Friday, December 8, 2017

Tax Reform a MONUMENTAL Task

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

As you may have heard, Congress is working towards a Tax Reform bill to take effect in 2018.  I’m not ready to use terms like tax relief or tax cuts but both proposals favor simplifying the tax code - a monumental task.  There’s work to be done, but there appears to be enough momentum (House and Senate bills must merge through conference committee, pass the House and Senate and the President must sign) to take a look at some key provisions and a few differences:

Lower Tax Rates and end of The Alternative Minimum Tax – Both tax bills (House and Senate) favor lower tax rates and an end to the Alternative Minimum Tax, but there are a few differences:

Difference:  The House tax bill repeals the Alternative Minimum Tax entirely but a last minute change to the Senate tax bill only lessened the bite (impacting fewer taxpayers).  

Difference:  The Senate tax bill lowers tax rates but doesn’t reduce the number of tax brackets (seven).  The House tax bill lowers tax rates and simplifies tax brackets extensively (down to just four).

Fewer Itemized Deductions offset by an increased Standard Deduction – Both tax bills support an increased Standard Deduction (roughly doubling it) offset by fewer potential itemized deductions (only beneficial to the extent greater than the Standard Deduction).  However, there are (again) some differences:

Difference:  The House tax bill reduces the eligible mortgage interest (itemized) deduction to interest paid on balances up to $500,000 (for new mortgages), while the existing mortgage interest (itemized) deduction limit remains unchanged in the Senate tax bill.   

Difference:  The (itemized) deduction for medical expenses is retained in the Senate tax bill but eliminated entirely in the House tax bill.

Replacing Exemptions with an increased Child Tax Credit – Both tax bills suggest replacing personal exemptions with lower tax brackets (to simplify) and an increased Child Tax Credit. 

Difference:  The Senate tax bill phases the child tax credit out at $230,000 of income while the House tax bill does so at $500,000 of income.

Difference:  The child tax credit itself differs too ($1,600 tax credit per child in the House tax bill and $2,000 tax credit per child in the Senate tax bill).

Estate Tax Exemption and Gift Tax Exclusion – We appear to be headed for an increase to the Estate Tax Exemption (amount you can transfer free of Estate Tax) and no change to the Gift Tax Exclusion (amount you can gift per individual, per year, without any Gift Tax filing implications).

Difference:  Both tax bills roughly double the Estate Tax Exemption (to $11,000,000), but the House tax bill goes one step further by eliminating the Estate Tax entirely in 2024.

The impact of 2018 Tax Reform will vary by taxpayer.  Taxpayers who don’t typically take the itemized deduction (or barely do), stand to benefit quite a bit.  The fate of taxpayers who typically take advantage of numerous itemized deductions (especially California taxpayers, with elimination of the deduction for state income taxes paid in both tax bills), will have to wait for the final merged tax bill.  Either way, if/when the rules change, we will look to interpret, adjust and clarify opportunities the same way we always do. 

Dustin J. Smith, CFP®

The above explanation is summarized and generic.  Please consult your tax professional with any specific questions and take a look at this summary from for a more comprehensive look at Tax Reform.  Feel free to play around with this calculator too.  

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Thursday, November 30, 2017

Catchphrase Investing

Let's face it - we love catchphrases. They're easy to remember, easy to talk about, and easy to follow along with. The investment world is full of them - FAANG, the Nifty Fifty, the dot-coms, BRICs - capturing the hot takes and hottest investments of the time. They get us excited, ready to jump on board and to hunt for the next group. Who doesn't want a piece of today's hottest stocks?

Should we be shifting our investments to each day's hottest acronyms? In this guest post, Dimensional Fund Advisors' Jim Parker touches on how to respond to today's (and tomorrow's) investment catchphrases. 

Jim Parker
Outside the Flags
Vice President

The financial media is drawn to catchphrases, acronyms, and buzzwords that can be sold as the new thing. FAANG (Facebook, Apple, Amazon, Netflix, and Google) is the latest of these. But does this constitute an investment strategy?
For journalists, commentators, and marketers, acronyms like FAANG are useful. They fit easily into headlines and they appeal to a feeling among some investors that their portfolios should match the “zeitgeist” or spirit of the age.

But as we’ll see, investment trends tend to come and go. This is not to downplay the transformative nature of new technologies and the possibilities they present. But as an investor, it is wise to recall that all those hopes and expectations are already built into prices.

The FAANG acronym has become particularly popular in 2017 as returns from the five members of the unofficial club have far outpaced the wider market. Exhibit 1 shows the total year-to-date returns of the FAANG members compared to the S&P 500.
Such is the public interest in the tech giants that the parent company of the New York Stock Exchange recently launched the NYSE FANG+TM Index that includes the quarterly futures contracts of the FAANG members apart from Apple (hence only one “A”), plus another five actively traded technology growth stocks.

So, does this mean, as some media gurus suggest, that you should reweight your portfolio around these tech names? After all, these companies have fundamentally reshaped traditional sectors like newspapers, television, advertising, music, and retailing.

