Windows 10 and Microsoft’s Earnings

Finance Gourmet on July 29, 2015

I don’t usually do a lot of analysis of company moves. I just don’t have the time, and often don’t have the insight. But, as a freelance technology writer, I spend a lot of time looking at technology and technology companies. Microsoft is rolling out its new operating system called Windows 10, and it has some interesting marketing and PR behind it.

Free Windows 10 Upgrade

The first interesting thing about Windows 10 is that it is free. Well…. kind of… and sort of.

windows 10 free upgradeIf you already own Windows 7  or Windows 8, Microsoft will allow you to upgrade to Windows 10 for free, for up to one year. That is, you have one year from now to upgrade to Windows 10 and get it for free.

Free? How does this make sense for a publicly traded, profit motivated company?

The first thing to understand is that most customers don’t actually upgrade their operating system when new operating systems come out. For retail customers (that is, people who have their own computers that they use and set up themselves) the process of upgrading an operating system is complicated, and unnecessary. After all, if your computer works now, why bother doing something like upgrading the operating system. This is doubly true if you have to PAY money to do it. Remember, the upgrade proposition is essentially, do this long, boring, complicated thing, to get a few new bells and whistles that you don’t really know why you would need them, and pay $150 to do it.

Not a good deal.

In fact, most retail customers only upgrade their computers when they get new ones. So, Microsoft giving away a year worth of upgrades probably doesn’t cost them as much as you might think.

For corporate customers, the story isn’t much different. If you think upgrading your three or four computers sounds like too much work, imagine having to do it to 1,000 or 10,000 or even 100,000 computers. It takes months of planning, thousands of man hours, plus new training for users, and making sure all of your mission critical applications still work. Is it any wonder that over half of all businesses have a least some Windows XP or Windows Server 2003 computer laying around somewhere?

The money factor is even less there. Most corporate customers have annual licenses that cover all of their Microsoft software. In other words, Microsoft already gets money for Windows every year, and that amount is the same whether they customer is installing Windows 7, Windows 8, or even Windows 10.

No More Windows Versions

Since its inception, Microsoft has operated on the model where it would release a version of Windows, and then sell that version for the next several years while it worked on the next version. The distance between versions always seems to be wrong, either too long or too short. The amount of space between Windows 95 and Windows XP was so laughably long that the company abandoned the naming convention with the year, lest the customer be reminded that they OS was years and years old.

The distance between Windows Vista and Windows 7 was very fast because of another problem Microsoft has. Sometimes, the operating system isn’t well received and customers don’t want it. Then, the company is stuck with a product that people don’t really want but it MUST sell. Even worse, is that even if Microsoft fixes it, the name is poison and no one will ever give it another change. Windows 7, for example, is a lot more like Windows Vista than most people will ever know because they never owned Vista. In fact, within the industry, Windows 7 is often referred to as Vista done right.

Which brings us to no more Windows.

The world of computing changes pretty fast these days. You likely have no idea what version of Chrome or Firefox, or whatever that you are running. They continuously update them. The same thing goes for the phone in your pocket. Only techies know what version of Android they have. Apple is pretty much the only technology company left releasing one version of something at a time.

Microsoft will do the same with Windows. Instead putting years of work into an operating system and hoping to get it right, Microsoft will incrementally release new features and improvements. If a better touch screen technology comes along, the company will just add it in, a little at a time. If customers howl, they can back it out, or make it optional. If they love it, it becomes permanent. And so on.

There are a lot of issues that have yet to be sorted out, including how and when corporate America will include various updates, but for the average consumer, the process will probably fade from their view. And, as far as money goes, while Microsoft will lose out on some upgrade money, this new system ensures that they can react quickly enough to the market to avoid another big, money losing turkey of an operating system, and avoid driving users further into the world of tablets, and away from Windows.

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Finance Gourmet on July 21, 2015

The U.S. stock market is composed of thousands of stocks. Of course, when it comes to moving the overall market, some stocks matter more than others. The biggest stocks, those in the S&P 500, and those in the Fortune 500, have some of the biggest impacts on the overall stock indexes. However, in most cases, the news that comes out of those companies is relatively expected.

apple-stock-logoThe exception to this rule are the technology companies. Unlike, say oil companies, or big manufacturing companies, it isn’t always easy to use the economic information surrounding them to accurately predict what will happen, especially when it comes to earnings reports. And, with those same companies forgoing the usual “guidance” that other companies provide, what happens in tech company earnings can be a true market moving surprise.

This week saw a negative report from industry titan IBM. IBM is not only a household name technology company, but it is also the second highest weighted component in the Dow Jones Industrial Average, commonly referred to as The Dow. The company itself is down over 5 percent so far today, and the Dow is down over 1 percent, or more than 150 points. (Also dragging on the Dow is United Technologies, which, is actually not a tech company.)

The interesting part comes tonight after the closing bell when perhaps the most watched of all technology companies, Apple, reports their earnings. Microsoft and Yahoo report earnings tonight as well.

