How to draft an Investment Policy Statement?

Financial Planning Dentist
  1. Define the investment objectives: The first step in drafting an IPS is to define the investment objectives. This involves assessing the risk tolerance of the trust or family office and determining the desired return.
  2. Establish the asset allocation: Once the investment objectives are defined, the asset allocation strategy can be established. This involves determining the proportion of assets allocated to each asset class based on the investment objectives and risk tolerance.
  3. Develop the risk management strategy: The risk management strategy should be developed based on the investment objectives and the risk tolerance of the trust or family office. The strategy should define how risks will be managed, monitored, and evaluated.
  4. Establish the roles and responsibilities: The IPS should establish the roles and responsibilities of the investors, fiduciaries, and investment managers. It should define who is responsible for making investment decisions, monitoring the portfolio, and evaluating performance.
  5. Evaluate performance: The IPS should include a performance evaluation process that assesses the performance of the investment portfolio relative to the investment objectives. The evaluation should be conducted regularly and used to make adjustments to the investment strategy.

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Kevin Taylor

Tax-smart moves that don’t involve tax deferral

Tax-smart moves that don’t involve tax deferral There are several methods that tax planners can use that are not part of the tax deferral strategy category and that might find new and improved legs as this change happens.   Contribute to your Roth IRA Qualified withdrawals from Roth IRAs are federal-income-tax-free, so Roth accounts offer the opportunity for outright tax avoidance. This strategy looks even more impressive as you can pay income tax at today’s lower tax regime, and mitigate any future taxes that will preserve the gains. Additionally, because the account avoids all capital gains tax this vehicle becomes the most promising to see capital gains on, but avoid the tax consequences of selling those assets. Making annual contributions to a Roth IRA is an attractive option for those who expect to pay higher tax rates during retirement.  Convert to a Roth IRA Converting a traditional IRA into a Roth account effectively allows you to prepay the federal income tax bill on your current IRA account. This account also allows you to see the assets grow tax-free. This method is capable of avoiding ramifications from capital gains and provides the necessary insurance from the rising tax rates. This is the only method that straddles both of the coming complications. Determining the amount to convert (all or partial) should be worked into your financial plan.  Contribute to Roth 401(k) The Roth 401(k) is a traditional 401(k) plan with a Roth account feature added. If your employer offers a 401(k) plan with the Roth option, you can contribute after-tax dollars. If your employer doesn’t currently offer the option, run, don’t walk, to campaign for one immediately. There is likely little cost to add such a program and this might be an oversight on the needs employees should convey to the plan sponsor.  The DRA (Designated Roth Account) is a separate account from which you can eventually take federal-income-tax-free qualified withdrawals. So, making DRA contributions is another attractive alternative for those who expect to pay higher tax rates during retirement. Note that, unlike annual Roth IRA contributions, your right to make annual ‘Designated Roth Account (DRA) contributions is not phased out at higher income levels. Key point: If your employer offers the Roth 401(k) option, it’s too late to take advantage of the 2019 tax year, but 2020 is fair game. For 2020, the maximum allowable DRA contribution is $19,500. Contribute to Health Savings Account (HSA) Because withdrawals from HSAs are federal-income-tax-free when used to cover qualified medical expenses, HSAs offer the opportunity for outright tax avoidance, as opposed to tax deferral. You must have qualifying high-deductible health insurance coverage and no other general health coverage to be eligible for HSA contributions. You can claim deductions for HSA contributions even if you don’t itemize. More good news: the HSA contribution privilege is not lost just because you happen to be a high earner. Even billionaires can make deductible contributions if they have qualifying high-deductible health coverage. Additional Resources for ‘Taxmageddon’ Tax Mitigation Playbook Download Opportunity ZoneOverview

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Investment Bias: Anchoring

Everyone has heard a mantra about first impressions and their lasting impact. That works for investors too. Because our brains thrive on recognizing patterns and the relationship one element has with another. This mental phenomena is called anchoring.  This want for your brain to resort to a reference point and “work form there” is helpful when trying to process new information. But it’s negative when trying divine the “value” of something. Traditionally investors think of an investment as being good or bad, by looking at the point where they bought it. This is anchoring, and backwards looking. Telling me where you purchased a stock tells me very little about its current value. Anchoring bias is the tendency to rely too heavily on, or anchor to, a past reference or one piece of information when making a decision. In this case, the purchase price.  Many studies work with anchoring to prove how the mind works. He’s an example: Take the last two digits of your phone number and answer this questions: A good bottle of wine should cost how much more or less than those two digits?  _ Your digits  _ wine bid The bias has already taken place and caused the brain to focus on the arbitrary number. The impact is done. It should come as no surprise the people with lower phone numbers bid less for the wine as a group, those with higher digits bid more. All come from an arbitrary reference point that contaminates the valuation process.  This happens a lot in investing, a person buys a stock at $10, and the other person buys the stock at $15, the stock has recently dropped from $25 to $20, the person with a $15 entry is more likely to sell then the person at $10. But both are wrong because they use the purchase price in their valuation. The $10 buys may hold too long, and the $15 buyer may sell too soon, but the valuation of the stock should be determined regardless of the entry. The bias has taken its toll on both investors.

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Kevin Taylor

What does the Nasdaq rebalancing mean for portfolios?

News from Reuters about a “special rebalance” happening in the Nasdaq 100 index is making headlines – but what does it mean for investors who use benchmarks and indexes to drive their performance? The Nasdaq exchange operator (NDAQ) is taking this step to reduce the dominance of heavyweight companies that currently account for almost half of the index’s weight. This year, the Nasdaq 100 index has experienced a significant 37.5% surge, largely driven by the remarkable rally in growth and technology stocks. In comparison, the benchmark S&P 500 (SPX) has seen a more modest gain of 14.8%. Companies such as Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), (AMZN), and Tesla (TSLA) currently hold a combined weight of 43.8% in the index as of Monday’s close. However, as part of the rebalance, their collective weight will be reduced to 38.5%. The concern behind this special rebalancing is that these few major names are potentially distorting the overall health of the stock market. The changes in the index will be based on the number of shares outstanding as of July 3. Nasdaq announced the adjustments on July 14, and they will take effect before the market opens on July 24. A special rebalancing like this is part of Nasdaq 100’s methodology to comply with a U.S. Securities and Exchange Commission rule on fund diversification. This has occurred twice before, in 2011 and 1998, the global head of index product and operations at Nasdaq. If the aggregate weight of companies with more than 4.5% weight in the index exceeds 48%, a special rebalancing is triggered. During the rebalancing, this weight is capped at 40%. Microsoft has the highest weight at 12.91%, followed by Apple at 12.47%, Nvidia at 7.04%, Amazon at 6.89%, and Tesla at 4.50%, according to Refinitiv data. The recent surge in Tesla’s shares pushed the aggregate weight above 48%, prompting the rebalance. The article also discusses the possibility of a similar rebalancing in the S&P 500, which takes place when the aggregate weight of companies with a weight greater than 4.8% exceeds 50% of the total index, according to S&P Dow Jones Indices. The changes in the Nasdaq 100 index are expected to impact investment funds that track it, including the popular $200 billion Invesco QQQ ETF (QQQ). The rebalancing will likely require portfolio managers to increase their positions in smaller companies, potentially boosting their share prices. Following the news, Apple and other mega-cap stocks experienced some declines. Apple, which had recently reached a market capitalization of $3 trillion, fell 1% on Monday, while Microsoft, Alphabet, and Amazon also saw declines ranging from 0.7% to 2.5%.

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