Instructions:

1. Enter Initial Principal: The amount of money you start with.
2. Estimated Rate of Return (%): The annual return rate you expect to earn on your investment.
3. Contribution Frequency: How often you plan to add to your investment (e.g., monthly, annually).
4. Number of Years: The total period over which you plan to invest.
5. Additional Contribution: The amount you will contribute at each frequency interval.

Example Calculation

Let’s say you want to invest $10,000 in a savings account with a 5% annual yield, compounded daily. You don’t plan to add additional funds after your initial deposit. Here’s how you would use the calculator:

• Initial Deposit: $10,000
• Contribution Amount: $0 (since no additional contributions will be made)
• Contribution Frequency: Ignore this field
• Years of Growth: 1 (start with 1 year, then increase to see longer-term growth)
• Estimated Rate of Return: 5%
• Compound Frequency: Daily

Example Results:

• After 1 Year:
  • Interest Earned: $512.67
  • Total Balance: $10,512.67
• After 2 Years:
  • Interest Earned in Year 2: $538.96
  • Total Interest Earned Over 2 Years: $1,051.63
  • Total Balance: $11,051.63
• After 10 Years:
  • Total Interest Earned: $6,486.65
  • Total Balance: $16,486.65

The hypothetical example is for illustration purposes only, not intended to be a recommendation or tax/legal advice.

Watch our video: “The Power of Creating Wealth Using Compound Interest – Everyone, Especially The Young Should Know”

Learn why compound interest is essential, especially for young investors, and how you can harness its power to grow your wealth. Don’t miss out on this valuable knowledge that can set you on the path to financial success.

Retirement planning can seem daunting, but there are easy techniques to estimate your retirement income. One of these methods is the replacement ratio, a simple calculation that provides valuable insights into your financial situation after retirement. In this blog post, we will explore everything you need to know about the replacement ratio and how to make it work for you. For a more in-depth discussion on this topic, I suggest watching my video titled “Conquering the Fear of Running Out of Money in Retirement.”  (Click Here to Watch)

Understanding the Replacement Ratio

The replacement ratio serves as a valuable retirement planning tool, allowing you to estimate the portion of your working income required to sustain your pre-retirement lifestyle throughout retirement. Generally, it is recommended that you aim for 70 to 85 percent of your pre-retirement income during this phase.

This percentage is derived from various assumptions and factors.

1. Decreased Expenses: You can bid farewell to work-related costs, such as commuting expenses and professional attire.
2. Lower Taxes: Your tax burden may decrease as some retirement income, like Social Security, may not be subject to taxation or may be taxed at a lower rate.
3. No More Retirement Savings: You will no longer need to allocate a portion of your income towards saving for retirement.
4. Independent Dependents: With financially independent children and potentially retired spouses, you will have fewer dependents to support.
5. Debt Reduction: By the time you retire, you may have already paid off significant debts, such as your mortgage.

Pros and Cons of the Replacement Ratio

Similar to any financial planning tool, the replacement ratio has its advantages and drawbacks.

Advantages:

1. Simplicity: It offers an easy-to-understand calculation, making it accessible to a wide range of individuals.
2. Flexibility: The replacement ratio can adapt to changing incomes and lifestyles as time goes on.
3. Visibility: It transforms the abstract concept of retirement income into a tangible goal to strive for.

Drawbacks:

1. Making the Replacement Ratio Work for You: It relies on a standardized calculation that may overlook individual variations.
2. Assumptions: Some assumptions, such as lower expenses and the absence of debt, may not be applicable to everyone. Moreover, predicting future tax policies introduces uncertainty.
3. Timing: It may not be suitable for individuals approaching retirement in the next few years, as their current and projected expenses require a more comprehensive analysis.
4. Rising Costs: Recent trends, including increased medical expenses, long-term care, and the potential for higher taxes, can challenge the accuracy of the replacement ratio.

Calculating your replacement ratio can be a valuable starting point for retirement planning. To simplify this process, I have included my expense analysis worksheet.

You can download it [here]. 

The next crucial step is to determine how you will generate this income. Common sources include Social Security, pensions, and personal savings. It is important to regularly recalculate your replacement ratio to assess if any adjustments are necessary, taking into account factors such as job changes, market performance, and life events.

Remember, the replacement ratio serves as a guideline for those whose retirement plans are five or more years away. As you approach retirement or if you have already retired, it is advisable to conduct a detailed analysis of your expenses and projected retirement income.

As mentioned earlier, the expense analysis worksheet can be extremely useful for this purpose.

Conclusion

The replacement ratio method is a powerful tool for estimating your retirement income needs. While it does have its limitations, when used wisely and in conjunction with professional guidance, it can offer valuable insights and assist you on your journey towards a financially secure retirement. So, take that first step, calculate your replacement ratio, and embark on the path to a worry-free retirement. For more valuable insights on this topic, don’t forget to watch my video, “Conquering the Fear of Running Out of Money in Retirement.“

Between the late-February market selloff due to Coronavirus fears and the record highs achieved in January, I’ve spent a lot of time this year fielding questions about whether it might be time to pull out of the markets. Surprising, right? But both rise in performance and a drop in performance can spark the same kinds of concerns.  

The concept of selling in these situations can be summed up as the “up a lot” and “down a lot” styles of investing: markets are “up a lot” so we should get out before they fall, or markets are “down a lot” so it must be time to get out before it gets worse.

That might sound sensible in general terms, but try to imagine what it would be like to manage a portfolio like this. What does “a lot” actually mean? Which asset classes would make for a “safer” alternative? How much do you sell, and why? In my view, the “down a lot” approach is even more threatening to your financial security: it’s like thinking you might be at risk of an accident and knowing your car has airbags, but deciding to jump out anyway. Psychologically jumping out of a moving car has now become the better choice than the unknown (aka fear).

These strategies are, in my opinion, a dangerous take on active management. But there is an alternative to both.

