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Tag: Risk Tolerance

Participating in an ESPP Plan: How to Decide If It’s Right for You

Written by support@seostats.com on . Posted in Equity Compensation, Financial Planning, Investing.

Wouldn’t it be nice to get a guaranteed 15% in profit whenever you wanted to sell shares of stock you own?

It sounds too good to be true… but with benefits like employee stock purchase plans that can be part of equity compensation packages, this kind of deal can be real.

Employee stock purchase plans, or ESPPs, are vehicles that employees use to purchase shares of company stock. You contribute to the plan through paycheck withholdings (just like 401(k) contributions are withheld from your paycheck). At periodic intervals, the money in your ESPP is used to buy company stock on your behalf.

Once you purchase shares, those are then deposited into a brokerage account. From there, you own these shares outright and you can either sell them or hold them. Making that decision is a planning conversation in and of itself, but before you can get there, you need to decide if participating in an ESPP is right for you or not.

 

The Benefits of Participating in an ESPP

Every ESPP is different, so you need to check your plan document to verify how the plan that your employer offers will work before you decide if you want to jump in or not. Some key aspects to look for are the benefits they offer.

ESPPs aren’t powerful tools simply because they allow you to buy company stock. Their real advantages lie in features like discounts and lookback provisions.

If your plan offers a discount, that might range between 0 to 15 percent. That means you can purchase company stock at up to a 15 percent discount off the fair market value. If you immediately sell your shares upon purchase, you can sell them at the full market value, which means you lock in a certain amount of profit simply by accessing the ESPP and selling shares from it.

A lookback provision can help you create even more of a profit, if your plan allows you to buy shares at the price of the stock at the beginning of the offering period or at the end of the purchase period, whichever is better.

While these can provide great reasons for participating in an ESPP, it’s not all upside. ESPPs do come with some limitations and potential issues which you must understand before you decide if contributing to a plan is right for you.

 

There’s No Such Thing as a Free Lunch… or Free Gains

Say your ESPP offers a 15 percent discount. While that can feel the same as locking in a 15 percent gain on your contribution, the reality looks a little different.

If you buy and sell your stock within one year of the date you made the purchase, you will owe taxes on the gain at your ordinary income tax rate. That could be as high as 40% in some states.

Your 15 percent gain is more like a 9 percent net return. Of course, that’s not bad by any means. But, it’s something you must be aware of in order to properly manage the tax implications of using an ESPP.

Failing to take into account how profits will impact your tax bill can leave you in a bad position when you file next year and realize you owe quite a bit of unexpected money to the IRS.

There is one way to reduce your tax burden, and that is to hang on to company stock you buy through an ESPP for one year or more. You still need to pay taxes, but those might be at preferable, lower long-term capital gains rates.

However, solving one problem with your ESPP can lead you straight into another: additional investment risk thanks to bad market timing.

 

Holding Shares for Long Periods Exposes You to Risk and Volatility

When you hold an individual stock for any period of time, you expose yourself to more risk and volatility than you would if you kept only a truly diversified portfolio.

Still, many people feel tempted to do just this because they try to avoid the biggest tax rates on the money they could make from selling shares. This forces you to maintain a lot of company stock for an extended period of time… and may take away the advantages of the ESPP, like the lookback provision and discount on shares.

Why? Because there’s no guarantee your company stock rises in value over a yearlong period. Holding the shares means taking on the risk the stock price falls. It could even drop below the price at which you purchased the shares, leaving you “underwater” on the stock.

This is an example of what it can look like when you let the tax tail wag the dog. It’s not always a bad idea to hold company shares… but to do it only because you’re trying to avoid higher taxes doesn’t always make sense.

You need to develop a strategy for how to manage the shares you purchase through an ESPP, and that may require making tradeoffs: like selling immediately and paying more in taxes, but knowing that you received the cash value of your shares right away rather than subjecting them to risk of loss in value over time.

 

All Your Financial Eggs Might Be in One Basket

The other major downside of an ESPP is that it exposes even more aspects of your financial life to a single entity: your employer.

You already work at the company, which carries risk; all employees run the risk of losing their positions for a multitude of reasons, both within and outside of their personal control.

And, if you have access to an ESPP, you may also have other equity offered as part of your compensation package. That means you might already be exposed to the company stock before you even participate in an employee stock purchase plan.

By contributing to an ESPP, that could increase that exposure to a level that doesn’t make sense for your plan.

ESPPs can offer great advantages, and many employees are right to participate in these plans. But they’re not the best option for everyone, and how you use your plan may require a nuanced approach depending on the context of your current financial situation.

Talk with a financial planner to make sure you’re considering all the angles before you make a decision on whether or not to participate in an ESPP.

