GMB Ep #94: 4 Tactics for Reducing Capital Gains Taxes on Appreciated Assets

 

Following the financial crisis of 2009, we entered one of the longest running bull markets in history. During this time, the Federal Reserve has injected a massive amount of US dollars into the monetary system, which has driven up the value of capital assets across the board. If you’re someone who holds equities or other assets at a substantial gain, you might be hesitant to sell them because of tax concerns. In today’s episode, Grant dives into four strategies you can use for exposure to appreciated assets and/or taxation when selling at a gain.

 

 

Show Notes

[02:29] Concentration and Risk – Why it’s risky to hold on to assets for too long and why it can be beneficial to repurpose your assets at the right time.

[07:57] Exchange Fund – Exchange funds can be used to diversify your holdings without triggering a taxable event. Grant shares his thoughts on the pros and cons of this method.

[13:28] Options – How to use stock options to reduce the risk of losing the value of your holdings during price fluctuations.

[20:05] Donor-advised Funds – Grant explores how donor-advised funds work and how investors can get tax benefits while contributing to charity.

[28:58] Charitable Remainder Trust – How charitable remainder trusts work, how they differ from donor-advised funds, and how to get started with them.

[34:38] Family & Insurance –Grant shares some ways you can reinvest the benefits of a charitable remainder trust to avoid financial stress within your family.

 

Resources

Donor-Advised Funds:
irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds

Convert Appreciated Assets into Income with a Charitable Remainder Trust:
schwabcharitable.org/maximize-your-impact/develop-a-giving-strategy/align-your-giving-vehicles/charitable-remainder-trust

GMB Ep #92: Money Funds & Where to Park Your Emergency Cash

 

You are probably already familiar with the concept of reserving an emergency fund for unexpected expenses.  You may even already have one in place.  However, deciding how much to reserve or where to keep this money can be tricky.  We dedicated this episode to exploring why you should maintain an emergency fund, how to determine how large yours should be, and a few different savings options that can be safe & accessible, while still giving you the greatest possible returns.

 

 

Show Notes

[02:09] Managing Emergency Cash – Why it’s crucial for everyone to set aside some emergency funds and the importance of keeping your cash in the right place.

[05:23] How Much to Save – Grant shares a method of estimating how much you should save as an emergency fund based on your income, expenses, and risk tolerance.

[08:31] Too Much in Cash – Why it’s a better idea to have your emergency savings as investments and the ideal investment method for your funds.

[12:17] CD Ladder & High Yield Savings – Grant explains how using multiple Certificates of Deposits and high yield savings accounts can help you make the most out of your emergency cash.

[16:36] Money Market Mutual Funds – How money market mutual funds work, how they’re different from money market savings accounts, and some of the recent reforms related to money market mutual funds.

[24:14] Types of Money Market Funds – How the reforms led to the creation of two types of money market funds, the differences between the two types, and what you should keep in mind about parking your emergency cash in a money market fund.

[28:24] Government Funds – The feasibility of putting your emergency cash in government funds and the benefits of utilizing multiple methods of investments.

 

Resources

Money-Market Funds Buckled in Two Crises in a Row. Regulators Look to Fix Them Again:
wsj.com/articles/money-market-funds-buckled-in-two-crises-in-a-row-regulators-look-to-fix-them-again-11626687001

Firms Wary as Money-Market Rule Changes Studied After Covid-19 Run:
wsj.com/articles/firms-wary-as-money-market-rule-changes-studied-after-covid-19-run-11630056602

GMB Ep #91: Why Mutual Fund Managers Are Converting to ETFs

 

One of the trends we’ve been recently observing is the tendency of mutual fund managers to convert their fund structure to Exchange-Traded Funds. Throughout this episode, Grant reviews the structures of mutual funds and ETFs, what makes them different from each other, the reasons why it makes sense for mutual fund managers to switch to ETFs, and what investors should keep in mind about mutual funds being converted to ETFs.

 

 

Show Notes

[01:43] Mutual Funds – Grant reviews how mutual funds are structured and how the mutual fund managers use funds from a group of investors to generate greater returns than what individual investors have the capacity to generate on their own.

[08:42] Limitations – Limitation of mutual funds and how these limitations may create unfavorable situations for mutual fund managers in some scenarios.

[13:50] Understanding ETFs – What led to the creation of Exchange-traded Funds, how they work, and the difference between mutual funds and ETFs.

[21:51] Benefits – Grant dives into the attractive characteristics and tax benefits of exchange-traded funds.

[25:00] Popularity of ETFs – Grant shares his thoughts on how ETFs became popular in the last decade and the trend of some mutual funds being converted to ETFs.

[30:00] Why Investors Should Care – How this trend of mutual fund managers converting their structure to ETFs affects the investors in terms of expenses, taxation, benefits, and what to do if their mutual funds are being converted.

