Helpful Articles

It is our goal to ensure that our clients are informed and educated on relevant economic and finance related topics. Below are some short and helpful articles you may find interesting:

Tax-Loss (and gain) Harvesting

Tax-loss harvesting is when an investor intentionally sells a portion of their investments at a loss in order to offset their gains on another investment, reduce their tax bracket, or increase the cost basis of an investment they currently own. This is a common practice used by sophisticated investors in order to decrease or eliminate capital gains and/or income taxes.

Imagine that you purchase 10 shares of XYZ stock at $10 per share, and 10 shares of ABC stock at $10 per share. One year later, the XYZ stock has fallen to $5 per share, while the ABC stock has risen to $30 per share. To harvest a tax loss, the investor would simultaneously sell 8 shares of XYZ, realizing a loss of $40, and 2 shares of ABC, realizing a gain of $40. These two sales would cancel each other out, thus eliminating capital gains taxes. The investor can either pocket the profits, or wait 30 days before reestablishing their positions, in order to realize the tax benefits without violating the IRS wash-sale rule.

To take this a step further, an individual may intentionally produce no earned income in a given tax year, while also selling many of their investments during that same year. Given that this individual had no earned income during the year, they will be in the 0% capital gains tax bracket, thus eliminating the taxes on their gains. This is known as tax-gain harvesting.

These examples explain tax-gain and loss harvesting in its simplest form, as these tactics can be adjusted and implemented in a variety of ways to achieve different results, which would depend on the individual.

 A slightly more complex example involves an individual who has a salary of $250,000 per year. This individual is in the 32% tax bracket. To reduce their tax burden, their financial advisor (me) intentionally sells some stocks in their investment portfolio for a total loss of $70,000. This would move them into the 24% tax bracket, thus decreasing their tax burden significantly more than the loss they realized on their investments. 30 days later, we would reestablish the positions in their investment portfolio. We essentially did not effect the value of the investment portfolio, but did significantly reduce the individuals tax burden. Please keep in mind that just because we sold investments from this portfolio for a loss of $70,000, does not mean that the overall portfolio did not gain value, as we simply chose specific investments to liquidate in order to harvest a tax-loss.

Obviously, these tactics have no benefit in a tax advantaged account like an IRA or 401K, but I do regularly implement these practices for my clients that can benefit from it. It is just one of many small things that separate a financial advisor from a good financial advisor.

As always, please share with anyone that may find this information interesting or useful, and reach out to me or my team if you have any questions or would like to discuss further.

Inflation

Inflation is simply a persistent increase in consumer prices over time, and a decrease in purchasing power of a fixed unit of exchange (money) over time. The U.S. government aims to keep inflation at around 3% per year. So, if this holds true, and a gallon of milk costs $1.00, one year later it should cost $1.03, two years later $1.06, and so on. Inflation is actually a necessary component of a healthy economy because without it, money would become so concentrated with a small group of individuals, that we’d eventually become a communist-like country. 

 

A common issue that most investment advisers see is that many folks don’t consider inflation when it comes to their financial plan. If you have $1m sitting in a bank account, at today’s inflation rate of nearly 8%, you’re essentially just throwing $80,000 per year down the drain. This is why Cornerstone constantly stresses not to “save” money beyond a reasonable emergency fund, as you must invest to keep your or your families’ wealth protected from inflation.

 

To bring this into perspective, in 1980, the average single-family home was around $36,000. Today, the average single-family home is around $800,000 (this is an average of ALL single-family homes in the U.S., so it might differ from your area). If we apply this same math to future price increases, then 50 years from now, in 2074, the average single-family home will be upwards of $30m… Yes, it sounds crazy, but we all would’ve thought the same thing if we were in 1980 and someone told us that the average home would be $800k in 2024. This is inflation.

 

Point is, if you leave your money sitting in a bank account, especially if you have $100k or more, inflation is making what seems like a lot of money slowly become worthless. 


