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Articles by Alan & Akemi

Balance

Balance is important in your portfolio, just like balance between work and play, office and family are important to your life and personal well-being.

Because we use a strategy for our clients based on broad, global diversification, regular rebalancing is especially important. Our portfolios typically contain many different "asset classes" --  U.S. large, medium, and small companies, international large, medium and small companies, emerging market holdings (such as China and India), real estate and bonds. There are often more than 6,000 different companies represented in a broadly, globally diversified investment. Diversification spreads your risk, and is just the opposite of "putting all your eggs in one basket." It tends to give you more consistent performance and good downside protection.

As you might expect, all these different asset classes don't all go up together -- they take turns, and each asset class usually has its day in the sun at different times. In a diversified strategy, rebalancing helps you to take advantage of the individual performance of each asset class.

You probably know that your investment portfolio is being rebalanced on a regular basis, but you might not know why.  Is it for higher returns?  For maintaining the agreed-upon balance of investments that is in your risk tolerance comfort zone?  Does rebalancing help manage portfolio risk?

The answer to the above is “yes,” “yes,” and “yes,” but with a qualification.  Rebalancing an investment portfolio is most importantly a form of discipline, a way to reduce the impact of those dangerous emotions of greed and panic in the investment process.

During a bull market, stock prices rise faster than bond values, causing them to make up a larger percentage of the portfolio than you signed on for.  Similarly, in a bear market, stocks will fall, while bonds often rise, causing your portfolio to become more conservative.  Real estate investments and commodities often rise or fall at different times than stocks or bonds, pulling your overall percentage allocations away from the target mix.

When you rebalance, you’re selling some assets that rose in price and buying the ones that went down. For us, if an asset class rises in value more than 2 to 5% in a 3-month period, depending on the asset class, we will usually sell some if it while it's up high, locking in some of the gains. Then, we use the proceeds from the sale to buy some of another asset class that looks like a bargain at the time. This discipline results, over time, in consistently buying low and selling high.

 

THREE WAYS TO REBALANCE  

1) The easiest is to use whatever new money is coming into the portfolio, monthly or quarterly, to buy the assets that have gone down, allowing you to make consistent adjustments that keep the portfolio at its recommended allocations.

2) Another possibility is to rebalance at certain times of the year—every three, six or twelve months.

3) Or you could follow a more sophisticated process, and rebalance whenever assets deviate by more than certain set percentages from the baseline asset allocation.

Using a simple mix of 60% stocks and 40% bonds shows that rebalancing using the percentage deviation method tends to lead to higher overall returns from the beginning of 2000 to January 2016.¹  Wider bands sometimes produce higher returns (and fewer rebalances), although of course there is no guarantee that this would be the case in the future.

Perhaps most importantly, rebalancing brings you back, over and over again, to the allocation that you established when you started your investment. If you are working with a Certified Financial Planner™ or CPA, this allocation was designed to give you the long-term returns that would best accomplish your most important goals in your comprehensive financial plan. 

When it comes to making decisions in a time of crisis, having a rebalancing policy in place ensures that buys and sells will be made with discipline, rather than emotion.

¹ 5/22/2017 Seeking Alpha

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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BITCOIN 101

It’s hard to turn on your TV or read the paper without some hype about becoming a millionaire off of Bitcoin investments.  Usually it ends with a scare tactic, call-to-action like, “If you don’t act now, you’ll be left behind!”  For many, the next couple of questions are, “What is Bitcoin?” and “How safe is it?”

Bitcoin is a “new” type of cryptocurrency - or more simply put, a form of digital money.  In 2009, Bitcoin was created by Satoshi Nakamoto as the first decentralized cryptocurrency.  All forms of prior digital currency were centralized, through an authority or middle man such as a banking institution.  Bitcoin’s decentralized model uses miners or record-keepers who transfer coin and record transactions in a public distribution ledger.

