7 New Years Resolutions for Investors | Podcast
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The 7 Habits of Highly Effective Investors

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Investment losses have economic value to you…and you don’t want to miss taking advantage of losses that you have.

Rick Winters, CFP®, CRPC®, AMWA®

Vice President

New Year’s resolutions often turn out to be lofty promises we make to ourselves and have a hard time keeping. But break those big pledges down into smaller, repeatable habits and you are far more likely to make them part of your year-round routine.

If you’ve been resolving to get your portfolio in shape for 2021, Vice President Rick Winters and Senior Financial Planner Andrew Busa are here to help. In the year’s final episode of The Adviser You Can Talk To Podcast, they lay out seven steps for investors to consider as we close the books on 2020—and they are equally applicable throughout the year.

In this wide-ranging conversation, Rick and Andrew explain:

  • What do we mean by “rebalancing a portfolio?” And is it the right move? (Not always.)
  • The importance of knowing when mutual funds pay out distributions
  • Why to be proactive about “tax-loss harvesting”
  • Different strategies for taxable accounts and tax-preferred retirement accounts like 401(k)s and IRAs
  • … and much more

To find out more about effective portfolio management and to hear our financial planning professionals’ money-saving tips, click above to listen now!

If you find this podcast informative and want additional resources and advice on managing your personal finances, we recommend the following free reports:

Key Financial Data & Tax-Planning Guide
Making the Most of Your Charitable Giving
2020 Year-End Thoughts for Your Portfolio and Personal LifeYear-End Portfolio Checklist

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Episode Transcript

Andrew Busa:

Hello. My name is Andrew Busa and I’m a financial planner here at Adviser Investments. I’m joined by my colleague Rick Winters today. Rick is a vice president at Adviser and he works with clients to help them reach their financial goals. He’s a CERTIFIED FINANCIAL PLANNER and I’m pretty sure you have picked up some other designations along the way, right?

Rick Winters:

Yeah, just trying to keep myself busy and fresh.

Andrew Busa:

Exactly, stay sharp. One of my favorite books, and Rick I know you love this too, is The Seven Habits of Highly Effective People. Whenever I hear that there are seven actionable steps that you can take to improve your life, I take notice. Today we’re going to take that same framework and discuss seven pieces of useful advice that you can use to improve your investment portfolio. These aren’t just items to think about now, this could be useful year-round.

Rick Winters:

That’s right. Yeah, these are things that you need to be thinking about literally each stage, and best of all at the beginning of the year.

Andrew Busa:

Yeah, for sure. This is a perfect time to do this episode and for you to listen. Without further ado, let’s not waste any time, let’s jump right in to our first habit. The first habit has to do with rebalancing your investment portfolio, specifically to rebalance continuously, not systematically. What do I mean by that?

Rick Winters:

Right. Just jumping into the whole concept of what do we mean by rebalancing is that when you first get into investing you spend a lot of time, maybe personally, maybe you’re reading about it, ideally you’re working with your investment adviser and you come up with the idea that you have a certain weighting of your portfolio towards stocks versus bonds or cash or other investments. For a simple example, let’s say you’re a 60/40 investor, 60% stock and 40% bonds and your portfolio performs extremely well in a given year.

Rick Winters:

January rolls around the following year and you look at your portfolio and you’re not 60/40 anymore but you’re 65% stock and 35% bonds, so conventional wisdom would say, “Hey, rebalance that. Let’s get that back to your target.” Here at Adviser Investments we take a much broader view of that concept and do not subscribe to that conventional once a year rebalance. We like to let the portfolio actually take care of itself, use the various things that are happening in your account in a given year to try to get back to that target so that you can actually through distributions or things where you need cashflow or maybe funds paying out or you’re earning interest or dividends, et cetera.

Andrew Busa:

Right, instead of sticking to a rigid approach of saying, “On this date it’s time to rebalance.” It’s really more about letting life dictate your rebalancing strategy, would you agree with that?

Rick Winters:

Yeah, it’s definitely about life because if you go in there in January and rebalance your portfolio and the reason that it’s up to 65% stock is probably not because bonds have lost a significant amount of value but because your stocks went up, so when I sell those stocks to rebalance what am I doing? I’m creating taxes right off the bat. Right in January I’m going to be creating a capital gain when I could use the full year and the various things that I need to do with it to accomplish that. If I rebalance and then need to go get money later in the year I’ve got to go and sell something again and potentially create more tax.

Andrew Busa:

Right. We’ll touch on taxes in different ways as we go through these seven habits, but I think that’s a good overview of the first one. Moving to the second habit, this has to do with knowing your mutual fund distributions and building a calendar around them. Rick, give us a little bit of background about what fund distributions are and why it makes sense to build a calendar here.

