A few weeks ago, The New York Times published an article that created controversy around President Trump’s tax returns. One of the most controversial claims of this article was that President Trump paid only $750 in federal income tax in the year that he won the election. In today’s episode, Grant dives into specific sections of the tax code that enabled President Trump to reduce his tax bill and how you can incorporate similar strategies in your tax planning.
Many of the investing principles we use in our portfolios today are related to a concept called modern portfolio theory. This concept was first introduced by Nobel Laureate Harry Markowitz in a paper written in 1952. In today’s episode, Grant dives into the history of modern portfolio theory, the benefits of implementing this concept, three golden rules we can derive from the modern portfolio theory, and how you can implement these three rules in your portfolio.
With the election right around the corner, Q3 was another hot quarter for global capital markets. U.S. stocks appreciated considerably, and the bond market’s outlook for the economy improved as the yield curve steepened. At the moment it seems like the markets are expecting another round of stimulus sometime soon. Rumors of different packages have swirled around both sides of the aisle over the last three months. As I write this, there appears to be a strong possibility that a bill is passed by the election. If that doesn’t happen, we may be in for the volatility so many investors are expecting in early November.
This is an odd time, an odd year, and it’s hard to believe that stocks and bonds are both in positive territory after everything that’s happened. But here we are. Now is a good time to remind ourselves of a few core investment principles:
- Diversification is your friend. Both globally and across different asset classes.
- Create a long term plan you can stick to.
- Stick to that plan no matter what.
Easy enough, right? Here’s this quarter’s market summary.
This week on the Grow Money Business podcast we have another mailbag episode. Grant covers four questions from our listeners about Social Security benefits, the future of value investing, distribution strategies for retirement, and saving for your kids’ higher education.
If you have more questions you’d like us to cover, visit growmoneybusiness.com, and drop your questions in the Mailbag section. Grant will answer your questions in a future episode.
Incentive stock options are a wonderful benefit to receive. They’re often granted to executives of publicly traded companies and early stage employees of startups, in an effort to align their interests more closely with shareholders. They’re also more complicated than their close cousins, non-qualified stock options thanks to certain tax advantages. The timing of when your shares vest, when you exercise, and when & whether you sell the resulting shares determine how your options are taxed & whether these advantages will apply. This post will cover the basics of incentive stock options, how they’re taxed, and a few points to consider if you’ve been granted them.
The Basics of Incentive Stock Options
Stock options give holders the right to buy or sell a certain security at a certain price for a certain period of time. You can buy and sell stock options on thousands of publicly traded stocks through a typical brokerage account. Incentive stock options are the same basic contract, where you’re given the right to buy a certain number of shares of your company for a specific dollar amount. Here are a few basic terms you’ll need to know.
Strike Price: This is the price at which you have the right to purchase shares. This is often discounted from the current market price.
Fair Market Value: Fair market value (FMV) reflects the value of a company’s shares at any given time. This is easy to ascertain for large, publicly traded companies since their equity value is constantly being traded over exchanges. FMV for a given day is simply the average of the high and low selling prices on a particular trading day. For privately held businesses, FMV is typically determined by a formal appraisal or business valuation.
Vesting: Vesting is the concept of your options becoming “active”. Often companies will issue stock options that vest over time. This incentivizes employees to stick around and continue building the value of the company. A common vesting schedule might be 25% over four years. This means that if you’re issued 1,000 options, 250 will be available for you to exercise one year after the grant date. Another 250 would vest after two years, and so on. Another common schedule for ISOs is a three year cliff, where none of the options vest for the first three years. Then when the three year date arrives, 100% vest.
Grant Date: This is the date the company gives you the options initially. Vesting “clocks” start ticking on the grant date.
Expiration Date: This is the date the options expire. Note that sometimes expiration is triggered upon resignation or termination of employment. Usually you’ll have 90 days after leaving to exercise your options, but this isn’t always the case.
