Executive Wealth Planning Partners
John spent 28 years as a financial adviser at a major wire house before leaving to start his own advisory firm, Executive Wealth Planning Partners (affiliated with First Financial Equity Corp.) specializes in providing consulting and asset management services to public companies, their employees and qualified retirement plans. Through a series of strategic partnerships John's team offers stock plan administration, corporate cash management, 401(k) plan administration services and individual asset management.
John is also the founder of the National Association of Stock Plan Professionals (NASPP) Rocky Mountain Chapter. He currently serves as Chapter President. This organization is devoted to the promotion of professionalism in the design, administration of and advice to equity compensation plans and their participants at the nation’s publicly traded companies. He is a member of the Global Equity Organization (GEO), the National Center for Employee Ownership (NCEO) and the Financial Planning Association (FPA).
John is an advisory board member and contributing editor at the financial advice web site myStockOptions.com. His popular “Stockbroker Secrets” articles found there are a common-sense guide to managing employee stock options wisely.
John has also assisted in the development of employee stock option analysis software published by Net Worth Strategies in Bend, Oregon which financial and tax advisors nationwide use to model employee stock ownership and stock option exercise strategies.
BA, Economics, University of Colorado-Boulder
Assets Under Management:
Executive Wealth Planning Partners is a marketing entity affiliated with First Financial Equity Corporation for the purposes of providing brokerage securities and investment advisory services. Brokerage Securities and Insurance products are offered through First Financial Equity Corporation. Executive Wealth Planning Partners, First Financial Equity Corporation and it’s advisors do not give tax or legal advice. This material was not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Please consult your tax advisor or attorney for tax and legal advice. The opinions expressed and materials provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. First Financial Equity Corporation is Member FINRA/SIPC.
Introduction and Investment Approach - John Barringer
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It almost never makes tax planning sense to convert tax deferred accounts to a ROTH when you are over the age of 55 because the realistic chance of earning back the tax consequences over your actuarial lifetime is low. If you knew for certain that you were going to live beyond age 90 (25 years from now) and could say with equal certainty that you'd receive better than an 8% annual return then it could make sense to pay $18,500 per year, for five years ($92,500) in conversion taxes (under current tax rates).
The ideal strategy for saving retirement funds in a ROTH is to start young and build up a substantial tax free source of income to use when you retire and to retire in a relatively high tax bracket. That is not your situation.
Someone with $20,000 in annual income is in the lowest (12%) tax bracket. You could take an additional $30,700 (net of the new $12,000 standard deduction for single filers) from your IRA before you moved into the next bracket (22%) but that sort of withdrawal would reduce your IRA to zero by about age 82. A better strategy would be to withdraw no more than 4% ($20,000) annually, from your IRA, to supplement your current income. Save it in a tax-free account if you don't spend it. This rate is likely to allow you to make the $500,000 last for your lifetime even under very modest return assumptions and save you $30,000 in taxes, if you live to be 90. In fact, you'd need to live to be 103 to pay the same amount of taxes as the five year conversion strategy would make you pay (assuming today's tax rates).
The Rule of 72 is a quick way of estimating the rate at which a stated rate of return will double the value of an investment. The number 72 is divisible by 2, 3, 4, 6, 8,9, and 12 so it's a simple way to do the calculation that most people (even those with limited arithmetic skills) can do. An 8% return will double your investment in nine years. [ 72 / 8 = 9 ]. So in your example, you should have $400,000.
There really isn't an "ideal" number of stocks to have in a portfolio, but there are a few guidelines that make portfolio management work to your advantage.
First, in order to be considered diversified, an Investment Company must limit its exposure to any one security in a portfolio to 5%. A portfolio that had 20 stocks all representing 5% would meet the definition. If the portfolio strategy seeks to over-weight securities in sectors of the economy, or of a particular type, while under-weighting other stocks that are believed to be somewhat less attractive or more risky, half and quarter positions could add to the total number.
Standard & Poor's (S&P) divides the economy into 11 Sectors and Industries: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Information Technology, Materials, Real Estate, Telecommunications Services and Utilities. A portfolio that wanted to always have some exposure to all of these and remain diversified would need perhaps as many as 40 positions to avoid reliance on one or two stocks in each sector.