How Bitcoin works

Currency exchanges exist online, all over the world, where Bitcoin can be purchased in one’s native currency.  Your Bitcoin balance is digital and accessible online through any technology such as your home computer or phone.  Theoretically, you can use your Bitcoin to purchase anything, like you would with regular cash, but your Bitcoin is not subject to cash limitations such as dollar limit of purchase, currency exchange, international borders, transfer limits and fees, etc. It is touted by Bitcoin users that more everyday vendors such as restaurants and movie theatres are accepting Bitcoin payment around the world.   

Bitcoin in a nutshell

Bitcoin Advantages:

-          Payment is transferred person to person online, rather than through an institution, such as a bank.  The peer-to-peer structure theoretically removes fees that a bank would charge for facilitating the transfer, currency exchange, etc.

-          No pre-requisites or limits

-          Your account cannot be frozen

-          The upside potential for growth and acceptance of Bitcoin could yield a hefty return for the initial investors.

Bitcoin Disadvantages:

-          There is currently little to no regulatory oversight over the cryptocurrency industry, nor protections in place for the investors

-          The primary current uses of Bitcoin are rumored to relate to illegal drugs and illicit weaponry

-          The value of Bitcoin is arbitrary in an unregulated market.  Therefore, the risk of a bubble or sudden drop in value is high.

Bitcoin bubble?

Bitcoin excitement circulates around the unknown potential of the new currency.  Some Initial Coin Offerings (ICOs) have even hired celebrities like Floyd Mayweather and Paris Hilton to promote their projects and endorse virtual money – a move highly criticized by the Securities & Exchange Commission[i].  

Perhaps unfair, but some have compared the Bitcoin buzz to the likes of the Dutch Tulip Mania of the 17th Century or the Dotcom Bubble of 2000.  Bitcoin (BTC-USD) is trading near 12,700, up approximately 1,300% in 2017[ii], compared to the Dow Jones Industrial which was up a stingy 21%[iii] during the same period.  In 1999, tech stocks with negative earnings were going up in value, on what was coined as “the new norm” because net earnings were deemed less relevant than internet traffic and future potential.  The normal rules about prudent investing were thrown out the window.  In hindsight, the tech phase was not different, but a bubble that burst.  The Bitcoin craze is showing signs of the same rapid growth, but with no regulation at all.    

The consensus of many investment professionals is that buying Bitcoin now would be late in the game (buying high), and the highly speculative investment could end in financial hardship to the average person.  

Digital currency is still in its infancy.  The idea of a currency medium that transcends international boundaries and is tracked and exchanged online is transformative.  However, it is too early to know who the winners and losers will be in the cryptocurrency horse race.  Going back to the Dotcom timeframe, many of our current household names like Facebook and Twitter, didn’t even exist until after the crash.  However, they were birthed from the innovative foundations (and subsequent deaths) of trailblazers like Classmates.com, Friendster and MySpace.

Before you make a large financial decision about a speculative investment, consult your Financial Advisor to ensure you are investing in a manner that matches your risk tolerance and not compromising your overall retirement planning.  When you have a network of professionals working together to provide you sound recommendations, you are more likely to create a plan that provides you and your family peace of mind.  

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.nytimes.com/2017/11/01/business/sec-warns-celebrities-endorsing-virtual-money.html

[ii] https://finance.yahoo.com/chart/BTC-USD

[iii] https://finance.yahoo.com/quote/%5EDJI?p=^DJI

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Easy Estate Planning Tips

In the juggle of daily life, many have a running list of To-Do’s that they steadily chip away at.  Some agenda items take priority, like grocery shopping or paying the bills, and inadvertently, some are pushed to the bottom of the totem pole to achieve “tomorrow.”  Unfortunately, estate planning is often in the latter category due to what we perceive as too complex or not urgent.  However, these are simple tips that can make estate planning effective and ensure that your kids, not the IRS are your biggest beneficiary after you pass away.    