Bargain Element: The difference between the fair market value of the shares and your strike price is the bargain element.
Qualifying Disposition: If you sell ISO shares at least two years after the grant date and one year after exercising, it’s considered a qualifying disposition. This comes with favorable tax advantages.
Disqualifying Disposition: Any sales of ISO shares that are not considered qualifying dispositions are considered disqualifying dispositions. Disqualifying dispositions are taxed differently.
Let’s say that your employer gave you 1,000 incentive stock options three years ago that just vested. The strike price (exercise price) is $10, and equity shares of your company currently trade over an exchange at $25. The bargain element works out to $15 per share: $25 – $10. Even though shares of your company might cost $25 on the open market, your ISOs give you the right to buy them for $10. If you exercised your options and hung onto them for one year, you could then sell the shares in a qualifying disposition. Exercising and immediately selling would be considered a disqualifying disposition.
This week on Grow Money Business we dive into another fascinating investment strategy: factor investing. Factor investing is a strategy that focuses on selecting securities based on attributes that are linked to higher returns. Throughout this episode, Grant covers what factor investing is, how you may implement it in your investment efforts, and some of the things you should keep in mind when engaging in factor investing. Stay tuned until the end of the episode, where Grant shares some valuable tips for minimizing your risks.
Non-qualified stock options (NSOs) are a very popular way to compensate employees at publicly traded companies, and a wonderful benefit to receive. But the tax consequences, and how to handle them, can be confusing.
How you handle an NSO grant should depend on your personal financial situation: your objectives, your tax situation, your cash needs, the rest of your portfolio, etc. Managing your NSOs thoughtfully can lead to a huge tax savings over time. Managing them haphazardly can lead to an unwanted (and unneeded) bill to the IRS.
This post will cover how NSOs are taxed, and a few questions you should ask yourself before deciding how to handle them.
Hi everyone –
As you may know, I launched a podcast last December called Grow Money Business. Thus far we’ve been hosting the episodes on Libsyn, and posting them each week to growmoneybusiness.com.
This week we’re starting something new. Rather than posting new episodes to growmoneybusiness.com only, I’m going to start posting them here as well. If you’re hearing about the podcast for the first time, you can check out the first 44 episodes on growmoneybusiness.com if you’re interested.
In today's episode we have another distinguished guest: Mariah Hudler. Mariah is a financial therapist who helps people build balanced, comfortable relationships with money. Throughout this episode, Mariah shares her wisdom about what contributes to our attitude toward financial matters, how our backgrounds impact our financial decision making, and what you can do to improve your relationship with money. Stay tuned until the end of the episode, where we talk about some valuable tips for reducing financial stress.
Sound investment management always starts with asset allocation. The biggest decision you can ever make as an investor is the portion of your assets you invest in stocks. This decision alone is responsible for around 90% of the returns you’ll see over the years in your portfolio. The other 10% is based on whether you’re investing in U.S. stocks or international stocks, large cap or small cap, and value or growth.
Once you decide the proper allocation for you and your family, the next step is to select specific investments to buy. Maybe that’s an S&P 500 index fund. Perhaps it’s a small cap value stock fund. Whatever the asset class, if you choose to invest in a fund you’ll have two predominant choices: a mutual fund or an exchange traded fund (ETF).
Both can be great investment vehicles, but they are very different animals. Making a sound decision surrounding which vehicle is best for your strategy is important, and one that many investors overlook.
This post will describe these differences, and how to determine which investment vehicle is right for you.
With the election in November creeping closer, the campaign season is now in full swing. And the closer we get, the more details & campaign promises start to emerge from the candidates.
Biden’s tax plan has mostly flown under the radar in the national media thus far, thanks to the global pandemic. But given that he has at least a 50/50 shot at winning, I thought it made sense to devote a post to what he has in mind if he does win the Presidency. If elected, we could see some substantial changes to the tax code in the next few years.
Here’s the rundown.