What gets interesting is that with IBM’s report disappointing, there is cause to believe that maybe other tech companies will disappoint as well. Indeed, all three of the above are currently trading down. If tonight’s reports are all negative (or at least not as positive as Wall Street would like), you can expect a pretty major rout in the markets tomorrow. On the other hand, if all three come in decent, then you can expect a pretty major recovery with everyone assuming that the industry is fine, and IBM was just the only one with a bad quarter.

If they are mixed, that’s where it gets really tricky.

The reality is that as Apple goes, so goes the tech market, at least when the direction is down. A bad report from Apple sends the markets down, no matter how well Microsoft and Yahoo do. However, a good report from Apple, coupled with just one other good report is enough to pull things up.

If the mix comes in good for Apple, but the other two down, then you can expect the broader tech market to end up down, while Apple itself rises. The idea here will be that Apple is a good company, but tech in general is currently in trouble.

The good news is that expectations for Yahoo are low, so even if it comes in weak, that can still be fine as far as Wall Street is concerned. So, basically, what the stock market looks like tomorrow all comes down to Apple. The company offers almost no guidance, so everyone expects essentially more of the same. If that happens, fire up your sunshine playlist. If not, break out that emo playlist you haven’t used in a while.

As always, long-term investors need not concern themselves with these relatively volatile short-term stock price movements. However, heeding that advice is often easier when one knows what is coming, and why the behavior works like that.


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Finance Gourmet on July 17, 2015

Every so often, tax loss harvesting seems to show up in various marketing literature like it was just invented. The funny part is that tax loss harvesting has been around for a very long time. In fact, it’s less important today than it was before Bush the Second cut long-term capital gains tax rates to 15 percent. So, what is tax loss harvesting, and how is it important to the average investor.

Understanding Tax-Loss Harvesting and Capital Gains

tax loss harvestingTo understand tax loss harvesting, you first have to understand capital gains taxes. Income taxes apply to most forms of income. However, the profits made on the sale of certain types of investments — for our purposes, stocks, bonds and other equities — are taxed differently. These taxes are known as capital gains taxes. The easiest way to understand it by example.

If you buy $10,000 worth of Apple stock and then sell it a few years later for $20,000, then you have made a $10,000 profit. This profit is a form of income known as capital gains. The original investment amount, or purchase price, is known as the basis. The basis may be adjusted depending on several factors, but that is outside the scope of this article. You only pay taxes on the difference between the basis and the sale price. In our example, taxes are owed only on the $10,000 profit, not on the whole $20,000 sell price.

There are few important details to grasp here. First, know matter how much paper profit you have in an investment, it is not taxes until you sell. So, even when your Apple stock is worth $18,000, you owe no taxes until you sell the investment. Note this is different from the dividends the stock pays, which are taxable in the year they are paid, even if you reinvest them.

Capital gains are taxed at one of two rates. If you hold the investment for less than one year, this is called a short-term capital gain. Short-term capital gains are taxed as ordinary income. In other words, if you are in the 30% tax bracket, you would pay taxes at the 30 percent rate.

If you hold the investment for longer than one year, then it is a long-term capital gain. Long-term capital gains are taxed at a fixed rate of 15%. (Technically, it can be lower for certain lower incomes.) This is how wealthy people pay such a low tax percentage. If most your income comes from investments, then most of your income is taxed at 15 percent, no matter how high your income actually is.

The final thing to understand about capital gains before you can understand tax-loss harvesting is that you can offset capital gains income with capital losses of the same type. Again, and example is the quickest way to understand.

Let’s say that you make that $10,000 profit on your Apple investment. Now, let’s say, that in the same year you sell your Dubious Company stock. If you bought Dubious Co. at $20,000 and your holdings are worth $12,000 when you sell, you have lost $8,000. That amount is a capital loss.

Now, you can offset that $10,000 capital gain with the $8,000 capital loss, and now you will only owe taxes on $2,000 of capital gains.

Tax Loss Harvesting Defined

So, what exactly is tax-loss harvesting. In the example above you happen to have $8,000 of losses to offset your $10,000 in gains. If you did that intentionally, specifically for the purpose of generating a loss to use to offset your gains, then that is tax-loss harvesting.

Generating losses in order to offset gains is tax-loss harvesting. IRS rules prevent you from buying an investment that is substantially the same for 30 days. In other words, you can’t sell IBM shares, and then buy back those shares withing 30 days, or the loss doesn’t count. This is called a wash sales and is disallowed as a capital loss.

That’s it. That’s all it is.

However, most investment advisors, or financial planners add the next step, which is to buy a replacement investment that is similar enough to the same to keep your portfolio invested like you wanted, without triggering the wash sale rules. This is very easy with mutual funds or ETFs, and pretty easy with most stocks, assuming that you are managing your portfolio as a whole.

Who Needs Tax-Loss Harvesting

Now we are ready to really understand tax-loss harvesting and how it works, and why it sounds so great on paper, at least.

Individual Stocks

If you only own stocks that you want to own because you have done your research, and you really believe in those specific companies, then tax-loss harvesting probably may not make much sense at first. If you really believe in Yahoo stock, then selling it for tax purposes doesn’t make sense. (In fact, many financial experts advise clients to ignore tax ramifications and just do what is right for your money while letting the tax chips fall where they may.) The reality is that unless something major happens during those 30 days, the price likely won’t have moved that far from your sell price.

