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  • 0 A Post-Divorce Checklist

    • Divorce
    • by William F. Davis, CFP®
    • 03/13/2025

    Welcome to your new life! Now may be the time for a fresh start. Maybe this means making that major purchase that you may have been held back from making – a shore house, a new convertible, a boat. Or taking that much-needed vacation with friends – you certainly are now "free" to roam about the country – but only if it’s in the budget. In other words, make sure you plan for it. But before you pull out your checkbook or credit card, make sure that you put together – and complete – a checklist of items that will help prepare you for your new life. Assemble your post-divorce go-to professionals. Going forward, you will still need good advice from a legal and financial perspective – so be sure you have someone on hand to help with investments and estate, retirement and tax planning strategies, etc. – and all the things mentioned below. Divide investment assets and retirement plans according to the terms of your divorce settlement agreement. To divide 401(k)s or other workplace retirement plans (but not IRAs), you may need a Qualified Domestic Relations Order (QDRO) from the court with specifics that plan administrators need to follow on how to pay out and structure the benefits and/or account. Change your emergency contacts (and name, address, if necessary) on all your information at work, doctors’ offices, health club, etc. Thoroughly review your credit report. Cancel any joint credit cards or accounts that remain. Update your estate planning documents – will, power of attorney (medical and financial), trusts. If you don’t have these documents in place – now may be the time to get them done! Update all beneficiary designations. Workplace retirement plans (pensions, 401k/TSP/403b plans), investment accounts, retirement accounts (IRA, Roth IRA accounts), trusts, annuities, life insurance and anywhere else you may have listed your former spouse. Research your health insurance options and apply for COBRA (if necessary). Please keep in mind that COBRA is only temporary, and is designed to hold you over until you get your own policy – either through work or elsewhere. Put together a spending plan for your new life. Your financial circumstances have likely changed as a result of your divorce. Take measures to ensure that your settlement lasts as long as absolutely possible. So when you’re sitting on a beach somewhere with friends celebrating your new beginning, you’ll feel much better knowing your financial and estate planning strategies are in order – and your trip is a reward for getting them done. Now go out and have a great time – and enjoy the kick-off to your new life!   ---   Bill Davis is a CERTIFIED FINANCIAL PLANNER™ and Certified Divorce Financial Analyst (CDFA). He is the Managing Partner with Vericrest Private Wealth LLC, a financial advisory firm in Newtown, Pennsylvania.  

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    0 Divorce and Social Security: Your Ex's Record Might Still Pay Off

    • Divorce
    • by William F. Davis, CFP®
    • 03/06/2025

    Divorce is a financial gut punch—splitting assets, rewriting budgets, maybe even selling the house you swore you’d never leave. But here’s a twist you might not see coming: your ex’s Social Security could still have your back. Yep, even after the ink’s dry, there’s a chance to claim benefits based on their record. Don’t get too excited—it’s not a jackpot, but it’s a lever worth pulling if the numbers line up. First, the ground rules. You can tap into your ex’s Social Security if the marriage lasted at least 10 years, you’re 62 or older, and you haven’t remarried. (Remarriage is the kill switch here—tie the knot again, and this option’s toast.) Oh, and your ex? They need to be eligible for benefits too, though they don’t have to be collecting yet. The kicker: your own benefit has to be smaller than what you’d get off their record. If it’s not, you’re stuck with yours. Fair? Maybe not. Practical? Absolutely. Now, let’s talk timing, because this is where it gets interesting. Claiming early—at 62—shrinks your payout, while waiting until your full retirement age (somewhere between 66 and 67, depending on when you were born) keeps it intact. Delay past that, and it grows a bit until 70. Figure 1 below lays it out clean: early birds get less, patient types get more. It’s a choice that can swing your monthly check by hundreds. Here’s the rub: you don’t need your ex’s blessing. No awkward phone call, no sign-off required. The Social Security Administration doesn’t even tip them off—it’s all between you and the feds. That said, don’t expect them to spoon-feed you the details. You’ll need your marriage and divorce docs handy, and probably a few hours to wrestle with the paperwork. Pro tip: call ahead or hit SSA.gov unless you fancy a day trip to the local office. What’s the payoff? Up to 50% of your ex’s benefit at their full retirement age, assuming it beats your own. If they’re a high earner and you’re not, that’s real money—maybe enough to offset the hit from splitting the 401(k). But it’s not extra cash on top of your own benefit; it’s an either/or deal. The system compares the two and hands you the bigger slice. Simple, not generous. Divorce might’ve torched the “happily ever after,” but it doesn’t have to torch your retirement. This benefit’s a quiet perk—easy to miss if you’re not paying attention. So, dig out those old records, run the numbers, and see if your ex’s work history can still do you a solid. It’s not revenge – it’s just good financial sense.  

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    0 Vericrest Insights - March 2025