What makes for good active management?

Most of my readers know that I’m a supporter of active management as a means of mitigating risk and uncovering opportunities. But as I tell my clients, active management is very different from trying to time the market based on past performance or a gut feeling, like the “up a lot” or “down a lot” philosophies.

Rather than making decisions solely on markets rising and falling, I think it’s important to look at how the underlying economic picture is developing. Looking at a broad range of economic indicators can provide a more nuanced view of the economy and where things might be heading.

One of the active managers I turn to for my clients’ portfolios does exactly that: the portfolio managers keep track of about 20 different indicators touching every aspect of the economy, from consumer behavior to geopolitical risk and business outlook. Taken together, these analyses provide a tapestry of information. This can be assessed as a whole to help provide a picture of the potential risks facing the markets.

Using that information, portfolios can be adjusted to mitigate the impact of growing risk in the economy and to potentially help avoid the impact of severe market downturns.

How does that look for clients – and what’s the difference?

In my opinion, is a significantly different approach compared to the way most portfolios are managed.

Most active investment managers will create a core asset allocation and perhaps include a “risk budget,” or some limits to the amount of volatility allowed in the portfolio. A manager might incorporate some economic indicators into this strategy and have a process for tactical decision-making. However, that’s where most of them will stop.

But what I like about the approach I recommend is an important additional step: personalized/customer risk management.

What many of my clients fear above all is another 2008. Taking these kinds of non-normal events (aka black swan events) into account and factoring in an investor’s specific individual needs means that we can seek to better control volatility through any market cycle.

Combined with the broad economic projections we talked about above, this is the next level of active management, one that is both highly tailored to the individual (pinpointing their own risk threshold) and highly attuned to the possible directions of the economy at the same time.

These are the airbags in your portfolio, and when they’re deployed they can help to cushion the blow of an economic turn for the worst.

Engineering versus emotion

Designing a portfolio that works like this is a lot like building a car: it takes engineering, not emotion. The process relies on having the discipline to spot big risks and build a portfolio that can deploy the airbags at the right moment. When that airbag is deployed, you start taking steps to move from riskier assets to more conservative assets, and even towards cash if the road starts to look very treacherous.

In my view, this is so important. It’s very easy to get caught up in the latest news about a single economic indicator or a single geopolitical headlines, including the Coronavirus,. It’s hard not to fall into it: the news is loud and it tends to focus on one big story at a time. The unknown is always the scariest: as Franklin D. Roosevelt said, “The only thing we have to fear is fear itself.”

But the economy is far more complicated than headlines, and it’s important to have a process in place for analyzing it – and reacting to it.

On the other hand, a lot of advisors will invest your money in a long-only model portfolio that won’t adjust when the market turns – and more importantly won’t increase the cash allocation if they are forecasting a recession. Even if they’re nervous, these advisors are unlikely to make any changes to help preserve your savings; you’ll just have to grin and bear whatever the market brings. I think this is also a mistake.

For me, the key is to be responsive to the market without getting emotional. Rather than relying on rules of thumb, build a strategy that can give you all the benefits of well-designed and well-engineered risk management.

For more information on this modern, personalized approach to risk investment management, click here for a more detailed article about my approach.

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Written by Bradford Pine with Anna B. Wroblewska

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

One of the major benefits of being an independent advisor is the ability to evolve and enhance my clients’ investment strategy choices. At the Bradford Pine Wealth Group (BPWG), we’re always on the lookout for more effective ways to offer my clients personalized, risk managed, and tax sensitive portfolios. As an independent advisor, I’m not reliant on any one company to provide me with the best of what they have. Instead, it’s my view that I have the ability to provide my clients with the best of what’s out there overall (oftentimes people think they’re getting this kind of service when they’re actually not).

In any case, after extensive due diligence process, BPWG recently forged a partnership (November 2018) with a large asset management company who will allow me to bring white glove service and a higher degree of customization to my clients’ investment portfolios.

This wasn’t easy to find, as such a high level of service isn’t available at most firms.

Truly individualized asset management can be difficult to offer because it requires expertise, technology, and sufficient infrastructure. That’s why so many investors are put in one-size-fits-all “model” portfolios which they don’t actually realize that they are in, and this also doesn’t meet their specific needs. At the same time, you probably recognize the value in having your preferences and financial needs addressed in your investment strategy.

While my business has always been focused on providing truly individual investment management for each of my clients, this relationship gives me the opportunity to offer so much more. Investors with $1 million in investable assets now have the ability to access a customized and actively managed portfolio, which means a lot – in my opinion, it is a strategy comparable to those used by institutional investors.

Of course, that doesn’t mean it’s for everyone: if you choose to stay in your well-diversified model portfolio you can still receive a lot of the benefits of diversification and market exposure. But here’s why this approach to portfolio management matters so much to me as an advisor – and why I think you should also consider it for your own investments.

What can a personalized strategy offer?

Personalized portfolio management isn’t management by a mathematical model and is not “set it and forget it”. It’s about reflecting the goals, objectives, risk tolerance and preferences of the investor. It is a thoughtful approach driven by a dedicated portfolio management team who I work very closely with on a daily basis – and who my clients can also interact with on a regular basis. This type of investment management can give you greater precision in aligning your investment strategy with your objectives and overall financial life.

Your personalized investment portfolio can:

• Account for the big picture by considering other investments, real estate, and additional assets held outside of the portfolio to ensure that the portfolio fits with and complements other pieces of the puzzle.In short, we don’t just look at the assets we’re managing: we look at them all.
• Control taxes by monitoring the potential impact of every trade every day. Every dollar that stays in a client’s portfolio rather than going to Uncle Sam compounds over time and helps to create meaningful wealth. In my experience, most firms are not willing to put the work in to provide individualized tax management at the client level. 
• Control risk by monitoring and adapting both your investment strategy and each individual position in light of shifting markets.
• Control income generation and distribution by precisely targeting an appropriate balance that works towards each client’s specific goals. We can construct your portfolio to meet your specific income needs.