Most professional tax-loss harvesting happens away from a company’s earnings announcements for this reason. You won’t want to not own your shares of Yahoo when the company announces it tripled its profits. In fact, if you ever notice your financial advisor harvesting tax losses at earnings time, you may question their competency.

Mutual Funds and ETFs

The easiest tax-loss harvesting is on mutual funds or exchange-traded funds. It is very easy to replace most funds or ETFs with something similar. In fact, with index funds, it is very easy. Even for tax purposes, a Vanguard S&P 500 index fund is not the same thing as a Fidelity S&P 500 index fund. So, if you have a loss on one, you can sell it, bank the loss, and then buy a different fund, or better yet, an S&P 500 ETF. You still have essentially the same investing exposure during those 30 days.

Do You Really Need Tax-Loss Harvesting?

As with many financial services and products, the science and finance behind tax-loss harvesting is legitimate. However, that doesn’t mean that is is useful or helpful for all investors. In many cases, it is nothing more than a gimmick, a way to make one investment advisor or another seem special, and not something that will actually help your finances.

When Tax-Loss Harvesting is Not Worth It

You do NOT need tax-loss harvesting in non-taxable accounts, because you do not pay capital gains taxes on those funds, ever. This should go without saying, and very often, it does. If your investment portfolio mainly consists of an $800,000 401k rollover account, tax-loss harvesting is not useful for you.

Commissions and fees can be generated by the selling and buying of investments to generate tax-losses to harvest. This makes tax-loss harvesting a losing proposition for most accounts where you pay a commission, a mutual fund load, or other fee. This is especially important to watch for with mutual funds.  Always get the full cost of the transaction in writing ahead of time. Remember to compare it not to the amount of the loss, but the amount of the tax it will save (roughly, 15% of the total loss.)

For example, if you have a $50,000 investment in a mutual fund that you can sell to generate a $10,000 loss, the the tax savings is roughly $1,500. If you have to pay a 3% load to buy your similar mutual fund, you’ll pay $1,500. In other words, you won’t actually save any money. In general, then tax-loss harvesting works best for people paying a deep discount commission on trades (like those $11.95 trades), or for those who pay an annual fee. If you are paying 1% of your total investment portfolio (and no trading charges) then the cost does not change.

Another factor is that in order for tax-loss harvesting to be worth it is that you have to have enough losses, and enough gains.

Remember capital gains losses can only be used to offset capital gains, except for $3,000 worth. In other words, if you have $20,000 of losses an no capital gains, you can only deduct the $3,000 in that year. While you can carry forward losses to future years, you need to decide if the future possibility of a tax offset is worth the expense and effort now. Even if you have a lot of taxable money invested, if you aren’t selling you aren’t generating gains, and those losses aren’t necessary.

As always, remember to calculate not only the percentage, but the real dollar amount. Tax-loss harvesting isn’t usually worth it until you are talking about a taxable invested portfolio of well over $100,000, with gains over $10,000. (Remember, your 401k and IRAs are already immune from capital gains, so don’t count them.)

In the end, tax-loss harvesting isn’t for basic investors with less than at least six-figures in taxable investment, except in extreme cases. If your advisor is pushing the concept for you ask him to compute a dollar amount (not a percentage) and see if its really worth it in your case.

If you do have a large portfolio and your capital gains taxes are taking a bite, then do check with your advisor to see what they are (or are not) doing about harvesting tax losses for you.

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Finance Gourmet on July 9, 2015

If you’re an American over the age of 10, you know that the U.S. media loves a good, dramatic story, especially one with some “scare” factor. The financial press is no different. So, it can be difficult to know just when a scary financial story is a legitimate concern, and when it’s just the media trying to pump up a story.

Greece and the Grexit

The longest running financial doomsday story involves Greece. The problem in Greece is that it has a huge deficit and no real way of paying it. Just like the U.S. having a deficit isn’t so much of a problem, as long as you can service it, that is, keep paying the bond holders the interest they are due, and the principal back when the bonds mature. Greece has a lot of economic differences from the United States, so comparisons aren’t very accurate. Whenever you hear someone talking about America becoming another Greece just understand that either they don’t understand what they are talking about, or they are trying to make a political point of some sort regardless of accuracy.

greece flagThe big problem for Greece isn’t actually just its deficit. The thing that is causing the trouble is that Greece uses the Euro for it’s financial currency. Typically, if a country like Greece ran a huge deficit that it couldn’t pay back, it’s currency would become less valuable. This would cause imports to be more expensive, but encourages tourism and other inflows from other countries with different currencies. However, because Greece is part of the Euro, its money is Europe’s money. Greece isn’t big enough economically speaking to cause real devaluation of the Euro, so it is stuck.

For years now, the other European countries have been propping up Greece via a variety of methods. In exchange, they want Greece to be more like them (fiscally conservative) and cut expenses and do a better job collecting taxes. The wisdom of this is for another discussion.

Long story made short, earlier this year, Greece elected a government that is based on a promise to not make those cuts and tax increases.

