To buy or not to buy, that is the I-Bond question

We’ve seen plenty of strange things over the past two years. One of the strangest might be the excitement over savings bonds this week. That’s right – savings bonds. Most people haven’t thought about buying them in years because the interest rates are so low. That all changed this week. The Series I savings bond grabbed headlines because its interest rate for the next six months is 7.12%. Before you rush to buy one, let me explain some of the fine print.

That headline interest rate will reset in six months to whatever the annualized inflation rate was over the previous six months (measured by CPI-U for the nerds reading this). Historically the interest rate on these bonds has been closer to 1-2%.

To buy one of these bonds, you need to set up an account at Treasury Direct (who wants another account to keep track of?).

Each person is limited to $10,000 of purchases per year. If you were hoping this would replace your entire dismal bond portfolio, you can’t buy enough to make a difference.

You must hold the bond for at least five years, or you forfeit three months’ interest. Think of it like a 5-year CD that you can then sell at any time.

Those pesky details make the offer less attractive, but it’s still a good option for people who are worried about inflation. The bond literally pays the inflation rate (one measure of it anyway), protecting your purchasing power. But if you were looking for a safe 7% return, I doubt you will continue to get that over the next few years.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Tech companies have too much cash

Big technology companies are buying up office properties (WSJ article). Why is this noteworthy? It’s a sign they have run out of more productive ways to spend their cash. Typically, high growth companies would lease their real estate because they want to reinvest their cash in something that will grow faster than 10%. Their growth prospects may be slowing if they are using cash to buy real estate instead.

Alphabet, Amazon, and Facebook are all mentioned as paying hundreds of millions of dollars for office buildings in that Wall Street Journal article. There are several factors that go into such a decision – control over the building, the cost of the building (office properties came down in price through the pandemic), and many others. Still, I’m willing to bet that most of those other factors would be set aside if there were fantastic growth opportunities in their core businesses.

In any case, buying a building is better than overpaying for an acquisition and is more productive than sitting on cash earning nothing. I’m just saying, if that’s the best use they have available, it’s a sign earnings growth may slow. That could hurt their stock performance in the long run.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Early Retirement

I love working with early retirees – those fortunate enough to retire in their 50s or early 60s. They are often high earners who suddenly find themselves in a lower tax bracket. This presents a number of fun planning opportunities – Roth conversions, IRA withdrawals, stock sales at the 0% capital gains rate, Social Security claiming strategies, etc. Where should they get their cash from today and in the future? It’s a fun puzzle to solve.

I start by looking at the tax situation in the early retirement years (before IRA required minimum distributions and before Social Security starts). I then compare it to the tax situation at age 72 (after IRA required minimum distributions and after Social Security starts). My goal is to smooth out the tax rates over time. If you are in the 12% tax bracket today and expect to be in the 24% tax bracket at age 72, then Roth conversions and 0% capital gains sales are a good idea.

Which one should you choose? We need to take a more in-depth look at how much you have in different account types. If you have mostly traditional IRA assets, Roth conversions are preferable. If you have mostly taxable accounts, 0% capital gains may be better. You should also be mindful of income thresholds for health insurance subsidies (before Medicare at age 65) and increased Medicare premiums (age 65 and beyond). Crossing those limits can cost an extra $1k or more per year in premiums.

If solving your early retirement puzzle stopped sounding fun a few paragraphs above, reach out to me. Getting these decisions right can save you thousands of dollars in taxes. I’ll crunch the numbers and you can enjoy the savings.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Simpler is Better

Years ago, I bought blinds for my downstairs bedrooms. Home Depot had a special where I could get blinds that open from the top and bottom for the same price as standard ones that only come up from the bottom. The saleswoman couldn’t believe that I didn’t want the fancier ones. The way the sun hits those windows, I would never need to have the top part of the window exposed and bottom part covered. You see, sometimes simpler is better. Getting the fancier ones just meant one more thing that could break.

The same principal holds in financial decisions. Complex financial products rarely improve people’s lives. Let me give you an example. Are you considering a major charitable gift? You might get sold the idea of a charitable remainder trust. Here’s the pitch. You give appreciated assets to charity. You get income payments back for the rest of your life. Ultimately the charity gets the remaining money from the trust.

They don’t tell you that you’ve just made your taxes more complicated (and more expensive). You’ve also made the charity wait until you die to be able to use the money. That probably wasn’t your intention. You likely could have accomplished all your charitable goals in a simpler fashion by just donating appreciated stock. That way the charity gets to use the money today. You avoided paying capital gains on selling the stock and you get a very nice tax deduction (without really complicating your taxes). Nice work!

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

What does CFA mean?

I have three letters after my name that I am quite proud of, even if most of my clients don’t understand what they mean. Either the CFA Institute or I haven’t done a good enough job explaining those marks, maybe both. Let me take a few minutes to try today. What does CFA stand for? More importantly, what does it mean?

CFA stands for Chartered Financial Analyst. I earned this designation by passing a series of three six-hour exams that at the time were only offered once per year. Thankfully I did my studying long before I had kids. It would be hard for me to find 10-15 hours per week to study from January-June three years in a row today.

Okay, I passed some hard tests. What did I learn? I learned how to properly analyze financial data, dove deep into statistics, and constructed investment policy statements for clients, among other things. In plain English, I learned what matters and what doesn’t when I’m evaluating an investment for someone.

While the average person doesn’t know what CFA means, the average fund company representative does. It means they can’t come to me with their newest shiny opportunity and expect me to jump at it. I’m going to grill them on the details of how it was constructed. I’m going to think long and hard about who it’s a good fit for. I’m going to evaluate whether it makes a meaningful difference in my client portfolios.

Then I’m going to compare notes with Keith, another CFA charterholder here at Cherry Tree. Together we take our time thinking about what risks there are with any new investment strategy, what opportunities there are, and what we still don’t know. If both of us think it’s a good idea, we’ll bring the strategy to the rest of our advisors.

You see, there are dozens of new investment pitches that come from fund companies every month. Most of them are just glitzy marketing efforts to convince you to make a change. Most of them don’t matter. You can rest assured that when I come to you with an investment idea, it has been properly vetted and I honestly believe it adds value. That’s what the CFA designation means to me.

  John O’Connor, CFA

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.