Also, click here to watch a video where I explain how “commission free” trading apps like Robinhood and TD Ameritrade make money… You may be surprised to hear the truth about these companies.

Stock Split

A stock split is a strategic move by a company’s board of directors to increase the number of outstanding shares by issuing more shares to current shareholders. Here’s how it works:

In summary, stock splits enhance liquidity, make shares appear more affordable, and can boost investor interest, even though the company’s fundamental value remains unchanged.

Short vs. Long Term Capital Gains

What are Capital Gains Taxes?

Simply put, capital gains taxes are levied on the profit you make when you sell an investment asset, such as stocks, bonds, or real estate.  The tax rate you pay depends on how long you held the asset before selling it.


Short-Term Capital Gains

Long-Term Capital Gains

The Benefits of Long-Term Investing

By holding your investments for more than a year, you can potentially qualify for the more favorable long-term capital gains tax rates.  This can significantly increase your investment returns.


Cornerstone Investment Services: Your Partner in Tax-Efficient Investing

Our team can help you develop a personalized investment strategy that considers your tax situation and long-term goals.  We can help you choose investments with a focus on long-term growth and potential tax benefits.

Recession

Understanding Recession: A Brief Overview

A recession is a significant, widespread, and prolonged downturn in economic activity. It affects various aspects of an economy, including employment, production, and consumption. While the common rule of thumb defines a recession as two consecutive quarters of negative gross domestic product (GDP) growth, economists use more complex indicators to measure and identify recessions. These indicators include nonfarm payrolls, industrial production, and retail sales, among others.

Here are some key points about recessions:

Why Hold Investments Through a Recession?

Despite the uncertainty and fear associated with recessions, here are compelling reasons to stay invested:

Remember that while recessions can be unsettling, maintaining a disciplined investment strategy and focusing on long-term goals is essential. Patience and resilience pay off in the end.

401k Rollover

401(k) to IRA Rollover: A Smart Move for Your Retirement Savings

1. Introduction

When transitioning jobs or retiring, you may face a critical decision regarding your old 401(k) account. Should you leave it behind, roll it into your new employer’s plan, or consider a 401(k) to IRA rollover? Let’s explore this option in detail:

2. What Is a Rollover IRA?

A rollover IRA is an account designed to transfer funds from old employer-sponsored retirement plans (such as 401(k)s) into an Individual Retirement Account (IRA). Here are some key benefits of choosing a rollover IRA:

3. Options for Your Old 401(k)

When leaving a job, you typically have three choices for your old 401(k):

4. How to Transfer a 401(k) to an IRA

Here’s how the 401(k) to IRA rollover process works:

5. Conclusion

A 401(k) to IRA rollover can enhance your retirement planning by providing more control over your investments and potentially reducing fees. At Cornerstone, we specialize in retirement plan rollovers and transfers so that we can maximize your tax and investment benefits. Please do not hesitate to reach out.

Types of Financial Advisors

As you navigate the financial landscape, you’ll encounter various professionals who play critical roles in managing your investments. Two such roles are investment advisers and broker-dealer representatives. While their names might sound similar, they operate under distinct rules and serve different purposes.

1. Investment Advisers: Your Personal Financial Guides

What Are Investment Advisers?

Why Choose an Investment Adviser?

2. Broker-Dealer Representatives: Navigators of the Trading Seas

Understanding Broker-Dealers

Why Opt for a Broker-Dealer?

3. Legal Standards: Fiduciary vs. Suitability

Investment Advisers (Fiduciary Standard)

Broker-Dealers (Suitability/Best Interest)

Conclusion: Choosing Wisely

Both investment advisers and broker-dealers play vital roles, but their approaches differ. Consider your preferences, involvement level, and financial goals. If you seek personalized guidance and holistic planning, an investment adviser may be your compass. If you prefer active participation and transaction control, a broker-dealer could be best for you.