For investors, there are a few ways of answering that question, none of which involve denying the significant influence Facebook, Amazon, Apple, Netflix, Google, and other technology names are having on our lives.

Firstly, market leadership is constantly changing based on a myriad of influences, including shifts in the structure of the global economy, commodities, technology, demographics, consumer tastes, and supply factors. Trying to build an investment strategy by anticipating these forces is like trying to catch lightning in a bottle.

In the 1960s, the then often-quoted Nifty Fifty of solid, buy-and-hold blue-chips included such names as Xerox, Eastman Kodak, IBM, and Polaroid, all of which were disrupted in one way or another by newer, more nimble competitors in the following decades.

By the late 1990s, the media was full of stories about the dot‑coms, companies that were building new businesses using the transformative power of the internet. A handful of those companies (Amazon, for instance) fulfilled their promise. Many others (retailer, prototype social network, and pet supplies firm were just three examples) crashed and burned.

In the mid-2000s, the focus turned to companies with a large exposure to the so-called BRIC economies, an acronym based on the fast-growing emerging economies of Brazil, Russia, India, and China.

Several financial services companies even set up BRIC products, with mixed degrees of success. One investment bank, having argued that the superior growth for emerging economies justified a bias to stocks exposed to these markets, ending up closing its BRIC fund in late 2015 after years of poor returns.1

So, while individual sectors each can have their time in the sun, it is not clear that weighting your portfolio toward an industry currently in favor is a sustainable long-term strategy.

A second way of looking at this issue is that accepting it is difficult to pick winning sectors does not mean you should exclude these zeitgeist stocks in a diversified marketwide portfolio. You can still own them, but you do so by casting a much wider net.

The more concentrated the portfolio, the more you are exposed to idiosyncratic forces related to individual stocks or sectors. Being highly diversified means you can still benefit from the broad trends driving technology or whatever is leading the market at any one time, but you are doing so in a more prudent manner.

Put another way, by diversifying you are not only reducing the risk of placing too much of a bet on one sector, you are improving the odds of holding the best performers. Look at Exhibit 2, which shows what would have happened if you had excluded the top 10% and top 25% of market performers in a global portfolio from 1994–2016.

We’ve seen that even professional investors can find it tough to pick which sector will lead the market from year to year.

It’s true that technology companies like Amazon and Facebook have performed well recently. But it is worth recalling that current prices already contain future expectations about those companies. We don’t know what future prices will be because these will reflect information we haven’t received yet. Because no one has a reliable crystal ball, a better approach is to diversify. That way we increase the odds of being positioned in the next big winning sector without chasing hot trends or latching on to cute‑sounding acronyms.

1."Goldman Closes BRIC Fund," The Wall Street Journal, November 9, 2015.
2.The “All stocks” portfolio consists of all eligible stocks in all eligible developed and emerging markets. The portfolio for January to December of year t includes stocks whose free float market capitalization as of December t-1 is greater than $10MM in developed markets and $50MM in emerging markets and with non-missing price returns for December of year t-1. Annual portfolio returns are value-weighted averages of the annual returns on the included securities. The portfolios “Excluding the top 10%” and “Excluding the top 25%” are constructed similarly. Individual security data are obtained from Bloomberg, London Share Price Database, and Centre for Research in Finance. The eligible countries are: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Republic of Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, and the United States. Diversification does not eliminate the risk of market loss. Past performance is no guarantee of future results.

Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Monday, November 20, 2017

Holiday Office Hours

Pathways Advisory Group, Inc.
The Pathways Advisory Group, Inc. office will be closed for 
the following holidays:

Closed at Noon - Wednesday, November 22nd, 2017
Thursday, November 23rd, 2017
Friday, November 24th, 2017
Monday, December 25th, 2017 
Monday, January 1st, 2018 
Monday, January 15th, 2018
Monday, February 19th, 2018
Friday, March 30th, 2018
Monday, May 28th, 2018
Wednesday, July 4th, 2018
Monday, September 3rd, 2018

In case of an emergency, 
please contact Schwab directly at 1(800) 435-4000.

Happy Holidays!

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Thursday, September 14, 2017

Equifax Data Breach

Pathways Advisory Group, Inc.

By now, you’ve likely heard about the data breach at Equifax. From May through July, Equifax - one of the three major credit bureaus - experienced a breach in data affecting at least 143 million people.  For information on this breach, please visit the Federal Trade Commission’s website here.  You can also check for updates directly from Equifax here, including whether you were potentially impacted.

Equifax is offering a free 1-Year subscription to TrustedID.  You can see the details of the program here.

We’ve written about credit and identity protection in the past.  Jeff’s blog post, Credit Protection, highlights freezing your credit among a other key ways to protect your information.  Leslie’s post, 10 Steps to Protect Your Identity, outlines other valuable options available to you. 

While many credit card companies and banks notify their customers of suspicious activity, proactively taking a few of the steps above can make a huge difference in keeping your identity secure. 

