I think we can all agree that there have been lots of changes over the last twenty years. I am especially sensitive to the many changes in the financial world. Unfortunately, many people continue to use thought processes or rules that were appropriate five, ten or even fifteen years ago that just aren’t particularly helpful today. Sometimes people make a financial decision on whether to buy a home, send a child to a specific college or invest their assets based on ‘rules of thumb’ that have worked in the past. While some financial ‘rules’ can still be applied today, many are simply less relevant because of the different financial environment we have. However, if we step back and gain a broader understanding of what is going on we can make wise decisions.  I cover a few of these below:


Paying Taxes

In the past, when doing any tax planning, you simply tried to make sure you were taking the appropriate deductions that were available to you. For some, perhaps you did some ‘tax-loss selling’ or if self-employed you may have tried to optimize, within the rules, how and when you showed revenue or expenses. Under the new tax law, itemized deductions may not have the same effect on the taxes you pay, given the higher standard deduction and a limit on State and real estate tax deductions. Today, it may make sense to ‘bundle’ your deductions in a year then take the standard deduction in the ‘off years’. The use of donor advised funds could help accomplish this since you get the deduction in the year you contribute to them and then distribute the funds in subsequent years.

For those who own ‘pass through’ (SCorp, LLC’s, sole-proprietor and partnerships) businesses it will be important to know income, phase-out limits and other stipulation to take advantage of the new Section 199A or Qualified Business Income (QBI)deduction. As we adjust to these new tax laws, we will pay the government what is due, but not to pay more than we need to. 


Paying for College

In the past, many parents and their students began to ‘get serious’ on getting ready for college the beginning of the student’s senior year in high school. However, given the high cost of college and the college aid formulas using the tax year of when the child is in the fall of their sophomore year it is important to begin planning early. Most advice from most financial planners centers around saving for college, which of course is important, however considering today’s high costs for college it is also important to explore how you can save ‘on the cost’ of college. Knowing early on how much/if any ‘need-based’ aid your child qualifies for can give you an opportunity to ‘shop’ for colleges that not only meet your student’s needs, but one that fits your budget as well. Rather than relying on savings alone, using some wisdom could help students and their parents in the long run.

Allocating Your Investments

For years, it has been prudent to allocate a significant amount of one’s investable assets to conservative bonds. This is usually especially given emphasis by some ‘rules-of-thumb’ for those close to retiring (or in retirement) to begin allocating a lot more to these ‘so-called’ safe investments. However, given the low interest rates that these investments offer and the potential for their principal to move down when interest rates move up, it just isn’t as safe of a strategy as it once was. A lot of money has gone into these funds, in fact more (almost $3 trillion) has gone into these investments and money markets than the equity markets ($1.3 trillion) since the financial crisis. 

The good news is that there are other income investments once can put money to work in. However, some very good risk/reward opportunities are not normally known or invested in by most investors. For instance, investing in floating rate, non-agency mortgages that were known as ‘sub-prime’ offer an opportunity to invest at less than .70 on the dollar. While many of these ‘sub-prime’ mortgages caused lots of problems and probably shouldn’t have been made the ones ‘still standing’ have been paying the mortgage down for 12-15 years.  My thought is that mortgages aren’t acting like their name. The longer the borrower pays on their mortgage the more equity they build up which increases the amount of equity in the property as well as the higher probability they will continue to pay. In addition, home values in many areas are beginning to move up as the economy continues to improve and new homes still not being built at a fast pace. To me this is a wise investment.  

Investment Strategy

In the past, investors could do well by only investing with a ‘value strategy’ meaning, mainly investing in areas or stocks that have cheap valuations. The idea was that buying these investments would eventually yield great rewards once they then reverted to a normal valuation. This strategy will still work at some level at times, however the aggressiveness of central banks to keep interest rates low which resulted in making money ‘cheap’ for companies and individuals has created an interesting dynamic. The stimulation provided by the central banks around the world has made the ‘value strategy’ a difficult one to pull off given that ‘volatility’ in the markets has been dampened. We may get more opportunities now that the U.S. Fed has begun to raise interest rates, however rates are still low and now with lower taxes it appears companies will begin to spend more which should support the economy. While 2018 has already produced more volatility than we experienced in 2017, it still may be difficult to find enough volatility for the opportunity for the ‘value’ strategy to work until other central banks such as the ECB (European Central Bank) begin raising rates as well. 

Additionally, if a company is cheap it may now have a better chance to be a ‘value trap’. This is due to the amount of innovation that has been taken place. I discuss this further in my piece on Innovation but something to be aware of is how much the technology companies have changed the shape of business and our lifestyles. While the earnings of the S&P 500 a broadly diversified index consisting of 500 of the largest U.S. companies increased their combined earnings by 100% since 2003, this did not compare with how much technology companies’ earnings improved.  The Nasdaq 100 which is largely made up of technology stocks, the earnings growth was 1,000%.  While paying attention to well thought out investing principles that have been used in the past can still pay some dividends, it is important to also be able to have the wisdom to know what is going on right in front of us. 

Today, we are at the beginning state of a fourth industrial revolution. Developments in genetics, artificial intelligence, robotics, nanotechnology, 3D printing and biotechnology, to name just a few are all building on and amplify one another. This will lay the foundation for a revolution more comprehensive and all encompassing than we have ever seen. …The Future of Jobs Report, World Economic Forum 2016.

In Summary, if you haven’t been able to keep up with some of the changes above (and most haven’t) then it may be time to re-examine how you are making financial decisions. Rather than ‘default’ into what has usually worked in the past, pursue the knowledge you need to make the wiser decision. I am happy to assist you toward this.