Diversification

Diversification of investments is like building a financial safety net. Instead of putting all your money into one type of investment, you spread it across different asset classes, such as stocks, bonds, and real estate. Diversification also involves spreading your capital across multiple investments within each asset class you own. This helps reduce the impact of any one investment performing poorly, providing a more stable and balanced approach to growing your wealth over time. It's like not having all your eggs in one basket, but rather creating a well-rounded portfolio to withstand the ups and downs of the market.


At Cornerstone Investment Services, we emphasize the importance of balance. Diversification isn't just about spreading investments; it's about intelligently managing risk and returns. Our approach ensures that your portfolio remains resilient, even in the face of market fluctuations.


Our team at Cornerstone customizes portfolios based on your unique financial goals. Whether it's wealth preservation, growth, or retirement planning, strategic asset allocation is the cornerstone of our approach. This thoughtful process aligns your investments with your specific objectives, providing a roadmap to financial success.


In a world where instant gratification often takes center stage, we advocate for the long-term view. Diversification is not a quick fix; it's a strategy that stands the test of time. By staying committed to a well-diversified portfolio, you position yourself for sustained growth and wealth accumulation.


As your financial quarterback, our commitment is to guide you through the intricacies of wealth management. Diversification is just one aspect of our comprehensive approach to securing your financial future. We aim to help you navigate the waters of the market, ensuring your investments align seamlessly with your aspirations.

Fundamental Analysis

Fundamental analysis is the bedrock of our investment strategy. It involves evaluating a company's financial health and performance to determine its intrinsic value. This goes beyond short-term market fluctuations, focusing on the underlying factors that contribute to a company's long-term success.


Key Components of Fundamental Analysis:

The Cornerstone Approach:

Our team at Cornerstone meticulously applies these principles to identify investment opportunities aligned with our clients' financial goals. By focusing on companies with solid fundamentals, we aim to navigate the market with a discerning eye.


Navigating Market Volatility:

In the face of market uncertainties, fundamental analysis serves as a steady compass. Rather than being swayed by short-term fluctuations, we prioritize long-term value creation for our clients.


Conclusion:

Fundamental analysis is not just a tool; it's a philosophy that guides many of our investment decisions. At Cornerstone Investment Services, we are committed to providing you with a thoughtful and comprehensive approach to wealth preservation and growth.

FIRE

At its core, FIRE is about taking intentional steps to achieve financial freedom sooner rather than later. It's a mindset that emphasizes saving aggressively, minimizing expenses, and investing wisely to create a robust financial foundation.


Key Principles of FIRE:

1. Frugality: FIRE enthusiasts adopt a frugal lifestyle, focusing on needs over wants. This doesn't mean sacrificing happiness but rather making intentional choices to optimize spending.

2. Savings Rate: A high savings rate is a hallmark of the FIRE movement. By saving a significant portion of income, individuals accelerate the journey to financial independence.

3. Investing Strategically: FIRE embraces the power of compound interest. Investing in a diversified portfolio helps grow wealth over time, providing the financial cushion needed to retire early.


While FIRE may seem radical to some, its core principles align with our commitment to strategic financial planning. At Cornerstone, we advocate for disciplined saving, strategic investing, and mindful spending to achieve long-term financial goals.


FIRE doesn't necessarily mean early retirement in the traditional sense. It's about gaining the flexibility to pursue meaningful work or personal passions. Achieving financial independence allows individuals to design a life that aligns with their values.

As financial experts, we recognize that the FIRE path may not be suitable for everyone. It requires a personalized approach considering individual goals, risk tolerance, and lifestyle preferences. At Cornerstone, we guide our clients in exploring options that align with their unique financial journey.


The FIRE movement is a fascinating exploration into alternative financial philosophies, emphasizing early financial independence and intentional living. While not a one-size-fits-all approach, it sparks essential conversations about the relationship between money and lifestyle choices.