 

Resources

Investor Bulletin: Mutual Fund Conversion to Exchange-Traded Fund (ETF):
investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/mutual-fund-conversion-exchange-traded-fund

Making the Switch: Turning a Mutual Fund into an Exchange-Traded Fund:
bbh.com/us/en/insights/investor-services-insights/making-the-switch-turning-a-mutual-fund-into-an-exchangetraded.html

GMB Ep #88: How Securities Lending Drives Down Investment Costs

 

Securities lending is one of the widely misunderstood concepts in the investment community, and securities lending shows up intermittently in the news for both positive and negative reasons. However, this complex trading pattern driven by short selling can drive down costs for the investors. In today’s episode, Grant dives deep into how securities lending works, the different parties involved in it and their roles, how investors participate in securities lending, and how it impacts the performance and costs of ETFs and mutual funds.

 

 

Show Notes

[02:40] Understanding Securities Lending – How securities lending works, how it relates to investment funds that many people put their money in, and how it generates revenue for brokerage firms.

[07:13] Trading Settlement – The process of trading securities is a bit more complex than it looks from the outside. Grant reviews how trade settlements work and how securities lending comes into play.

[12:50] Short-Squeeze – How unexpected fluctuations in stock price can cause investors to lose money in certain scenarios.

[13:47] Driven by Short Selling – Grant reviews how securities lending transactions between several parties create a complex ecosystem that facilitates short selling and how the demand for securities lending is driven by short selling.

[16:23] Supply and Demand – How brokerage firms can make money through securities lending depending on the demand for shares.

[19:10] Sources of Supply – Grant explains the sources brokerage firms use to get the securities they lend to other parties and how investors can make money by lending securities to brokerage firms in some scenarios.

[21:40] ETFs and Mutual Funds – How ETFs and mutual funds are involved in securities lending as another source of supply and how it benefits investors by reducing expenses.

[27:20] Facilitating Short Selling – A common argument about securities lending is that you may not want your shares to be lent out because you don’t want to facilitate short selling in a company that you own. Grant shares his take on the relevance of this idea.

 

Resources

My Take On Short Selling: www.abovethecanopy.us/my-take-on-short-selling/

GMB Ep #87: Top 10 List: Behavior Biases Impacting Your Investing

In today’s episode we’re diving into ten behavioral biases that negatively impact your investment decision-making. Throughout the episode, we explore the psychological background of these ten behaviors, how they get in the way of sound investment decision-making, and how you can be conscious about your financial decisions so that you won’t make mistakes because of them.

 

 

Show Notes

[3:10] Oversimplification – Grant explains what happens when our brains are overwhelmed and are trying to process information in the most efficient way by oversimplifying complex scenarios in an attempt to break them down into bite-sized pieces, ultimately leading to poor investment decisions.

[6:15] Restraint – When we come across an opportunity that we think is beneficial to us, it’s very hard to show restraint. The problem that gets in the way of our sound investment decision-making is our overestimation of our ability to show restraint. Grant explains how this practically affected the cryptocurrency market.

[8:53] Familiarity – People naturally trend toward investments that they know and are familiar with. Grant dives into how this can negatively affect your investments and how to avoid falling into this trap.

[11:20] Incentive Bias – How some of the systemic features in our financial systems, in some cases, lead people to make poor decisions and how the general public can identify these incentives that could potentially lead them toward poor investment decisions.

[14:40] Self Attribution Bias – Grant dives into one of the behaviors in which our egos play a major role. He explains how this behavior is largely visible among day traders and how to be aware of this trait of human brains.

[18:05] Information Bias – Picking reliable data is crucial for making savvy investment decisions. For instance, not being able to grasp the difference between correlation and causation can lead to disastrous investment decisions. We talk about why we need to be vigilant about the information we consume.

[20:55] Groupthink – Since humans naturally like to be in groups, it can be extremely uncomfortable to make a decision that severely deviates from what everyone else is doing. In investments, succeeding in some scenarios may require exactly that. Grant explains how we can grow beyond the herd mentality while being open to new ideas to make savvy investment decisions.

[24:30] Anchoring Bias – When we take time and energy to research something and come to a decision, we like to be anchored on that decision, making us less open to ideas that are contrary to our decision. This tendency to remain anchored on our original decision is something that simply gets in the way of making sound decisions.

[26:50] Loss Aversion – The losses in our investment accounts feel worse than the gains feel good. And because of that, people make investment decisions very commonly, in an attempt to avoid the losses, without appreciating the opportunity for potential gains in the same manner. Grant explains why you should try to avoid this behavior in your decision-making.

[28:40] Confirmation Bias – How our minds tend to cherry-pick certain information in an attempt to process information efficiently, how it affects our investment decisions and how to avoid making mistakes that occur due to confirmation bias.

