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 – cash leaves the mutual fund, which lowers its total value of assets (Net Asset Value). 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 16th - 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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Holiday Hours!

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

Thursday, November 28th, 2019
Friday, November 29th, 2019
Tuesday, December 24th, 2019

Wednesday, December 25th, 2019

Closed at Noon - Tuesday, December 31st, 2019

Wednesday, January 1st, 2020

Monday, January 20th, 2020

Monday, February 17th, 2020

Friday, April 10th, 2020

Monday, May 25th, 2020

Friday, July 3rd, 2020

Monday, September 7th, 2020

In case of an emergency, 

please contact Schwab directly at 1(800) 435-4000.

Happy Holidays!

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Kids-n-Money: The Pre-Teen Years

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

In 2017 I wrote about our first humbling experiences with our kids-n-money and diving into the book The Opposite of Spoiled. We’ve made some progress since then. The kids, now pre-teens, have developed stronger temptation muscles and they ask a lot of questions:

How much do you have in our College accounts? 

Can I use my Donate for the jogathon at school?

How much do I have in my Invest account?

Why should I add to my Invest if you add to it for me every month?

I’ve got a hundred dollars in my Save but I don’t have anything in mind, can I just add it to my Invest? 

What would it be like if everyone had a summer break?  My favorite question!

How much did we pay for this house?

How much do you have in your Truck account?  

How much do you have in your Retire accounts?

The kids have outgrown their Money Savvy Pigs® but, as you can see from their questions, the spend, save, donate and invest money choice experience has shaped how they think about money.  That’s definitely a win!  Now, about those tricky allowances:

Allowances:  The suggestion from the Opposite of Spoiled, was to separate your child’s allowance from their chores.  This made sense to us, as household chores are responsibilities not compensated tasks, so we went with it.  However, we quickly learned that an allowance without daily expectations feels like an entitlement – not exactly our intention.

Summer Chore Cards:  Inspired by Michelle’s post about the Carter household, we decided to take a break from allowances and experiment with chore cards for the summer (Unload and put away groceries = $1, Fold and put away Laundry from the Laundry basket =$1, etc.).  Without an allowance, there will be more incentive to help out.  Hopefully this, plus the extra free time, allows them to experience the value of hard work, a sense of accomplishment and the joy of being helpful.

Back to School:  Fresh off the lessons of summer, it was time to reset expectations and reinstate allowances.  We went with the usual $7/week, settled on the typical expectations (homework, lunches, make your bed, etc.) but decided to add one weekly rotating household chore from the summer list. 

Like most parenting topics, the kids-n-money topic has evolved through lots of trial and error.  We learn something new with each experiment.  Life also gets in the way periodically.  I am at least two weeks behind on their allowances, as of this post.  Please do not tell them to ask for interest!  We are trying to take it all one year at a time – soon, whether we like it or not, they will be teenagers!!!!

Resources:

Children Now Average $30/week in Allowance

Allowance is Like Welfare

Money Habits are Set by Age 7

The Opposite of Spoiled

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Watch Out For Equifax Settlement Scams

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

In 2017, Equifax - one of the three major credit bureaus - experienced a data breach affecting at least 143 million people. Now, there is a class action lawsuit settlement awarding those affected free credit monitoring and a potential cash payment. Of course, internet fraudsters are using this settlement as an opportunity to create new scams.

Internet bad guys are now trying to trick you into filing an Equifax claim and get a $125 payment because your personal data was in the Equifax data breach. They are sending phishing attacks that look like they come from Equifax. When you click on the links, you wind up on a fake website that looks like it's Equifax but will try to steal your personal information. Don't fall for it.

If you want to file a claim, go the legit FTC website and click on the blue "File a Claim" button. The website will check your eligibility for that claim, as not everyone's information was compromised. Here is the link to the FTC site: https://www.ftc.gov/enforcement/cases-proceedings/refunds/equifax-data-breach-settlement   

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Jeff’s Guide to The Financial Media

Pathways Advisory Group, Inc.
Jeff Karst, CFP®

Often times when I read the headlines, I get a chuckle.  Of course, their intention is to grab your attention.  The more people that “click” on their article, the more advertising they can sell.  It’s not about education for them.  With a bit of volatility to end 2018, it was prime time for the media. We’ve seen the same within the last few weeks. Here is my (not so) definitive guide to interpreting the headlines.

“Stocks Clawed Back to Positive Territory” 

Basically, stocks should be going down and the only way they were able to make it positive for the day was through sheer grit.  Much the same way a zombie climbs out of the grave.

