A common question we receive from clients: “How can I save more money in a tax advantaged way?”  Fortunately, if you are an employee of Lockheed Martin you have a unique opportunity.

As us nerds call it, the “Mega Backdoor Roth IRA” is a strategy available in 401(k) plans that allow for after-tax 401(k) contributions (i.e. Lockheed Martin).  This strategy is appropriate for employees who are already maximizing contributions to the Pre-Tax or Roth buckets and are looking to save additional tax advantaged funds.  The maximum employee contribution to pre-tax or Roth is $19,500 plus a $6,500 “catch-up” contribution if you are over 50 ($26,000 total).  However, most employees are unaware that the total contribution limit to a 401(k) plan is $64,500.  This is where the after-tax piece comes into play.  If you are already contributing $26,000/year (assuming you are 50 years old or older) and your employer match/profit sharing is $15,000/year, you can still contribute $23,500 to the after-tax portion of your 401(k) plan!  Upon retirement, all after-tax contributions are eligible to be rolled into a Roth IRA!

Case Study:

John is a Program Manager at Lockheed Martin in Syracuse and earns $170,000/year.  He maximizes contributions to his 401(k) plan ($26,000) and receives the 4% match ($6,800) and the 6% profit sharing( $10,200).  Since these contributions total $43,000, John can still contribute $21,500 after-tax in is 401(k) plan.

This is a great strategy for Lockheed Martin employees and allows them to essentially fund a significant amount of money into a Roth IRA indirectly.  Give us a call or schedule a phone call if this is something you’d like to learn more about!

Most of our clients hold bonds and most of those bonds have “lost value” in the first three months of the year. That does not mean any of the bonds have defaulted. In fact, almost no bonds have defaulted in 2021. Rather, interest rates have risen causing the value of existing bonds to drop.

It may seem counterintuitive that yields going up means bonds are worth less. At first glance, one might think if bonds are now paying higher interest rates, they should be worth more. While that is relatively true if you are buying new bonds, the bonds investors hold are bonds that have been issued in the past.

For example, say on 1/4/2021 Nick bought a 1% U.S. Treasury Bond for $100. If Nick wanted to sell it the next day, Nick would have gotten about $100. Fast-forward 3 months and $100 can buy a bond of the same length but with a yield of 1.75%. If Nick wants to sell his bond today, a buyer won’t be willing to pay $100 for a 1% bond because that buyer can now get a 1.75% bond for $100. To entice someone to buy it, Nick will have to lower the price.

The following (simplified) table shows how a 10-year bond’s price would be calculated assuming that the bond pays a 1% coupon, and the current interest rate is 1.75%.

In this scenario, Nick will have to lower his price 6.83% in order to find a buyer. His bond has accrued 0.25% of interest, but he still will have lost 6.58% on the investment.

It’s good to remember that changes in interest rates can work in an investor’s favor. At the start of 2019, the aggregate bond market was yielding about 3%, and yet returned 8.8% for the year. At the start of 2020 it was yielding a little more than 2% but returned 7.7% that year. One way to think of it is that we got most of the upcoming decade’s return paid to us in the last two years.

Let’s see how interest rates have impacted returns so far this year. The rise in interest rates is what caused bonds to drop in value. The most common bond holding is an aggregate bond fund. Vanguard’s Total Bond Market (VBTLX/BND) has an average bond duration of 6.6 years. 7-year treasuries have seen a 0.74% increase in yield this year. Multiply the interest rate move (0.74%) by the duration (6.6) and you get a price movement of -4.9%. That plus the interest earned, some movement in credit spreads, and stronger mortgage-backed performance, and you get a year-to-date return of -3.8%.

While this is painful in the short-term, it means future returns are higher, which will benefit investors over the long run. Regardless of short-term performance, bonds make sense for many people for the following three reasons.

  1. They pay interest: Even if it’s less than historical rates, it’s better than nothing, which is what we are getting in checking/savings accounts.
  2. They are less volatile than Stocks: So far 2021 has been a bad year for bonds, and they are down 4%. A year ago, stocks were having a bad year and they were down 30%. The magnitude of bond movement is much less than stocks.
  3. They provide a diversification benefit: When the stock market is falling during times of economic turmoil, interest rates are normally falling as well. That means bonds are appreciating in value which gives us extra money to rebalance back into stocks, buying them at hopefully cheap prices.

Lastly, while interest rates are expected to rise, it doesn’t mean they will. At the start of 2019, the U.S. 10-year bond was at 2.66% and expected to rise. A year later it was at 1.88% and again forecast to rise. At the start of this year, it was yielding 0.93%. No one knows what interest rates will do in the future, so we will maintain our discipline and continue holding bonds.

“The American marketplace is an economic jungle. As in all jungles, you easily can be destroyed if you don’t know the rules of survival. … But you also can come through in fine shape and you can even flourish in the jungle—if you learn the rules, adapt them for your own use, and heed them.” — Sylvia Porter

Is it just our imagination, or has there been an uptick lately in exciting new trading tactics for seizing riches from exotic new markets?

Unfortunately, as Sylvia Porter observed above in her 1,200-page, best-selling “Sylvia Porter’s Money Book,” excitement isn’t necessarily an investor’s best friend. Respecting the jungle rules is the wiser way to endure.