Rick Winters:

Yeah. Okay, this is very important because a lot of people, if you’ve been investing in mutual funds for years this is no news to you, funds pay out distributions. Most often you’re going to get your distributions in November and December, so it’s a time of the year where you’re going to be able to expect that you’ll be seeing quite a bit of cash potentially showing up in your portfolio. Just to be clear, we’re really focusing our attention in this section, on this habit, in your taxable account because these distributions are things that we would recommend that you have directed to your money market. In an IRA since there’s no risk of a tax on that distribution and we can trade, and in our case because we don’t have costs associated with trading we can let that distribution reinvest in the mutual fund.

Rick Winters:

That distribution is made up of capital gains, dividends, and interest, but in the IRA none of those matter because they’re not taxable. But in your taxable account these distributions are going to be coming throughout the year, again the majority at the end, dividends, interest, and capital gains, and you want to make sure that you’re factoring this into your plan because if you need to take money out of your account to buy gifts, pay bills, buy a car, do some work on your house, it might be better to know when your funds may be paying you a taxable distribution that you can use then, rather than going in and trading and creating a capital gain unnecessarily.

Andrew Busa:

Right. If you aren’t aware of what the fund distributions are and when they’re going to happen, you could potentially unknowingly purchase a mutual fund that has a capital gains distribution for a fund that you haven’t been there to experience the growth for. That would be painful.

Rick Winters:

That’s right. That’s why this calendar concept is the habit, the good habit, because money is going to be coming in and going out throughout the year and if you’re in a position to make a meaningful deposit in September and you just blindly go in and start buying up your investments because you already own them, then you may be buying a capital gain that you’ve played no part in, you had no benefit from. Now I don’t want to make it sound like that you don’t buy investments in September because there is quite a bit of strategy about how you can use distributions to your advantage by buying them at certain times, you just have to be eyes wide open aware of what you’re walking into. That calendar is that gatekeeper for making good decisions throughout the year and I the gatekeeper would be to keep you from making bad decisions throughout the year.

Andrew Busa:

Yeah, no question. I know we work hard with our clients on this and internally to make sure that we’re very aware of when funds are paying out distributions. We talked a lot in this habit about gains and tax gains and being aware of that. The third habit has to do with tax-loss harvesting, and specifically be proactive when it comes to tax-loss harvesting. Talk to us a little bit about this one.

Rick Winters:

Yeah. I want to state this one clearly. Tax losses have economic value to you and if you miss taking advantage of them by a position that you own, an investment that you have drops in value … I’m not talking about half a percent or $100, but if let’s say it drops a meaningful amount, 5% and that may be a $10,000 loss, you do want to be in a position to be able to take that loss.

Rick Winters:

Let me take a step back and actually tell you what I’m talking about here. Let’s say you make a $100,000 investment in something and it grows by 10%. Now your investment is $110,000 and you were to sell that position for any number of reasons why you would do that, and you realize that $10,000 gain. That gain is taxable to you and it can be taxable depending upon how long you held it, either as long term or short term, and they are treated different for tax purposes. That was a good investment, I made money, but if I’m just letting that ride throughout the year, I can guarantee I will pay taxes on it.

Rick Winters:

If I have another position that may not be performing so well I could sit there and say, “Hey, just going to let that one ride that out and hope it comes back to its full value.” Or I can actually take a different step and I could actually sell that position. Let’s say I bought it for $100,000 and it fell to $90,000. I could sell that position and realize that $10,000 loss. That $10,000 loss is able to offset that $10,000 gain that I had, meaning I don’t have a tax. Now you say, “What’s the use of that? I just gave up on an investment.” We’re not suggesting that you give up on investing we just say, “Sell that position, turn around and buy something of …” We don’t leave that in cash, we buy something of similar style, maybe a utility stock, we buy a utility ETF to replace it.

Rick Winters:

Because we’re now fully invested, if that position goes up back to $110K, I made my money back. I realized my loss and I offset the gain that I had realized on my other trade. That is very smart, that is a great habit. We are very proactive with that with our clients and make it something that we are doing all throughout the year. It’s not a January thing, it is not a December thing, it is an every month as the market moves habit that you have to employ.

Andrew Busa:

I agree. I see taxes as very much tactical opportunities when it comes to working those. They might seem like little things over the course of the year, but if you do these strategies correctly it can really save you on taxes and it allows you to be opportunistic with your investments rather than on your heels, right?

Rick Winters:

Yeah. You actually just took the words right out of my mouth. I was going to say, “Hey, it puts you on your toes rather than your heels.” You just went to the heels first, so you got half of what I was going to say.

