I lost my wallet over the holiday season. Maybe someone took it; I really do not know and it does not matter. Aside from the loss of something sentimental, I do not need to express the hassle around replacing everything in one’s wallet. For three days I tore apart the house, the neighbor’s house, the car, and traveled all around town asking merchants if they had seen it. I must have retraced my steps ten times and I was frantically checking my accounts every three hours; I was sick over it.
Last week, I wrote about investment fees in my blog, Are My Dollar Bills Transparent? I was lucky to hear from a colleague of mine who shared his recently published piece on the same theme. Improve Your Future Investment Returns By Keeping a Lid on Your Expenses by Steve Thorpe of Pragmatic Portfolios, LLC, illustrates why it's so important to keep expenses low.
Registered Investment Advisors can help clients with this same philosophy discussed in both my and Steve's blogs. Below is a short excerpt of Steve's blog.
Improve Your Future Investment Returns By Keeping a Lid on Your Expenses By Steve Thorpe
Contrary To Popular Belief: Past Performance Truly Does NOT Predict Future Performance
Numerous studies have shown that investors have no reliable way to identify, in advance, which asset classes or active managers will outperform in the future. This phenomenon is persistent across time, market subsectors, and geographic regions. To a large extent, where outperformance exists it is due to random chance -- being in the right place at the right time -- as opposed to skill.
Steve Thorpe is the founder of Pragmatic Portfolios, LLC, a fee-only Registered Investment Adviser based in Durham, North Carolina, that focuses on developing sensible investment plans integrated across all of a client’s investment accounts. He also chairs the Research Triangle Park, NC area chapter of the Bogleheads®  investment interest group.
We are proud to announce that we are changing our company name from Failla Financial Management, LLC to Strada Wealth Management, LLC.
The name change is due to the significant change in our business structure. Strada Wealth Management is now a fee-only Registered Investment Advisory firm and as always, our business activities will continue to include comprehensive retirement and income planning for families just out of divorce.
As a fee-only registered investment advising firm, we are able to truly assure our clients that our advice is objective and independent. Compensation never comes in the form of commission or trails (money paid to the financial adviser for chosen investments), and as a result, we are our client’s fiduciary.
Our former e-mail addresses will continue to be operational for the foreseeable future. Our new email addresses are as follows: email@example.com and firstname.lastname@example.org. Our web domain is in transition - www.faillafinancial.com will change in the near future to www.stradamanagement.com. We will continue to update you on our progress and improvements; we strive to be better for you, our clients. Thank you for all these years of trust in the firm.
Warmly, Jennifer Failla
Tax efficiency - when discussed in divorce, portfolio construction, and investing in general - is how much of your money is left over after you’ve paid your taxes. How efficient was that investment to your personal bottom-line?
To understand how efficient a particular investment may be, a person must understand what they own inside the portfolio, but also how those instruments are taxed so they can efficiently calculate their true net income potential. At the end of the day, you need to understand how your investments are working for you and how your life is impacted by it.
There is often confusion around what is taxable, what is tax-deferred, and what is tax-exempt.
- Taxable accounts, such as a checking account that earns interest, would be subject to taxes on the interest.
- A tax-deferred account indicates investments which are sheltered from taxes as long as they remain inside of the account; for example, an Individual Retirement Account (IRA) or 401(k) plan. If those investments are taken out, those monies will be taxed at ordinary income tax rates.
- Tax-exempt investments are those not subject to federal or state taxation, such as income from a municipal bond.
The distinction is important to understand, especially in a divorce when a client might be reviewing an account for income potential. Income from a taxable account will be treated differently than a tax-deferred account, depending on the client’s tax bracket. A tax-deferred account may have growth, but taxes must still be paid when funds are withdrawn. A good question to ask oneself is: how much net income will this investment in this account yield me?
Each account has advantages and disadvantages. The first steps to becoming tax efficient and investing wisely is to understand your tax bracket; understand the classification - or “titling” - of your accounts; and understand the investments in your accounts and how they affect the income.
There is a common rule that the investor should protect inefficient investments in tax-deferred accounts (e.g., 401(k)s and IRAs), and tax-efficient investments in taxable accounts (e.g., brokerage or checking accounts).
Placing high-growth stocks, Exchange Traded Funds, and mutual funds in tax-deferred accounts like 401(k)s and IRAs can allow an investor to make trades, capitalize on profits, losses, etc. without the worry of taxes. Tax-inefficient accounts might be a good fit for municipal bonds since the income generated is tax free.
This is not a catch-all, but it can provide a guide for understanding. An investment advisor or your tax professional can help sort through the specifics in your individual portfolio.
We have a saying in our office: “Divorce forces you to put your financial house in order.” We say this a lot. Every investor can benefit from taking a hard look at what one owns, why it is in a particular account and whether or not it is even working for the needs and objectives of the investor.