Your average model or cookie-cutter portfolio simply can’t do this much for you. 

A truly customized portfolio

A personalized portfolio is absolutely within reach for high-net worth investors (those who have $1 million or more in investable assets). At this level of investment, your advisor and portfolio manager can help you build a custom portfolio that mostly employs individual securities, rather than relying solely on mutual funds or ETFs.

Why would you want to own individual names?

The simple answer is that a tailored portfolio utilizing individual stocks and bonds allows for a higher degree of control and precision that is not achievable when in a cookie cutter model or mutual fund.

Using individual securities for the bulk of your investments has important potential benefits: they have no hidden management fees, no risk of “slipping” from their benchmarks, they don’t have capital gains distributions to manage, and they aren’t subject to emotion-driven inflows and outflows like mutual funds.

That makes individual securities very useful as an anchor in your portfolio – and it’s even more powerful when you know that the balance of sectors and asset classes can be adjusted depending on any other securities you already have. Of course, there are risks involved in investing in individual securities that are important to take into account. For some investors, this approach may not be suitable.

At BPWG we complement a foundation of individual securities with mutual funds that target specific strategies, such as international equity and opportunistic fixed income.

A holistic approach to investment management

It’s important to note that your personalized portfolio isn’t just a standalone set of investments: it’s built to account for all of your investable assets to create more coordination in your strategy and more tax efficiency overall. Being holistic means we can also take steps to mitigate potential risks in other areas or to diversify into sectors where you want more exposure.

Over time, we’ll monitor your portfolio to make sure it’s always in line with your goals. We’ll check in regularly to keep tabs on how those goals are evolving and to make sure that you’re clear on what you own and how it’s performing. Behind the scenes, your portfolio management team has support and resources to monitor the economy and markets to track potential risk areas and rebalance your portfolio accordingly. This can possibly help you avoid getting caught in a major recession.

Finally, we make sure to bring other stakeholders into the conversation when appropriate: this might include your CPA or other professional advisors. That way, we can coordinate your risk management and tax budgets/strategies appropriately. This level of communication fosters a relationship where the client, the advisor, and the portfolio management team are always in alignment.

Try it: I think you’ll be convinced

I’ve been in the trenches for over 26 years, and I’ve gained a lot of knowledge over this time. It’s my conviction that this is simply a better way to invest. With a portfolio that considers the big picture, stays aligned with your overall goals and objectives, actively manages risk and taxes, and comes with a team of very experienced portfolio managers who work directly with me and my clients, I believe your probability of successfully meeting your goals and objectives increases significantly. 

Many of my clients have seen a great deal of success building their wealth in their own way and have a unique set of goals and objectives that will change over time. Those evolving financial goals and objectives can’t always be met with a cookie-cutter portfolio, which is why I am very excited to bring a more personalized approach to my clients.

However, don’t just take my word for it. See for yourself: I strongly believe you’ll come to the same conclusion. I have so much conviction, I’ll be shocked if you don’t!  

Written by Bradford Pine with Anna B. Wroblewska

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

Specifically, one of the things that has people confused is the impact of tariffs on Chinese goods and the consequences of renegotiating the North American Free Trade Agreement (NAFTA).

Here’s my point of view on what’s going on and the potential impact on your portfolio.

What’s going on

A lot of the news has been focused on tariffs, which are important for a couple of reasons: first, they change the cost of the products you buy. If there are tariffs on Chinese imports, those imports will get more expensive for you. For businesses, tariffs can affect competitiveness and profitability, which can make business leaders look for alternative ways to manufacture and distribute their products.

So, when the US imposed tariffs on another $200 billion in Chinese goods on September 24, bringing new tariffs to a total of $250 billion, it was significant news. China retaliated with duties on another $60 billion in American products. If the US follows through on threats related to China’s retaliation, tariffs could be imposed on another $267 billion in goods, effectively covering all goods imported from China in 2017. In the meantime, China cancelled continuing trade talks, though both sides have indicated that they are “open” to it.

You could see that openness on September 26, when China walked back tariffs on several imports (without specifying whether they would apply to American imports) to spare Chinese consumers the threat of rising prices and to help offset an economic slowdown. In the face of the trade war, China has been facing a weaker stock market, while the US market has continued to rally.

On the Canadian side, the US and Canada made slow and difficult progress towards the US-imposed October 1 deadline to update NAFTA – late on September 30, the parties agreed to an updated framework for the agreement.

I think the negotiating process with Canada has exemplified something I said earlier in the year: that the point of all the hoopla is to create a stronger negotiating position. In this case, it seems to have work.

Uncertainty and politics

I believe the same thing is happening with negotiations with China: as the public, we see the political posturing, which is actually part of a larger discussion process. In my opinion, we’re likely to see a resolution with China, too.

In fact, I think better and more sustainable trade agreements are the whole point here. While there are, in my opinion, some problems with the way that we conduct trade with our global partners, on the whole there are gains to be had from having trading relationships. If we can structure those agreements to protect our economy from some of the risks of trade, I think we could be doing ourselves a good service.

Again, what we see in the meantime is the political posturing, the pointed public statements, and the bluffing of public disputes. We don’t really know what’s happening behind closed doors, but it’s my opinion that most of the people involved are hoping to get to a mutually beneficial resolution.

What happens next?

From where I’m sitting, the US is in a great position to negotiate right now because the economy is doing so well. Unemployment is low, consumer confidence is high, and we’re in the middle of a solid economic expansion.

I think that makes it a good time to revisit and revise trading relationships so that we can be on firm footing in the future.

Of course, it’s possible that whether or not the new tariffs stay, there will be short-term challenges and even market volatility. After all, any kind of change in the way that business is conducted will affect investment decisions, manufacturing locations, and any number of other variables.