What Does Greece Crisis Mean for U.S. Investors?

So, what does all of this mean for the average American?

In a word, nothing.

Greece has a very small economy. It’s about the same size as the economy of Connecticut. Most importantly, it isn’t linked very much to the United States. Most economic transactions occur in the form of tourism (mostly us going there, so there is no down effect if they stop coming here), and things like olives. Not exactly foundations of the U.S. economy.

Europe, on the other hand, is a pretty big deal to the U.S. economy. However, unlike a few years ago, most of the other European countries have righted the ship and if Greece goes down, it won’t take Europe with them.

The entire issue then is one of stability. Financial markets don’t like instability and so, whenever more dramatic news emerges from Greece, you will see a one or two day blip in the U.S. stock market. The danger to U.S. investors is that there are growing fears that the U.S. stock market is overvalued and that a correction is due. Typically, corrections don’t just happen out of the blue, but rather are started by some, often unrelated, event. In other words, if a few days of market downturn based on Greece instability were to precipitate a correction in the U.S. stock market, that would be a real issue for U.S. investors, at least in the short term.

China Stock Market Meltdown

Unlike Greece, the Chinese economy is actually very big. Unlike Greece, the issue in China is not one of debt or inability to pay it. Also, unlike Greece, China has its own currency.

So, what is the problem in China?

stock market down


Much like in the U.S. in the past, the Chinese stock market ran up in what was widely regarded as an unsustainable bubble. Eventually, bubbles pop, and that is what is happening in China. The only reason it’s even news is because it happened so fast.

Even then, the Chinese stock market, for all of it’s free fall, is still higher than it was on January 1st of this year. In other words, this isn’t stock brokers jumping out of office towers.

For virtually all U.S. investors their only exposure to China is in mutual funds with an international component. In the case of diversified funds, the effects will not be drastic. If you happen to have got into a China, or even Asia-only mutual fund, then things probably look pretty scary for that one investment. This is a good lesson in diversification. There is no reason for a U.S. investor to have a huge portion of their finances exposed to China.

In the end, this crisis, like most others, is a short-term issue to the U.S. stock market, where what happens depends, over a 12-month or more period at least, entirely upon what is happening in the U.S. economy where low interest rates, coupled with painfully slow, but real, employment gains are moving the economy in an upward direction. That doesn’t mean a correction isn’t coming, it just means that if one happens, it was already deserved before either China or Greece happened.

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Finance Gourmet on July 1, 2015

When you sell certain assets or investments that have appreciated in value, you may owe taxes on the increased value. The difference between what you paid for the investment and the amount you sold the investment is a capital gain and it is subject to capital gains taxes. However, if you lose money on an investment you can deduct the capital loss.

2015 Capital Loss Deduction

When it comes to taxes, the more tax deductions the better. And, when you lose money on an investment, a tax deduction can take out a little of the sting. However, deducting capital losses can be tricky. Get the rules straight to save on taxes and avoid making mistakes.

Just like with capital gains, there are two kinds of capital losses, short-term capital loss and long-term capital loss. Generally, a long-term capital loss occurs when you have a loss on an investment that you have held for at least one year. Conversely, a short-term capital loss occurs when there is a loss on an investment held for less than a full year.

The tax deduction for capital losses is limited to $3,000 per year against regular income. That means that you can get a full deduction of up to $3,000 each year, regardless of whether you have any other capital gains. (You can each have up to $1,500 for the year if you are married filing separately.) Capital losses are not a itemized deduction, so they can help even if you are taking the standard deduction.

Offset Capital Gains with Capital Losses

However, you can offset an unlimited amount of capital gains with corresponding capital losses. For example, if you had an investment that gave you a $10,000 capital gain, and you have another investment that generated a $10,000 capital loss, you can offset the entire $10,000 gain. That means that you do not pay any capital gains taxes on the $10,000.

There is a catch, however.

In order to offset gains with losses, the type of loss must match the type of gain. In other words, in order to offset long-term capital gains, you must have long-term capital losses. You cannot use a short-term capital loss to offset a long-term capital gain, or vice versa.

It does not matter if your capital loss is short-term or long-term when it comes to deducting the $3,000 above and beyond any investment gains that you have for the year.

Capital Loss Carryover

If you have more losses than gains to be offset, only the first $3,000 of the losses can be deducted from ordinary income. However, the remaining amount is not lost. Rather, losses can be carried forward to be used on future year’s taxes.

Revisiting our example, assume that you have a $10,000 capital gain for the year, but you have $20,000 in capital losses. You can completely offset the $10,000 gain, meaning you owe no capital gains taxes this year. However, you can only deduct $3,000 of the remaining $10,000 of losses against your regular income. That leaves $7,000 of loss that can be carried forward to next year’s 2016 taxes.

In the following year, you can use the entire $7,000 to offset any capital gains. If you have no gains, you can still deduct the $3,000 allowance against ordinary income for the year.

So, if the following year you have $5,000 in capital gains, you can offset all $5,000 and still use the remaining $2,000 in losses as a deduction against ordinary income.