Andrew Busa:

Yeah, there you go.

Rick Winters:

Yeah, you want to be on your toes with this stuff. This is fun. This is where you’re not falling victim to the market or just passively working your way through. This is where I get to add value in my client’s investment portfolios in a way that unfortunately for maybe tracking historical performance I don’t get to add it to the actual decimal point in return that we report to you each quarter, you just have to know that we’re doing some good stuff over here and saving you a lot of tax money.

Andrew Busa:

Yeah. The key with this habit again, tax losses have economic value to you so be sure to be opportunistic with those. Let’s move on to number four here. We’re still sticking with the overall theme of taxes with this one, and that is do not automatically reinvest dividends in your taxable account. That might seem counterintuitive to some listeners, so talk about that one.

Rick Winters:

Yeah. This is a universal rule at Adviser Investments. We do not automatically reinvest distributions from funds, that’s interest, dividends or capital gain distributions from funds automatically back into an investment. The reason is that I want to have control over the investments I make in a situation where I may be compounding a tax problem for myself. If an investment pays out a distribution and automatically buys back something, I’m giving up other control that I would have otherwise had. I may need to use that cash for, as I mentioned earlier, basic life expenses, rent, mortgage, filling the fridge, paying a bill, or maybe ideally giving a gift to someone in the family, someone you love.

Rick Winters:

But the idea that you’re going to just let that money sit there in cash is absolutely not the case. It falls back to one of our other habits, which was using the portfolio as it lives to do things like rebalance the portfolio, maybe build a new position in another investment that you’ve been looking to build. Do not automatically reinvest. That does not for the IRA, I mentioned this earlier, I’m going to repeat myself for good reason. Just reinvest in the IRAs. You can trade freely. I’m assuming that you’re in the same position we are where you’re not paying transaction costs with that statement.

Andrew Busa:

Right. I want to point out too a little bit of nuance here, how these first four habits work together a little bit. Let’s say you were automatically reinvesting inside of your taxable account. You could then unintentionally buy a mutual fund distribution, which we talked about in the second habit. You can see how these things layer together, it’s interesting.

Rick Winters:

Yeah. Every one of these working together is additional money in your back pocket.

Andrew Busa:

For sure. Let’s move on to number five then. The fifth habit is to take full advantage of tax-deferred and tax-free growth. This one might seem obvious, but it’s a moving target and you can’t forget the contribution limits change every year.

Rick Winters:

That’s right. If you’re looking at maxing out your retirement accounts this year that you’re in and you’ve made all the necessary adjustments to make sure your percentage is going in, each year because these contribution limits are pegged towards inflation, they can adjust and more frequently now they have been adjusting year in and year out. You need to go back to your paycheck and make sure that the percentage that you were contributing for this year will actually get you to that number. And for these retirement accounts to work, this is a December 31 deadline so if this is something that’s coming through your paycheck as an employee you do need to be able to make sure rather than trying to play catch-up because we didn’t put enough towards that account early in the year, which would affect your week to week or bi-weekly or monthly cash flow.

Andrew Busa:

Right. Those employer-sponsored plans, your 401(k) or 403(b), you have until the end of the calendar year to make your contributions to those plans, whereas something like your IRA, your Roth IRA, your health savings account, you have until the tax deadline to make those contributions, April 15.

Rick Winters:

That’s right. I appreciate you going through and actually listing some of the names of what we’re talking about here rather than me just saying, “It’s just your 401(k),” because it’s not, it actually … Yeah, you have so many ways that you can save. Don’t be naïve to any of them, make sure you talk with your investment adviser please, us, when you have a question because I know we can help and this is one of the key ingredients where you’re just implementing this habit of saving routinely early and often to make sure that you’re working towards those longer-term goals that you’ve set for yourself.

Andrew Busa:

Right. You know I had to mention health savings account and Roth IRAs because we have former podcasts on those topics.

Rick Winters:

I wonder who talked about those?

Andrew Busa:

Yeah.

Rick Winters:

Those were pretty good guys, very informative.

Andrew Busa:

Yep, absolutely.

Rick Winters:

You know them.

Andrew Busa:

I do, I recommend those two.

Rick Winters:

We’ll get those numbers in the notes after here so you can go back and take a look.

Andrew Busa:

Yes. I was about to say you can check up on these numbers on the key financial data sheet that we can attach to this episode.

Rick Winters:

That too. Yeah, so not only can you go back and listen to our podcasts for some self-promotion, you can pick up my favorite sheet that I keep on my desk, and I have it right here, there it is. I call it the greatest financial cheat sheet ever.