Investing FOMO Is Real – But Here’s Why You Shouldn’t Give In

Written by support@seostats.com on . Posted in Behavioral Finance, Investing.

The fear of missing out is real in many aspects of our lives. Today more than ever, with how ingrained social media is in our society, it’s hard not to let that fear, or FOMO, affect how you think and feel about your own decisions.

FOMO impacts all of us. I see it everywhere, and in almost everyone—from my 11-year-old twins when they hang out with their different groups of friends, to my clients who question if they just missed out on the next best investment.

I can admit I’m guilty of it myself, and I work to stay aware of this fear. For me, it comes up when I look at Bitcoin and think, why didn’t I just buy a few coins to try it out? Or when I read the latest headlines and wonder, why didn’t I buy some Tesla shares years ago?

We can’t get rid of these thoughts or feelings, those worries or fears that we missed out on what everyone else is enjoying or doing right. What we can and should do, however, is learn to recognize FOMO when it pops up for us—especially in the realm of our money and our investments.

 

Investing Is About Managing Money and Emotions

When many people think of investing, they assume the focus is on the analytical side of things. But for individuals, their investment experience is often defined not by numbers or statistics or data points, but by their own emotions.

One of the biggest emotions investors experience is fear. Fear of missing out on something, be that “the next Apple” or the market timing to avoid a future dip, is very real.

It’s also a very compelling feeling. Investing FOMO can be difficult to simply ignore it in favor of sticking to a rational, strategic investment plan.

Again, you don’t need to get rid of all fears of potentially missing out. What you do have to learn is how to handle FOMO when it tries to influence your investment decisions.

Learn more about how behavior can cloud your investing focus in Episode 9 of The Build below!

Awareness Is a Key Tool in Combating Investing FOMO

The best way to put the breaks on investing FOMO—or at least, to not let it make your decisions for you—is to be aware.

First, when you feel FOMO creeping up, simply acknowledge it. It’s completely normal to feel this way. It’s not necessarily a sign that you need to take action.

Investing FOMO can be so powerful because none of us wants to make a big mistake with our money that will cost us an opportunity to grow wealth or have enough in assets in the future to support our families and enjoy the life we want.

It helps to understand you will probably always have that worry, no matter what you do. Even if I buy Bitcoin or Tesla, there will still be some other stock or investment out there that will grab headlines and leave me thinking, “why didn’t I buy that instead?”

Second, work on getting to know yourself. For example, I know myself well enough that I don’t have the stomach to hold individual, concentrated positions. I’d always be tempted to sell out of my shares for fear of the price dropping (which is exactly what I did with Amazon back in 2012).

 

By the Time You’re Reading About It, It’s Probably Too Late

A third helpful way to manage investing FOMO is to understand how the financial news works. The headlines you see are inherently going to be:

  • About something that is already in motion (meaning, you are not going to get the inside scoop on a great investment in the news; other investors already beat you to it)
  • About anomalies and outliers; it’s news because it’s not normal!

Take the Gamestop story that cropped up in early 2021. If you read about the rally in the Wall Street Journal and wanted to buy in to assuage your feelings of FOMO, it was probably too late. You might have been one of the investors who bought at the peak and got left holding the bag when the stock plummeted shortly thereafter.

The story itself was highly unusual. That’s exactly why it made the news in the first place! That’s likely the case for any sensationalized investment that “everyone” is talking about: it’s an outlier, and outliers are very difficult to spot without the benefit of hindsight.

Another thing to consider is what you don’t hear about in the news (or in people’s normal, everyday conversations, for that matter). People will always brag about their winners. But they almost never talk about the bad trades and financial mistakes they have made.

Anyone who brags about a homerun investment has definitely struck out multiple times on other investments—whether they tell you about them or not.

 

FOMO Hurts, But Boring Really Is Better

There’s no denying the fact that the fear of missing out is painful. FOMO isn’t fun to experience. It can be agonizing to wonder if you’re the only one who isn’t getting rich for the latest fashionable investment trend.

If nothing else, know this: your worries are not representative of reality for a number of reasons. For one, it’s easy to feel like everyone but you are benefitting. But in reality?

The number of people who hold Bitcoin is tiny compared to the global market of investors. The number of people who made money off of Gamestop may be the hundreds or even thousands – but it’s probably not more than that, which is nothing when you consider the millions of people who are just investors in America.

And two, it’s the boring stuff that works! There are no reliable “get-rich-quick” schemes. But maintaining a portfolio of low-cost, globally-diversified mutual funds and ETFs and taking advantage of strategies like dollar cost averaging and dividend reinvestment will help you build assets over time.

You can know all of this, and still have FOMO. That’s okay to feel the fear of missing out. What you want to learn to avoid is taking action on that fear because, in all likelihood, it’s unfounded.