What’s Old Is New Again

Who is Sylvia Porter? A 20th century financial author and journalist, Porter challenged financial and social norms alike during her extensive career, which launched in the 1930s and peaked in the 1970s. Making her way in a male-dominated business, she initially wrote under the name S.F. Porter, to conceal her gender. By 1975 (when her Money Book was first published), she was syndicated across 350 newspapers as well as the Ladies’ Home Journal. [Source]

Porter is credited as having created the role of personal financial journalist, writing for and by the people. And yet, few remember her name. This in itself is telling of how readily financial times, tides, and fortunes can ebb and flow.

But let’s return to the here and now, and the current incubator of hot new trends. After a year of sitting at home, an excitable generation of do-it-yourself traders has been replacing traditional leisure-time activities with online pursuits—including aggressive, Tweet-worthy trading for fun and profit.

The result? Waves of volatile financial feeding frenzies and overnight sensations, egged on by a brood of freshly hatched social media stars, and a spate of flashy new trading platforms with captivating names like Robinhood.

When SPAC-Man Speaks

The movement roughly launched in January 2021, when a Reddit-driven rally abruptly sent the prices of several unloved stocks like GameStop through the roof. More recently, special purpose acquisition companies (SPACs) have captured a lot of attention. “When SPAC-Man Chamath Palihapitiya Speaks, Reddit and Wall Street Listen,” observed a recent Wall Street Journal column. “Amateur traders hang on [Palihapitiya’s] every word for clues about his next target—and for the insults he hurls at the high-finance elite.”

Non-fungible tokens (NFTs) have also been taking the trading world by storm. As described in this the Hustle article:

“An NFT can represent any kind of digital asset: a piece of artwork, an audio file, a video clip, a plot of virtual land. The NFT isn’t actually the piece of artwork itself; it’s a piece of code on a digital ledger (blockchain) that points to where the artwork lives — usually on a server somewhere else.”

If you think of an NFT as being like a collectible—say, an autographed baseball card—but in digital format, you’re getting close to envisioning its worth. Similar to playing cards, people are collecting these pieces of code, typically exchanging them in cryptocurrency such as bitcoin.

How much is an NFT actually worth? However much the market decides. Some are currently trading in excess of $1 million each. As the Hustle article describes, NFTs “have caught the attention of tech investors (Mark Cuban), the high-brow art world (Christie’s auction house), and major corporations (Nike) alike. And everyone from Lindsey Lohan to the rock band Kings of Leon is flooding the market with high-priced virtual creations of their own.”

Innovations vs. Investments

These and similar get-rich-quick possibilities may seem shiny and new. And some of the underlying infrastructure truly is groundbreaking. Like the Internet, electricity, and the wheel, intriguing innovations like blockchains, cryptocurrency and NFTs may lead to incredible applications we can’t even imagine at this time.

Plus, at least on paper, there are those who have amassed rapid fortunes by being in the right place at the right time. Trading into the innovations, they’ve caught a wave of risk-laden opportunity; some have gotten very rich in return. Much of the action is highly reminiscent of the 1990s tech bubble, when a trade at nearly any price into nearly any company with a high-tech name seemed sure to pay off handsomely … right up until most of them no longer did.

Time will tell whether these brave speculators manage to convert their good fortune into lasting wealth once today’s trends fizzle or fly. Because beneath it all, the laws of the jungle remain the same. Among these immutable laws is determining whether you want to be a sprinting speculator or a long-distance runner in the wilds of the stock market—and trading accordingly.

In his book, “The Psychology of Money,” Morgan Housel describes two types of market participants—short-term traders and long-term investors—and why it’s essential to know which one you are:

“Short-term traders operate in an area where the rules governing long-term investing—particularly around valuation—are ignored, because they’re irrelevant to the game being played. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.”

97-year-old billionaire Charlie Munger (Warren Buffett’s long-time Berkshire Hathaway partner) is even more blunt about the differences between short-term speculators versus long-range investors. Some “may call it investing,” he said in a recent interview, “but that’s all bulls**t. It’s really just wild speculation, like casino gambling or racetrack betting.”

In yet another powerful piece, “Financial Implications of Robinhood Investors,” financial author Larry Swedroe took a look at a recent academic study that analyzed the new breed of stock market participants using Robinhood’s no minimum, zero-commission trading platform. The study found that Robinhood participants tend to be younger; less wealthy; and hungry for more frequent, higher-volatility trades. In aggregate, “zero-commission investors behave as noise traders,” with a market impact similar to past noise trading and inventory risk models.

Thriving in the Jungle

In other words, hot trends are business as usual in the financial jungle. Fortunes will rapidly rise overnight. But many will fade just as suddenly. A few will strike it rich. Far more will be left licking their wounds … if they’re lucky.

That’s a dicey way to patiently pursue your long-term financial goals. You may be seeking to harvest returns from the same market, but your end goals are entirely different from those of noise traders on the prowl. Remember these differences if you ever feel a little left out of all the excitement. It should address your concerns about whether they know something you don’t.

As 16th century Renaissance mathematician and gambler Gerolamo Cardano reportedly once said: “The greatest advantage in gambling lies in not playing at all.”