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Sunday, February 21, 2021

Socially Responsible Investing Is Just A Feel Good Fad

 Like all these blogs the heading is a myth . . .for a number of reasons.

First, the largest asset management firm in the world, with $8.67 trillion on the books, is going all in with ESG investing.  BlackRock's CEO Larry Fink recently wrote a letter to CEOs predicting a "tectonic shift" in the pricing of climate risk into the value of securities.
"From January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019. . . . We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity."

 But just because Larry Fink is doing it and BlackRock is saying it still doesn't mean ESG isn't a fad.  But there are other trends that do.

The Dept of labor released a new reg 10/202 that intends to limit not only ESG investing in retirement plans but even the mention of it in plan documents!  It also requires plan fiduciaries to choose investments for their participants based solely on financial performance.  Which is insane.  Private prisons are very profitable while also being a scourge on this country.  Fracking for gas is a hugely profitable enterprise with massive externalized costs, from air pollution to sullying groundwater with as yet unknown chemical cocktails.  Both are enjoying short term profitability.  Until their hazards and damage get priced in.

So how do you tell who is who?  Isn't greenwashing rampant?  Yes, it is.  But not for long.  Several organizations are growing in power and influence, based on science and increased computing power.

  • TCFD- the Task Force on Climate Related Financial Disclosures. The TCFD recommendations on climate-related financial disclosures are widely adoptable and applicable to organizations across sectors and jurisdictions. They are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings.
    The recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets.
  •  SAAB- Sustainability Account Standards Board.  SASB Standards enable businesses around the world to identify, manage and communicate financially-material sustainability information to their investors.
  •  CDP- Carbon Disclosure Porject, helping persuade companies throughout the world to measure, manage, disclose and ultimately reduce their greenhouse gas emissions. No other organization is gathering this type of corporate climate change data and providing it to the marketplace.
  • WDI- The Workforce Disclosure Initiative (WDI) aims to improve corporate transparency and accountability on workforce issues, provide companies and investors with comprehensive and comparable data and help increase the provision of good jobs worldwide.
  • FASB- Even the Financial Accounting Standards Board informally embraces sustainability reporting.

I'm confident these forces will cause the DOL to reverse it's corporate pressured stance on ESG.  A true fiduciary considers all things that can positively and negatively affect its clients.  ESG investing, and consumption, are the future.

Your Constructive Comments are Welcome!

Monday, February 15, 2021

-30 + 43 = 13

This is a mercifully short blog just to drive home a few points.
First, the heading

-30 + 43 = 13

is indeed a myth, it is false . . . if we're talking about rates of return.  The correct math is this;

-30 + 43 = 0 or, more precisely, -30% + 43% = 0% return for those two time periods.

Suppose last month you invested $1000 in Bitcoin and by the end of the year your share is worth $700, a 30% loss.  If next year you gain 42.85% you would be back to even (700 x 1.4385 = 1000), a zero rate of return. 

In frothy markets like we have currently, everyone is an investment genius.  But our selective memory for achieving double digit returns doesn't accurately project over the long term.  Here are the keys to staying afloat and avoiding herd mentality:

1. Take all ego and emotion out of your investment decision making.

2. Remember your goals.  Very few people come to me with a goal of making as much as possible, especially after we work through what that really means to them.  Over what time period?  Compare to what?  Starting with what and adding how much periodically?  And, most importantly, why?  So you can buy a mansion in Paris that you can't visit?

3. Stick with the plan.  If you've done your Expense Plan, with all your dreams and goals built in to it, and our plan achieves those goals with very little risk, do you really want to let your lizard brain kick in to start running the show?

4. But be flexible.  Sometimes new hazards as well as new opportunities will present themselves and we'll have to adjust, that is, without succumbing to shiny object syndrome or FOMO (fear of missing out).

One of my favorite motivational speakers, Jim Rohn, once said that we have two choices in life, discipline or regret.  It took me many years to understand and absorb that somewhat grim prescription.  Words will fail, you just need to examine and initiate your own disciplined efforts.  What gives your actions power is the order in which you make them.

Look at your heart, for example, and the astonishing daily discipline with which it keeps you alive.  It isn't suffering or complaining at the effort (unless you have heart disease) or wishing it could just stop  and watch some TV.  Its most important task is keeping you, and itself, alive and healthy.  

So, what's most important to you?  Wouldn't it be worth a discussion with someone expert in getting specific with your goals, plans and dreams? 

Your Constructive Comments are Welcome!

Sunday, February 7, 2021


I should point out, again, that the titles of these blogs are Financial Myths.  Especially this one.
Conversions from your pre-tax retirement accounts such as:

  • Traditional IRA
  • 401k
  • 403b
  • TSA. etc.

must be calculated every year to be sure you don't bump yourself up into the next tax bracket . . . except sometimes.  For example, raising your Federal marginal tax rate from 10 to 12% isn't a big deal, normally.  Unless you're on Social Security and that causes your Social SEcurity to become taxable.  At higher income levels it's not a disaster if the Roth conversion bumps you from 22% to 24%, the upper limit of which is $164,925 for single filers, $329,850 for joint filers.

But assuming Roth conversions make tax sense, what do you do with the money?  Where do you invest it?  How?  In many cases the answers are diametrically opposed in terms of investment strategy.  Let's focus on two examples:

**Background #1:  You don't really need the money in your $500,000 IRA that you rolled out of your 401k when you quit work at age 60.  But you know it is a disaster to pass pre-tax retirement accounts to your kids.  Until age 70 you plan to live off cash, capital gains and rental income.  When you start Social Security at 70 you plan to stop taking capital gains in order to reduce its taxation.  (You're delaying Social Security until 70 because when you took the calculator it indicated your mortality age at 94, well past the breakeven age of 83)
Your Roth Conversion Strategy-
a. Convert as much as you can each year up to the top of your 24% bracket.  Why?  Because taxes are going up. 
b. This is also your gift to your kids, taking care of the taxes for them.
c. Invest very aggressively for the long term.  This will easily recoup the taxes you've paid.
Now you'll have a spending cushion that you can tap if you need it without affecting your Social Security taxation.  And when the kids inherit, they'll pay no tax on the Roth funds.

**Background #2:  You've been very conservative in savings and budgeting and if you can just meet your budget throughout retirement you'll be OK.  You need every penny, can't afford losses, and want the assurance of adequate, guaranteed lifetime cash flow.  You quit work at 60 because it was killing you.  You have a nice pension which, right now, is enough to meet your budget.  But it has no inflation protection.  You still have great longevity.  You plan to spend down your excess cash savings to bridge the gap between age 67-70.
Your Roth Conversion Strategy-
a. Convert just enough each year to stay in the 12% bracket.
b. Over the next ten years put it into a Roth IRA income annuity that accepts premiums after the first year. 
c. Once your Social Security kicks in you will need to reduce or stop the conversions to keep Social Security totally or at least partially tax free.
d. Turn on the annuity income in 15-20 years, which will be tax-free and guaranteed to last your lifetime.  It will also have no effect on taxation of your Social Security benefits.  And it will be welcome step-up in income for your later years.  In the meantime your principal and interest credits are protected.

Naturally, all the rules could change in the ensuing years.  Or even this year.  And there are a virtually infinite number of "Backgrounds" we could consider.  I like these because they're based on real people and result in vastly different strategies.  Disclaimer:  Even if one of these examples mirrors your situation exactly I haven't detailed every thing you need to consider because I risk making this blog a sleep aid.  It is well worth the time and expense to consult with your adviser to be sure you make no mistakes.

Your Constructive Comments are Welcome!