Resources

Investing Myths #3: You Need To Keep Up With the Financial News: growmoneybusiness.com/podcast/ptkre5734rgwc

GMB Ep #86: Buying the Building Your Business Will Operate In With Justin Smith

Commercial real estate is something many investors seem to be interested in both as an asset class as well as a place for operating their businesses. Justin Smith, a broker, industrial advisor, and author, joins us today to talk about investing in commercial real estate. Throughout today’s episode, we explore what investing in commercial real estate is like as an asset class and what business owners who are considering buying buildings for their own businesses need to consider prior to day one and from day one to the day that the business no longer occupies the building. Stay tuned until the end of the episode, where Justin shares some strategies that help real estate investors with taxation.

 

 

Show Notes

[2:50] Justin’s Background – Justin has been working at Lee and Associates for 17 years, focusing primarily on industrial property. We talk about how Justin got into the real estate industry and what he learned through his long career.

[9:40] Buying a Building – Justin explains where to start if you’re looking for a building to buy and how the process differs according to the type of business, type of property, and whether it’s a lease or ownership.

[20:05] Transition From Tenant to Owner – Switching roles from the tenant to owner often calls for some construction work. Justin explains what potential property owners should know about working with contractors and other parties and maintaining compliance.

[26:55] Selling the Current Building and Purchasing the Next – What business owners need to think about when selling their current building to move to another and how their options differ based on liquidity, capacity, and capital.

[34:41] Potential Property – What makes a potential property or building an attractive investment in a portfolio, and what to look for in a potential real estate investment in terms of its cash flow.

[42:45] 1031 Exchange – Justin shares his thoughts on the future of the 1031 exchange, which gives business owners an option to avoid paying capital gains taxes when selling a property and reinvesting in similar properties.

[46:30] Tips for Pure Investors – Justin shares some tax strategies for people who are looking at real estate as a pure investment.

[49:00] Industrial Intelligence – Justin’s book, Industrial Intelligence: The Executive’s Guide for Making Informed Commercial Real Estate Decisions, came out last April. We talk about what he covers in the book and how it helps investors make smarter decisions for real estate investments.

Resources

Industrial Intelligence: The Executive’s Guide for Making Informed Commercial Real Estate Decisions: amazon.com/Industrial-Intelligence-Executives-Commercial-Decisions

Connect with Justin Smith

LinkedIn: linkedin.com/in/justinbsmith

Website: smithcre.com

GMB Ep #85: Investing Myths #3: You Need To Keep Up With the Financial News

Evaluating investment funds or any other type of investment is crucial for a savvy investor. In today’s environment, it’s easy for investors to get influenced by misinformation that ultimately leads them to make sub-optimal investment decisions. We dedicated today’s episode to inspecting the process of evaluating different mutual funds, ETFs, or any other types of investment funds. Throughout the episode, we explore the process of due diligence and how to decide whether or not a potential fund is worthy of including in your portfolio.

 

 

Show Notes

[2:40] The Myth – Although more knowledge is good, getting into deep details of things via mainstream financial news might tempt you to make short-term tactical adjustments to your portfolio. Grant dives into how this occurs and why it results in bad outcomes. 

[3:40] Strategic Strategies vs. Tactical Strategies – Grant shares his thoughts on why savvy investors focus more on strategic strategies than short-term tactical actions.  

[6:42] Clickbait Headlines – How digital media business models based on advertising negatively affect the quality of journalism and how this behavior influences users to follow unreliable and biased financial advice. 

[8:55] “If you’re not paying, you are the product” – Grant explains how free news sources may often contain misleading information and why Grant always tries to digest financial information from sources he pays for.  

[10:25] Social Media  – Grant shares his thoughts on investment-related misinformation that are being shared on social media platforms and how to be mindful about misleading financial news.  

 

Resources

Investing Myths #2: It’s Dangerous to Invest At All-Time Highs:
growmoneybusiness.com/podcast/Invest At All-Time Highs

Investing Myths #1: Rising Rates Will Crush Your Bond Portfolio:
growmoneybusiness.com/podcast/Rising Rates Will Crush Your Bond Portfolio

GMB Ep #84: This is How I Evaluate Mutual Funds & ETFs

Evaluating investment funds or any other type of investment is crucial for a savvy investor. In today’s environment, it’s easy for investors to get influenced by misinformation that ultimately leads them to make sub-optimal investment decisions. We dedicated today’s episode to inspecting the process of evaluating different mutual funds, ETFs, or any other types of investment funds. Throughout the episode, we explore the process of due diligence and how to decide whether or not a potential fund is worthy of including in your portfolio.

 

 

Show Notes

[2:15] Sub-Optimal Investment Decisions – Why people make sub-optimal investment decisions by not using the right criteria to evaluate a standard investment fund.