Wash Sales

Wash-sales occur when an investor sells a security at a loss and, within a 30-day window, buys a substantially identical security. The IRS has stringent rules regarding these transactions to prevent individuals from exploiting tax loopholes. The impact of wash-sales becomes particularly significant when implementing tax loss harvesting strategies.


Tax loss harvesting involves strategically selling investments that have incurred losses to offset capital gains and potentially reduce taxable income. However, the challenge arises when trying to avoid wash-sale violations while still optimizing your portfolio for tax efficiency.


Here's a simplified breakdown of how it works:

By incorporating tax loss harvesting into your wealth management strategy, you can potentially minimize your tax liability and enhance overall portfolio performance. However, meticulous planning and adherence to the rules surrounding wash-sales are paramount.


As your financial partner, we understand the importance of these strategies in preserving and growing your wealth. If you have any questions or concerns about tax loss harvesting and wash-sales, we are here to provide guidance tailored to your unique financial situation.


Investing wisely and navigating the intricacies of taxation require a delicate balance, and we are committed to helping you achieve your financial objectives with prudence and foresight.

Beta & Alpha

Crafting Your Custom Portfolio:

At Cornerstone, we leverage alpha and beta to build personalized investment portfolios tailored to your specific financial objectives.

Goal Alignment and Portfolio Construction:

The key to successful portfolio construction is aligning your investments with your goals. Through a meticulous analysis of alpha and beta, we ensure your portfolio reflects your risk preferences, return expectations, and time horizon.


The Cornerstone Approach:

Our experienced team at Cornerstone combines financial expertise with a deep understanding of alpha and beta to construct portfolios that stand the test of market dynamics. We prioritize your financial goals, focusing on both growth and preservation, to create a customized investment strategy.

Accredited Investor

An accredited investor is an individual or entity that meets specific financial criteria, allowing them to invest in certain securities that are not registered with the Securities and Exchange Commission (SEC). Here are the key points about accredited investors:

Remember that being an accredited investor comes with both opportunities and risks. If you are interested in adding alternative assets to your investment portfolio(s), please reach out.

Alternative Investments

What Are Alternative Investments?

An alternative investment is a financial asset that doesn’t fit neatly into the conventional equity/income/cash categories. Unlike stocks and bonds, alternative investments offer diversification, potential for higher returns, and protection against inflation. However, they also come with higher risk, fees, and often limited liquidity.

Types of Alternative Investments

Advantages and Risks

Conclusion

Alternative investments can enhance your portfolio, but they require careful consideration. As you explore these options, consult with financial professionals and assess your risk tolerance. Remember that each alternative investment has its unique characteristics and potential rewards.


Tax Alpha

In short, alpha is simply the excess return that you earn on an investment or investment portfolio above or below its expectations. If you expect the S&P 500 to return 10% this year, and it actually returns 15%, it had positive alpha.

That said, tax alpha is the enhancement of an investment portfolio's returns through effective tax management. Let's break down a few methods for achieving tax alpha:

Essentially, tax alpha is the extra money you get to put in your pocket via effective tax management of your investments that otherwise would have been paid to Uncle Sam, something very seldom considered by a traditional “financial advisor”.

REITs (Real Estate Investment Trusts)

A REIT is an investment vehicle in which investors’ money is pooled and used to fund the purchase of real estate. In the eyes of the investor, a REIT behaves much like a stock, as it can be traded on an exchange and fluctuates in value much like a share of a companies stock. Each REIT has its own investment policy statement (IPS), which means some REIT’s have a goal of purchasing incoming producing real estate (like apartment buildings), some have a goal of land speculation (like purchasing raw land that may be the future site of a commercial development), and there are many in between.


Cornerstone Investment Services regularly receives inquiries regarding real estate investments. REIT’s are a great way to invest in real estate without shelling out millions of dollars, dealing with closings and tenants, and also provide the liquidity of a share of stock that traditional real estate investments lack.


If REIT’s are something that you would like to add to your portfolio or learn more about, please contact us and we’d be glad to help.

