplace you set SMART goals. Likewise, to achieve results in your personal life, you also need to set goals and measure progress.

There are many excuses for not having a financial plan: 

    – I don’t make enough money to save anything. 

    – I make so much money I’m not worried about retirement. 

    – I’m maxing-out my 401k, things are probably fine.

This analogy will not resonate with everyone, but putting a financial plan in place, is like getting a comprehensive blood test. You don’t look forward to it, but once you’ve done it and spend time digging into the data and results, it can be quite interesting, and it can further motivate you to make lifestyle adjustments.

Even the ultra-rich need a plan. I think we’ve all heard the horrific stories of those that overspent their wealth; just google Johnny Depp or Allen Iverson bankruptcy. 

BUT, some ultra-rich people spend too little: you could have been enjoying the finer things in life. Or as a philanthropist contributing and participating more in your favorite causes while you are alive on earth. 

In Summary

Want to reduce or eliminate financial related stress? Simple. Get a financial plan and investment strategy and stick with it. 

– I went 35 days without any alcohol. A feat significant in itself, but not as hard as I anticipated.

– I tracked all my sleep data before and after. My average sleeping heart rate decreased by more than 6 bpm, implying 76,000 less heart beats in a one month period. 

– The results were overall positive, but enough to full-stop? 

Alcohol and me

I drink almost every Friday and Saturday night and have been since I think college. Also throw in 50% of the time on any given Wednesday or Thursday, for good measure. Sunday, Monday and Tuesday are generally off limits.

I’ve gone through the brewing-my-own-beer phase and I belong to a number of wine clubs. I’m 43 and as I’ve aged, the effects of alcohol are more pronounced, particularly on my sleep quality. After as little as one glass of heavy red wine, I often wake up at 3:00am; likely due to a circadian rhythm induced liver cleanse. 

Not only have I noticed that I wake in the night after drinking, but in analyzing my Oura Ring data, I’ve noticed that my sleep vitals improve significantly in the absence of alcohol, and more so after 2-3 nights drink free. So Tuesday and Wednesday nights, I sleep like a rock. 

Alcoholic? I’m going to save that discussion for a very long blog, or possibly book. I suppose the fact that I have so much to say on the subject is telling in itself. 

More Background

I’m a little bit of an optimal living eating sleeping fitness enthusiast. I try to eat healthy, and so avoid all processed foods and bad oils and when eating “meat”, only grass-fed naturally raised meats and wild caught fish. Grocery bills are ridiculous. I practice intermittent fasting (so skip breakfast). Regular cold water plunges and showers.

Daily workouts, including run, bike, swim, gym and yoga. Myriad of supplements. I track my workouts on Apple Watch and Strava. I practice good sleep hygiene and I sleep with an Oura Ring that tracks my sleep vitals.  

The vices most detrimental to my overall health are likely: dessert (sugar), alcohol and caffeine consumption, the latter being the most debatable I suppose. I think sugar/dessert is likely the most offensive to my overall health. Or is it alcohol? 

The Mission

I wanted to objectively compare my sleep data to a normal month vs a month of not drinking. From a subjective standpoint, also wanted to see how it affected my relationships, feelings, performance and productivity.  

My Oura Ring tracks a lot of data including sleep duration, times, sleep cycles (REM, Light and Deep), heart rates (min, max, average), heart rate variability (a measure of the variance in time between heart beats, which is an indicator of nervous system readiness), body temperature, respiration patterns, sleep efficiency (time in bed vs actually asleep) and more. 

The Test

I stopped drinking on May 5 and didn’t drink again until June 8 (35 days). BTW, I was leading a local wine night fundraiser scheduled for June 22, so I basically had to start drinking in order to taste all the wines I was in charge of sourcing; I strive for excellence in all my endeavors.

I have a lot of data, but the most “telling” and easy to understand or relate to is heart rate.  Below is a graph showing my average heart rate for the month of April (the normal drinking month) and May (the non-drinking month).

BLUE Line: My average heart rate per night for the month of April. 

RED Line: My average heart rate per night for the month of May (and some of June). 

The straight lines are trend lines. So in each month my heart rate on average trended lower as the month progressed. 

Data Analysis

Blue Line: Just looking at the Blue Line, you can see there is a lot of variability, i.e. peaks and valleys from the straight trend line. The peaks correspond to weekends. There were a few nights where I was averaging 57 bpm during my sleep; likely nights of heavier drinking combined with less than optimal sleep times and maybe poor food selection. A few times I dipped down to red line territory and that was likely a Monday, Tuesday or Wednesday night.