How To Claim a Capital Loss

Capital gains and losses are calculated and reported using Schedule D of Form 1040 and entered on Line 13 of Form 1040.

What is most important about capital losses is that you remember to carry them forward. Users of tax software like Turbo Tax or Tax Cut have this data automatically carried forward by the program if you import last year’s tax returns when you start filing your taxes with the software. However, taxpayers who do their taxes by hand or that switch accountants or tax software need to ensure that their previous year losses are carried forward. Large losses can take years to use up if there are no corresponding large gains to use them against.

Many people have big capital losses to use thanks to recent market volatility. Even if you have tens of thousands of dollars of losses or more, be sure to continue to carry the amount forward. Some day, you’ll make money on an investment and those losses will keep you from having to pay taxes on your gains.

Capital losses can be carried forward forever with no limit on how long they may be used.

Be sure to also understand short sales for capital gains.


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Finance Gourmet on June 24, 2015

A researcher published some data showing how the individual states are doing recovering jobs lost during the recession. The highlight is that 15 states have not recovered all of the jobs lost during the recession. The interesting part is what that might mean.

(Note: this is from total nonfarm employment and counts both part-time and full-time jobs)

state employment recovery map

The 15 states that still haven’t recovered all the jobs lost during the recession are:

  • Alabama
  • Arizona
  • Connecticut
  • Illinois
  • Maine
  • Mississippi
  • Missouri
  • Nevada
  • New Jersey
  • New Mexico
  • Ohio
  • Rhode Island
  • West Virginia
  • Wisconsin
  • Wyoming

If your life is all about politics, I’m sure you’re rushing to count Democrats and Republicans as a way to “prove” that your side is the best side. Sorry, but that shows little understanding of economics. But, if you insist, there are more Republican governors than Democrat governors on the list. Of course, to be fair, a lot of those states are the so-called purple ones.

A more realistic analysis shows some obvious ones.

Nevada and Arizona were the poster children of over-heated housing markets that collapsed, so it’s natural, they are one the list. On the other hand, Florida was hit pretty hard by the housing bubble but is not on the list.

I can’t honestly remember the last time Alabama or Mississippi had job growth, and part of the issue in Ohio and Illinois is still the fact that manufacturing isn’t what it once was and those states still have a long way to go toward overcoming that.

Another interesting looks shows that none of the states with higher minimum wage laws are on the list either. Maybe raising the minimum wage doesn’t wreck the economy of a state, or maybe it just takes longer.

North Dakota is still a high job growth state overall, despite the fact that the employment picture there is worsening, proving that when it comes to an economy highly dependent upon oil jobs, it isn’t local government, so much as global oil markets that determines how well the job picture looks.

Wisconsin, where Democrats bemoaned Governor Scott Walker’s dismantling of union power, is on the list, but in all fairness is so close to net zero that it actually shows up on the graph in the zero to 2.50% category.

Colorado, Utah, and Texas are all doing very well. None of those states participated much in the housing bubble that smashed the economy, so that probably helped as much as any policy decisions, although neither did Wyoming and it’s very negative.

Of course, the major factor missing from this whole exercise is that there is no data about the KINDS of jobs we are talking about here. For these purposes, a job is a job, so a minimum wage job counts the same for recovery purposes as a high-paying job. Also, part-time jobs count the same as full-time jobs in this analysis.

Also, a deeper look at the trends, shows that every state except West Virginia has added jobs since May of 2014. That means, even where the full recovery isn’t complete, things are still moving in the right direction, and Nevada had one of the largest percentage gains. Maybe that housing bubble burst is finally working its way through.

The reality is that the U.S. economy is too big to be shrugged off by individual states. If America is doing well, most of the states will be too, and vice versa. Still, it’s always interesting to get a look at data.

If construction is any indicator, things in Colorado are going to be booming for a while.


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Finance Gourmet on June 15, 2015

Recently, I did a review of the Acorns app. If you are not already familiar with the Acorns savings and investing app, you should read that for an introduction to using Acorns first.

Are Acorns Investments Good Portfolios?

The idea of the Acorns automatic money savings app is that it rounds up all of your transactions and automatically invests that money for you. There are some nuances about how Acorns works you should understand first. Money is only transferred once the amount of the round-ups is at least $5, and only happens once per day.

Before we get too in-depth here, it is important to remember a few things. First, when you get started with Acorns, we are talking about a very small amount of money. That means that as far as real dollar amounts go, the difference in percentages won’t be big. For example, if you have $100 in your Acorns account the difference between 10 percent and 8 percent (whether up or down) is just $2. In other words, this not something to wring your hands over, especially in the beginning.

Where Does Acorns Invest Money?

Of course, the whole point is for your automatic savings to add up and grow over time, so it is necessary to understand where Acorns is investing our money. So, let’s take a look.

Acorns has five different portfolios that it uses and automatically re-balances for all users. This is a typical robo-advisor setup. The Acorns app helps you pick which portfolio based on various risk tolerance questions, or you pick yourself. The five portfolio types are very traditional, even if what is in them is not. The five Acorns portfolios are Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive.

These portfolios are pretty typical as far as the stock to bond ratio is concerned.