    If you read or watch any sort of financial news, you’ve, no doubt, seen/heard prognosticators talk of the current valuation of the stock market – are we at the precipice of a market correction? To assess whether the stock market, specifically the S&P 500, is overvalued, we can look at its forward-looking price-to-earnings (P/E) ratio and compare it to historical levels. The forward P/E ratio measures the current market price of the S&P 500 index divided by the expected earnings per share over the next 12 months, based on analyst estimates. It is a widely used metric to gauge whether stocks are priced reasonably relative to their future earnings potential. As of last week, the S&P 500 forward P/E ratio is around 22.2, based on recent data from late 2024 and early 2025 trends. Historically, this is on the higher side. For context, the 5-year average forward P/E is approximately 19.6, the 10-year average is about 18.1, and the 20-year average sits closer to 15.8. Over the past 25 years, the forward P/E has rarely exceeded 22, with notable peaks at 24.4 in March 2000 (during the dot-com bubble) and 22.2 in April 2021. So, the current level is in the upper range—higher than most historical averages but not at an all-time extreme. What does this mean? A forward P/E of 22.2 suggests investors are paying $22.20 for every $1 of expected earnings over the next year, which is about 13% above the 5-year average and 23% above the 10-year average. This premium could indicate optimism about future earnings growth, possibly driven by sectors like technology, which often carry higher valuations. However, it also raises questions about whether those earnings expectations are realistic—since the forward P/E relies on projections, it can inflate if analysts overestimate or deflate if they miss the mark. Historically, elevated forward P/E ratios don’t always signal an imminent crash, but they do suggest the market might be stretched. For instance, in November 2024, the forward P/E hit 22.2, the highest in over three years, yet the market continued to climb, supported by projections of record-high earnings for 2025 (around $274-$275 per share). Back in 2000, though, a peak of 24.4 preceded a major correction. Keep in mind, that this P/E ratio doesn’t just exist in a bubble - underlying conditions such as interest rates, economic growth, and earnings delivery all play a major role. Right now, the market isn’t screaming “bubble” like it did in 2000, but it’s not cheap either. Compared to historical norms, the S&P 500 is trading at a premium, which could mean less room for error if earnings disappoint or economic headwinds pick up. On the flip side, strong growth expectations could justify it if companies deliver. It’s a mixed bag—overvalued by some measures, but not wildly so. The S&P 500 has recently pulled back from its mid-February highs – roughly 5% off its all-time high – putting it in what some call “correction territory” (typically a 10% drop, though it’s not there yet based on these numbers). The shift isn’t a full-blown crash but a choppy consolidation, testing investor nerves after a two-year bull run. And we do expect continued market volatility, given the current landscape, and there are a few key drivers that could keep the S&P 500—and the broader market—on edge. Volatility often stems from uncertainty, and right now, there’s plenty of that to go around. Concerns over the rapid pace of artificial intelligence investment, coupled with tariffs, government budget reductions, and lackluster consumer sentiment data, have fueled uncertainty in the stock market. For example, the Magnificent Seven tech stocks, key drivers of market gains in 2024, have dropped approximately 7% from Election Day through Friday afternoon. There’s a growth scare echoing last summer’s jitters—soft economic data might be spooking markets. December 2024 GDP growth was solid at 2.3%, but if January or February numbers (not fully out yet) show a slowdown in consumer spending or business investment, that could explain the wobble. The Fed’s pause on rate cuts in January, holding rates at 4.25%-4.50%, adds pressure—Powell’s “no hurry” stance means no quick relief for borrowing costs, and sticky inflation (PCE at 2.6% in December) keeps the heat on. Markets had priced in more cuts; this recalibration could be rattling confidence. If inflation ticks back up—maybe from energy prices or wage pressures—the Fed could tighten more than expected, squeezing stock valuations (higher rates discount future earnings more heavily). Conversely, if they cut too aggressively and signal economic weakness, that could spook markets too. Traders react to every Fed whisper, and that back-and-forth keeps volatility alive. Additionally, geopolitical risks are simmering. Trade tensions, conflicts, or disruptions (think Middle East flare-ups or China-U.S. friction) can rattle supply chains and commodity prices—oil, semiconductors, you name it. The market’s been resilient, but it’s not immune. A single headline can swing sentiment overnight. Tariffs are dominating headlines—25% on Mexico and Canada were delayed, but a 10% hike on Chinese goods hit in February, and talk of metals tariffs or broader “reciprocal” measures looms. The U.S. Trade Policy Uncertainty Index spiked in January to near-record levels, per Schwab’s February 13 update. This “headline risk” can freeze business spending and jolt sectors like manufacturing or tech, which rely on global supply chains. The dollar’s 10% surge in 2024, with more strength expected if tariffs stick, is already shaving 2% off 2025 revenue forecasts for U.S. multinationals, per some analysts. So, the shift right now? A market stepping back from euphoria, grappling with policy fog, sticky inflation, and a reality check on growth and earnings. It’s not a collapse—resilience persists, and a rebound could hit if data firms up—but the easy gains of 2024 might be over. Volatility’s the name of the game until clarity emerges on tariffs, Fed moves, or Q1 results.   ---   Warren Buffett’s 2024 Investing Playbook: Stay the Course Those who have been reading my newsletters know my admiration for Warren Buffett, and his 2024 Berkshire Hathaway shareholder letter, released on February 22nd, offers more timeless wisdom for investors. In it, Buffett emphasizes patience and reinforces the value of staying the course, urging a focus on long-term growth—like America’s economic resilience—over reacting to short-term volatility. This underscores the importance of discipline, avoiding impulsive moves, and seeking quality investments at fair valuations. Buffett also admits to past mistakes, counseling swift action to correct errors, a reminder to regularly reassess portfolios without clinging to losing positions, while his confidence in equities over cash long-term highlights the power of compounding for sustained wealth building. For those eager to dive deeper into Buffett’s insights, I recommend "3 tips from Warren Buffett's 2025 shareholder letter that can make you a smarter investor.” This article distills key lessons from his latest letter, including learning from mistakes, sticking with equities for growth, and finding value in unexpected places—like his Japanese investments. Written in Buffett’s clear, approachable style, it’s a quick read that reinforces the strategies I advocate: act decisively on errors, prioritize quality businesses, and stay patient. His counsel: stick to your knitting, bet on enduring value, and let time do the heavy lifting.   ---   Required Reading   Here are a few articles that I’ve recently published or came across that are worth reading:   Time in the market can top market timing. https://www.ishares.com/us/investor-education/investing-101/long-term-investing   Three reasons to stay invested right now: https://www.fidelity.com/learning-center/wealth-management-insights/3-reasons-to-stay-invested   Here is an in-depth look at the U.S. deficit and how it impacts the Treasury market. https://www.ishares.com/us/insights/debt-deficit-investing   Do you know the difference between a tax credit and a tax deduction? https://www.schwab.com/learn/story/tax-credit-what-it-is-and-how-they-work?sm=uro&sf276282980=1   --   Spring weather is almost here – fingers crossed. Hope you and your families get out there and enjoy it!     Bill    

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    0 Fee-only vs fee-based: what everyone is missing!

    When seeking help with your finances, you may be contemplating the merits of fee-only vs fee-based financial advisors. While there’s been much said on this topic, we feel other explanations fail to analyze past the obvious. There is an important aspect that is being overlooked by other discussions, which we’ll address in this article. Before you get started, we’ve written at length on the topic of financial advisor fees. You may want to give these blogs a quick glance if you haven’t seen them already. Low-cost ETFs: what you need to know Average financial advisor fees – are you paying more than you should be? Mutual fund fees can be sky high - know when you’re overpaying! What is a fee-only advisor? Before we get into the comparison, let’s talk about what a fee-only financial advisor is. A fee-only financial advisor does not accept commissions, and works only for the client. Usually a fee-only advisor charges a fee for the assets they manage. However, there are other types of fee-only arrangements whereby the advisor may be paid by the hour, or paid a flat fee. This type of compensation structure aligns the interests of the advisor with the client. As the assets grow over time, the advisor earns more money. There is no incentive to take undue risk for short term profits, as the advisor’s compensation would be impacted. A fee-only advisor usually works for a Registered Investment Advisor (RIA) firm, registered with either certain states or the Securities and Exchange Commission. They follow the fiduciary standard, putting the client’s interests before their own. What is a fee-based advisor? A fee-based advisor is also called a “hybrid advisor” because he or she wears two hats. The advisor may manage your assets on an ongoing basis for a fee, following the fiduciary standard. Or, they may earn commissions for trades recommended, following the suitability standard. Basically, the client gets to choose which way they’d like to be serviced. There are very important differences between these two ideologies. The most important difference between them is a fiduciary must act in the best interest of clients, while suitability only means their recommendations must be suitable. We highly recommend that you take some time to familiarize yourself with the fiduciary vs suitability standard. Fee-only vs fee-based advisors: the difference that nobody talks about We’ve found that when others discuss the topic of fee-only vs fee-based financial advisors, there is one little thing they tend to overlook. Although we ourselves are fee-only financial advisors in Philadelphia and we wholeheartedly believe that fee-only is better than fee-based, here’s the reality. The overall level of fees paid by the client is what matters the most. Fee-only or fee-based, the client should always strive to work with the advisor who offers the greatest value for the fee charged. The lower fees, the better! Because of the negative impact that high fees have on a client’s wealth in the long term, fees should be as low as possible, and this is generally conducive to working with a fee-only advisor. We have written on this topic at length; please refer the blogs in the beginning of this piece, as well as our article on what financial advisors cost. There is an incentive for advisors earning commissions to recommend investments that come with higher fees, to recommend larger trades, and to trade more often. Mutual funds carry higher fees than ETFs, and in addition you are paying for their fund’s marketing expenses in the form of 12b-1 fees. It doesn’t seem like a big deal on paper, but small percentage differences in fees can add up over time. For these reasons, working with a fee-only advisor is more conducive to the client paying lower fees, which is healthier for the growth of their portfolio in the long run. Which ones take a smaller piece of the pie? Fee-only advisors do tend to charge lower fees, in general. Because they do not earn commissions for trades recommended, they tend to avoid mutual funds with high 12b-1 fees. The average fee that financial advisors charge is somewhere around 1%, and we charge far lower than that, around 0.5%, because we feel it is in our clients’ best interest to keep fees low. Does it really matter? Well, yes. The type of financial advisor you work with has a huge impact on the standard of care you receive, the fees you pay, and the decisions that are made regarding your wealth. All of this can have a huge impact on where you end up in the long term. Finding a quality financial advisor goes beyond the question of fee-only vs fee-based; it’s about what the service entails. Many wealth managers focus on what we feel is of less significance – achieving a certain return with the portfolio. While that is important, what we feel is of greater value is behavioral coaching. What is the value of financial advice? We can recount numerous times when we have helped our clients avoid making major blunders. These setbacks can be very costly. Most of the time we are able to add value to our clients by preventing them from falling victim to the behavioral biases that many investors succumb to if operating on their own. If you are managing your own finances, be aware of the inherent psychological traps that you could inadvertently fall into. They range from holding onto losing positions for emotional reasons to making choices based on too narrow a data range. Work with a fee-only fiduciary advisor We hope that our blog on fee-only vs fee-based financial advisors has been helpful to you. Whichever way you choose to go, ask yourself if the advisor is going to provide the best value for the price paid, if that price is reasonable, if the standard of care with which they will handle your wealth is what you truly desire, and if you feel their services are going to truly make an impact on your long term outcome. In our experience, fee-only fiduciary financial advisors line up best with all of these ideals. And we thought we might mention… We are a fiduciary financial advisor in the Philadelphia, PA area, but we work with clients across the country. We provide fee-only, objective advice to our clients. If you would like to discuss a possible relationship, contact us.  

