Friday, December 21, 2018

Holiday Office Hours

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

Monday, December 24th, 2018 
Tuesday, December 25th, 2018 
Closed at Noon - Monday, December 31st, 2018
Tuesday, January 1st, 2019 
Monday, January 21st, 2019
Monday, February 18th, 2019
Friday, April 19th, 2019
Monday, May 27th, 2019
Thursday, July 4th, 2019
Monday, September 2nd, 2019

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

Happy Holidays!

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Wednesday, December 19, 2018

It's Dividend Season!

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

If you’re investing in mutual funds, a curious thing tends to happen each quarter. The value of your funds all suddenly dip! What is the cause? A market calamity across every type of investment??

While regular market activity might affect the value too, one key reason for the dip in prices is the dividend. Mutual funds hold a bunch of stocks, bonds, and other investments. These stocks may pay dividends and the bonds interest. To avoid paying taxes on this income themselves, mutual funds are required to pass them on to you, the shareholder. This can be done annually, but often each quarter. You may see larger capital gain distributions at the end of the year as well.

That’s a good thing, right? Sure, you are able to benefit from the cash flow of the many stocks and bonds you are invested in. However, it does something funny to the price. Each quarter, mutual funds that pay dividends will reduce their share prices by the same amount of the dividend being paid out. This happens on the “ex-dividend” date, the first date you can buy the mutual fund but not have a right to receive that quarter’s dividend.

For example, let’s say XYZ Stock Fund has a current price of $10.00 per share. The fund is set to pay a $0.10 per share dividend on Friday. So, on Thursday, the “ex-dividend” date, the price will drop by the same amount to $9.90 per share. 

This makes sense – why pay the same price to buy an investment, but not have a right to the dividend everyone else is getting? So, the price adjusts accordingly. And you, the current owner, still end up the same financially. Your fund goes down $0.10, but you get a $0.10 cash dividend.

Why now? It’s now that time of year! In fact, the 17th and 18th of this month marked the “ex-dividend” date for many of the mutual fund we invest in. We hope this post sheds some light on the change in prices.

Happy Dividend Season and Happy Holidays!

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Friday, October 26, 2018

Donating Required Traditional IRA Distributions

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

As many of you know, you are required to take taxable distributions from your Traditional IRA once you attain the age of 70½.  Those of you that have experienced this firsthand likely experienced a subsequent uptick in state and federal tax due.  However, as touched on in 2016, donating these required Traditional IRA distributions directly to a charity (otherwise known as a Qualified Charitable Distribution (or QCD) can help mitigate this uptick in taxation. 

Why revisit QCDs now?  

The Tax Cuts and Jobs Act (enacted late last year) made them more attractive.  The fact that taxpayers can take the greater of their itemized deductions or the standard deduction has not changed, but a near doubling of the standard deduction (along with the end of miscellaneous deductions and a new limit for state and local taxes of $10,000), means that more taxpayers will take the standard deduction in the future. 

How will more standard deduction taxpayers make QCDs more attractive?  

Charitable giving has been one of the more popular itemized deductions in the tax code.  Once Standard Deduction taxpayers realize there is no longer a material tax benefit from their itemized giving, they will look for alternatives.  

If you take the standard deduction and also happen to have a required Traditional IRA distribution, donating the required distribution (or any portion of it) directly to a charity (instead of writing a check yourself) effectively makes the contribution deductible again.

How do QCDs work again?  

Required Traditional IRA distributions, up to $100,000, can be given directly to a qualified charity without incurring any tax due.  It’s tax-free money to the charity and a non-taxable distribution for the taxpayer, yet still satisfies the taxpayer’s distribution requirement (or a portion of it). Although it’s not technically reported as a deduction, avoiding taxation on the required distribution is effectively the same thing.  

QCDs have been around since 2006 but they will be much more prevalent now.  For standard deduction taxpayers with required distributions from a Traditional IRA, it’s time to consider switching all charitable giving to direct gifts from a Traditional IRA.  

Dustin J. Smith, CFP®

The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional. For a more detailed summary of the 2018 Tax Laws alluded to above take a look at this post from January.

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Friday, October 12, 2018

Perspective During "Turmoil"

Pathways Advisory Group, Inc.
      Evon Mendrin, CFP®

Well, that escalated quickly.

If you’ve been anywhere near the news this week, you’ve likely been made aware of the most recent “End of the World As We Know It.” Stocks had a rough day at the office, and globally we saw quite the decline. How bad was it? Well, if you do a quick Google search of “stocks” and “bloodbath”, you can find more articles than you’d like explaining how the sky is falling, such as:
  •          “Traders are betting that the global market bloodbath…”
  •          “Wall Street Bloodbath Paints Tech and Media Stocks Red”
  •          “Australian stock market plummets after bloodbath on Wall Street…” 
  •          And of course, to help you get through the chaos – “5 Ultra-Safe Stocks to Survive the Wall Street Bloodbath”
It’s times like these when writers dust off the thesaurus, as you can find a medley of doomsday words thrown about, like “plummeting,” “chaos,” “turmoil,” “turbulence.”

To add to it, the financial news is sure to inform us that the Dow Jones Industrial Average faced the third-worst points decline in history, having dropped about 832 points. It’s enough to convince you the end is here and there’s no going back. But what does that really mean? Are we really seeing such a historically devastating event?