“Stock Sell-Off Intensifies” 

You can replace “Intensifies” with any word you like (to make the headline more attention grabbing).  The media always uses the phrase “sell-off”.  As if, by some miracle, stocks are sold and no one buys them.

For any stock to be sold, there must be a buyer on the other end of the transaction.  If there were no buyer, the stock could not be sold. For every seller that believes now is the time to sell, there’s a willing buyer that believes now is the time to buy. “It takes two,” as they say.

“Markets in Turmoil amid _________ fears”

This usually means that one of the major stock indices have dipped slightly in value, often by 2-3%. It’s often coupled with some impending doom for the economy, stocks, or both. Based on this headline alone, you’d guess markets are down 35% for the year. What’s often missed is that – although they dipped for the day – stocks might actually have strong positive performance for the whole year.

This is the case in 2019. The S&P 500 (+16.73%), Russell 2000 (+11.7%), and all but a few international indices are positive year-to-date despite the recent “turmoil”. Beyond one year, these dips tend to be short-lived compared to the overall long-term growth of stocks around the world.

We have no clue how the year will end. But as Evon wrote in his blog post, Perspective During “Turmoil”, “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.”

 “XYZ Company Earnings Missed Expectations”

How does the company miss expectations?  Wouldn’t they want to always exceed expectations to, you know, make more money?  Perhaps the real answer is, the analysts were wrong.  The media doesn’t want to say that.  That would mean that the prognosticators aren’t actually able to see the future.

“It’s tough to make predictions, especially about the future.” – Yogi Berra

Focus on Your Goals

It’s hard to ignore these headlines given what we experienced in the 4^th quarter of 2018 or in the past few weeks. It’s human nature to be affected by the short-term news flashes. We must remember what the long-term trend of stocks has been. If your goals are long-term, then your focus should be too.

Lastly, focus on the things that are within your control. We can’t control the ups and downs of the markets, let alone guess where they’re heading next. We also can’t control what the news writes about it. Instead, focus on the amount you invest, the amount of each type of asset you hold (stocks, bonds, and real estate), the expenses you pay, and the taxes you owe. Therein lie the keys to your success!

Note: All returns data are as of writing, 08/19/2019. The data very well may have changed by the time you read this

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Office Closed this Friday for 4th of July Holiday

Our office will be closed this Friday, July 5th, as part of our observance of the 4th of July holiday. In case of an emergency, please contact Schwab directly at 1(800) 435-4000.

We wish you a Happy 4th of July!

The Pathways Team

Summer Jobs

Pathways Advisory Group. Inc.
Michelle Carter, CFP®

If you're a parent, you may have mixed feelings about summer vacation.  

Video Courtesy of Kids Are The Worst

Look familiar?

Each year, as the weather becomes hotter and the days become longer, I begin to think about my goals for those 10 weeks.  It's a break from traditional school work, but since children are always learning, what do I want to teach them this summer?

This year, I want them to learn the feeling of accomplishment from earning their own money.  My kids are ages 4-7 and don't receive an allowance.  They are expected to help around the house, mostly in their own rooms, with some regular chores added in (clear the table, feed the cat, etc).  I wanted to take it up a notch, and summer seemed like a great time to do this.

I am creating a "Work for Hire" board.  You can find multiple examples of this online.  Here is one:

Photo Courtesy of The Chic Site

The basic premise is to post a chore to be done and attach the payment.  With younger kids, you can use pictures (a dusting rag or a broom) and pay with quarters.  With older kids, you can use tougher chores for higher pay.  It's a flexible way to teach children hard work and money management.  

At the end of the week (or month) you can take them to spend some of their hard earned money, or you can save all summer for a bigger reward just before school starts.  I have even seen it done with Monopoly money, complete with a "mom store" for spending hard earned "money" on small treasures.

We are going to give this a try this summer in the Carter household.  I'm sure we will learn what works best for us as we go.  It will be a fun experiment, and I look forward to reporting back this fall on how it went!

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It's a Boy!

Pathways Advisory Group. Inc.
Evon Mendrin, CFP®

We are proud to announce the birth of Isaac - born to Evon Mendrin and his wife, Natasha. He was born 9 lbs 1 oz, 22 inches long, and seems to already be pondering life's greatest mysteries. Both mother and Isaac are doing great, and the family couldn't be happier. Congratulations to Evon and Natasha on the first addition to their family! 

Tax Form 5498

Have you received a tax form in the mail recently? If you just received a 2018 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 2019. 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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What’s Your Motivation?

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

What motivates you to make good financial decisions? What motivates you to save, invest, or buy insurance? To spend time and energy thinking about goals, money, life, and death? These aren’t easy topics to think about, but you do them anyway – what’s your motivation?