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    0 8 investor biases to avoid – don’t be your own worst enemy!

    • Investing
    • by William F. Davis, CFP®
    • 02/19/2025

    While we’d all like to think that we are capable of handling the stock market on our own, investor biases play a big part in interfering with our ability to do so. Don’t let them! This article covers the eight major psychological investing biases that get in our way, and what to do about each one. What is an investor bias? A bias is defined as a strong preconceived notion. It can be in favor of or against a particular person, place, or thing. An investor bias is defined as an inclination about a particular aspect of investing (a security such as a stock or bond, the market, a particular type of investment style, etc.). Often these biases are the root cause of behaviors that investors have, and actions they may take. Humans are living, feeling beings and under stress we can be subject to our emotions, making decisions that are counter to our logic, that we would not have made in a more composed state of mind. As markets and life events can never be predicted, it is a matter of time until we are faced with situations that tempt us to conform to our inner psychological flaws. Why behavioral biases are so damaging to investors It may not seem like a “thing”; but it is. Investor bias is harmful because of its impact on investment performance. According to a Dalbar report, the average stock investor underperformed the index by 5.35% in 2019 (Dalbar, 2020). If you’re reading this and doubting that the figure is accurate – well, then that’s just another example of how we can lack objectivity when faced with the cold, hard facts. So before you devote any more time to debating… Investing is emotional, and emotions vary like the wind. They are hard to quantify. I’m sure there are just as many studies proving the opposite, and there may be validity to dissent about this statistic – but that’s not really the point of this article. No matter what the investing population does, your only concern is you. And that’s where we can provide insights that may help you overcome investor biases that you may be having. Let’s talk about those instead, shall we? Alphabetically-arranged list of investor biases and how to overcome them The list of investor biases is long. We’ve organized them in alphabetical order, because we like to keep things tidy on our blog. Action bias When faced with a shocking market event, there is a penchant to take action, and it doesn’t always work in the investor’s favor. This is called action bias. Did you know that, according to Dalbar, about 70% of investor underperformance has happened over ten periods, and each of those periods was a time when the market was a major decline? (Dalbar, 2020) Go ahead and roll your eyes – oh no, now they’re citing that Dalbar report again! It may be or may be completely accurate in your case, but you’ve got to admit, there is a sneaking tendency to want to cash out instead of watching your hard-earned money sink in to the red tick marks zone. How to overcome it: There are mantras and emotional training tools you could use to keep your emotions in check. However, we do believe the best remedy is to work with a financial advisor who can behaviorally coach you through these times. Also try pausing and asking yourself, “Do I really need to sell at this precise moment, or is there any possibility that I am able to hold out and wait for the market to come back?” Anchoring bias Imagine this scenario. You love baking strawberry shortcake in the summer, and to do that you need to buy strawberries. Now, the price of this food follows a very distinct seasonal pattern. In the summer, there is a higher quantity of strawberries produced, causing there to be a lower scarcity for the product available – prices fall. However in the late fall/early winter, prices rise sharply due to scarcity. Let’s say you don’t know all this. Although you usually make strawberry shortcake in the summer, you get inspired in the midst of shopping for your New Years Party. “What? Three dollars for a pound of strawberries – I’m never buying these again!” you say. It’s anchoring bias. You’re used to paying $1.37 for the same food. You swear off of strawberries without looking at what the price is at the time when you usually consume it. It’s a classic case of shortsightedness; you’re only analyzing the most recent information presented to you instead of looking at the overall picture. This type of investor bias happens in the market all the time when investors create their expectations for what they think returns in their portfolio should be. Let’s say you are in a secular bull market. Every year your portfolio returns 10%. Then the Fed hikes interest rate and the economy falls into a recession. Now you’re in negative territory for the year thinking it’s a crisis. You’re anchored to the most recent negative return and comparing it to the high returns of years past, failing to recognize that in the long term, this average return of the market is neither negative nor 10% but somewhere in between. How to overcome it: Ask yourself, “Am I being too short-sighted? What long term information am I overlooking that could possibly change my perspective?” Confirmation bias It’s a human trait to gravitate towards things that make us feel good, and avoid things that don’t. When investing, it’s easy to selectively weed out data that does not concur with beliefs we may have. This is the essence of confirmation bias. Let’s say you are a big fan of cryptocurrency. You open your browser and the first three articles you see published on the internet are about the risks of investing in crypto, and how volatile it can be. Despite these signs of caution, you move ahead with your bullish stance. Sadly, most of the great crashes in the stock market history would have been predicted if participants had just paid attention to the obvious signs. But they didn’t see it coming (as they should have) because of their blind spot. Confirmation bias is to blame. How to overcome it: As with many other investor biases, the best remedy is to work with an objective third party, such as a financial advisor. One of the benefits is that in scenarios like this, a financial advisor will bring to your attention the information you are overlooking; and sometimes just that nudge is enough to help you from veering off course. Disposition bias Picture this. You hold a diversified portfolio which contains two stocks of note. Stock A has a 25% loss, and the prospects for future performance are not good. The management team is stagnant and the product they sell is obsolete. Stock B has a 25% gain, and it has a bright future. The CEO was just replaced with a more suitable one, the company restructured and profit margins are rising, and the industry is expected to grow rapidly in the next 5-10 years. You sit down for your quarterly review, and upon a quick glance you decide to sell the one with the gain. It’ll be great to pocket the gain to offset other losses in my portfolio, you say. On the other hand, you are too skittish about recognizing a loss to sell the stock that is in the red. The pain of seeing the loss of dollars locked in prompts you to hope and pray that somehow the stock turns around and sees better days. Disposition effect is a real investor bias, folks. How to overcome it: Making intelligent decisions about when to sell a stock is something that most investors don’t pay enough attention to. As we’ve mentioned before, one of the advantages of working with a financial advisor is that an unemotional third party can advise on the proper sell methodology. If you opt to go your own route, have a discipline that applies to your sell decisions. What criteria do you look for in deciding to keep or sell a position? Write it down and revisit it on a regular basis, and certainly as you review your portfolios. Familiarity bias With a broad universe of securities to invest in, and a long list of Wall Street shiny objects constantly touted by the media it’s easy for investors to feel overwhelmed. One natural reaction is to stick to what is familiar and exclude the full set of investment options. This type of investor bias plays out in various ways, from the style in which we manage our portfolio, the stock or bonds we buy, and even the investment decisions we make. Investment decisions should come from a sound, repeatable process incorporating elements such as risk assessments, research, valuations, and economic or market forecasting; not just a feeling. Take a hypothetical example. Let’s say you are a gastroenterologist and through your work you become familiar with the ins and outs of various gastrointestinal remedies. You invest heavily in pharmaceutical stocks that could benefit from these trends, incurring a concentration in one or two stocks. Now suppose regulators put up resistance to drug development, and your portfolio takes a hit – which it may or may not recover from. You thought you felt safe by sticking to what you knew – but the reality was you were exposing yourself to massive risk. Seeing the big picture is important for all investors. Familiarity bias is harmful because it can lead to improper portfolio diversification and failure to protect from various risks (geopolitical risk, economic recession, inflation). How to overcome it: Form a thorough investment process and write it down. Follow it every time. If you are unable to do this on your own, consider hiring a financial advisor. Loss Aversion Loss aversion is the psychological incongruity between the experience of loss and that of gain. The lows of feeling a loss are stronger than the highs of experiencing a gain, even if the two amounts are completely equivalent. Loss aversion plays out in investing in a few different ways. This investor bias may cause you to hold on to a stock longer than you should, just to avoid recognizing the loss. It may lead you to sell down to cash if you fear the market is going to take a dive. There are some pretty significant consequences when it comes to investment performance. According to the Quantitative Analysis of Investor Behavior 2019 study by Dalbar, the average investor in 2018 lost twice as much as the market (as cited in Charles Schwab, 2021). As there were a couple drawdowns over the course of that year, it’s presumable that investors did as described above – they either held on to positions they should not have, or sold when they shouldn’t have. How to overcome it: As loss version has deep emotional underpinnings, we believe the best remedy (as is for many other investor biases) is to work with a trusted financial advisor who can help you stay objective and exercise smart judgement during times of stress. Self-attribution bias Imagine the following scenario. You undertake your quarterly rebalancing process, and having read an article about the value style, you decide to make some changes in your portfolio that involve a tilt towards certain value stocks based upon some research you did. The next week, you see that those stocks experienced a 20% gain. Patting yourself on the back for your hard work, you brag to your friends at the cocktail party about your investing skills. Or was it luck? Self-attribution is an investor bias that speaks to our ego. We’re way more likely to attribute positive outcomes to our hard work and skill rather than random chance or other factors that we are not responsible for. When things go wrong, we point the finger to others instead of ourselves. It’s dangerous because it may lead us to wrongly perceive our true aptitudes and attempt tasks that we really shouldn’t be. All of this gets in the way of rational thinking. How to overcome it: As the Greek philosophers say, “Know thyself.” It’s hard to remove your own pride from investing, but it’s important to see the truth. Careful analysis of the facts can often make this hard to ignore. Trend-chasing bias As Boys 2 Men once sang, “It’s so hard to say goodbye to yesterday.” You can read every single disclaimer in the world, but human beings are naturally going to want to take an investment’s past performance into account when contemplating its future potential. And the financial media screaming about the latest “hot stocks” or “big movers” doesn’t help one iota. This is the origin of trend-chasing bias. How to overcome it: Process comes into play if you want to manage this investor bias. A thorough research process should entail an analysis of: Volatility Fundamental factors Correlations with other investments you may hold How this affects the overall risk level in your portfolio A buy and sell discipline What the risks specific to the investment are, and how to manage them What the costs of the investment are If you’re not up for all the work involved with following a proper due diligence process for every investment you hold, consider working with a financial advisor. How are YOU going to overcome investor biases? Thanks for reading our blog about investor bias and how to overcome it. We’ve written other blogs about how to find a financial advisor, what financial advice costs, and the perks of working with a financial advisor. We hope you’ll enjoy reading them, should you so desire. Need some help curtailing your investor bias when it comes to your portfolio? We are a fiduciary financial advisor in the Philadelphia area, but we work with clients across the country. We provide fee-only, objective advice to our clients on taxes, wealth management, and financial planning. If you would like to discuss a possible relationship, contact us. Sources Charles Schwab. November 3, 2021. Fundamentals of behavioral finance: Loss aversion bias. Retrieved from here. Dalbar, Inc. 2020 QAIB Report for the period ending December 31, 2019. Retrieved from here.