For example, the ratings agency Fitch suggested that economic growth will slow in the coming year as a result of the trade dispute with China, and we could see other short-term headwinds as well.

But when and if an agreement is reached, I think we will unleash a lot of optimism. As most investors probably know, businesses like clarity – and once they get it, I can see both markets and the economy going higher.

In closing, I have to add an important disclaimer: I don’t have a crystal ball. What we know is what’s in the news and being shared publicly. But based on my experience and the way I’m analyzing the situation, I think there could be a lot of long-term positives from this volatile period. Let’s see what tomorrow brings.

Written by Bradford Pine with Anna B. Wroblewska

Sources:

https://www.bloomberg.com/news/articles/2018-09-24/trump-imposes-next-batch-of-china-tariffs-as-trade-war-escalates

https://www.reuters.com/article/us-trade-nafta/adviser-says-us-close-to-mexico-only-nafta-deal-canada-unmoved-idUSKCN1M11SH

https://www.cnbc.com/2018/09/23/risk-that-all-china-imports-could-see-new-tariffs-goldman-sachs.html

https://www.cbsnews.com/news/why-wall-street-is-ignoring-trumps-trade-war/

https://www.wsj.com/articles/china-announces-more-tariff-cuts-to-spur-spending-investment-1537967930

https://www.wsj.com/articles/u-s-canada-likely-to-reach-nafta-accord-sunday-announcement-is-imminent-1538360025

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

There are a lot of factors involved in this year’s market volatility, but that doesn’t mean it’s all bad news out there.

What’s going on here?

A few of the major drivers of volatility this year have been around economic uncertainty, geopolitics, and what I’ll call generalized fear.

The Federal Reserve has started reining in the generous policies (like low interest rates) that were implemented after the financial crisis, which could have an impact on lending rates both at home and abroad. While the Fed is implementing more conservative policies as a result of a strengthening US economy, there are market observers who worry about implications on other economies – and to the stability of the US economy should our trade relationships undergo significant changes.

As the US renegotiates NAFTA and engages in trade negotiations with China, which have also been somewhat volatile, markets have been constantly trying to predict and absorb the potential implications.

Geopolitics is also a factor. From OPEC statements that led to uncertainty about future oil prices to the complicated situation in North Korea, we’ve seen varying degrees of hope, confusion, and volatility. More recently, political turmoil in Italy brought additional (and renewed) fears about prospects for the Eurozone and even the stability of the European Union itself.

The historical context

Finally, our own political climate could be having an important impact – but not in the way you might think.

Historically speaking, mid-term election years are more volatile than other years. In fact, in eight out of the last nine mid-term election years, the S&P 500 lost between 7% and 20%. Through April 2018, the S&P 500 was down about 10% from the high in January. However, as of this writing, the index is still slightly positive for the year.

If you ask me, that on its own tells you something. Markets don’t like uncertainty: the more there is, the more volatile things tend to become. In mid-term years, the political order could be upended and shift the balance of governance – which could shift the balance of policy and predictability.

But, taken together, all these factors have made for a year where we’ve seen market swings that are more numerous and more pronounced than anything we experienced in the previous two years.

In fact, according to Bloomberg, down days are 24% bigger in magnitude this year than up days, a difference in performance that hasn’t been recorded since 1948. Whether you feel confident about your understanding of what’s going on or not, it’s enough to give anyone pause.

Should you be worried?

All that said, there’s still a lot of good news that sometimes gets drowned out by the bad.

Large companies are doing very well in terms of earnings and activity, and implied volatility going forward is actually pretty low compared to historical averages. While economic growth in the first quarter came in lower than expected, it was still above the long-term average of 2%, and there are indications that second quarter growth will be even stronger.

There could also be important benefits for businesses (and thus investors) thanks to a trimming down of the Dodd-Frank Act, which had put more stringent rules on banks following the financial crisis. I believe smaller and medium-sized banks will now find it easier to operate – and to lend money.

Additionally, with lower taxes on corporations and repatriated profits because of the new tax plan, I believe we’re entering a period where companies will be able to invest in their operations, expand, and grow. This is potentially very good news for investors.

Global economic prospects are also positive. In fact, European markets have been more stable than ours this year as the European Union builds economic momentum.

Here’s what I think

Even if trade tensions continue and even if geopolitics remain challenging, the prospects both at home and abroad are positive. I believe we’re closer to the bottom of this challenging period than to the top, and I think it’s important to look beyond a few months worth of volatility to get a real sense of where we are and where we’re going.

Of course, markets can surprise anyone, and there’s always a chance of a curve ball throwing all our collective predictions off course. But in this situation, I think the numbers speak for themselves. If you have a longer-term investment time horizon and a prudent investment strategy that’s suitable for you, I don’t think volatility should be at the top of your mind

Written by Bradford Pine with Anna B. Wroblewska

Sources

Brinker Reports (provided)

Bad day stats: https://www.bloomberg.com/news/articles/2018-05-29/big-days-are-all-bad-ones-as-stocks-punish-optimists-yet-again

US market vol: https://www.bloomberg.com/news/articles/2018-05-02/global-market-volatility-now-a-made-in-the-u-s-a-phenomenon

Italy: https://www.bloomberg.com/news/articles/2018-05-30/treasury-volatility-reawakens-with-biggest-jump-since-2016

OPEC: https://www.bloomberg.com/news/articles/2018-05-30/oil-snaps-5-day-losing-streak-as-u-s-stockpiles-seen-shrinking

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

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You’ve probably heard about this in the news, and you may be wondering: what is a trade war, and why should I care about the possibility of one?

In this article I’ll introduce you to some of the basics of trade, trade wars – and the arguments for and against protectionism.

Trade war economics  

 A trade war is what happens when countries try to punish each other using trade policy. Tariffs and quotas (a tax) on imports and subsidies on exports are the most common ways that governments influence trade – and they’re also the most common weapons in a trade war.