Is it your family? Your spouse and children? Is it that beach house you’ve always wanted? The thought of free time and financial independence? Or is it simply the thought of having piles of money and huge account balances?

Financial planning is all about trade-offs – do you spend or do you save? Do you pay down debt or do you invest? Happiness today vs. security tomorrow. It’s easy to focus on the things you want today. They’re always enticing you, always calling out. What motivates you to find that balance, rather than spend for your pleasure today?

Whatever that motivation is, research shows that consistently keeping that motivation in front of you might be the key you need to reach your financial security.  

A 2011 study (Soman and Cheema), searching for a way to help families save more money, tracked 146 low-income households in India. The study found that there were two key ideas – certain key actions – that helped the families greatly save more.

The first idea was segregating and earmarking money into different “buckets.” The study used separate paper envelopes, but aren’t you doing a bit of that already? You’re likely already peeling off portions of your income and diverting them into different investment accounts – IRAs, 401(k)s, regular brokerage accounts, etc.

With help from the tax code (tax-deferred growth!), you’re already earmarking certain pots of money for your future self. The same can be done with bank accounts. You might have checking, savings, and even separate savings accounts for buying a house, paying off debt, or for emergencies.

The second idea was found to be even more impactful – enhancing all the other methods. They placed a picture of their children on the “savings” envelopes.

Why?

For these families, the main goal was to make sure there were resources for their children. Their children were their primary motivation. That’s why the parents worked so hard. This simple action had a substantial impact on their savings rates and helped them not to dip into their savings when tempted with spending.

The two actions combined nearly doubled their savings rates, even with very low income. It’s simple, yet effective – and it’s not hard to imagine why. Visual reminders keep us on track in so many other areas of our lives.

It’s no fun to exercise simply for the sake of exercising. But if we keep a “before” photo in front of us, or pictures of the figure/athlete we want to become, we find ourselves much more motivated to get moving.

It’s also no fun to skip the new car purchase or a few meals at your favorite restaurant. It’s no fun to fill up your emergency savings when that island getaway is waiting.

But just imagine – you’re about to use this month’s savings on a night out on the town when you’re confronted by a picture of you and your spouse smiling. Imagine pulling out your wallet to pay for that all-inclusive stay, when in front of your credit card you see a picture of your children.

Just a gentle reminder of why you’re doing what you’re doing – planning your future, setting goals, making healthy financial decisions.

The struggle is real, and we’re often our own enemies (I know I am) – but the tools to help us can be simple.

What shall we do?

Find your motivation. What’s important to you? Where do you see yourself in the future? Why is that important to you? This should be at the forefront of all your financial planning. Make your personal finance…well…personal!

Sanctify your savings. That is, set aside your saving into separate, sacred pots of money.

Most importantly, keep your motivation in front of you. Put pictures on the fridge, in your wallet, in your financial planning binder. Have them on your computer screen, your phone, and your tablet. Keep them in your car and at your work.

What’s your motivation?

If you know it well, it just might help you reach the financial future you’re planning for.

Special thanks to Dr. Daniel Crosby and his book, The Laws of Wealth, for directing me to the research!

Source - Soman, Dilip and Cheema, Amar, Earmarking and Partitioning: Increasing Saving by Low-Income Households (December 30, 2010). Journal of Marketing Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1732709

-Written by Evon Mendrin from our June 2018 Client Newsletter Article.

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You May Still Itemize on Your California Tax Filing!

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

The tax code was simplified.  With a larger Standard Deduction (amount all taxpayers can deduct, if greater than the total of your itemized deductions), many of you can stop tracking itemized deductions altogether.  As a matter of fact, it’s so easy now, you could practically file on a napkin yourself!

HA! Back to reality…  

The Federal Tax Cuts and Jobs Act (TCJA) of 2017 eliminated some itemized deductions, capped a few that remained and nearly doubled the Standard Deduction to $24,000 for joint taxpayers ($12,000 for individual filers).  However, it did not make your tax filing any simpler than it was before.  As a matter of fact, a new complication is the ability to itemize on your California tax filings despite taking the Standard Deduction federally.

California did not alter its own tax code as a result of new federal tax laws. As long as your total California itemized deductions exceeds the modest California standard deduction of $8802 for joint taxpayers ($4401 for single filers), you benefit from itemized deductions.  This has not changed. 

Further, since the California tax code remains unchanged, some miscellaneous tax deductions that were eliminated federally by the TCJA, remain deductible on your California filing.  Investment management fees, tax preparation fees and unreimbursed employee expenses, for example, remain deductible on your California filing. 