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    0 What is confirmation bias in investing (and what should I do about it?)

    • Investing
    • by William F. Davis, CFP®
    • 02/12/2025

    Confirmation bias affects many investors, and it often goes overlooked. In this blog we are going to talk about the definition of confirmation bias, and an example of how it may affect an investor. Lastly, we’ll discuss how to manage it and the role a financial advisor plays in helping clients manage confirmation bias. What is confirmation bias? Confirmation bias is defined as the propensity to select information that aligns with our beliefs, while rejecting information that does not support them. Investors often apply lower standards to confirming information and higher standards to data that does not concur with their views. As a result, they are more likely to accept what they agree with and less likely to accept what they do not agree with. Confirmation bias – example of how it affects investors Let’s talk about how confirmation bias may potentially impact investors. Here’s a hypothetical example of confirmation bias. Keisha is a doctor and knows a great deal about the pharmaceutical industry. She believes there is tremendous growth potential for telemedicine, given her anecdotal experience as a physician. Keisha reads a Wall Street Journal article touting telemedicine start ups’ growth potential and decides to allocate a portion of her portfolio to several of the stocks mentioned. Keisha reads a Barron’s article about how telemedicine startups are likely to face heightened competition and reach a plateau of growth due to regulatory pressures. She dismisses this opinion as invalid. In the example above, is Keisha making a truly unbiased decision? No. She is pursing the path of least resistance instead of asking the hard questions about the opinions against her hypothesis. Instead, she should have asked herself questions such as: Is there true validity to what the Barron’s article is saying? Is this a viable source? Do other reputable sources confer with this not-so-rosy picture of telemedicine startups? Am I missing something? Of course, this is just a theoretical example that may not be construed as a real scenario. The purpose of our example is to conceptualize the way that confirmation bias leads investors to seek information that supports their beliefs, often leading them to make decisions based on incomplete information. It’s natural to do this; it feels good to think you’re right, and it feels bad to think you are wrong. It’s human nature. But whatever the cause and reasons for it, confirmation bias is a danger to investors. It causes them to compromise objectivity and operate in a biased fashion, overlooking key data that should be employed in a proper research process. So what can you do about it? Can investing biases be overcome? In other blogs, we’ve discussed how to overcome investor behavioral bias. Please refer to our discussion of action bias and its consequences for the detailed analysis. In short, there are several ways to overcome confirmation bias in investing, ranging from behavioral controls training to mindfulness practice. But these biases are inextricably linked to our inner psyche as humans – and hard to get past on our own without another person to keep you centered. We feel the best way that an investor may overcome confirmation bias, and the many other biases that investors face (projection bias, overconfidence bias, herd bias, etc.), is to work with a financial advisor who can coach you through it. Even the strongest of investors are subject to human flaw; having an independent third party who can advise you unemotionally is one of the best benefits of working with a wealth manager.   The role a financial advisor plays in correcting investor bias The ironic thing about confirmation bias is this. The contradictory information that an investor rejects is precisely the type of input that they should paying more attention to. But unfortunately, when you’re making decisions from left (or right) of center, you won’t see that. And that is where the danger comes in: when it gets to the point that you are making an off-balance investment decision. Educated, informed people can sometimes be their own worst enemy when it comes to investing – because they believe so strongly in their convictions that in a sense they create “blind spots.” All investment decisions should be made with objectivity. There is zero room for emotion of any sort in the investment process, whether it be in selecting investments to buy, knowing when to buy, knowing when to sell, taking capital gains, managing the overall risk level of a portfolio, picking the right level of stocks vs. bonds, or any of the other crucial tasks that go into the process of managing wealth properly. The financial advisor plays a key role in helping clients overcome confirmation bias, as well as any other investing biases that they may be subject to. In some cases, it useful for the investor to have a gentle reminder or nudge that they are overlooking facts that they shouldn’t. In other (more extreme) cases, the financial advisor will need to make a full-on case for why the opposing view is valid and should be considered. The extent to which a wealth manager must get involved to correct clients’ behavioral financial blunders will vary from one case to the next. For investors who are serious about building long term wealth, a financial advisor really shouldn’t be a “nice to have.” Most people will eventually make a mistake at some point, and it can be very damaging if it is a major mistake in the latter stages of the wealth cycle. Working with a financial advisor – finding the right one A skilled financial advisor is trained in the biases that investors are subject to, and knows how to coach a client through it. The process should be collaborative and won’t make you feel like you’re being restricted but rather nurtured to a higher level of investing skill. As financial advisors in Philadelphia working with clients across the country, behavioral coaching is our core value adds to the client. We provide fee-only, objective advice to our clients on taxes, wealth management, and financial planning. If you would like to discuss a possible relationship, contact us.  