[4:00] Terrible Evaluation of Potential Investments – Using the example of large-cap US equities, Grant explains how some of the most popular fund ratings do not provide a very good evaluation of potential investments.

[8:37] Structuring Your Portfolio – The most important decision one has to make in structuring a portfolio is allocating assets. Grant shares high thoughts on why this decision is far more important than focusing on a specific fund and how long-term asset allocation can improve the integrity of your portfolio.

[13:46] Evaluating Strategy – How to evaluate the strategies of different investment funds and how to decide whether the strategy of a specific fund aligns with your goals.

[18:05] Historical Performance – Why it’s important to take a look at the history, stability, and performance of the fund management company before you invest.

[21:33] Path to the Best Outcome – Wrapping up the episode, Grant shares his take on how having a consistent allocation, a consistent philosophy, and remaining invested through harsh conditions combine to create the path to the best investment outcomes.

 

Resources

ETFs vs. Mutual Funds: What’s the Right Investment Vehicle For You?
abovethecanopy.us/mutual-funds-vs-etfs-whats-the-right-investment-vehicle-for-you/

GMB Ep #83: Consider This Strategy If You’re Paid In Company Stock

Compensating employees with some form of equity has become a fairly common practice among employers. This may come in several flavors, including restricted stock units, employee stock purchase plans, incentive & non-qualified stock options. In today’s episode, Grant dives into how these programs work, how they’re taxed, common issues employees face when they’re compensated with equity, and a strategy that allows employees to benefit from equity compensations while reducing their tax bills.

 

 

Show Notes

[02:48] Common Issues – Grant shares his thoughts on two common issues that employees face when they are compensated with equity.

[04:51] Risks Associated with Company Shares – Grant talks about some of the disaster stories of a few companies that put their employees in deep financial trouble with equity compensations. However, he also talks about how equity compensations can create a whole lot of wealth for employees if the company continues to flourish.

[07:01] Restricted Stock Units – Grant reviews a few common equity compensation programs, starting with RSUs, a performance-based method of compensating employees.

[09:57] Employee Stock Purchase Plans – While rare among private companies, employee stock purchase plans are quite common in publically traded companies. Grant dives into how these plans are taxed and the pros and cons of these plans.

[13:35] Incentive & Non-qualified Stock Options – Grant dives into the benefits of another two types of equity compensation and what employees should keep in mind about them.

[15:23] Strategy – Grant shares his out-of-the-box strategy of utilizing equity compensation that allows employees to pay as little tax as possible.

 

Resources

Employee Stock Options: The Top 5 Mistakes That Leave Money on the Table:
abovethecanopy.us/employee-stock-options-the-top-5-mistakes-that-leave-money-on-the-table

GMB Ep #82: Debunking Investing Myths #2: It’s Dangerous to Invest At All Time Highs

A few weeks ago we started a series of podcast episodes dedicated to debunking popular misconceptions around investing. In today’s episode, we’re continuing that discussion by covering another investment myth: that it’s too dangerous to invest new money at market highs.  Buying low and selling is an obvious objective for any investor, but avoiding the markets simply because they’re breaking new highs is a common mistake for many.  Throughout the episode, Grant dives into why this concept is a myth and data from a few studies conducted by reputed organizations that show the potential dangers of the delay in waiting till the markets fall. 

 

 

Show Notes

[04:56] Historical Data – We often use historical data to assist our investment decisions. While it is a good starting place, it comes with a lot of shortcomings. Grant reviews why we need to look beyond historical data to make savvy investment decisions.  

[06:33] Study on S&P 500 Returns – Grant dives deep into a study that analyses the returns of the S&P 500 companies right before the dot com bubble crashed and after the market crash. 

[11:13] Investing on Random Days vs. All-time Highs  –  Last year, the investment firm JP Morgan conducted a study to compare the returns of investing on any random day versus selectively investing only on the days when the markets reach certain points. Grant dives into the findings of this study and how they relate to the misconception. 

[16:20] Risks – The risks associated with investing in financial markets and some of the methods we can use to mitigate the risks and the limitations.  

[18:31] Looking at a Wider Dataset – Grant reviews a chart from Dimensional Fund Advisors, which uses a wider data set, a total market index, and a longer time period than the previous studies. He shares his thought on why this chart contradicts the other two studies and what investors can learn from it. 

[21:23] Dividends and Distributions – How dividends and distributions can reduce the impact of a market crash and significantly increase your returns if the markets do not crash.  

[24:37] Dollar Cost Averaging – How dollar-cost averaging helps us reduce risks associated with investments.  

 

Resources

Is it too late to get invested?
jpmorgan.com/wealth-management/wealth-partners/insights/top-market-takeaways-is-it-worth-considering-investing-at-all-time-highs 

The beauty of doing nothing:
jpmorgan.com/wealth-management/wealth-partners/insights/the-beauty-of-doing-nothing