We highlight the work of Morgan Housel a lot. Maybe we do it too often, but he’s just that good. We think he’s the best personal finance writer alive. Read this piece (and stick with it to the end) for a new way to think about what really matters as you measure your investment performance.

Click here for what Morgan calls “Lifestyles”.

I taught personal finance and leadership at the high school level for over twelve years. One of my favorite concepts I loved to communicate was the magic of compounding. Although great financial value is derived by recognizing the wisdom of compounding, I believe there is even greater value in recognizing the compounding of wisdom.

Could your financial success be exponentially enhanced by making wise financial decisions repeatedly over a long period? 

In the months ahead, I’ll share important ideas I’ve seen result in positive financial outcomes, and give you the roadmap. The goal? Help you make wise choices at every turn in your own financial road trip. Think of it as an introductory – or “101” – guide to compounding financial wisdom.

Compounding Wisdom on Investing:

Compound Wisdom Actions

• Pay yourself first – invest every time you get paid, even if the amounts seem small, through automatic transfers to either your 401k/403b or personal accounts. 
• Stretch to invest – target 15%-25% of your income to save or invest each year.
• Diversify – spread your investments across multiple asset classes to manage risk.
• Leave nothing on the table – make sure you receive the full match your company offers.
• Look out for Roth – consider the Roth 401(k) option if available in your employer plan.
• Control for fees – you can’t control returns, but you can control investment fees by investing in low-cost funds.
• Keep emotions in check – you invest for the long term, so resist the urge to trade urgently, or time the market.
• Rebalance – keep your investment allocation in balance across asset classes.
• Harvest your losses – take advantage of down markets to accumulate valuable capital losses.
• Be aggressive – as a young adult, don’t fear an allocation that is dominated by equities.
• Look under the covers – many target date funds are costly and may not be appropriately allocated. 
• DIY is difficult – work with an advisor who always works in your best interest (also known as a Fiduciary). 

Actions to Avoid

• Waiting to get started – your most valuable dollar invested is your first.
• Failing to sign up for employer retirement plan – start the first month you are eligible.
• Failing to earn the entire match – one of the only free lunches around.
• Investing in mutual funds with high fees – don’t be seduced by sexy short-term returns that are unlikely to persist.
• Paying penalties – don’t incur penalties by withdrawing from retirement accounts early.
• Abandoning your plan – don’t get sucked into the latest “can’t miss” stock recommendation you hear online or from a friend.
• Timing the market – invest regularly or whenever you can, as early as you can.
• Loving your company too much – monitor the risk you may incur from owning too much company stock.

Feel free to pass this along if you know someone who might benefit from the guidance and look for more from me in this monthly series.

I lead our Hillfolio level client service and planning efforts, learn more about me here and reach out if I can help you put the magic of compounding on your side.

As of today, general equity markets are ~10-20% off their peak, tax rates are relatively low, and there are record amounts of cash on the sideline. This combination of variables presents an excellent opportunity for a strategy known as a Roth Conversion. A Roth Conversion is the process by which you take money in a pre-tax account (e.g. traditional IRA) and convert it to an after-tax account (e.g. Roth IRA). The potential benefits of such a change include:

• Tax-free growth inside the Roth IRA
• Tax-free distributions from the Roth IRA
• Avoiding required minimum distributions until you (or possibly you and your spouse) pass away
• Lower estate taxes
• Lower surcharges on Medicare premiums

For more information on Roth conversions, see the paper we created to provide more detail on this strategy, as well as the pros and cons of Roth conversions.

While this all sounds great, and it is, to receive these benefits, you have to pay ordinary income taxes at the time of conversion. This is a strategy worth considering if you are in a relatively low tax bracket because you recently retired and haven’t yet started receiving your Social Security or taking required minimum distributions. Even if you are in a higher tax bracket, it could still make sense because we could implement other tax strategies simultaneously. If you’d like to know the specifics around this strategy or any different ways we help clients maximize their long-term odds of success, we’d be happy to talk with you.