  •

    0 Vericrest Insights - February 2025

    Good afternoon. It’s been a turbulent week for markets, driven by key developments across multiple sectors. From major AI breakthroughs that could reshape the tech industry to the Federal Reserve’s latest policy stance and newly imposed tariffs on Mexico, Canada, and China, investors are navigating a shifting landscape as we head into February. Each of these factors carries significant implications for market direction in the coming months. Economic Highlights · Federal Reserve Policy – Fed Chair Jerome Powell kept interest rates unchanged, signaling a patient approach while removing previous language about the need for “further progress” on inflation. · GDP Growth – The U.S. economy grew at an annualized rate of 2.3% in Q4, slightly below the expected 2.5% but slowing from the 3.1% pace in Q3. For the full year, GDP expanded 2.8%, just below 2023’s 2.9% growth rate. · Consumer Spending – Remained strong, rising 4.2%, a crucial factor since consumer activity accounts for about 70% of GDP. · Labor Market – Initial unemployment claims fell sharply to 207,000 for the week ending January 25, down 16,000 from the previous period and well below the 228,000 estimate. · Housing Market – Residential home listings are increasing, yet mortgage applications remain at multi-year lows, according to the American Enterprise Institute. · Interest Rates – The average rate for a 30-year fixed mortgage declined slightly to 6.97% from 7.02%.   Federal Reserve & Economic Outlook The Fed’s latest meeting aligned with expectations, as policymakers signaled no immediate urgency to cut rates. Powell’s removal of language referencing “further progress” on inflation suggests confidence that price pressures are stabilizing, but the Fed remains in wait-and-see mode. With GDP growth tracking between 2.5% and 3% for Q1 and jobless claims holding steady, the economy doesn’t appear to be in dire need of a rate cut. Most economists now predict at most two rate cuts in 2025, barring a notable economic slowdown. The upcoming employment report will be a critical indicator, with forecasts predicting 130,000 job gains and a stable 4.1% unemployment rate. If the labor market remains resilient, the Fed will have even less incentive to lower rates in the near term. One of the biggest uncertainties for 2025 is whether consumers can maintain the strong spending patterns seen in 2024. The wildcard in this equation? Tariffs. (More on that shortly...) Overall market volatility is expected to persist in 2025, largely influenced by three key factors: the political landscape, continued enthusiasm for artificial intelligence investments, and Federal Reserve rate cuts. In 2024, the S&P 500 experienced seven days of gains exceeding 1.5% and nine days of losses greater than 1.5%. A review of the headlines on these high-volatility days reveals that each was driven by one of these three themes—sometimes fueling optimism, other times sparking concerns. After two years of strong performance in large-cap U.S. stocks, investor sentiment has turned cautious, with fears of a market pullback on the rise. However, historical data supports remaining invested in equities. Since 1926, there have been 11 instances (excluding 2023-2024) where the S&P 500 delivered consecutive annual returns above 20%. In the third year following such gains, the average return was 6.7%—lower than the long-term average of 12.3%, yet still higher than most bond yields and cash returns. While 2024 largely mirrored 2023 in terms of market behavior, we anticipate a shift in 2025.   GDP and Market Implications Economic growth, as measured by Gross Domestic Product (GDP), is a significant driver of corporate profits and stock prices. The incoming federal administration has proposed policy changes that could materially impact GDP, making this an important period for macroeconomic forecasting. One useful framework for assessing these potential impacts is the GDP expenditure formula:   GDP = Consumer Spending + Government Spending + Investment + (Exports − Imports)   By evaluating how proposed policy changes may affect each component, we can estimate their overall economic impact.   Factors That Could Reduce GDP: 1.      Lower Government Spending – Federal budget cuts could constrain economic growth. 2.      Deportations – A reduction in the number of people living and spending in the U.S. may dampen consumer demand. 3.      Decline in AI Investment – While AI-related spending has surged, it has yet to drive significant profit growth; a slowdown in investment could weigh on economic expansion.   Factors That Could Boost GDP: 1.      Tariffs on Imports – Higher import prices may reduce demand for foreign goods and increase domestic consumption. 2.      Lower Taxes – Reduced tax burdens could stimulate consumer spending.   While various research groups have estimated the potential impact of these factors, the cumulative effect appears likely to create a net headwind for GDP in 2025.   Small-Cap Stocks: A Potential Bright Spot Unlike large-cap multinational companies, small-cap firms are primarily domestically focused, making them less exposed to global trade fluctuations and currency risks. Historically, small-cap stocks have tended to outperform following presidential elections, and this cycle appears no different. In November, small-cap stocks gained 11%, outpacing large- and mid-cap stocks by more than 2% and 5%, respectively. However, their sensitivity to interest rates led to a partial reversal of these gains in December when rates rose. Looking ahead, potential tariff increases could benefit small-cap companies by making imports more expensive, increasing demand for U.S.-produced goods. Additionally, reduced competition from imports may give small businesses greater pricing power, improving profit margins and overall financial performance. By many valuation measures, small-cap stocks are currently trading at more attractive levels than large-cap equities. As a result, we maintain an allocation to the S&P Small-Cap ETF (IJR).   For Further Review Here are a few articles that you may find of interest. · Understanding the New Catch-Up Contribution Limits for Retirement Plans for 2025 ·       Security Knowledge Center – This one is a bit more in-depth and speaks specifically to protecting against cyber threats. Definitely worth a read: https://www.schwab.com/schwabsafe/security-knowledge-center · The Trump Economy and Federal Reserve Rate Outlook: Four Scenarios · How to Prepare Your Portfolio for a Bumpy 2025   And for those of us who will be watching this Sunday…….GO BIRDS!   Thanks, Bill

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    0 Interval Funds: what to know before you invest