Red Line: Two big observations: way less variability and significantly lower than the Blue Line. Pretty incredible that my average heart rate per night started at around 48 bpm per night and decreased ultimately to 45 bpm per night. That is 6-7 beats per minute on average less than when I was drinking. 

Doing math of 6 beats per minute X 60 minutes per hour X 7 hours per night X 30 days = 76,000 heart beats. I.e. my heart beat 76,000 fewer times during sleep in the month of May. It’s likely that if I included the few hours leading up to bed this number would increase to well over 100,000. 

Subjective Analysis

Productivity increased and I would attribute that to having more energy and just tinkering around more in the evenings. As opposed to relaxing with a glass or two of wine on a Thursday night, I may instead find myself practicing the piano, fixing something or watching TV with my kids, which can actually be a healthy activity in moderation — for example, it creates funny memories and common points of reference. I also read more, because I had the mental energy to engage in a book; not that you can’t read after a drink or two, but I think you’re more likely to sober.

Relationships. I should have my wife chime in here, but she was a little nervous that I would be more irritable and edgy than typical. I don’t think we saw that, at least not after the first week. Overall, I feel it was a net positive on relationships because when I did spend time in the evenings with people, I was more engaged and concentrated.

Feelings. I was curious if I would have any mental ah-ha moments or visions induced by a perpetual clarity of mind. Or would I be a generally happier or unhappier person? Answer: inconclusive. Next time, I’ll probably need to go longer and actively journal more to conclude here.

Physical well-being. From a vanity stand-point, was curious “hey am I going to look better”? Less wrinkles, baggy eyes, etc..? Answer: Maybe. What about increased overall energy and feeling good in the morning? Answer: Probably? It was really hard to put my finger on this. Clearly, I felt more refreshed and looked better than on a Sunday morning after a Saturday night bender of 10 drinks, but the results were not super obvious. My overall body weight and composition didn’t change much either; implying my lack of drinking was compensated by increased eating. And I can relate to that…instead of grabbing a beer, a might instead go for chips and salsa.  

Final Thoughts 

People ask me if it was hard and how I did it. The anticipation was harder than actually doing it. Getting thru the first Friday and Saturday night was the toughest; it was a change in routine. And to that point, to make it easier: 

     – I started planning things for early evenings. A common one, for example, would be a hard work-out ending around 6:00pm, so I got home and was simply starving for food, with no desire to drink. 

     – I also found a buddy to stop drinking with me and found some comfort in texting with him “how we could sure use a beer right now”. 

    – And finally I listened to some podcasts and read some books on not drinking, which helped provide some motivation. 

Will I do this again? Yes. The next time however, I’d like to cut out all processed sugars – so no cookies or cake – and substitute the sugar craving with fresh fruit only. And I’d love to cut out caffeine as well…but I am only human here.  

Clearly there is hard data to support that my body is more relaxed (lower heart rate) and recovers better when I’m not drinking. I do enjoy drinking though, and am not sure the benefit of not drinking outweighs the joy at this time. However, I could see this changing as I continue to age and experiment more.  

If you have any questions, shoot me an email or comment.

Until then, Cheers! 

Sean

sean@hathawayfinancial.com 

$500,000 to send my 2 children to college. I’m talking about a 4 year state school…not Harvard.

It’s that time of year: Facebook feeds with college visitation photos and selection decisions…not as much on how they intend to pay for it though (67% of high-school graduates go to college if you were curious).

As a financial advisor, it shocks me how few of my client-parents have established 529 College Savings Plans.

I’m from Oregon and graduated from the University of Oregon (Ducks). We now live in California and I just checked here, and to send one of my non-resident children to Oregon is going to cost well over $200,000! But it will be even more as tuition increases outpace inflation. I think Oregon is a fine school, but seriously!?

The cost of a 4 year education, including tuition, room and board may range from around $85,000 for in-state 4-year public university to north of $200,000 for out of state or public schools. This is 2-5 years of TOTAL income for the average US household. Per child! Virtually impossible that the average American can save this. And not even an easy task for the affluent.

Scholarship?

The Wall Street Journal recently reported “Parents’ Can Invest for Years in Kids Sports, but Scholarships are Elusive”. Only 2% of high-school athletes will receive a scholarship in their sport. That is roughly 1 in 50 varsity students. Makes you think differently about spending your hot summer weekend at the ball tournament in Fresno. Family day at the beach perhaps?