For example, to protect American steelmakers, the US might impose a tariff on foreign steel. In retaliation, another country might put a tariff on American bourbon. In both cases, the tariff is essentially added to the cost of the final product.

What happens next?

Let’s pretend you own an American bourbon distillery. You sell bourbon for $10 a bottle in a foreign market. If that market imposes a $2 tariff per bottle, it means you either have to eat the cost and get only $8 from sales in that country, or pass some or all of the cost to your customers. If you pass the whole cost through, you’d charge $12 a bottle – which could reduce demand for your bourbon, meaning fewer sales.

In other words, a foreign tariff on your product can have a significant impact on your ability to make sales and stay profitable in that country.

On the other hand, let’s say you’re an American steel producer. In this situation, you could find yourself better off: maybe your foreign competitor is forced to raise their US prices to accommodate the tariff, which means that the market price for steel goes higher – and you take more money home. Perhaps they decide to leave your market altogether, or maybe they just eat the cost of the tariff and become less profitable.

But notice I said you “could” find yourself better off: one of the reasons trade policy is so tricky is that it can be hard to predict what will happen after the tariff is imposed. For example, higher prices could reduce demand for steel as customers start looking for cheaper substitutes.

Another complication is that most tariffs aren’t uniformly applied to all trading partners. In the case of steel, the proposal would affect China but not other imports, so it’s possible that the industry isn’t “supported” enough to really make an impact on local steelmakers.

Finally, tariffs can have unexpected or unintended consequences. A trading partner facing tariffs might decide it’s preferable to fight back rather than negotiate, or you could accidentally affect another domestic industry that you weren’t expecting to. That means supporting one industry could have negative consequences for another, or even on economic growth as a whole.

All of these details and nuances matter in how effective a policy is and what the potential fallout could be, which is part of the reason why markets are so worried about what will happen next.

The benefits and costs of trade

At its core, the idea of free trade is about specializing in the activities that are the most profitable to you. This concept has arguably revolutionized (and globalized) the world economy. 

For example, if the US is incredibly good at building airplanes relative to everyone else, meaning it’s highly profitable for us to do it, then we’ll build more airplanes and someone else will build less (today, Boeing is the largest single exporter in the US in terms of dollar value). If Malaysia is better than the US at producing t-shirts, they’ll do more of that and we’ll do less.

There are benefits to this division of labor: when there are no restrictions to trade, you can have free rein make more profits on what you’re good at while enjoying the benefits of better prices on the things that someone else is good at.

Obviously, we do this all the time amongst ourselves as friends, colleagues, and spouses. For example, you might have an arrangement with your spouse where one of you does the dishes and the other does the laundry. These kinds of natural trades arise because one person might be better at doing a particular job, or because one person finds it aggravating (or costly, in economics-speak) to do it.

With trade, you see something similar on an economy-sized scale.

But that doesn’t mean trade is good for every person all the time. We might benefit as a whole from a highly-profitable aircraft sector and lower clothing prices. But your local t-shirt manufacturer might still have to shut down their factory and find a new job.

That’s one of the costs of free trade, which makes it understandable that people in industries facing a lot of foreign competition feel like they’re missing out.

Balancing the pros and cons

There are many ways to deal with this, and protectionist trade policies are one way. Again, those policies can come at a cost, and it’s part of the policy-making process to figure out what the possible costs could be and whether they’re worth it.

In 2002, President George W. Bush implemented a 30% steel tariff that was rescinded in 2003 because of possible economic effects and the threat of retaliation from key trading partners. As the president’s former Chief of Staff, Andrew H. Card, Jr. put it, “Once the tit-for-tat starts, there are unintended consequences. You don’t know the extent of how everyone else will react.”

It’s not just countries: industries also react, and that can affect both consumers and investors.

Steel prices have already been higher all year with the expectation that tariffs will be imposed. American corporations, including Campbell’s Soup, have weighed in with their concerns, and the Swedish manufacturer Eloctrolux announced that it was putting a $250 million investment in American manufacturing on hold pending more clarity on the decision.

In other words, it can be hard to predict how a policy will impact an economy.

What happens next?

Some have argued that the Trump Administration policies are intended as a negotiating tactic to improve our bargaining position on future trade agreements. I think that might be the case, and that the potential for a real trade war is slim. After all, the US is the world’s dominant economic force, and we have a lot of clout on a number of levels. As a pure negotiating tactic, it could make sense to use this fact to improve the position of key industries in the global market.

I think the idea of tariffs as a form of negotiating has merit based on what the president has said about trade with China. The US does have a large trade deficit with China, and in many cases there’s a mismatch in tariff policies that could be seen to penalize American workers. For example, the auto tariff in the US is 2.5% on imported vehicles versus China’s 25% — an arrangement that was negotiated decades ago, before China had a real auto industry (read more about it here). This is something that President Trump might want to renegotiate – using the threat of tariffs on Chinese imports as leverage.

That’s part of the reason I don’t expect that we’ll go down the path of a real trade war. The economics of trade have been pretty well established at this point: even when another country acts “unfairly,” it’s usually in our interest to foster free trade as a way to help long-term economic growth.

Of course, there is also an argument that this approach could backfire. Europe, Asia, and Latin America have all been actively strengthening their own trading ties in the last year, which could give the US less clout in a dispute. Also, sometimes trade negotiations aren’t just about economics. It’s possible that foreign leaders will find the economic reasons for staying at the negotiating table to be less compelling than the political reasons to retaliate.

So, while the recent threat of trade war might just be a bluff, it’s not surprising that the markets have taken notice. We’ll just have to see what happens next.