    • Investing
    • by William F. Davis, CFP®
    • 01/27/2025

    One of the newest investment vehicles on the scene is interval funds. We’ve found other discussions of interval funds to be quite uninformative. In this blog we’ll discuss what they are, what their inner workings typically look like, and when it does and does not make sense for an investor. Before we get started, you may want to take a moment to read our other blogs on mutual fund investing. 12b-1 fee Mutual fund fees A share mutual funds – run away! First - understand open vs. closed end funds Here’s where we feel others mess up the definition of interval fund: You have to understand the difference between an open and closed end mutual fund before you can grasp what an interval fund is. There are two major types of pooled investment vehicles that are gaining some visibility with investors. An open-end mutual fund: Does not trade on an exchange. Has an unlimited number of shares. When you buy into an open-end mutual fund, new shares are created using the funds you deposited. On the converse, when you redeem, the fund buys your shares back using cash from the fund, or it may have to sell some of its holdings to create liquidity. You can effectuate a transaction any time you wish, but it is only executed at the closing day price and the shares don’t move until after the fund closes for the day. Is regulated under the Investment Company Act of 1940 and must file reports with the Securities and Exchange Commission Are bought and sold at the Net Asset Value, or NAV A closed-end mutual fund: Usually trades on an exchange. Has a limited number of shares. When you buy into a closed-end fund, no new shares are created. You are simply picking up shares that another investor is offering to sell. You can trade intraday. Is regulated under the Investment Company Act of 1940 and must file reports with the Securities and Exchange Commission Is bought and sold by the price determined by supply and demand for the fund These definitions are important to know if you are considering investing in any type of mutual fund. Don’t just trust whatever your broker or advisor says. Do your own research and know what you are owning, just to be safe. What is an interval fund? An interval fund is defined as a closed end fund that does not trade on an exchange that offers periodic liquidity. Wow! That was a mouthful. Here’s how interval funds are different from the typical closed-end fund (U.S Securities and Exchange Commission, ND). Unlike most closed-end funds, they do not trade on an exchange The fund itself will buy or sell shares directly from or to the consumer instead of these transactions happening through the exchange. You may be able to purchase shares at any point. You are only able to sell shares back to the fund at a specific time, which the fund specifies in its prospectus. Bought and sold at a priced based on the NAV, that is not known at the time the repurchase offer is made. You aren’t able to redeem your entire investment amount at once. There may be a 2% redemption fee. There may be higher management fees. Interval fund vs. mutual fund Aside from the differences mentioned above, interval funds often pursue a different investment strategy that most mutual funds. They can use leverage, and many times they run what many investors consider alternative asset strategies such as real estate debt, credit, or direct lending. These strategies tend to offer higher yield but offer less liquidity. History of interval funds Interval funds have an interesting history (Interval Funds, ND). They have been around since the 1990s, but with the recent popularity of exchange traded funds, they became less notable. After the 2008 recession, closed end funds started to become more popular and interest in interval funds rose along with them. Decreased regulation made it easier for fund vehicles to invest in alternative asset classes such as private equity. Who it makes sense for The investment objective of every fund is different, and a person’s strategy is dependent upon a number of different factors. On balance, interval funds are usually chosen by people who: Is looking to invest in less liquid instruments Desires yield Wants a return that is non-correlated with the market Don’t have high liquidity needs, as many interval funds have gated redemptions, prohibiting the investor from having free access to the money held in the fund. Do not require the ability to liquidate their investments immediately; has additional funds saved for a crisis Has done enough financial planning to feel confident in their gauge of future expenses and cash flows Is not highly fee conscious Who it doesn’t make sense for Intervals funds are not a wise choice for someone who: Requires immediate or short-term liquidity Does not have funds saved to support living expenses outside of the money invested in the fund Doesn’t have a financial plan or a clear concept of future cash flows Is highly fee conscious Need certainty about short term access to their funds What to ask yourself before buying an interval fund If you are thinking of investing in an interval fund, here are some questions to ask yourself before you do so. Could I survive without this money, if I had a sudden need for cash? If so, for how long? One of the benefits of working with a financial advisor is the ability to gain clarity about cash flows. Many financial advisors will help clients by creating a financial plan that maps out their expenses and the cash flows projected to cover them. This may give you a sense of how much excess cash is given at any one point, and how much you can invest in the market. Along with an overall assessment of your risks and life goals, an understanding of your liquidity needs may be reached. All of this should be outlined in the Investment Policy Statement that an advisor puts together for you in the beginning of a relationship, and revisits through the duration. What are the fees? The fees for any mutual fund are disclosed in the fund’s prospectus that is required to be delivered at the time of purchase by the 1933 Act. It is imperative that you understand any and all interval fund fees before putting your money into these vehicles. Take, for example, the Goldman Sachs Real Estate Diversified Income Fund (GSREX) prospectus (Goldman Sachs Asset Management, 2022). It is useful to search on the term “Fee Table” within the prospectus. Most have a section called “fund fees and expenses” or the like which outlines all the fees you could potentially pay by investing in the fund. Know what each type of fee is. In the above fee schedule, here’s how these fees would be defined. Sales Load – a commission paid to the broker who sold you the fund. Redemption fee – if you redeem the shares within a certain period, you are due to pay a fee. Management fees – fees paid to the portfolio manager for managing the fund Interest payments on borrowed funds – if the fund is using leverage, you’ll likely be paying interest on the line of credit they took out to borrow the funds Operating expenses – legal, accounting, custodial expenses Distribution fee – fee you pay to compensate the fund for marketing itself As you can see, there are quite a few fees to be aware of. It’s imperative that investors can gain an understanding of the fees; do not invest without doing the research. What are the liquidity constraints I would be facing if I were to put my money into this fund? Repurchase terms vary by fund. To quote the Goldman Sachs fund prospectus mentioned above: The Fund operates as an “interval fund” (defined below) pursuant to which it will, subject to applicable law, conduct quarterly repurchase offers for between 5% and 25% of the Fund’s outstanding Shares at net asset value (“NAV”). And in another place: An investment in the Fund is not suitable for investors who need certainty about their ability to access all of the money they invest in the short term. Even though the Fund will make quarterly repurchase offers for its outstanding Shares (expected to be 5% per quarter), investors should consider Shares of the Fund to be an illiquid investment. In addition, there is no active secondary market for Shares. There is no guarantee that investors will be able to sell their Shares at any given time or in the quantity that they desire Every interval fund has different terms; this is merely an example. However, we do take the view that given the uncertainty of redemption, you should consider any investment in an interval fund to be an illiquid investment. Even though they are somewhat illiquid, there is more liquidity compared to private funds or alternative assets. Final thoughts on interval funds Investing in an interval fund isn’t something to be taken lightly. There are liquidity constraints and the fees can be burdensome. Before doing so, we recommend that you conduct thorough diligence and proceed with caution. It’s important to find the right interval fund for you, if you chose to go this way. Many times, a financial advisors can be of assistance in determining your liquidity needs, the suitability of such investments, and your overall cash flow budget. We are a fiduciary financial advisor in the Philadelphia area, but we work with clients across the country. We provide fee-only, objective advice to our clients. If you would like to discuss a possible relationship, contact us. Sources Goldman Sachs Asset Management. Goldman Sachs Real Estate Diversified Income Fund. Retrieved from here. Goldman Sachs Asset Management. Goldman Sachs Real Estate Diversified Income Fund.(28 January, 2022). Prospectus. Retrieved from here. Interval Funds. (Sept 09, 10:53). The History of Interval Funds – and Where They’re Heading. Retrieved from here. Investor.gov. ND. U.S Securities and Exchange Commission. Interval Fund.  Retrieved from here. U.S Securities and Exchange Commission. (2020, Sept 25th).  Investor Alerts and Bulletins. Investor Bulletin: Interval Funds. Retrieved from here.