Bear in mind that the richest man in the world, Bill Gates, has only one stock in his portfolio.
You don't say how old you are, what type of account the proposed investments would be made in or anything about your tolerance for risk so there is no "Rule of Thumb" that would be appropriate to apply. In spite of all that, there are some characteristics of dividend-paying stocks (which may or may not qualify as "value" stocks) and of growth stocks.
Historically, dividend paying stocks, as a group, have had a very dependable track record of capital appreciation. This does not mean that all dividend payers are created equal. Those with very high earnings to payout ratios can be volatile. Large, established, "name brand" companies with decades-long histories of dividend payments and dividend increases are among the best total return investments, rivaling even many growth stocks, over the long run. Among these are General Mills (GIS), Johnson & Johnson (JNJ), Kimberly Clark (KMB), Coca Cola (KO) and Procter & Gamble (PG). A portfolio of dividend payers should be carefully watched because even huge companies can fall on hard times, decline dramatically in price and cut or eliminate their dividend. This happened to CitiBank (C) in the late 1980s after paying a dependable dividend for 200 years!
Growth stocks are attractive, as a group, because some fraction of the universe of growth stocks will have spectacular performance. Think about Intel (INTC) and Motorola (MOT) in the 1990s or Amazon (AMZN) last year. Many stocks that may fall into the growth category will rise and fall dramatically. For instance, Cisco Systems (CSCO) lost 75% of its value in 2000-2001. Successful growth companies will someday become mature dividend payers like Microsoft (MSFT) has. Because a portfolio of growth stocks can have more losers than winners, it should be managed with an eye toward stopping losses.
The mix between dividend paying stocks and growth stocks is a choice that should be made on the basis of an investor's willing to take risk. Generally speaking, growth stock investing will incur more risk and volatility than will dividend investing. Even when a dividend payer drops in price, the dividend, if it’s not at risk for the same reason the stock is falling, continues. If a growth stock falls, it may never get back up and nobody is paying you to wait and see.
Dividend paying stocks have, for some investors, become a substitute for bonds because of low interest rates. Not only do many stocks pay a dividend higher than you can get from a high quality bond but, if the company's earnings continue to rise dependably, as is the case with many consumer products, health care, energy and utility company stocks, and the dividend will too. A portfolio with a rising dividend income stream is a good hedge against rising prices. It also helps that, under current tax law, investors receive favorable tax treatment on qualified dividends.
Investing in a cash account is considered safer. It certainly is more simple. If you invest $10,000 and your holdings rise to $13,000, you've made 30%. [ $3000 / $10000 = 30% ] If you invest on margin, you're borrowing up to half of the funds you're using to make the investment. So, you can buy the same $10,000 of investments with $5,000. If you get 30% appreciation, your return on cash is 60% [$3000 / $5000 = 60% ] minus the cost of borrowing (currently between 4% and 8% at most brokers)
This demonstrates the power of leverage but there is a risk...let's say the investments you choose don't work out as you hoped and instead of appreciating by 30%, they fall by 40%. In that scenario, you lose 40% on the cash investment but the margin investment loses in two ways: First, you must maintain a minimum collateral balance for your account. If your investment falls below $6250, your broker will ask you for more money (a margin call) just to keep the investments from being liquidated to pay back the $5000 you borrowed. Or secondly, if you sell, when the investment is worth only $6000, after you've paid back the $5000 loan, you'll only have $1000 (minus any interest you paid) of your original investment left...that's at least an 80% loss.
Margin can be used wisely. If you invest with all cash and, over time receive a decent return, you may be reluctant to sell, even if you need some of your investment funds for some other purpose. The capital gains taxes may not be appealing to you, you may feel the investments can still appreciate or you may enjoy receiving the dividend the portfolio provides. In this case, you might choose to margin your investments in order to take out cash. If your original cash $10,000 investment has risen to $25,000 over a period of years, you could borrow up to 12,500 against your holdings from your broker without the tax consequences of a sale.
You may want to choose the margin feature of your brokerage account but plan to initially invest with all cash. The agreement does not obligate you to borrow. Good luck!