Written by Bradford Pine with Anna B. Wroblewska

References:

Reserve currency issue https://www.bloomberg.com/news/articles/2018-03-26/as-trade-war-heats-up-biggest-currency-whales-make-their-move

Steel volatility https://www.bloomberg.com/news/articles/2018-03-22/trump-s-trade-war-wreaks-havoc-on-2-most-volatile-tariff-stocks

Bush tariff costs https://www.wsj.com/articles/SB1046138047996402463

Bush tariff costs, contrasting conclusion https://www.bloomberg.com/news/articles/2018-03-04/lessons-from-2002-show-economic-bang-from-steel-tariffs-was-tiny

Andrew Card interview https://www.washingtonpost.com/news/wonk/wp/2018/03/06/remember-bushs-2002-steel-tariffs-his-chief-of-staff-warns-trump-not-to-do-the-same/?utm_term=.d782d4431382

Steel prices 2018 https://www.marketwatch.com/story/heres-why-the-stock-market-took-the-trump-tariff-announcement-so-hard-2018-03-01

Campbell’s Soup https://www.cnbc.com/2018/03/02/wilbur-ross-tariffs-are-nbd-but-campbells-says-cans-will-cost-more.html

Electrolux https://www.reuters.com/article/us-usa-trade-trump-electrolux/electrolux-puts-250-million-u-s-investment-on-hold-over-trump-tariff-hike-idUSKCN1GE1P0

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

The tax reform bill made significant changes to several parts of the tax code. One of the most talked about (not to mention confusing) applies to the owners of “pass-through” businesses, with a new 20% tax deduction on qualifying business income.

What many people don’t realize is that you can deduct up to 20% depending on your business income and even the type of business you operate. Owners of service businesses will face important restrictions on their deductions.

Given that many of my clients are business owners themselves, I’ve put together some basic information about the new tax deduction and how it might apply to your service business.

Of course, I need to lead with an important disclaimer: I am not a tax attorney or an accountant, and this article is not intended to give tax advice or to replace the advice of a qualified attorney or accountant. Before you make any decisions about your own tax return or business, be sure to seek the help of a professional.

Are you subject to the new rules?

If you operate a business or earn income as one of the following types of entity, the tax law changes could apply to you:

• Sole proprietor

• Partnership

• Limited liability company (LLC)

• S Corporation

One of the key features of these business structures is that you do not have to file a corporate tax return. Instead, you get a K-1 from your company’s accountant or 1099s from your clients and include that income on your personal income tax return.

Now, if you own a service business – that includes many, doctors, lawyers, consultants, financial advisors, athletes – you won’t just get to lob 20% off your business income on your tax return. Depending on your income, you may need to make some additional calculations, or forget about the deduction at all.

Figuring out your deduction

Service businesses are subject to income restrictions on deductions. In a nutshell, if you earn more than $207,500 from your business as a single filer or $415,000 as a joint filer, the new pass-through tax deduction will have phased out completely and you will not receive the benefit.

More specifically:

• If you earn less than $157,500 from your business as a single filer (less than $315,000 for joint filers), you’ll likely be able to take the full deduction.

• If you earn between $157,500 and $207,500 as a single filer ($315,000 to $415,000 for joint filers), you’ll be subject to a scaled phase-out and your deduction will be reduced – talk to your accountant about how to figure out the exact number.

• If you earn above $207,500 as a single filer ($415,000 as a joint filer) and you operate a service business, you won’t be eligible for the deduction.

The word qualified is important. If you earn both wages and pass-through income from your business, you can only take a deduction for the pass-through income.

In other words, the deduction applies only to business income, not wages or compensation. That means if you earn $400,000 in wages and $125,000 in pass-through income, you’ll still be able to take the full deduction on the $125,000.

Start early

Hopefully by reading this you have a rough sense of whether this deduction will apply to you – and how much math you’ll have to do to figure out your potential deduction at the end of the year.

But there are a number of complicated issues that still need to be addressed, especially if you have a complex business, several businesses, or other unique tax factors. In my opinion, the best thing you can do is to start early with navigating the new rules so that you have time to get help, answer questions, and figure out what you need to do to get the most benefit from the new rules.

Also keep in mind that if you do qualify for the pass-through tax break, you may have lost out on others (for example, with state and local tax deductions). That’s why it’s important to put this calculation together with the other updated rules, which may or may not apply to you – this will give you a more complete picture of your 2018 tax position.

In other words, don’t wait to reach out to your tax advisor. It could save you a lot of stress and confusion later on!

Written by Bradford Pine with Anna B. Wroblewska

More information about the pass-through deduction:

Limits to the deduction: http://www.cpapracticeadvisor.com/news/12389903/2018-tax-reform-pass-through-income-deduction-more-complex-than-thought

Calculating your deduction, the simple version: https://www.forbes.com/sites/kellyphillipserb/2017/12/22/what-tax-reform-means-for-small-businesses-pass-through-entities/#1b5a262c6de3

Section 469 issues: https://www.crowehorwath.com/insights/tax-alert/tax-news-highlights-pass-through-entity-deduction-calculation.aspx

Impact on state taxes: https://taxfoundation.org/pass-deduction-wont-flow-states/

AGI: https://www.irs.com/articles/adjusted-gross-income-agi-vs-modified-adjusted-gross-income-magi

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

For early adopters of cryptocurrency, 2017 was a good year: the value of bitcoin rose about 1,500%.[1] Litecoin, another cryptocurrency, recently jumped 73% in less than 24 hours right around the time bitcoin futures became available for the first time, in mid-December.[2]

Of course, the market is changing so rapidly that this article may very well be outdated by the time you read this!

But if you’re considering bitcoin or another cryptocurrency as a possible investment, I suggest you tread carefully. In this article, I’ll answer some common questions that I’m hearing about bitcoin, and I’ll offer a few insights into my perspective about cryptocurrency as both an innovation and an investment.

What is bitcoin?

In my opinion, many of the people who are buying into the bitcoin rush know very little about it, or about blockchain and cryptocurrencies in general. That means they haven’t thought through some of the risks and realities of this kind of investment.