Andrew Busa:

Yep. How many times a day do we look at this thing?

Rick Winters:

Mine has actually got a coffee stain on it and it’s got wrinkles all over it, so I could use a new one.

Andrew Busa:

Yeah. We’ll make sure …

Rick Winters:

I’ll send you a picture, I’m not lying.

Andrew Busa:

We’ll add that to our to-do list.

Rick Winters:

Ten times a day.

Andrew Busa:

Alright, let’s move on to number six before someone gets started here. The sixth habit is to never, ever miss a required minimum distribution from your account. We spend a lot of time to make sure that this doesn’t happen to our clients.

Rick Winters:

That is exactly right. We have layers and layers of spreadsheets that we start really looking in-depth at in September. There’s a number of relationships that we work with that do need to take distributions throughout the year, so they’re usually all set and we know that we’re just checking up to make sure we’re going to hit that requirement of distribution, which is usually something that can be taken care of through the custodian that you work with.

Rick Winters:

But if you’ve been ignoring it and you have not set up preset instructions, we’re going to find it. And you should be looking too because there’s a really good reason for it and that is because missing your required minimum distribution would be a 50% penalty, which is really expensive. I know I jumped right into the part of telling why you wouldn’t want to miss your requirement of distribution, but Andrew maybe we can tell them when does that RMD kick in, what is it?

Andrew Busa:

Yeah. And this is a recent change too. The RMD age used to be 70½, now it’s 72. What does this mean? Let’s say you’re spending your whole life building up a retirement account, either your 401(k) or your IRA, and you’re getting a tax-deferred growth on that vehicle. Eventually the IRS comes around and says, “It’s time to pay the piper,” in this case being Uncle Sam. There comes a time, right now it’s 72, when you need to start taking money out of that account, it’s mandatory, and those distributions are going to be taxable to you. The IRS finds a way to get their money, is the long story short here.

Rick Winters:

That’s right. A couple of special rules, caveats, to the simple at 72 and take your distribution is that first year you have the ability to delay a little bit into the following year so just giving you a little bit of a break to make sure that you don’t miss your first distribution. But if you do that and let it go to the following year’s April first, you are going to be taking two distributions in that year, I would not say that’s a good habit.

Rick Winters:

The other one is, if you’re still working through an employer plan past 72, you enjoy the work you’re doing or you have to continue working. The good news there is you do not have to take a required distribution from that plan that you are actively participating in. That has no impact on your personal IRA account, but only the company-sponsored plan that you are actively participating in.

Andrew Busa:

Right. That can be a reason to leave money in a 401(k) or 403(b) rather than roll it over.

Rick Winters:

Or put it back in.

Andrew Busa:

Yeah, good point.

Rick Winters:

I’ve advised many people to do that, yes.

Andrew Busa:

I want to add just one more caveat to that one is that as long as you are not or have never been a five percent or greater owner in your company are you able to delay that RMD inside of your 401(k).

Rick Winters:

The living disclaimer, I like it.

Andrew Busa:

Right.

Rick Winters:

You don’t even have to read it in the notes, we’re going to give it to you right now.

Andrew Busa:

Exactly. All right, good. The seventh and final habit to keep in mind, this is give with taxes in mind. We’re talking about charitable giving here. This is a big topic, but how do you boil this down?

Rick Winters:

Yeah. The habit is good that we’re paying attention to the taxes, but I want to put everything in its proper order is that you are giving to charity because you want to support charity, that is the number one reason. It may be a church, it may be an organization, it may be a cause that you feel strongly about and you want to support that. But as you’re taking that action, don’t just write checks out of the checkbook without thinking about how … Is that the smartest means for me to do that? Because with the more recent tax law changes it’s really changed the playing field for how people should manage their charitable giving because one thing that had changed is that the standard deduction is significantly larger.

Rick Winters:

On the basic it’s over $24,000 for couples filing jointly, and for people over the age of 66 there’s actually additional standard deduction as well. If you’re someone that doesn’t have enough itemized deductions to get up over that number and you write $5,000 in charitable giving, you are not getting a deduction for that charitable giving. But you’re not without hope, there are other ways to do that and I think there are a couple of strategies. Andrew, am I covering enough of that first part to lead into this?

Andrew Busa:

Yeah.

Rick Winters:

Okay.

Andrew Busa:

I think that’s perfect.

Rick Winters:

Yeah. I just want to make sure that when you think about your charitable giving there are some strategies to try to make sure that you get over that standard deduction so you can actually get some additional benefit from your giving. One of those would be a couple of strategies that people are employing are to pool their gifting together. You know that you give $5,000 a year, I know that’s not a small number, that’s a meaningful gift, but that’s what we’re going to have to be talking about to get there.