Investment Advisers Vs. Broker Dealers

To preface this article, I want to emphasize that my firm, Cornerstone Investment Services, is a registered investment adviser. Companies like Ameriprise, Wells Fargo, Morgan Stanley, Edward Jones, and many more, are considered broker-dealers (some firms are dually registered). These two types of firms are bound by drastically different sets of laws, and charge for their services much differently.

 

Investment advisers are independent fiduciaries that are required to register with state securities regulators and/or the SEC in order to conduct business. To become registered as an investment advisor, your firm must submit a series of compliance items to its respective government regulator which includes a business continuity plan, forms regarding your business structure and services you plan to offer, balance sheets, etc. All representatives of an investment advisor, which would be me and my employees, are required to pass a series of regulatory exams that tests their knowledge on both the laws of the securities industry, and investing itself.

 

On the other hand, broker-dealers, are large “wirehouse” firms that are only required to register with the SEC. The requirements for broker-dealer registration are much less stringent than that of an investment adviser. Representatives of a broker-dealer must also pass a series of regulatory exams, although these exams differ from that of an IA.

 

The main difference between the two is that investment advisers are bound by the fiduciary standard, and broker-dealers are bound by the suitability standard. This means that investment advisers are legally required to put their client’s interests ahead of their own, and always act in their clients best interest. Broker-dealers, on the other hand, only have to recommend investments that can be justified as “suitable”.

 

Another major difference between the two is that investment advisers usually charge for their services using a yearly fee, most commonly a percentage, for assets under management, or an hourly rate for consultation. Broker-dealers charge a commission; so naturally a BD’s reps are incentivized to recommend whatever earns them the highest commission, as long as they can justify that it was “suitable”. In essence, a representative of an investment adviser is much like a partner to a law firm, while a representative of a broker-dealer is much like a car salesman to a dealership. One is held to a much higher standard than the other.

 

I do completely understand that this article may be slightly biased in favor of my own firms’ structure, so I am attaching an article written by Investopedia that explains what I have just said, but in much greater detail.

 

https://www.investopedia.com/articles/active-trading/100915/rias-and-independent-brokerdealers-comparison.asp

 

As always, please share with anyone that may find this information interesting or useful, and reach out to me or my team if you have any questions or would like to discuss further.

Direct Indexing

Direct indexing is a strategy in which you build an investment portfolio to intentionally mimic an index like the S&P 500 or NASDAQ. Rather than just owning a mutual fund or etf that replicates the index, you actually own the underlying securities.


For example, one can purchase $SPY if they want to purchase shares of all of the companies that make up the S&P 500 in one purchase. However, with direct indexing, you would actually purchase all of these different securities individually.


The most obvious benefit to doing this is the fact that the investor won’t be paying the management fees associated with a mutual fund or etf. The second benefit to doing this is that you can intentionally omit certain stocks and securities from your portfolio to reduce risk in certain sectors of the economy, certain companies, etc. The third most beneficial reason for direct indexing is that it allows you to harvest tax losses (an article about tax-loss harvesting is located below) throughout the year, which would not be possible if you simply purchased an etf or mutual fund.


Cornerstone Investment Services implements some form of direct indexing in almost all portfolios that we manage to ensure that we are maximizing our clients’ tax and investment benefits, as well as eliminating unnecessary fees.

Compound Interest

Quite simply, compound interest is when you earn interest on interest. 

For example, if you invest $100,000 in a security that returns a fixed rate of 10% per year, after one year you would have $110,000, after two years you would have $121,000, and so on.


The most famous example that helps illustrate the power of compound interest is the story of the doubling penny. If you took one cent and were able to double it every day for 30 days, on day 30 you would have $5,369,709.12. Yes, that’s 5.4 million dollars. This is why Cornerstone Investment Services always stresses to leave your money invested, no matter how tempting it may be to cash out your profits.