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Friday, September 1, 2017

Marshmallows and Retirement

Back in the 1960’s, Walter Mischel, a psychologist, studied preschool children to assess the level of self-control they possessed. Using marshmallows, he placed one on a plate in front of each child. He then left, but before doing so, gave each child the same two choices: either eat the marshmallow, or wait 15 minutes until he returned. If the child was able to wait, he would receive two marshmallows (Delaying Gratification, n.d.). 

Only about a third of the children could wait the full 15 minutes. Why? Willpower and impulsiveness are the two competing cognitive processes that come into play. Willpower is based on a person’s strategic planning, while impulsiveness comes more from a person’s emotions (Delayed Gratification, n.d.). If a person employs willpower in a situation, it decreases the chances of submitting to impulsiveness in the next situation. In other words, a person must practice willpower to have willpower.

We see our clients practice willpower every day in order to save for a comfortable retirement. Younger clients are typically in the midst of buying a house, having children, and achieving career goals. It’s sometimes harder for this generation to save towards their retirement goals. But, if possible, it does have a significant effect on portfolio size at retirement. How much? See the following spreadsheet from our website's Young Investors page

Ben’s willpower to save those first ten years made a huge difference! In addition, isn’t it a little crazy how compounding interest can substantially increase our savings over time? The point: Today’s choices completely affect our future.

So, what happened to those preschoolers? Mischel tracked down nearly 60 of those original subjects more than thirty years later. The children who had exhibited high self-control remained that way throughout life, and vice versa. The higher self-control group led healthier lifestyles, received higher SAT scores, and had higher income (Konnikova, 2014).

Later in life, Mischel addressed some worried parents. He explained that children who fail The Marshmallow Test need to practice. Start out small, a few minutes maybe, and increase the time slowly (Konnikova, 2014). After all, 15 minutes is a long time for a little kid.

Remember: Practicing willpower builds willpower. Whether it is marshmallows or regular savings, willpower pays off.

Also, if you would like to see children take The Marshmallow Test, check it out here on YouTube. It’s quite entertaining.

-Written by Katie Nelson from our March 2016 Client Newsletter Article.


Delaying gratification (n.d.). American Psychological Association. Retrieved from

Konnikova, M. (2014). The struggles of a psychologist studying self-control. The New Yorker.

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Friday, August 18, 2017

What’s your Money Mind®?

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

Is there a particular money paradigm that drives your financial decision making? If so, what is it and where does it come from? When your thoughts are consumed by this dominant Money Mind®, how does it ultimately shape the decisions that you make?

Take this brief quiz for a little insight.

According to the source of the Money Mind® quiz, while each of us has traits of all three money minds (The Protector, The Giver and The Pleasure Seeker) one of the traits routinely dominates. This makes a lot of sense. We seem to shift back-n-forth (between money minds) depending on the circumstances, but most of us default to a particularly dominant money paradigm. However, as you read at the end of your quiz, it’s not beyond your control. With awareness and lots of clarity (e.g. life goals projections), you can cultivate your less dominant money mind(s) and live a more balanced financial life.

Dustin J. Smith, CFP®

As described in this previous post, understanding the role of money in your life can be very helpful in achieving financial clarity. For another take on the Money Mind® quiz, view this post from Forbes online.

Source: United Capital Financial Advisors, LLC.

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Thursday, August 3, 2017

Brokers and Fiduciaries, Butchers and Dietitians

Pathways Advisory Group, Inc.
Evon Mendrin

America’s brokers and financial representatives giving advice on retirement savings accounts are finally required to act as fiduciaries.

The U.S. Department of Labor’s Fiduciary Rule partially came into effect on June 9th after much delay and not without a fight.  The rule requires financial professionals working with retirement accounts – such as IRAs – to work in their clients’ best interests rather than simply finding “suitable” investments. Now, there’s a higher level of accountability and conflicts of interest are to be disclosed. (See here for more detail on the law).

While this may seem like an obvious thing for someone in that position to do – and I’ve personally known many brokers and reps to work under that principal – they were not required by law to do so!

If you’re not entirely sure what that means or how it affects you, you’re not alone. A recent survey by Financial Engines shows 93% of Americans think financial advisors should be legally required to put their clients’ interest ahead of their own. However, 53% mistakenly believe that all financial advisors are already required to do so.

It’s not entirely the clients’ fault. A great issue in the financial services industry and the planning profession is that confusion abounds. Everyone uses the same terminology – broker, representative, advisor, planner, fee-based, fee-only – it’s easy to think everyone’s the same. However, there are many differences.

Some may say the law is not quite enough, as it only includes retirement accounts (what about every other part of your financial life?). It's not perfect, but it could be a step in the right direction.

As a fee-only financial planning firm, we’re proud to have served as fiduciaries all along. The best thing you can do for yourself is to know the professionals you work with (or want to work with).  See our Searching for an Advisor page for more information on different types of financial professionals and business models – from commission-only to fee-only and everything in between.

Lastly, the video below, courtesy of Hightower Advisors, gives a great overview of the simple differences between a broker and a fiduciary. Do you want to work with the butcher or the dietician? Ultimately it’s up to you and your situation, but an informed decision is the best decision.

(Credit: Hightower Advisors, YouTube)

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