Andrew Busa:

Right.

Rick Winters:

What you would do is you take three years of your gifting, not necessarily write all those checks right out to a charity, but you put that contribution into a donor advised fund, that’s an account that you can make a gift to that you still have control over. It’s not your money, it’s been given to a charity, but you then have the ability to direct it out to the charities that you specifically want to support this year, next year, or five or 10 or never years from now, it just gives you the ability to get the deduction. You can give the money away to your charity later.

Andrew Busa:

Yeah. These charitable giving funds or donor-advised funds, these are really cool strategies. Like you said, you get that immediate tax deduction for your contribution but then you can choose how to invest it. We can manage those for you. There’s just loads of options when it comes to these.

Rick Winters:

That’s exactly right. With other parts of the charitable giving is that with the planning you don’t want to, again, just write that check or just start putting money into donor advised funds without thinking about it.

Andrew Busa:

Right.

Rick Winters:

You should treat your giving similar to how you would treat anything that you consider to be very important to you. If you were running a business you wouldn’t just walk in and say, “Hey, I don’t really know what I’m going to do today to try to help my business move forward.” You would have taken the time to … On the higher level write a mission statement or a vision statement so you know what your overall drive is. You should be doing very much the same thing for your charitable giving, for your benefit and the benefit of your family. I think that there’s a lot of structure that you could put in, and that charitable giving for charitable reasons is the number one, but number two, if you plan wisely and think ahead you can take full advantage of the tax benefits of that as well.

Andrew Busa:

Sure. Yeah, and I think this one is a perfect example of why it’s important to update your financial plan on an ongoing basis because … You mentioned at the beginning of this habit where the standard deduction increased significantly, if you weren’t paying attention and you were just continuing to do this $5,000 charitable gift every year, well all of a sudden you’re no longer itemizing that. This is why it’s important to speak with your adviser about these strategies and have a clear plan.

Rick Winters:

That’s right. And one other thing that we didn’t touch on in this charitable giving is, one of the rules that is now permanent from a couple of years ago, which is you can give to charity if you’re someone that’s taking your required distribution each year. You will be in a position to be able to give directly from your IRA to a charity and that will be non-reportable income, non-deductible because you didn’t report it as income, and that is meaningful because that will reduce your total adjusted gross income for calculations related to medical expenses or even the calculation to come up with your Medicare premium. If that is available to you and you’re over 72 and taking your required distributions and you have charitable interest, QCD.

Andrew Busa:

Yep.

Rick Winters:

You should be talking about it. Do not be naïve of that, it’s incredibly powerful.

Andrew Busa:

Yeah. QCD is an efficient way to give. Giving highly appreciated securities, again that’s an efficient way to give as well. There’s a whole load of topics we could go into here. One thing that I heard that I really like is that a lot of times cash is the most expensive asset that you can give, to you, because there’s just more efficient ways to do this from a tax perspective.

Rick Winters:

That’s right. Yep. There are more pieces to that. I’m sorry, I know we’ll wind up turning this into a charitable giving podcast if we go too much further, but we can always expand on these topics to find out how they’re more meaningful for you as a listener.

Andrew Busa:

Absolutely. With that, let’s summarize the seven habits that we talked through today because we covered a lot of ground. Number one, let life dictate your rebalancing strategy and not the other way around. Number two, know your fund distribution calendar. Number three, be proactive when it comes to tax-loss harvesting. Number four, opt out of automatic reinvestment, specifically for taxable accounts. Number five, maximize opportunities for tax-deferred and tax-free growth. Number six, never, ever miss a required minimum distribution. And finally, number seven, always give with tax in mind, really be thoughtful there.

Andrew Busa:

You’ll notice as we talked through this list, a lot of this is tax-related so it’s a great time to engage with your CPA or investment adviser team and make sure you’re taking advantage of all of these opportunities. Taxes really are a year-round consideration. It doesn’t matter if it’s the beginning or end of the year, if you follow these habits you will be more efficient tax-wise.

Andrew Busa:

Rick, anything else you want to throw in?

Rick Winters:

No, just agreeing with you. Taxes are always right around the corner so be thinking about it.

Andrew Busa:

Yeah, that’s true. You can’t escape it.

Andrew Busa:

This has been Andrew Busa and Rick Winters from Adviser Investments and we’re thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can also check us out at www.adviseryoucantalktopodcast.com. Your feedback is always welcome, and if you have any questions or topics you’d like us to explore, please email us at info@adviserinvestments.com. Thanks for listening.

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