Bitcoin is a cryptocurrency, which means that it’s a digital version of cash that relies on cryptography to protect and verify transactions – and to control the creation of more bitcoin. This system is built in something called blockchain, which is basically a new way of creating and maintaining a ledger of transactions (I won’t get into the creation, or “mining,” of bitcoin here, but it’s part of the system).

Every time bitcoin is created or traded, it’s recorded on the blockchain, which is verified and shared across a network or participants instead of by a single institution, like a bank. Blockchain is special because it’s transparent while remaining difficult to modify. It also runs forever, meaning there’s a record of every single transaction ever made.

For a simple comparison, think of an online message board: everyone’s messages are automatically added and recorded where every other reader can see them. All the messages from the very beginning of the thread are logged and displayed for all to see. However, in a message board you can usually delete or edit your message later on – you can’t do that with blockchain.

What’s it worth?

A recent CNBC headline stated, “It’s Official: Bitcoin is Bigger Than Disney.”[3] In other words, the total dollar value of all the bitcoin out there is greater than the value of a large and recognizable company with assets that you can put a dollar value on.

But an economic argument for what a “reasonable” price is hasn’t been so easy to come by.

Bitcoin isn’t like a Disney: it doesn’t have assets you can sell, and it doesn’t have bonds that provide income which you can buy. It also has limited use as a currency. Bitcoin doesn’t have a history as a reliable or broadly accepted store of value, like the dollar, and its “exchange rate,” or price, has rocketed up thanks to market demand – but not by the economic value of bitcoin itself.

Add to this the reality that about 40% of all bitcoin is held by just 1,000 people.

That makes bitcoin extremely sensitive to the whims of that very small group – and their actions aren’t regulated by securities authorities because bitcoin isn’t a security.[4] Cryptocurrencies in general aren’t regulated, and it’s not clear they could be effectively regulated in the future. The government is not involved yet, and it may or may not get involved in the future – and it’s tough to know how it could affect prices and demand in the future.

When you add all this together, it’s difficult to see how bitcoin could be worth the values it is reaching today. Right now, it’s supply and demand that is driving the price, so there’s no true valuation – or even a valuation process – that you can rely on. That makes me nervous.

So why all the hype?

Is bitcoin worth something? Probably.

Blockchain is pretty widely considered a significant improvement on transaction recording, and the real-world potential for digital currency could certainly be there. The way I look at it is that blockchain is the arms dealer in the war between cryptocurrencies. No matter which one wins – or even if none of them do – in my opinion it looks like blockchain will be here to stay.

I’m not a specialist in either area, and relatively speaking I’m quite a novice. But I’ve been around long enough to know the lasting impact that a new technology can have on financial markets and the world as a whole (do you remember the first “personal computers?” I sure do).

But I’ve also been around long enough to know that when you hear words like “new world order” it doesn’t always end well. There are unforeseen risks and even known weaknesses in the system. Just in December, a South Korean bitcoin exchange, Nicehash, went out of business after hackers made off with an undisclosed amount of the currency, while earlier in the month $70 million was stolen from the Nicehash exchange.[5]

Exchanges can make promises abount making investors whole, but this is an unregulated market – there are no guarantees.

In other words, I think it’s important to understand that “new world order” doesn’t always mean “smooth sailing.” Back in 1999, people were laughing at Warren Buffett for not recognizing the world had changed.[6] Some of the companies founded in those days did end up changing the world, but a lot of good people also lost their life savings in the hype.

What if I really want in?

For those who are determined to be part of the bitcoin rush, I have three pieces of advice.

First, do your homework. Understand the product and learn everything you can about how it’s being used, where the potential lies, and what could impact its price – for better or worse.

Second, don’t invest money you’re not prepared to lose. My typical advice is to cap these types of investments at 5% of investable assets, but even that might be too much depending on your specific financial situation, personal financial needs, and overall asset allocation. If you don’t know what you can lose without impacting your overall financial goals, check in with your advisor.

Finally, prepare for any outcome. In my opinion, this is a “zero or hero” investment: it might work brilliantly, or it might amount to nothing. In these types of situations, where price is driven by demand and where there are few fundamentals to work from, you need to brace for volatility and the potential for heavy losses.

Whatever you do, always do your homework

Cryptocurrency may very well stick around and be a successful innovation, just like the tech sector was. The question is which cryptocurrencies will stand the test of time and go on to be successful – and at what price.

This is notoriously hard to predict. For example, few could have foreseen that MySpace would be eclipsed by Facebook, or that Amazon would grow from online bookseller to retail juggernaut.

In other words, I don’t know what’s going to happen in bitcoin, but what I see right now is a lot of uninformed investors piling in – and very few reasoned arguments for where bitcoin “should” be in terms of value. In my opinion this is a problematic situation to walk into.

My reasoning is simple: I think that when we stop acting like informed investors – or even informed traders – and start believing that something will be the winning lotto ticket, we’re likely to get in trouble.

Are people making a lot of money on bitcoin right now, at least on paper? It sure seems that way. But I’m concerned about all the people who could be left holding the bag when and if the bitcoin rush turns.

Like Warren Buffett, in this case I’d rather miss out on the upside than risk experiencing the downside. You can call it being a dinosaur if you want: I just call it being prudent.

Written by Bradford Pine with Anna B. Wroblewska

[1] Source: https://www.marketwatch.com/story/heres-what-bitcoins-monster-2017-gain-looks-like-in-one-humongous-chart-2017-12-06

[2] Source: https://www.forbes.com/sites/jessedamiani/2017/12/12/litecoin-rockets-ahead-with-a-73-7-hour-bull-run-hitting-9023-growth-year-to-date/#216a02a52bcc

[3] Source: https://www.cnbc.com/video/2017/11/28/its-official-bitcoin-is-bigger-than-disney.html

[4] Source: https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-of-the-market

[5] Source: http://money.cnn.com/2017/12/20/technology/south-korea-bitcoin-exchange-closes/index.html

[6] Source: https://www.cnbc.com/id/26902137 and http://news.bbc.co.uk/2/hi/business/1217716.stm

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

The biggest mistake you can make right now is to think your information is perfectly safe. Even excluding the many corporate hacks that happen regularly, up to 148 million people were affected in the Equifax breach. There are about 250 million people over the age of 18 in the US.