Also, newly capped itemized deductions at the federal level such as a $10,000 limit for property taxes paid, experience no such limitation in California.  California income taxes paid were never deductible in California, so nothing changes there.

In the end, despite less federal tax incentive to donate, utilize mortgage debt, pay for tax and/or financial advice (among the other itemized deductions removed from the federal code) for some, the approach is the same.  Continue tracking potential itemized deductions the way you always have, and pay your accountant’s bill with pride. With countless new Forms, schedules, software updates and the surprise of many Americans around the amount due at tax time, they’ve earned it!

Dustin J. Smith, CFP®    

This is not intended to be tax advice, but purely educational. Please consult your tax professional about your personal tax situation. 

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Takeaways From 2018 - a Market Review

Pathways Advisory Group, Inc.
Evon Mendrin, CFP®

In the blink of an eye, we’re already three months into 2019! Before we go too far into the year, we’d like to take one last peek at 2018. The year was full to the brim of drama – politics, the Fed Reserve, Inflation, Brexit, Kardashians, and plenty more. It was quite the year. With the help of Dimensional Fund Advisor’s 2018 Market Review, let’s look back at a couple of the takeaways.

1) Market Declines Don’t Always Spell Doom and Gloom

Market declines can be scary. It’s scary to see your investments decline in value – especially by a lot! It’s human nature to be, at the very least, uncomfortable. 2018 ended in a bang - and I don't mean the New Year's fireworks. As we see in the chart to the left, Major World Indices, 4^th quarter of 2018 saw major declines across US and International stocks.

Most saw double digit declines. That seems scary. However, large declines like these don’t always spell doom and gloom. In fact, stocks across the globe tend to do very well after the scary dips!

Stock market declines of 10% have occurred numerous times in the past. After declines of 10% or more, equity returns over the subsequent 12 months have been positive 71% of the time in US markets and 72% of the time in other developed markets.¹ The chart below shows the historical performance of markets subsequent to declines of 10%, 20%, and 30%.

Large Cap stocks across the world have historically shown major positive performance through 12-months after deep declines of 10%, 20%, 30%. This is especially helpful if you are buying stocks at these times (contributing to your accounts). As prices go down on businesses around the world, the expected return on your investment goes up. Your favorite companies are on a temporary discount! 

Can we guarantee this will happen? Of course not. Historically, 28-29% of the time we saw a continued decline (2008, anyone?). The markets will do what the markets will do. However, the odds are good that there’s light at the end of the tunnel. Keep in mind this is only 12-months after, not taking into account the longer-term track record of 5-, 10-, 20-, and 30-year periods. Quite the fascinating phenomenon!

Fortunately, we’ve seen this happen in 2019. Year-to-date (as of 2/27), the S&P 500 is up over 11% and the MSCI All Country World Index up over 10%.  It just takes grit, willpower, and a long-term belief in the long-term markets to stick with your investments through each decline.

2) Diversification Continues to (and always will be) Important

While markets around the world generally had negative returns in the fourth quarter, the dispersion in their returns highlights the importance of global diversification. When looking at individual countries, 46 out of 47 countries were down for the year.

Using the MSCI All Country World Index (IMI) as a proxy, no countries posted positive returns among developed markets, and only Qatar managed a positive return among emerging markets. As is typically the case, country‑level returns varied significantly. In developed markets, returns ranged from −24.1% in Belgium to 0.0% in New Zealand. In emerging markets, returns ranged from −41.3% in Turkey to 27.1% in Qatar—a spread of almost 70%!

Large dispersion among country returns is common. It’s nearly impossible to predict which counties will outperform the others in any given year. Without a reliable way to predict which will deliver the highest returns, this large dispersion in returns between the best and worst performing countries again emphasizes the importance of maintaining a diversified approach when investing globally. Aim to capture the long-term return of the global economy without trying to guess which country does best.

Conclusion

2018 included numerous examples of the difficulty of predicting the performance of markets, the importance of diversification, and the need to maintain discipline if we as investors want to effectively pursue the long-term returns of the businesses of the world.

It’s not always pleasant and sometimes downright terrifying. However, history shows us that – through Great Depression, Great Recession, World Wars, military conflicts, oil panics, and so on – stock markets reward long-term, patient, discipline investors that stay the course.

1. Declines are defined as points in time, measured monthly, when the market’s return since the prior market maximum has declined by at least 10%. Declines after December 2017 are not included, but subsequent 12-month returns can include 2018 returns. Compound returns are computed for the 12 months after each decline observed and averaged across all declines for the cutoff. US markets (1926–2018) are represented by the S&P 500 and Developed ex US markets (1970–2018) are represented by the MSCI World ex USA Index.

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