When looked at through the proper historical perspective, we see that the day’s drop in the Dow Jones was hardly a devastating event. It’s easy to view dramatic events through a microscope, looking only through a narrow lens. But what if we change lenses, zooming out with for a wider perspective?

Let’s go one lens wider. 832 points may be the third-highest point drop, but as a percentage, it was only roughly 3.1%. That’s hardly historically devastating. For perspective, the 20th largest historical percentage drop in the Dow Jones was 7.07% (7/20/1933). The largest ever? 23.52% (12/12/1914). A 3% dip is a drop (no pun intended) in the bucket compared to that.

Data from (10/11/2018)

Interestingly, that huge drop was only 16.8 points.  Using a points drop isn’t a helpful reference when the value of the Dow Jones is so much higher than the past. In 1980, the Dow as a whole was only worth around 850 points! The index is currently valued at around 25,000. As Dustin wrote about before, “the Dow just ain’t what it used to be.” Long-term, despite the headlines, the stock market continues its march.

What about the performance of stocks for the year? Through this lens, the Dow Jones Industrial Average is actually positive for this year – just over 3%year-to-date. So is the S&P 500, a popular measure of large-cap US stocks, gaining just over 4%. US stocks as a whole are positive for the year, as the Russell 3000 index is up about 3%. Sure takes the sting out of one day’s news. 

With the widest lens of historical perspective, we also see a decline like this is actually typical. Par for the course. Over the last 38 years, the S&P 500 has had positive returns in 29 years (76%). However, we see an average decline within each year of 13.8%. If we go back to 1946, we see similar results. That kind of drop, historically, is typical within any given year, and doesn’t tell us much about how the year will end. 

It’s amazing what perspective can do when faced with one day’s dramatic event. Taking a step back gives us the opportunity to evaluate what’s really going on and not overreact. Where do stocks go from here? Impossible to say. Trying to predict where the stock market goes in the short-term is a fool’s errand. Should we rush to action? Despite the “chaos” you see, nope. Try to tune out the noise, keep a long-term perspective, and continue with the long-term investment plan you’ve had all along.

Note: All returns data is as of writing, 10/11/2018. The data very likely may have changed as of the time you read this

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Friday, September 28, 2018

Credit Freezes Are Now Free!

Pathways Advisory Group

Just over a year ago, Equifax experienced a data breach affecting the private information of over 140 million people.  In a blog post responding to the breach, we highlighted a few ways to protect yourself from potential use of your information. One of the most useful methods is placing a freeze on your credit. A freeze restricts access to your credit file, minimizing the risk of new credit being established with your identity. One of the drawbacks of a freeze, however, was the fee required to not only initially apply the freeze but also each time you lifted and reapplied it.

One year later, thanks to a new federal law, we have a remedy for that pesky fee. Starting September 21st, credit freezes (and unfreezes) are now free of cost! You can now apply or lift a freeze with all three of the nationwide credit reporting agencies – Equifax, Experian, and TransUnion without the unnecessary charges . This can be done by mail, by phone, or online. Once established, a freeze can be lifted entirely, for a period of time, or to provide access to a specific entity.

In addition, if you’ve applied a fraud alert to your credit file, they are now extended to one year instead of 90 days. They are still free, and victims of identity theft can still get an extended alert for seven years.

With all of the risks we seem to face when it comes to protecting our identity, it’s good to know one helpful tool was made a lot easier to use.  

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Friday, August 10, 2018

Keeping Clients' Rebates and Knowing Your Advisor

Pathways Advisory Group, Inc.
Jeff Karst, CFP®

A news story earlier this year brought to light that Wells Fargo was keeping mutual fund fee rebates rather than distributing those rebates back to the clients.  Well Fargo managed the investment portfolio for a pension fund.  Some of the mutual funds have a revenue sharing feature that would kick a rebate back to Wells Fargo.  Those rebates were supposed to go back to the pension fund but Wells Fargo kept them.

The story might cause some people to wonder if they’re missing out on their own fee rebates. 

This is yet another story highlighting the importance of knowing about the advisors you hire. Pathways is a fee-only investment advisor and financial planning firm.  We are paid solely by our clients.  We do not receive kick-backs, rebates, etc. from any of the mutual funds that we use or from our primary custodian, Charles Schwab.

We primarily (almost exclusively) use the mutual fund company Dimensional Fund Advisors (DFA).  It is simply a match-up in investment philosophy and beliefs.  We believe they do an excellent job of applying academic research to real-world investing in a cost-effective manner.

What can you do to protect yourself and have a better understanding of your advisors? Asking your current or prospective advisors the following questions might be a good way to start:
  • How do you get paid? Only by your clients, or is there compensation from third-parties? The advisor should be able to answer clearly and with full disclosure.

  • Do you act as a fiduciary? Meaning, are you required by law to put the interests of your clients above your own?

  • Do you have a certification or designation, such as the CFP® certification, that holds you to high ethical and competency standards?

You might also find the Searching For an Advisor page on our website helpful. We wish the best for your financial planning through the rest of 2018 and beyond!

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Monday, May 21, 2018

Tax Form 5498

Have you received a tax form in the mail recently? If you did just receive a 2017 IRS Tax Form 5498, don't 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 2018. 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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