That gives you better than 50-50 odds that your information is out there. If you’re frustrated and angry, I’m with you. I was one of the many who actually paid for Equifax to monitor my personal information, only to have it compromised.

But like I tell my kids: you can get angry about a problem or deny that it exists – or you can roll up your sleeves and do something about it.

Here’s what I’m doing.

Step 1: Deal with your credit record 

The very first decision you need to make is what to do about your credit record. Do you freeze it, so no one can take credit under your name unless you lift the freeze? Sign up for ongoing credit monitoring?

The answer is that it depends on your needs and your trust level. Monitoring is convenient and usually effective. Of course, a lot of people are concerned about giving Equifax the very same information they already failed to protect.

But if you need your credit record to stay open, a monitoring service could be a good solution. Equifax is offering their monitoring service for free for a year, and other bureaus have a monitoring option as well.

You could potentially improve the security of monitoring if you add a free 90-day fraud alert to your credit report. This will give you an extra layer of protection for 3 months because it requires every lender to verify your identity before proceeding with any applications. You may even be able to set up an automatic renewal on the 90-day fraud alert. I have this in place and I think it’s a good combination of simplicity and security.

If you won’t be needing to use your credit report anytime soon, you can also freeze your file with each credit bureau. You’ll likely need to pay for this service.

When a lender has a legitimate request, like a credit check on a car loan, you’ll have a special PIN that you can use to temporarily open the file. You’ll need to know which credit bureau your lender uses, call in to “thaw” your file so they can access it, then freeze your record again afterwards. You may need to pay a fee each time you freeze and thaw your report.

This is obviously a little inconvenient, but it could be the best way to ensure that no one can access credit in your name.

If you want to learn more about identity theft and some of the serious issues that can accompany it, click here to see my 3-minute TV segment on the subject.

Step 2. Set up two-factor authentication on every account that you can

This, in my opinion, is a must. Two-factor authentication notices if someone is trying to log into your accounts from an unknown computer, mobile phone, or tablet. To make sure it’s really you, the system will send a security code to your phone number (or, sometimes, an email address). Once you’ve logged in from a particular device, you can check a box to remember it if you want to, so that you only have to go through these steps once. Some systems, like Gmail, will automatically remember your device after the first authentication.

Two-factor authentication can seem annoying, but it can also prevent someone from getting into your bank account. That’s why it’s important to set it up on any website that you can. Put together a list of all your bank and investment accounts, insurance agencies and credit cards, and then go to this website to learn how to set up two-factor authentication on each one. I have personally also set it up on all my email and social media accounts.

It only takes a few minutes, and in my opinion it’s very much worth it.

Step 3. Add a PIN on your phone number (I’m not talking about the PIN to open your phone!)

Next, close another potential gap in security: your cell phone number.

As noted above, one of the most common features of two-factor authentication is a text message that provides you with a temporary security code. So what if someone else was able to compromise your phone number?

This isn’t a stretch: it’s easy to port a phone number from one carrier to another using only some basic personal information. If someone had that information already and just needed to get access to your security codes… well, let’s just say it’s happened before and it can easily happen again.

Make it harder by putting a PIN on your phone number with your carrier so that it can’t be ported by someone else. Call your phone providers today and make sure you have this extra layer of security in place. It’s an extremely fast and easy way to make sure two-factor authentication always works the way it’s supposed to.

Step 4. Update your passwords

A lot of us are guilty of using the same basic password for all our logins, with a few tweaks here and there. It’s convenient, but it’s also unsafe. Once someone knows part of your password, it becomes a lot easier to figure out the rest of the sequence. This doesn’t just make your password easier to crack: if you reuse your passwords, it gives criminals access to a huge amount of digital information.

That’s why unique passwords are so important. One recent recommendation (you can read or hit the play button next to the title, within this link) on passwords is to forget about complicated letters and symbols, and use long sentences for your passwords instead. So, instead of something impossible to remember, like “P@77yW3N7”, you could try “pattywenttothebank”.  Although in my opinion you should have a different phrase for each login. Reason being, if they hack one website and compromise your password, you don’t want them to have access to all of your sites.

The reason a phrase is better because sentences – very long passwords in general – are harder to crack because they’re long. Each character can be one of 26 letters: a password with 18 characters and no numbers, like the one above, has over 1.5 million possible combinations of letters. If you wanted to (or were required to) add a number or a symbol, your possibilities only go higher. However, for the user, they’re still memorable enough to be useful.

Of course, remembering dozens of different passwords can still be hard. To help you manage, you could use a password manager. Again, it depends on your level of trust: these tools are convenient, but they can also be hacked. Consumer Reports has a great introduction to password managers, including how to get the most value from them and some of the more popular products available.

That’s why some people find it more secure and less of a headache to use a more old-fashioned tool: a pen and a piece of paper. Few hackers are going to make that kind of effort, and you know it can’t be compromised online because it’s nowhere to be found. Just make sure you keep it in a very safe place.

The reality of the modern age  

Hacking is, unfortunately, here to stay. There’s a high probability your information was compromised in the Equifax hack, and it may have been compromised before (check out this site to learn if your email address and site password were involved in other hacks – all you have to do is enter your email address).

That’s why you need to take these basic security precautions.

I’m not a cyber-security expert, and none of these tools or methods are foolproof. But much like the way you lock your doors, set the alarm in your house, or install a password to unlock your phone (by the way, you should have one of those too), these tools provide extra layers of protection that make stealing harder.

That alone is worth a lot.

So don’t wait: take these steps, and start taking control of your information today.

Written by Bradford Pine with Anna B. Wroblewska

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.