Don’t give in and chase the next hot investment. Feel the fear—and stick to your investment strategy anyway.

The Lessons We Can Learn from Times of Financial Crisis

Written by support@seostats.com on . Posted in Cash Flow, Financial Planning, Kiplinger Articles.

It’s time to step back and take a look at how you weathered the coronavirus crisis. Did your cash hold up? Does your job feel secure? Your answers could reveal the need to make some adjustments for the future.

Learn more in our latest Kiplinger article, “The Lessons We Can Learn from Times of Financial Crisis”.

If you have any questions or comments please let me know and as always, don’t hesitate to share with those who you feel may find this helpful!

Regards,
Paul

3 Reasons Risk is Not a Bad Thing

Written by support@seostats.com on . Posted in Investing.

Just about every investor wants safety, income, and growth, but is it possible to have all of these things at the same time? The short answer is no, but that’s not a bad thing.

When you fully understand risk and the role it plays in your investments, it can completely change the way you think about it. Furthermore, understanding your personal tolerance for risk can allow you to use risk in a way that aligns with (not undermines) your long-term financial goals.

Let’s take a look at what risk is when it comes to your investments and how you can leverage it as a tool to help achieve financial success.

 

What is financial risk?

To oversimplify, financial risk is the possibility of losing money. High risk is associated with the potential for big losses, but it often can also provide the potential for the highest reward as well.

Inversely, low risk aims to eliminate the potential for big losses, thereby also canceling out the possibility for large gains.

As an investor, you are either comfortable with risk, not comfortable with risk, or somewhere in between. This is commonly labeled as your risk tolerance, or how you feel about risk. Your risk capacity, on the other hand, is essentially a measure of how much risk (loss) you can afford without it literally devastating your financial well-being and future.

            Related content: What Investors Need to Know About Risk

 

3 Ways Financial Risk is Helpful

Even though risk can seem scary, it can be a powerful tool within your investment strategy to help you reach your financial goals over the course of your lifetime.

When starting with new clients, we review the basics of risk, especially the risk reward trade off (i.e. you need to take some risk in order to have some possible gain).  This is personal to each investor and there is no right or wrong answer per se, but there is usually a bad, neutral, good, better, and best answer depending on the impact and potential outcomes certain levels of risk can have on an investment portfolio.

Here is how appropriate levels of risk can be helpful:

1.    Risk can yield higher returns. Higher returns almost always involve higher amounts of risk. You will never build wealth by keeping your cash saved in an FDIC-insured account (almost zero risk – zero reward). In fact, you will lose purchasing power as inflation erodes any small return. Luckily, there are ways to aim for higher potential returns by taking on more calculated (and not unnecessary) levels of risk.

Related content: Diversification: The Right Way to Manage Risk

2.    Risk can keep you level-headed. Risk can serve as an effective speed bump on your path to financial success. Greed can get the best of all of us, and the potential for big reward can be alluring. I have seen many investors (often the same investor) get extremely risk tolerant during up markets and very risk averse during down markets. Risk is a welcomed consideration that causes investors to slow down and reassess. Investing for the long-term means you will continuously re-evaluate how much money you are willing (or able) to lose and whether or not you’re on track to reach your financial goals. The trade-off has to be aligned.

3.    Risk can prevent you from making a mistake. The awareness and potential for loss can be sobering for your financial life. Aside from helping you to invest with a level-head, it can stop you in your tracks from making a huge, sometimes irreversible financial mistake. If you are two years from retirement, for instance, you are not going to invest all your savings into an up-and-comer start-up that could be the next Amazon or Apple.

 

Conclusion

Ultimately, every investor should look to achieve the highest amount of return with the least amount of risk. Your risk tolerance and capacity evolves as you advance through the decades, which is why your investments should evolve with you.

Remember, if it sounds too good to be true, it probably is. Risk isn’t a bad thing. In order to achieve your goals you will need to take risk, just makes sure it’s an appropriate level of risk that you can handle.

 

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

When Will the Market Stop Going Up?

Written by support@seostats.com on . Posted in Investing.

Stock market’s value has grown 320 percent since it hit rock bottom on March 9, 2009, but how long can investors expect this trend to continue?

Most Americans have been watching in wonder as their retirement portfolios continue to rise. Whether you invest in a 401(k), IRA, 403(b), or TSP, chances are you have seen your retirement savings grow exponentially over the last twelve months. And the start of 2018 hasn’t shown any signs of slowing.

Will strong market performance continue? Can it continue at the unprecedented rate we see right now? That is THE question, and there is only one right answer.

 

Will the market continue to go up? I don’t know. No one knows.

I am asked all the time about what I think about the market or a particular stock or industry or technology. And while it is fun to talk about where things could be headed and when the market will pull back, the fact is no one knows.