A real-world example of the power of compound interest would be folks like Warren Buffet and Charlie Munger, both are billionaires. Neither of them won the lottery, bought bitcoin at half a cent per share, or anything like that. They simply lived below their means and left their unused cash invested for a really, really long time. This is why many people are able to retire with $1m+ in their 401k or IRA, despite the low contribution limits to these types of accounts.

It is often said that compound interest is the 8th wonder of the world…

Correlation Coefficient

Correlation coefficient is a numerical measure of the statistical relation between a group of variables. In finance, this would include stocks, bonds, commodities, or any other type of investment. This coefficient can range from -1 to 1, with -1 meaning the variables are inversely correlated (they move in opposite directions), 0 meaning there is no correlation at all, and 1 being perfect correlation (the variables move in perfect relation to each other).


In finance, the correlation coefficient is commonly used to determine if an investment portfolio is properly diversified. For example, Apple’s stock is not likely to fluctuate in the same manner as Home Depot’s stock. These two stocks would most likely have a correlation coefficient somewhere near 0, because these two companies are in completely different industries and are influenced by different economic indicators and legislation. On the other hand, Apple and Microsoft are likely to have a correlation closer to 1, because they are similar companies and are in the same industry. You can then apply this same concept to a large investment portfolio by taking the weighted average of all of the investments contained within it and determine its overall correlation coefficient.


When an individual’s risk tolerance, time horizon, and investment needs are taken into consideration, the correlation coefficient should be a major consideration when building their investment portfolio. This ensures that they are not particularly vulnerable to market downturns in any particular sector, and/or are participating in investment vehicles that maximize their benefit given their current situation. 


At Cornerstone, the correlation coefficient is a major consideration when managing a clients’ investments.

Annuities

Annuities are an insurance product that is used for post-retirement income. Usually, when someone retires, they buy an annuity using their 401k and/or IRA accounts. In exchange for forfeiting their entire life’s savings to an insurance company, they are guaranteed income until death. This income is usually about 5-8% of the value of their forfeited retirement accounts per year. So, if you have a $1m 401k, you can exchange that for an annuity that guarantees +/- about $60k per year of guaranteed income until death.

 

There are contingencies that you can add to your annuity that are called “riders”. A common rider added to an annuity is called a period certain rider, which promises that if you were to pass away before a certain date, then annuity payments would continue to your named beneficiary until the end of the specified period. Any riders that are added to an annuity contract will have a drastic negative impact on the guaranteed return rate.

 

There are several reasons why Cornerstone Investment Services has such a strong stance against annuities, from both an ethical and client-value standpoint. The most obvious being that if you buy an annuity, and suddenly pass away a day later, your entire life’s savings and retirement has been forfeited to an insurance company with absolutely no benefit to you or your family. The second most important reason for our stance against annuities is inflation. Referring back to the example above, $60k per year may sound like a lot, but 10-15 years from now it may not be enough to cover just basic living expenses. Since you have forfeited your retirement to an insurance company, you likely will have little to no backup plan to combat inflation.

 

A true financial/investment advisor can craft a retirement portfolio that pays regular income, while also keeping pace with inflation. The beauty of this is that your investments and retirement accounts can continue to grow, pay you regular income, and still be available for you to make large withdrawals when the need arises. An annuity will only accomplish one of these three things.

529 Plans

To begin, we must note that all types of brokerage accounts from IRA’s, to custodial and 401K accounts are essentially the same thing. The only significant difference between these account types is how they are taxed.


A 529 plan is no different. A 529 plan, also known as a college savings account, is a type of investment account where all investment gains are 100% tax free, as long as they are spent on post-secondary education and its related expenses like dorm rooms, meal plans, and transportation. This is similar to a Roth IRA, in the sense that withdrawals are tax free, as long as they meet the criteria set for this type of account by the IRS.