  • Aggressive Portfolio – 90% stocks / 10% bonds
  • Moderately Aggressive Portfolio – 75 / 25
  • Moderate Portfolio – 60 / 40
  • Moderately Conservative – 50 /50
  • Conservative 40 / 60

What Investment Does Acorns Use

One of the interesting things about Acorns investment strategies is that all five portfolios use the same six investments. All the investments are index-based Exchange Traded Funds, or ETFs. All six ETFs are regular, publicly traded ETFs. They are not specific to Acorns. In other words, you can look up the prospectus, history, and ticker symbol on any finance website or tool you like.

The six Acorns ETFs are (Name, Ticker Symbol, Discussion):

  • Vanguard S&P 500 ETFVOO – The bread and butter of stock investing, this is an index-based ETF that attempts to replicate the SP500 index by investing in large U.S. companies.
  • Vanguard Small-Cap ETF – VB – This is the small-cap stock ETF for Acorns. It invests in small U.S. companies. Specifically, it is designed to track the CRSP US Small Cap Index.
  • Vanguard FTSE Emerging Markets ETF – VWO – This is the international component of the portfolio. Specifically, this portfolio invests in a “sampling” of companies based in so-called emerging markets. The largest investments are in China, Taiwan, Brazil, India, and South Africa.
  • Vanguard REIT ETF – VNQ – This fund invests in Real Estate Investment Trusts, or REITs, and is designed to track the MSCI US REIT Index. A REIT is a way to invest in the real estate market through stocks. So, assuming everything goes according to plan, REITs would go up when real estate is going up, and vice versa.
  • iShares 1-3 Year Treasury Bond ETF – SHY – This is the low-risk investment in the line-up. Nothing lowers your risk like short-term U.S. Treasuries. There is probably a way to take the riskiest investment in the world, combine it with short-term Treasuries and come up with a Moderately Conservative portfolio. This fund is essentially one-step riskier than a money market fund.
  • PIMCO Investment Grade Corporate Bond Index ETF – CORP – This ETF is the “bonds” part of the Acorns investment portfolios. These are investment-grade bonds (not junk bonds) and is designed to track the BofA Merrill Lynch US Corporate Index.

So are Acorns investment strategies good?

Acorns Investments Review Good, Bad or Ugly?

As I’ve written multiple times before, when it comes to investing, what matters far more than investment selection is the amount of money you invest, and how long you keep it invested. That is true here as well. Remember, compound interest takes a long time to work its magic. The good news is that the whole point of the Acorns app is to keep you investing steadily over time. That is going to be a far bigger component of your long-term investing success.

That being said, the investments are solid, if somewhat unusual.

First, this is all index investing. That means these investments are cheap. Fees won’t be eating into your returns, and you don’t have to worry about “beating the market” since the point of index-based funds and ETFs is not to beat the market, but rather to BE the market. If the market is up 7 percent, so are you. This is good.

Second, the diversification in the Acorns portfolios is good, but not traditional. Again, while we are talking about hundreds or thousands of dollars, it really isn’t material, but if you ever did end up with a lot of money in your Acorns investment account, you would want to ensure that you compensate, if necessary, in other areas of your portfolio.

Typically, a financial advisor or financial planner would divide up your money in stocks and bonds to achieve a portfolio that matches your risk tolerance. At most major brokerages or investment firms, that would entail mutual funds or ETFs just like with Acorns. The difference is in two major areas, and one minor one.

First, most diversified portfolios include some exposure to international stocks, and so does Acorns. However, Acorns only includes emerging markets, that is economies that are still developing. That means your Acorns portfolio does not include any investments in Europe, Japan, or Australia. This isn’t necessarily good or bad, but it is different. Since emerging markets are more volatile this choice means dialing back the international exposure quite a bit for the more conservative settings.

Second, the inclusion of a REITs part of the portfolio is non-traditional as well, at least one this big. The Aggressive portfolio, for example, includes 30 percent invested in REITs. The theory is that real estate is a non-correlated asset to the stock market and therefore might do well when stocks are declining (or vice versa). The catch here is that REITs are still stocks, and stocks, even real estate stocks, don’t fully decouple from the correlation of the markets. If there is one area that gives me pause about how good the Acorns portfolios are, it is the large allocation to REITs.

Here is my point. Below, you’ll see the annual performance of the specific REIT ETF that Acorns invests in. While the size of the moves are different, there is a lot in common with the ups and downs of the stock market. Part of that is that good economy is good economy (and in 2008 vice versa).


The next image is a similar chart to the above for an S&P 500 ETF. In this case, this is for the SPY S&P 500 ETF. This is for example purposes because the actual Vanguard SP500 ETF used is not old enough to have the years before 2011 included. So, there are some differences but a lot of the overall direction and magnitude are in the same ballpark.

acorns investments sp500

Here is what we are looking at. The REITs are indeed different, but often move in the same direction, with the very notable exception of 2007 when real estate was falling apart, but the stock market hadn’t figured that out yet. Obviously, there is some value in including REITs in a diversified portfolio, but the 30 percent number seems an odd way to push for more aggressive returns. Let me be clear, this is not wrong or bad, just not traditional.