Historically speaking, if you look at market performance over an extended period, you will see moments of peaks and valleys, and then something in between. The market can have long up trends (2009 to now), sharp downswings (2007-2009), and it may level off for longer durations of time (2000 to 2010). It doesn’t matter which charts you reference, they all behave similarly.

The market can (and will) behave just about any way you can imagine, but predicting what it will do on any given day, week, or month is anyone’s guess. The only thing we can know for sure is that the market will eventually stop going up because economies are cyclical, and so are markets.

 

What matters when it comes to market performance?

I have lost count how many times since March 2009 (the most recent bottom) how many people have told me this run was going to end. At times I even believed it myself, but it didn’t matter.

What really matters has less to do with overall market performance and more to do with your financial situation.

 

How to stay focused on your finances

I tell all of my clients not to pay attention to the daily market movements. Daily market performance is just for a quick headline story, not something to take over your focus. If you let it distract you from your long-term financial planning, it can’t serve your economic interests. So here are three things you can do to ensure you stay focused on your finances in the midst of newsworthy market performance.

1.    Set or Reset Financial Goals

Don’t forget why you’re investing your money in the first place. Chances are it’s not just for the sake of building wealth, but what that wealth can presumably afford you. Are you now closer to that goal? Resist the temptation of getting caught up in guessing when to get out of the market. Keep your investment portfolio well-diversified according to a long-term game plan, and let it do its thing. Curbing emotionally-charged financial decisions is so essential for your long-term success.

2.    Understand Your Risk Tolerance

Making sure your assets are adequately diversified starts with understanding your risk tolerance.  Risk tolerance is a gauge of the amount of financial risk you can stomach. Risk tolerance is unique to all of us, some are more comfortable being risky with money, and some are not. The key is to know what camp you are in before you invest.

3.    Operate Within Your Risk Capacity

Once you reevaluate your financial goals and understand your tolerance for risk, operate within the risk capacity you are comfortable. Knowing your risk tolerance is a guide for the types of investments you are likely to include in your retirement. Your risk capacity is a measure of how much of a loss you can handle without severely jeopardizing your financial goals and well-being. It will help you to make informed decisions about how much you can afford to lose.

 

Conclusion

Regardless of how the market is behaving in this moment, try to avoid making any sudden or rash decisions based on a feeling, fear, or speculation. Now is not the time to get out of the market, but it is the time to make sure you are protecting yourself.

If the market goes down, what does that look like for you?

If the market continues to go up, are you positioned to take the greatest advantage of strong performance without putting yourself and your financial future at too much risk?

These are the personal questions that matter more than when the market will stop going up.  If you are wondering whether or not your investments still align with your financial goals, risk tolerance, and risk capacity, sit down with your financial advisor or contact me at Paul@lakeroadadvisors.com.

Everyone may wonder what the market will do, but you don’t have to wonder where you stand financially.

https://www.cnbc.com/2018/01/18/stock-markets-value-under-trump-has-grown-by-6-point-9-trillion-to-30-point-6-trillion.html

http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

https://www.kiplinger.com/article/investing/t047-c032-s013-what-investors-n…

https://www.kiplinger.com/article/investing/t047-c032-s013-what-investors-n…

Is This A Good Investment?

Written by support@seostats.com on . Posted in Investing.

Is now a good time to buy Corning?  What do you think about Apple?  Is Gold a smart investment?

As a financial planner and investment advisor I am often asked “Is this a good investment?” Here are 5 questions you should ask yourself before you move forward with making any investment.

1.      What is your goal for the money you are investing? How much are you hoping to earn on this investment?

Earning a return on your money is only part of the equation.  What do you want to do with the money? Build up your savings, set aside for a new home, a vacation, or make charitable donation? Do you have an exit strategy?  Is a 20% gain enough to achieve your goal or will you be happy with a 10% gain?

2.      Do you understand the downside risk associated with this investment?

The opportunity for a large gain always comes with the possibility of an equal or greater loss.  This is the risk/reward tradeoff.  There is no “free lunch” when investing.  Do you know what this loss is?

3.      What is your risk tolerance?

Everyone says they can handle risk until the market drops (ex. January 2016).  Make sure you understand that markets fluctuate often and sometimes with great volatility. Will you be comfortable staying the course and not selling your investment when this happens? If you can’t, then this is not the right investment for you.

4.      Do you understand the fee’s associated with this investment or product?

Is there a flat fee for this investment or is it sold with a commission?  How is the person selling you this investment incentivized?  Fees and incentives do matter and be sure to ask about both.

5.      How does this fit into your overall plan?

Is this investment more than 10% of your overall net worth?  If so, you may want to reconsider it’s appropriateness in your financial plan.

The next time you think about an investment first think how you answered these questions.

Learn more at www.lakeroadadvisors.com