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    0 Should you be pursuing the SALT cap workaround?

    Importance of talking to your tax advisor What is the SALT cap workaround? What states does that workaround apply to Example of how it works in New York How to know if this is for you How to do this – talk to your tax advisor The SALT cap workaround is not well understood by most pass-through entity owners, and as a result it is underutilized. If you are the owner of a pass-through entity such as a business and are seeking to reduce your tax liability, here are some tips for how to leverage the SALT workaround. And by the way, we realize that most writeups on this topic are written in “CPA-ese” – which we try not to speak when trying to explain esoteric tax concepts to the public. Before we get into the blog, we are financial advisors in Philadelphia serving clients across the country. We have written other blogs clarifying tax issues such as the following, which you may wish to read: Where can I get my 1099 form? The K-1 tax form We’d also like to remind you that we are not offering tax advice in this article. Our statements are general in nature. For specific recommendations applicable to your situation, consult yourtax advisor Now for the feature presentation – all about the SALT cap workaround. What is the SALT deduction? First if all, what is a tax deduction? A tax deduction is an expense that gets subtracted from your taxable income, thus lowering the amount of tax you pay. Deductions can be a variety of things, from charitable donations to IRA contributions and mortgage interest. SALT stands for “state and local tax.” Basically, you can deduct up to $10,000 of: State and local property tax State income tax or sales tax You claim these taxes as an itemized deduction on Schedule A (Form 1040), Itemized deductions of your Federal tax return. Note that you can either deduct your income tax or your sales tax, but not both. If you live in a high-income tax state such as New York, deducting income tax would make sense. If you live in Texas where there is no income tax but there is sales tax, you would opt for the latter. What is the SALT workaround? The Tax Cuts and Jobs Act of 2017 (TCJA) limits individual deductions taken on the Federal return by individuals. The deduction limit is $10,000 for tax years 2018 to 2025. However, it does not limit such deductions incurred through business activity. As a result, there is a loophole for business owners, individuals who own pass through entities: entity-level income taxes for passthroughs. Touche! Certain states can elect to allow pass through entities (such as corporations and partnerships) to have state income taxes directly imposed on business entities, instead of passing through to the individual. This is deemed a “pass through entity tax” (PTET). So why do all this? What is the advantage of passing through income tax to an associated entity, such as a business, rather than paying it outright as an individual? The benefit is that paying taxes at the entity level effectively reduces the amount of income for the pass-through entity that the owner has a share in. The person, in turn, is liable for a lower amount of tax on the income for the entity. Who this may apply to The workaround does not apply to W-2 wage earners or individuals; the SALT workaround applies to owners of pass through entities. The idea has become popular with owners of S Corporations, partnerships, entities taxed as partnerships, family offices, investment partnerships, and even some statutory trusts and sole proprietorships. Also, please note that the SALT workaround is only available in certain states. You can only claim the SALT workaround if your state allows. If you are a resident of one state, you can not claim PTET credit to another state where you have a residence. As per FORV/S, the states that have adopted PTET programs as of November 2021: Alabama Arizona Arkansas California Colorado Connecticut Georgia Idaho Illinois Louisiana Maryland Massachusetts Minnesota New Jersey New York North Carolina Oklahoma Oregon Rhode Island South Carolina Wisconsin Example of how it works Let’s take the case of Keira, a New York City business owner. She owns an LLP and files her taxes as a limited partner, with business entity taxes being passed through to her as an individual. She itemizes deductions on her Federal income tax return. For the year 2021, she files and pays her federal, state, and local taxes. The state and local deductions are $15,000, but because of the SALT cap, she can only utilize $10,000 of the $15,000 deduction. How does she effectuate the SALT cap workaround? Keira receives an individual deduction for $5,000 of state and local taxes when she files her partnership tax return. The Federal government then issues the LLP a deduction of $5,000. The LLP’s income is reduced by $5,000. The amount of tax owed by Keira for the LLP income that she receives is reduced. Please note that in this case, Keira is the sole owner of the LLP and didn’t need to obtain consent from other owners. However, were there multiple owners, consent would be needed for all of them. Should you pursue the SALT cap workaround? As a reminder, nothing in this article can be construed as tax or financial advice. For such matters, please consult with a CPA. There are many details to consider if one is thinking about try to participate in a PTET program utilizing the SALT cap workaround. It is compulsory to understand what the tax effects are, for both the owners of the pass-through entity and also the entity itself.  It is also useful to remember that the future of this initiative of highly uncertain. While the cap is set to expire in 2025, it’s unclear whether Congress will increase it, extend it, or pursue another course of action. There is no clear guidance on the direction at this time. We advise all owners of passthrough entities who qualify to tread lightly and devote significant attention to staying apprised on developments, if this is something you wish to pursue. We are financial advisors in Philadelphia, advising high net worth clients across the country on financial and tax related matters regarding their personal wealth or their businesses. Please contact us if you have questions you wish to discuss. Sources IRS. Topic No. 503 Deductible Taxes. Retrieved from here. Ramsey Solutions. (9 May, 2022). How Does the State and Local Tax Deduction Work? Retrieved from here. Scheutz, Jeff, Sparlin, Rhonda, and Kuntz, Amie. (2022, April 6). Bloomberg Tax. State Passthrough Entity Taxes and Federal SALT Cap Considerations. Retrieved from here. Ludman, Adam, McGraw, Tom, and Sprechman, Jordan. JPMorgan Private Bank. Can you benefit from the SALT Cap workaround? Retrieved from here. Wheeler, Josh. Forvis. (3 January, 2022). Get Up, Work Around, & Throw Out the SALT – State Tax Entity-Level Elections for Pass-Throughs Summarized. Retrieved from here.

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    0 Say “no” to A share mutual funds!

