Planning for Physicians: Managing Contributions Between a 401(k), 457(b)
As many of our readers likely know, the Federal government provides strong incentives for saving for retirement and other financial goals. You can break these down into three broad categories: tax deductibility (on contributions), tax-free distributions (i.e. withdrawals), and tax deferral (on growth). Many physicians can increase their tax deductions and benefit from tax deferral by contributing to both a 401(k) plan and a 457(b) plan.
401(k) and 457(b) plans are both employer-sponsored retirement plans. The main difference is 457(b) plans can only be sponsored by certain entities, namely state and local governments, along with nonprofits such as hospitals, charities, and unions.
What’s the Deal With Interest Rates?
As I write this, I just got a mortgage for 2.75%, my student loans are about to get refinanced at 1.5%, and my auto loan is 0%. And as a consumer, you might think ultra-low interest rates are the greatest thing since sliced bread. That might be true for consumers, but for investors looking for low-risk and a decent return, not so much. A couple of things to start you off:
- The Federal Reserve controls interest rates. Congress and the executive branch do not. That separation is a good thing.
- The yield on a bond is how much income you’re being paid. If a $100 bond has 3% yield, you get $3 per year.
What Are Tax Exempt Bonds?
A properly diversified portfolio should contain a healthy array of different types of investments. One of these investments may be tax-exempt bonds.
What are tax-exempt bonds?
Tax-exempt bonds are municipal bonds. In finance slang, they are commonly referred to as “munis” or “muni bonds”. Municipal bonds are issued by states, counties, municipalities, hospitals, schools, airports, and so on. When you buy these bonds, you are effectively lending money to these government or nonprofit entities. Typical uses for these funds includes construction and maintenance of infrastructure like buildings, bridges, roads, water, sewer, power, etc.
Investment Year in Review for 2019
The year 2019 was a solid one for investors. A year after one of the worst fourth quarters since the Great Recession, stocks rebounded to close 2019 with several major indexes reaching record highs.
During the year, investors faced a yield curve inversion for the first time since 2007, a slowing economy, and a constant barrage of positive and negative information on the trade war with China. Nevertheless, investors stayed the course for most of the year, pushing stocks to their best year since 2013.
Each of the benchmark indexes listed here closed 2019 in fine fashion, led by the tech stocks of the Nasdaq, which gained more than 35.0%. The large caps of the Dow (22.34%) and the S&P 500 (28.88%) also fared well by year’s end. The small caps of the Russell 2000 began the year on a tear, ending February up almost 17.0%. However, the small-cap benchmark index pulled back some in March, but remained a steady gainer for much of the rest of the year, closing 2019 about 24.0% ahead of where it started.
Heartland Trust Company Brings Responsible Investing to Our Clients
This is a topic that has been flying under the radar for a bit too long. What does “responsible investing” mean and why would someone allocate their assets towards it?
In industry talk, we refer to this as environmental, social, and governance (ESG) investing. Responsible portfolios are centered on these three criteria. Until recently, the problem with many of the funds in this space was that one fund’s ESG criteria could differ from another’s. It was awfully hard to distinguish if funds were simply using it as a marketing moniker or if they actually meant what they said.
We didn’t want to put our client’s hard-earned assets into funds that didn’t represent their values. Finally, a coherent set of principles started to gain traction a few years ago.
4 Ways to Avoid Common Investor Biases
It may stun some folks, but successful investing often relies more on managing emotions than on managing the market. I’m emphasizing this even after analyzing fund and macroeconomic data for the last three hours. Our biases and emotions play a strong role in our investment decision-making, often to our detriment.
Let’s start with recency bias, also known as, “markets are falling and they will continue to fall because they just fell.” It also happens to be my girlfriend’s bias toward my cooking. Just because I burned spaghetti 10 times in the past doesn’t mean I will burn spaghetti 10 times in the future. (Okay, I might.) However, it does apply to investing and the markets. This is also called zoom theory. It’s the tendency to overweigh recent experiences when forming a view of the future. It’s why folks think they can tolerate risk when returns are strong, only to sell when asset prices fall. They zoom in. Let’s zoom in on the most recent sell off for an example:
Don’t Let Emotions Swing with the Markets
It’s no secret that investing is an emotional process. Markets swing and news organizations take full advantage to pump their ratings and incite fear, oftentimes without fully understanding the economy or how markets work.
Even veteran investors can act impulsively and lose perspective when markets correct or become volatile.
All of this said, volatility is normal.
That’s why it’s essential for all of us to consider the big picture during periods of market stress. If you’re contemplating a change to your portfolio, there are two important questions you should ask: 1) have my goals changed, and 2) has my time horizon changed?