A common question is “Well, what if start a 529 account for a child/grandchild, and they end up not going to college?” Just as with IRA’s and 401k’s, any withdrawals made that don’t meet the criteria for an eligible withdrawal will be taxed at the owners income tax rate, plus a 10% penalty. However, with a 529 plan, you can change the beneficiary of the account, which would be the child who is intended to go to college, to anyone who is in the same family as the original beneficiary, without any penalties. So, if your child/grandchild ends up not going to college, it is quite simple to just change the beneficiary of the account, and still avoid taxes.


Another plus to 529 plans is that they can also be used to pay for trade school, without incurring any penalties.


Lastly, 529 plans can be used for elementary, middle, and high school tuition and related expenses, but there is a cap at $10,000 per year.

Family Offices

Traditionally, family offices are private investment firms that cater to ultra-high net worth families, usually with a $30 million net worth or more. Family offices assist with things outside of just choosing investments and managing money, like identifying tax reduction strategies, diversifying wealth beyond that of what is available to retail investors, inheritance transfer strategies, etc. Most family offices work very closely with their clients in order to educate younger generations on how to manage their family’s wealth, position their liquid assets to mutually benefit from/with their less liquid assets (like businesses and real estate), as well as helping with the acquisition and/or sales of private companies. This is much different from that of a traditional “financial advisor”, who usually does nothing more than choose a couple of mutual funds for their clients’ portfolio, then moves on.

 

More recently, there has been a boom in what is called a multi-family office, or MFO. MFO’s function much like that of a traditional FO, except they serve multiple families, and therefore are able to profitably serve families with a net-worth of less than $30m, since expenses are spread across a larger number of clients. MFO’s usually perform all of the same functions as a traditional FO, and charge for their services using a percentage of assets under management, while a traditional financial advisor charges a commission, plus a yearly “management fee”. Since MFO’s and FO’s help with things that they aren’t directly compensated for (like tax-reduction strategies, wealth transfers, etc.), they usually have a minimum initial account balance to become one of their clients (like Cornerstone’s $100k minimum).

 

Cornerstone Investment Services would technically fall under the MFO category, as we help clients with many different tax reduction strategies, estate planning, and wealth management. We aim to serve the same families for many generations to come, and be their “financial quarterback” in all aspects of life, not just managing their money.

Qualified vs. Non Qualified Dividends

At Cornerstone, we place an emphasis on minimizing taxes for our clients. One area in which we do this is dividends… where we strategically choose different account types for the different types of dividends that your investments might produce… but what exactly does this mean?

By placing non-qualified dividend producing assets within tax-advantaged accounts, and qualified dividends in non tax-advantaged accounts, you are able to reduce taxes in a way that is frequently overlooked… something rarely implemented by a corporate advisor or average investor.

ACAT

ACATS stands for automated customer account transfer service. The purpose of this service is to transfer securities and cash from one brokerage or trading account to another, at another brokerage or bank.


A common misconception is that in order to move a retirement or investment account from your current financial advisor or firm to a new advisor or firm, you will have to sell all of your investments and transfer the cash to a new account. This is not true, as the ACATS system is used to directly transfer securities from one account to another, without triggering any sort of sale, taxes, or fees. Most ACAT transfers are completely free and very easy (your advisor will usually do it for you).


As stated above, the great thing about an ACAT transfer is that you can transfer your securities from one firm to another, without selling them. This helps you switch brokerages or advisors without the hassle of reporting any taxable events or having to keep up with portfolio allocations, as everything in your account will remain identical, other than the firm that holds it.


Pretty much all of the major banks and brokerages support ACAT transfers among each other, however, some small credit unions do not. Usually, if you have an IRA or 401k at your local credit union, and you want to transfer your account to an investment adviser or another firm, you will initiate a traditional transfer of assets, where the securities in your account will be sold, and the cash will be sent directly to the account you are transferring to. Keep in mind, this type of transfer is still completely free and not difficult to do, as they are usually only done for retirement accounts that are not taxable.


Also, you can click here to watch a YouTube video where I explain this information a little more in-depth.