    • Investing
    • by William F. Davis, CFP®
    • 01/13/2025

    Despite the availability of lower cost options, investors continue to buy A share mutual funds. They shouldn’t. In this blog we’ll talk about why we think investors should run away as fast as they can from A share mutual funds, and we’ll refute the fake logic of the hollow sales pitches that people are often given to urge them to invest in these vehicles. Get ready for an eye-opening analysis! But first, we are low fee financial advisors in Philadelphia, PA. We feel passionate about low-cost investing, and wrote these blogs you may want to check out: Mutual fund fees can be sky high 12b-1 fees take a big bite out of your portfolio Financial advisor fees – are you overpaying? Low-cost ETFs How investors lose money Before we get started on our crusade against A share mutual funds, let’s take a moment to discuss how investors lose money. So, you have a portfolio. Sometimes it goes up, and sometimes it goes down. It’s all the market’s fault, right? Well, not exactly. There are two very large factors that play a part in your portfolio performance. #1 Cost of investment erodes returns Your portfolio may be riddled with higher fees than necessary. True, if you need a financial advisor, that costs money. Buying pooled vehicles such as ETFs or mutual funds costs money. But with so many options available, there’s no reason you should be getting price gauged, which is unfortunately the case when people buy A share mutual funds. You may not even consciously be aware of it, but your portfolio, over time, may be suffering from the effects of a mutual fund management fee that is taking more than it should out of your portfolio. Compounded over time, this can have a big effect. Look at what the impact of mutual fund fees can be on your wealth - this graph from Investor.gov just says it all: There’s nothing wrong with using mutual funds, ETFs, or with hiring a financial advisor. But if you choose to go that route, you should always make sure that the fee you’re paying comes with commensurate value to the benefit provided. It’s not always easy – sometimes the terms aren’t clear – and we’ll get to that in a little bit. #2 Biases derail investor performance Most investors, if left to their own devices, will wind up not beating the market, or in many cases, not even performing in line with it, as confirmed by numerous Dalbar studies. Our blog about investor bias covers the eight psychological traps that investors tend to fall into. In alphabetical order, they are: Action bias Anchoring bias Confirmation bias Disposition bias Familiarity bias Loss Aversion Self-aversion bias Trend-chasing bias These psychological biases are deeply engrained in each investor’s mind, and one of the best ways to overcome it is to work with a financial advisor who can provide behavioral coaching to help you stay grounded and avoid the pitfalls. There are many subtopics within both categories, but for now let’s just focus on one of them: A share mutual funds and how they are a rotten option for investors who want to accumulate long term wealth. What is an A share mutual fund? An A share mutual fund is defined as a mutual fund that charges a sales load for you to invest in it. In addition, the mutual fund has an ongoing expense ratio that is paid out of the invested amount, which may include a 12b-1 fee. Whoa whoa, we threw some terms at you. Let’s slow down and define them. A sales load is a commission paid to the broker who sold you the fund. In an A shares mutual fund, the sales load can be as high as 5.75%. So, if you were to invest $100,000 in the fund, the broker who sold you the fund would pocket $5,750. Quite a big bite, no? With so many low-cost ETFs and no-load mutual funds available (both of which charge zero sales load whatsoever), we feel there is no need for anyone to pay a sales load anymore. What is a mutual fund expense ratio? The expense ratio is paid directly to the mutual fund company. It compensates the fund management company for administering, marketing, and managing the assets in the fund. The average equity mutual fund expense ratio is 0.50% (Investment Company Institute, 2021) and just to reiterate, this is paid out of the portfolio in addition to any sales loads What is a 12b-1 fee? A 12b-1 fee is paid to the mutual fund company. It is included in the overall expense ratio. Essentially, it pays the fund for the sales and marketing related expenses incurred for selling the fund to you. By law it can’t be greater than 1%. Enough fees for ya? By the way, some mutual funds offer breakpoints, a scenario in which you receive a discount off the sales load for purchasing a certain amount of the fund. Mutual fund breakpoints are disclosed in the fund’s prospectus. Breakpoint discounts may be recognized for a lump sum investment, or a series of investments over time. However, in the latter case, you must sign a letter of intent stating the dollar amount that you are committing to invest in the fund. Confused yet? If you’re like most people, you are! It’s important to understand how mutual fund fees work though, before you invest. What is a mutual fund share class, and why do they exist? You can just imagine how in days of yore, with all these different fee structures abounding, things became a bit overwhelming for investors. To clarify matters, the SEC came up with what are called mutual fund share classes. There are four: A, B, C, and D. Here is a great explanation of each of the mutual fund share classes. This was done under Rule 18F-3, passed in 1995. As Class A shares is the subject of our article, we’ll just focus on that for now. Class A mutual funds: Have a front-end sales load which is debited out when you buy it Have a lower 12b-1 fee than the other classes Are usually sold directly to investors by brokers Debit out ongoing expenses for the administration and operations of the fund, and this is reflected in their expense ratio. For an example, please refer to the prospectus for the AMCAP Fund. You should always refer to a fund’s prospectus before purchasing shares of it. You can see, for example, the 5.75% maximum sales charge for class A share is clearly stated. There is also a chart breaking out the fund operating expenses. Importantly, the prospectus also illustrates what the cost of the fund would be over time given various assumptions. How do you know if you are buying an A share mutual fund? That’s all well and good, you may say, but how do I know if I own an A share mutual fund? Even better: how do I know what share class of a fund I own, in general? First, you should know what share classes of the mutual fund are in fact offered, so that you can evaluate which share class meets your needs. Do your research before you buy it. This is all disclosed in the mutual fund’s prospectus. A copy is available online, or you can contact the company to have a copy mailed to you. Second, determine how you want to buy the fund. You can buy it directly from the mutual fund company or using your brokerage account. The fees may vary depending on how you go. When you enact a purchase transaction, you will be asked to specify which share class you want. After the trade is executed, you will receive a confirmation stating the ticker, amount, commission paid (if applicable), and share class. Remember to save this in your records in case you forget. Another way for an investor to check is to go to the mutual fund website and check the Fact Sheet. It will list the various shares classes. Also, in many cases, you can tell by the ticker symbol. For example. PIMCO total return fund is PTTAX for the A share and PTTCX for the C share Why A share mutual funds are not beneficial to investors There are several circumstances that may lead an investment in A share mutual funds to benefit the issuing company and the person who sold it more than the investor. This is important for anyone thinking about buying an A share mutual fund to understand. Here’s how an A share mutual fund will likely be sold to you, usually by a broker who wants to get a commission. Remember the sales load we discussed above? They’ll usually say that after you invest, you won’t pay any loads for the next 10 years, as you would with other share classes such as C shares who charge a redemption fee when you sell them. They also may make some claim that the 12b-1 fees are lower because of the sales load paid. They may even say that you can invest within the same fund family without having to pay another load. We don’t see the logic of the argument for the following reasons: Even if you don’t, you’re still paying fees throughout the duration of the time you hold the mutual fund in the form of the fund’s internal operations, which tend to be higher than the expense ratios associated with holding other less expensive vehicles such as ETFs. High fees paid have a significant effect on the long-term performance of an investment. From the start, you have to earn the sales load back just to breakeven. Over time, the compound effect is a large detractor from wealth. If you want to avoid paying another load by going outside the fund family, you are inherently limited to whatever the options are within that fund family. Make sure that any performance figures you use, whether in the prospectus, on the website, include the sales load. If not, you may be thinking the returns are higher than they really are. Usually, the company will publish a version of the figures with and without the load. What to do before buying a mutual fund Being an educated investor is of high importance. Before purchasing a mutual fund, do your homework. #1 Read the prospectus. You can find it online or call the company to have a copy sent. #2 Use online tools to determine the cost of what you are buying. Here are two mutual fund cost calculators: Personal Fund mutual fund cost calculator FINRA Fund Analyzer #3 Evaluate the full universe to determine if there are lower cost options available. This may take some time, but it is better to make a wise, informed decision. Websites such as Morningstar provide free research for the public There are better options than A share mutual funds In our view, we think A share mutual funds should be avoided by investors – and in fact, we are not a big fan of investing in mutual funds for our clients whatsoever. As a low fee financial advisor, we invest our clients’ money into low-cost ETFs and avoid high fees altogether. None of our clients’ money is invested into funds with loads, 12b-1 fees, or high expense ratios. We are a fiduciary financial advisor in the Philadelphia area, but we work with clients across the country. We provide fee-only, objective advice to our clients on taxes, wealth management, and financial planning. If you would like to discuss a possible relationship, contact us. Sources Dalbar, Inc. 2020 QAIB Report for the period ending December 31, 2019. Retrieved from here. Finra. Mutual Funds: Share Classes. Retrieved from here. Investment Company Institute. 2021 Investment Company Face Book. Chapter 6: US Fund Expenses and Fees. Retrieved from here. Mutualfunds.com. Decoding Mutual Fund Share Classes. Retrieved from here. U.S. Securities and Exchange Commission. (12 May, 2014). Investor.gov. Investor Bulletin: Mutual Fund Fees and Expenses. Retrieved from here. Capital Group. American Funds. Forms & Literature. Summary Prospectus, AMCAP Fund. Retrieved from here.