Thursday, May 18, 2017

Tax Form 5498


Have you received a tax form in the mail recently? If not, then disregard this post. If, however, you did receive a 2016 IRS Tax Form 5498 recently, do not panic. Form 5498 is generated by investment custodians every May for Traditional IRAs, Roth IRAs or Educational Savings Accounts with activity during the previous tax year and usually does not lead to an amended tax filing.

Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I contribute or initiate activity out of an Educational Savings Account last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498.

Contribution information is typically requested on an accountant's questionnaire. IRA rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2017. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

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Friday, April 21, 2017

Kids-n-Money

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












Parenting is much harder than it looks.  I cannot recall an exact moment, but somewhere along the way, the questions got harder – and we’ve got a LONG way to go.

Kids-n-money, however, should be one topic we can handle.  I am, after all, a CERTIFIED FINANCIAL PLANNER™ professional.  Surely that counts for something.  I’ve got this one Teri….

The kids ask for stuff every time we shop.  Toys, treats, you name it, and the store layouts aren’t coincidental.  “No” doesn’t seem to deter them.

I know, let’s get piggy banks and give them a little money so they can decide for themselves.  That’ll stop them from asking for more stuff.  They will learn about money choices and experience why the answer is “no” when it’s all gone.  This piggy bank will be the perfect tool – they can pick their favorite style/color...

Two weeks later, when the piggy banks arrived, it was time to get started.

“Emilie, you still have fifty dollars from your birthday. I will trade you for five ten dollar bills so you can put some of it in the spend slot, some in the save slot, some in the invest slot and some in donate. The spend slot can be used whenever you want.  The save slot is for a spending goal in the future. The invest slot actually grows for you when you’re older and donate can be used to help other kids.”

Great speech Dad - really nailed it!

“Dad, I am going to put it all in the spend slot.”

Ok - not what I was expecting.

“Ok honey.  It’s your money.  You can put it in whatever slot you like, but, if you spend it all you won’t have any money left.”

That should do it.  It was a teaching moment.

“That’s ok Dad, I will have more birthdays.”

Dammit.  Good point kid.  It is birthday money after all; maybe I don’t have this one.

“TERRRIIIIIII”

Humbled but never one to quit trying, we’ve been plugging away with the kids-n-money topic ever since.  We read an interesting book The Opposite of Spoiled and started a weekly allowance.  There have been some generous moments and lots of Legos (money smolders quickly in Bryce’s pocket).  Emilie turned out to be more of a saver (half way to a Penny skateboard purchase).  They have learned to make change and pay for things themselves.  However, they do still ask for stuff at the store.

I have no idea what parental challenge is coming next, but I do know that a kid-less beach vacation will help.  Time to call the Grandparents!!!!

Find Dustin on
https://www.linkedin.com/in/dustinsmithpathwaysag

Friday, April 7, 2017

Warren Buffett’s Bet Shows the Market Wins, Again


Pathways Advisory Group, Inc.
Evon Mendrin, Paraplanner













If there’s one thing that’s been confirmed over and over in my few months at Pathways, it’s the undying belief that markets work. I’ve been baptized in the eternal optimism in businesses and the investment in those businesses as broadly and efficiently as possible.

Warren Buffett agrees – and 9 years ago a great bet was brought forth.

It was 2005 when the first challenge was announced by Buffett – he reminisced in his recent 2016 Letter to Shareholders that he boldly declared the following:

 “I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees.” 

Fast forward to 2008 – a contender emerged, and the heavyweight bout began.

Protégé Partners, LLC came forward – a New York City money management firm that runs funds of hedge funds. In other words, they create funds that invest in other (hedge) funds. Their skill is selecting the best hedge funds available for their investors, rather than running their own. In theory, they select the cream of the crop – able to produce positive returns through any market environment.

In Buffett’s corner is the simple Vanguard S&P 500 index fund. In the opposite corner is Protégé’s selection of 5 funds of hedge funds – the names of the funds not publicized but known by both parties.

The bet was simple – as told on LongBets.org, the host of the bet. “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” The stakes, totaling $1 million at the end of the bet, goes to the winner’s choice of charity.

The challenge is, indeed, the challenge of passive investing vs. active investment management as a whole.  Buffett, often called the Oracle of Omaha, has long been critical of the active investment management industry and the fees charged in their services. Passive investors, he argues, will instead enjoy the growth of the market as a whole with minimal costs involved. As he states in his argument on Long Bets,

“A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.”


He is especially critical of hedge funds – the supposed cream of the crop. The managers of these funds are supposed to operate at a level above traditional active management – enticing institutional and wealthy sophisticated investors to take the bait.

Nine years into the bet – who is pulling ahead?

As of February 25, 2017, the compound annual increase for the index fund was 7.1%. The collection of hedge funds? Only 2.2% compounded annually. To put that in terms of dollars - $1 million invested in the five hedge fund-of-funds would have grown to $1,220,000. The index fund would have grown to $1,854,000.

While there are 7 months left to the bet, we can assume Mr. Buffett’s charity of choice will be eagerly anticipating the mail come January 1st, 2018. As the Oracle concludes in his recent Letter,

“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

This bet highlights what we wholeheartedly believe – have faith in the markets. Have faith in businesses. Invest broadly and efficiently, without trying to select or time, and let the markets work for you over time. Focus your energy, instead, on other financial decisions important to your success. Your future self will thank you for it.


Sources:  

Find Evon on 
https://www.linkedin.com/in/evonmendrin/

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