IRA's

 An IRA is a tax-advantaged investment account that is intended to incentivize people to save for retirement. The tax-advantageous feature is that fact that contributions to these types of accounts are tax deductible, so if you contribute $5,000 to your IRA, you would reduce your taxable income by $5,000.


Obviously, there are some constraints to this. Firstly, you can’t withdraw from the account until you reach age 59.5, unless you want to pay a 10% penalty on the amount withdrawn, plus income tax. Second, as of 2023, you can only contribute a maximum of $6,500 per year, and $7,500 per year if you’re 50 or older.


There is a special type of IRA called a Roth IRA. The only difference between a Roth and a traditional IRA is that contributions to a Roth are not tax deductible, but all investment gains in the account are tax free.


Most people, when they retire, move their employer sponsored retirement plan, whether that be a 401k, pension fund, etc., into an IRA. This type of account transfer is tax-free and usually does not cost anything. Moving your retirement plan from your employer to an IRA will give you access to a much wider variety of investment options, and usually saves you quite a bit on administrative and advisory fees. I even have a handful of clients that have moved their 401k’s to my firm prior to retirement, just to take advantage of the benefits of an IRA a little sooner than usual.


As always, please share with anyone that may find this information interesting or useful, and reach out to me or my team if you have any questions or would like to discuss further.

Mutual Funds

Mutual funds are a type of pooled investment where investors’ money is pooled together and invested by the mutual funds’ fund manager, in accordance to their investment policy statement (IPS). For example, if you invest in ABCDE mutual fund, whose IPS says that they invest in high growth technology stocks, then purchasing a share of ABCDE might get you shares of Apple, Microsoft, Nvidia, etc. all in one purchase. This same concept can be applied to bonds, CD’s, and most other types of investments, which are then pooled into a mutual fund and managed by a fund manager. Many mutual funds even have what is known as a target allocation, which would be their desired weighting of stocks, bonds, etc. The most common target allocation of a mutual fund is 50% stocks and 50% bonds.

 

The problem with purchasing a mutual fund is that you must pay the fund manager a hefty management fee. Oftentimes, this fee is not explicitly disclosed to investors. For example, if you invest in ABCDE mutual fund, and the money within that fund earned a 10% return for the year, but that fund charges a 2% management fee, then on paper, you would see that they earned an 8% return. This hidden fund management fee is deducted before you even pay your advisors’ advisory fee… So, they really add up, and most folks never even see it.

 

Cornerstone Investment Services regularly does asset transfers for new clients, where their investment portfolio holdings are transferred directly from their previous advisor to our firm. Unsurprisingly, an overwhelming majority of these transfers show that most advisors almost exclusively use mutual funds. Unfortunately, many advisors lack the expertise and formal education to truly manage their clients’ assets, which is why they are handed off to an outside fund manager for a hefty fee, at the expense of the client.

 

At Cornerstone, we never recommend mutual funds to our clients (unless specifically requested). This is because we have a deep understanding of many different types of investments, how they are taxed, and how they can work together. This not only saves our clients quite a bit of money, but drastically increases their long-term gains.

Smart Money

Many of you have read articles by Forbes and Wall Street Journal that talk about things that the “smart money” is doing, or where the “smart money” is at. 


Smart money refers to money and assets held by institutions like hedge funds, investment advisers, and even accredited investors (individuals with a net worth in excess of $1m and/or an income of $200k/yr or more). Some retail investors (individuals investing money on their own behalf), attempt to identify what the “smart money” is doing in order to determine what they should be doing with their own money. This is often problematic, because the smart money is pretty discreet about their investment decisions, and pretty good at masking their investment strategies.


Usually, large and sudden changes in trading volume can indicate a security purchase or sale by smart money, but identifying a single stock that was purchased by an institutional investor does not indicate what their overall portfolio strategy may be. This is one of the reasons that around 90% of investors/traders lose money…


All of the money and assets under the control of Cornerstone Investment Services would be considered smart money. So, your retirement and/or investment portfolios are in good hands.