The final, smaller difference is the lack of a mid-cap investment option. Perhaps this is where that extra REIT allocation is coming from. Mid-cap stocks often end up being the best performers over the 10 year period, partly because they are bigger enough than small-caps to not have such volatile swings (especially in down markets) but smaller enough than large-caps to have plenty of room to grow.

Again, this isn’t wrong, but the typically financial advisor will send you home with a portfolio that has a mid-cap option (maybe split into mid-cap growth and mid-cap value) and with a smaller amount allocated to REITs. In some ways, this difference in portfolios offers even more diversification for your overall assets.

In the end, the Acorns investments are solid portfolios. They are built using low-cost ETFs which is important both for you the investors, and for the company. For you, the anchor of higher fees isn’t weighing down your returns. For Acorns, the ability to get into and out of ETFs cheaply is important to its low-cost, no minimums fee structure.

Finally, Acorns automatically rebalances your portfolio for you. This is huge, and maybe more important to your long-term success than getting the particular investments or percentages just right. The reality is that if you look at a chart of which asset class performed best each year, you’ll see that it varies greatly. Sometimes, small cap stocks are the big winners, and then the big losers in the next year or two. If you don’t rebalance your portfolio, you end up just riding the wave up and down. However, with rebalancing, you pull money out at the top, and put it in at the bottom. This is how to buy low and sell high without ever knowing anything about stocks, and like everything with Acorns, it’s automatic.

Acorns rebalances your funds by taking your incoming contributions and investing them where you are low. More importantly, it will actually transfer funds between investments quarterly if things get more than 5 percent out of balance. That means that Acorns will be selling after that 30 percent run up to lock in some gains.

If you like the idea of automatically investing over the long-term to build up a nice portfolio, then the Acorns portfolios are going to be just fine for achieving that.




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Finance Gourmet on June 9, 2015

The U.S. national deficit marked up some interesting news coverage these last few months. First up, was news at the total national debt hit $18 trillion earlier this year. Then, seemingly different news when a May report showed that the U.S. ran its largest budget surplus in seven years during April. What does all of this deficit stuff mean, and does the national debt really matter? (The government often runs a surplus in April; it’s when the majority of U.S. taxes are collected, so it is a larger than normal inflow of funds.)

The Deficit vs The National Debt

us deficitsIt is important to understand some terminology. First, the national debt, is the total amount owed by the United States government. Contrary to popular belief this debt is not owed “to China” or to any other government. Rather, the debt exists in the form of Treasury Bills, Notes, and Bonds (including those U.S. Savings Bonds your grandmother gave you). These all trade as securities on the open market. The Chinese government is free to buy them if it wants, and so are you, and anyone else. Owning these securities entitles you to an interest payment and the repayment of principal on a predetermined schedule. Neither you, nor China, gets any additional rights, no matter how much you own.

The deficit is the amount of money the government takes in, minus the amount of money it pays out. You can measure this over any number of time frames. It is popular to report an annual deficit number. So, the 2015 deficit would be all the money received by the federal government during 2015, minus all of the money paid out.

This number is always negative, unless the U.S. economy is growing strongly and tax revenues are up. This is what happened during part of the Clinton Presidency when the U.S. ran an annual budget surplus, fueled, ironically, by the Internet Bubble of the late 1990s.

So, does the deficit and national debt actually matter?

The answer, is not really, kind of, sort of, and it depends.

First, if you are thinking that someone proved that higher deficits impact the economy negatively, you are kind of correct. However, that paper has since been disproved as it turns out the math relied on for the conclusion was incorrect. In other words, there is no yes, or no on how a large deficit affects the economy.

If you are thinking of comparing the U.S. to Greece, that isn’t accurate either. The problem with Greece is that its economy is separate from Europe’s, but its currency is not. This is not an issue for the United States.

So, what is the actual problem for U.S. deficits?

The real issues come in the form of interest rates and inflation. Assuming the government ran out of people and investors willing to buy Treasury Bonds, it would have to pay higher interest rates. In fact, whenever the government needs to borrow more money, it holds an auction to sell bonds. This sets the interest rates.

However, even though the debt is higher than it has ever been, interest rates are very low. The reason, is the U.S. economy.

Ironically, inflation is low for the same reason. The U.S. economy is not generating higher wages, or greater employment, so inflation is not rising either.

In other words, the economy has much more of an affect on the deficit than the deficit has on the economy.

Theoretically, there would come a point where this would no longer be the case. The catch here, is inflation. As low as inflation is right now, it does exist, and 30 years from now, 18 trillion won’t be worth what 18 trillion is today. In other words, a lot of the debt we have now is getting smaller just by existing longer. As long as the national debt doesn’t outpace actual inflation, nothing really happens except politicians get to excitedly proclaim that they can “fix” the debt.

For long-term investors, and for your own personal financial planning purposes, the debt is a non-issue.

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Finance Gourmet on June 4, 2015

As most regular readers of this financial planning blog know, I used to be a professional Certified Financial Planner for several years. That gave me a lot of insight into just what a financial advisor does and does not do for his or her clients, and how much that is worth.