It may not be that bad though, as some estimates show that about 2⁄3’s of students receive some aid in the form of scholarship, grant or loan. Most parents have the attitude “we’ll figure it out” and that actually tends to work, but not without pain. Probably good to “figure it out” in a way that minimizes the pain. Hence the 529 Plan.  

The 529 College Savings Plan

You contribute after-tax money to a 529 Investment Plan and that money grows tax free until used for qualified education. So for example, you are super disciplined and save $250/month (keeping your older car and cutting back on Starbucks). Assume you earn a conservative average of 5% on that money, then after 18 years you will have invested about $54,000 and earned about $30,000, bringing your total balance to $85,000, which you can now use directly for education expenses. If you save this money outside of a 529 Plan you will pay taxes on the $30,000.

Here are the benefits in a nutshell:

–Money grows free from Federal and State income taxes.

–Qualified education expenses are broad and can include,  K-12 tuition, 2 and 4 year colleges, post graduation and vocational schools. Spending can be on tuition, room, board, books, supplies, etc…

-If your children don’t end up going to college of any kind (unlikely), you can change the beneficiary to any close family member: a grandchild, cousin, niece, nephew, etc…

–Here’s more FAQ straight from the IRS.

In my opinion, the best way to get started is to work with your financial advisor or brokerage to set up a 529 plan and then have the contributions automatically deducted from your paycheck. That way you never see the money and don’t miss it. Then try to raise those contributions a little bit each year (after your raise presumably).

If you have children and have not yet done this, get on it today. It’s one of the best tax-advantaged benefits offered in the US. 

sean@hathawayfinancial.com

I’m embarking on a new journey in Financial Investment and Advisory Services. I’m excited to help people invest and plan for their future, be a coach, and join in leading the democratization of personal finance. This has always been an area of deep interest to me and I hope to help drive transparency, lower cost and simplicity to the space.

I have always been curious, adventurous and entrepreneurial at heart, but starting a company from scratch has been a tough decision; it feels right though. The 20 years of experience I’ve gained serving clients in public accounting and in the corporate environment have emboldened me and provide a strong foundation to launch from. And I could and would not be making this move without the support and love of friends and family.

I hope to work with visionary and inspiring people, to mentor and lead, and to build an enduring and helpful business. I hope to give back significantly to the communities we touch, both monetarily and thru leadership.

To begin, I have started Hathaway Financial, a fee-based only firm that assists families and professionals with financial planning, decision making and investments. Our goal is to help people navigate the complexities of their personal financial situation in a simplified manner and industry leading low cost model. Our core investment approach is (1) diversified portfolio (2) of high-quality low-cost investments (3) for the long term.

Most investors should follow this simple pragmatic approach, but they do not. Why not? Busy lives, behavioral psychology, switching costs and not the least The Wolves of Wall Street, being:

–Conflicted and commissioned financial advisors: Some 90% of financial advisors work either for a brokerage or insurance house, and are therefore commissioned and not in fact independent.

–Actively managed mutual funds with high fees that eat up your returns.

-Investment managers professing competence to time the market. Hint: you can’t.

-A litany of complex and expensive investments, like annuities, derivatives, and of course  hedge funds that dominate headlines and continuously underperform and overcharge.

–And on and on and on we go…

Is your financial advisor independent or do they work for a brokerage or insurance company? Do you know what they charge you? The all-in fees; advisor fees, mutual fund fees, trading costs? Do you know how well your investments perform?

There are some firms making great progress towards transparency, simplicity and fair pricing, like Wealthfront and Betterment. They charge a very low investment advisory fee around 0.25% of Assets Under Management (AUM), but it is rare that you would speak with a person and you will not get hands-on financial planning. However, the more traditional high-touch consultancy models are still often charging 1.0% or more and 3x higher price does not translate to higher returns; usually not even close. Excessive fees are remnants of a bygone Wall Street era lingering on in our digital age.

Hathaway Financial will steer towards the the model of simplicity, advanced process automation, and fair value pricing but will employ human touch and judgment.

There is a lot left to do and improve. Hopefully we can grow, hire more people sooner than later,  expand our physical footprint, educate and impact more broadly and effectively. So here we go.

Thank you to all that have always been encouraging and supportive. Gratitude and love to you. Reciprocation is my intention.

Sincerely!
Sean

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