Susie Orman is a former financial planner who decided that the whole profession was basically rubbish. Other former financial advisors are now out there saying that these professionals are indispensable. The truth, as with most things lies somewhere in between. So, how does a robo-advisor stand up to a real financial advisor?

Robo-Advisor vs Financial Planner

Let’s start with getting some facts straight. First, robo-advisor is a fancy, sensational term for bold headlines. The reality is that the so-called robo-advisors are actually computer programs that build and investment portfolio, usually out of mutual funds and ETFs, for you. There are no robots sitting behind desks anywhere (although that would be cool.) Second, a robo-advisor really isn’t an advisor or financial planners so much as an investment manager.

The reason these things matter, is because, unlike most people’s perceptions, investing your money is actually not the most important thing a typical financial advisor does. The days of a fast-talking New York broker calling you and screaming, “Buy!” or “Sell!” into the phone are pretty much over. For almost everyone without a million dollar portfolio, the only thing your human financial planner will ever do with your money is put it in mutual funds or exchange traded funds (ETFs) which will actually handling the buying and selling of stocks for you.


Believe it or not, many advisors don’t have that much variety in their investments between customers. Most advisors working with clients that have less than $1 million dollars of investable assets, aren’t out there determining which mutual funds are best for you specifically. Instead, they determine which mutual funds are the best to use for their customers overall, and then slot each individual into those funds using individual percentages. If you and a friend have the same advisor, compare your portfolios some day. You’ll see a lot of the same investments, even if the percentage amounts in each investment are different.

Check this out to see if Credit Karma is legit.

A robo-advisor does essentially the same thing. The company, using whatever method they think works best, selects a portfolio of investments to be used by the robo-advisor. This field of investments is the same for all clients. What changes is what percentages of your money goes into each investment. Then, certain investments are added, or removed, for more or less risk tolerance.

For example, if you are young, and profess a high risk tolerance, you might get a specific small cap international fund, or a micro-cap fund. On the other hand, if you are nearing retirement and profess a low risk tolerance, those funds will not be in your portfolio at all. We recently reviewed Acorns, an app that transfers small amounts of money into an investment account run by a robo-advisor. Your funds are all invested in pre-chosen portfolios run by computer, or robo-advisors.

Now, neither the robo-advisor, nor the human advisor, have a single portfolio used by everyone, but you’ll find a small stable of investments in common used among most all of their clients.

Note that this all changes once you have more than approximately $1 million worth of investable assets. At this point in time, certain financial advisors start calling themselves wealth managers, and they will build portfolios for you out of individual stocks. The reason for this is two-fold. First, at about this dollar amount, you can actually buy enough individual stocks to achieve the proper diversification for a smart portfolio. Second, at about this amount, your financial advisor needs become a lot less about financial planning, and a lot more about making the money you already have earn more. (Think about it. If you have a million dollars out there being invested, do you really need a plan to pay for your kid’s college education? Just use some of your money. That’s your plan.)

Which Is Better Robo-Advisor or Human Financial Advisor?

Overall, the robo-advisors are likely to have better investment returns than human advisors over a long period of time. That is because human advisors charge higher fees. As long as you aren’t using bozo-style mutual funds, the difference, over the long-term, in diversified investment portfolios is often relatively small. This is sort of the point of diversification, to take the big volatility out of investing. However, the constant drag of higher expenses should make robo-advisors out-perform over time.

However, that out-performance may be relatively small. Especially, for people without a large investment portfolio, saving the right amount, the right way, is far more important than how much money your investments return. A person starting at zero, earning just 7% but saving 10% into their 401k will have oodles more money upon retirement than someone earning 10% but only saving 7%. Mistakes along the way like borrowing from your 401k or withdrawing early from an IRA will cost you much more that high fees. And these are exactly the kinds of things a human advisor can sit down and help you avoid.

In the end, whichever kind of advisor actually makes you get started saving and investing is the right one for you. If you are the kind of person who will open an account at 2:00 in the morning, but won’t call to schedule an appointment with a human, then go with a robo-advisor. If you’re the kind of person who is afraid to hit submit because you want someone to double check your work, then go with a human advisor.

We’ll break down some of the different robo-advisors here on Finance Gourmet in upcoming articles.

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Finance Gourmet on June 1, 2015

Interesting story this morning. It seems U.S. comsumers increased their savings rate in the month of April even though incomes increased during the same period. Generally, rising incomes, means increased spending, but that didn’t happen in April. This is good news and bad news. The good news is that it means Americans are not increasing the amount of debt they have. The bad news is that they are not spending their money in order to stimulate the economy either. With an economy that is overwhelmingly dependent upon consumer spending, no spending means no growth. Coupled with the Fed ending its stimulus programs, and you have recipe for stagnation.

The upside is that without consumer spending increasing, there is little chance of any real inflation, so as long as the hawks at the Federal Reserve can keep from trying to fight for who is the biggest hawk, there is no reason to raise interest rates either.

In the end, this is even mor confirmation that while the economy is moving in the right direction, it continues to do so very, very, slowly.

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