Review your living will and trust regularly

Time flies by in the blink of an eye.  We recommend that you meet with your attorney at least every 5 years (max 10) to ensure that your trustees, executors, guardians, beneficiaries, and healthcare agents are all up-to-date.  Equally as important, you should ensure that your trust takes advantage of the most recent tax rules, which seem to be changing rapidly these days.  In the year 2000, the estate tax exclusion was $675,000[i].  Today, the estate tax exclusion is $5.49M[ii] per person, and under the Trump Tax Proposal, the gift tax exclusion may double to nearly $11M[iii] per person or nearly $22M per couple.  Meeting with your attorney regularly will ensure that your trust is taking advantage of the current tax code and structured to pass assets to your beneficiaries in the most efficient manner.  

A revocable trust provides privacy over a will

Sometimes people feel that their finances are too simple to require a trust and their wishes can be captured in a will alone.  What many don’t realize is a will does not protect your privacy.  When you pass away, your estate transfer is a public record that anybody can have access to.  That can lead creditors to tie up your estate in probate if they claim rights to your assets.  On the other hand, a revocable trust will provide you privacy and pass assets to your heirs upon your passing, escaping probate. 

Fund your trust

Often people go through all the steps to create a thorough and well thought-out trust but then fail to actually retitle assets into the trust name.  Consult with your attorney regarding which assets should be transferred into the trust title for protection if you pass away.

Provide titling consistency

Review the beneficiary designations on accounts such as retirement accounts, life insurance policies and annuities.  Your beneficiary designation will take precedence over your will or trust if there is a discrepancy.  For example, if the beneficiary of your life insurance policy is your ex-spouse, proceeds will go to that person, no matter what the will or trust dictates.  

Pre-tax or qualified assets such as IRAs typically have individuals listed as beneficiaries instead of your trust.  That is because IRA assets afford better tax benefits to the beneficiaries if they are inherited directly, rather than being inherited through the trust.  For example, if a parent lists a child as the primary beneficiary of their IRA, when he/she passes away, the child can receive the money in an Inherited IRA and continue to benefit from the same tax deferral treatment.  If the trust is the primary beneficiary instead, the IRS can take income taxes from the account which has grown tax deferred all these years and only the net proceeds may be disseminated per the trust language.  

Utilize the annual gift tax exemption

Under the current tax code, you can gift up to $14,000 per year, per person, gift-tax free.  For a couple, that means you could gift a total of $28,000 to each person annually without triggering gift taxes.  For a family of four, that could amount to a total gift of $112,000, tax free, every year!  This annual gifting strategy does not tap into your lifetime gift tax exemption (currently $5.49M per person).  

Future tax law changes

Tax laws are currently in limbo and could change within the next year.  However, delaying your estate planning for future tax changes could leave you or your loved ones in financial disarray if no planning is completed and something unexpected happens.  Even if the estate tax exemption is repealed in full, there’s no telling if the next administration will put estate taxes back in effect.  When drafting a living will and trust, you can draft a durable power of attorney over health and finances to designate someone to act on your behalf if you become incapacitated.  In addition to wills and trusts, there are many estate planning tools available that provide protection of assets against lawsuits and claims.  

What’s next?

If you don’t have a will and trust in place, ask an attorney if creating one would be appropriate for you.  If you have a will or trust already, look at the last time it was updated and make an appointment with your estate planning attorney if it’s time to revisit the good planning you’ve already done.  Often, you can update your trust with an amendment rather than recreating the entire trust from scratch.  

Once the new tax laws are finalized, consult with your attorney, CPA and Financial Advisor to ensure you are taking full advantage of opportunities available.  When you have a network of professionals working together to provide you sound recommendations, you will create an estate plan that provides you and your family peace of mind. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

[ii] https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

[iii] https://www.cnbc.com/2017/11/03/the-good-the-bad-and-the-money-what-the-gop-tax-plan-means-for-you.html

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Giving Thanks

How did we get to the end of the year so quickly? Now that they start playing Christmas music after Halloween, the years seem to fly by more quickly than ever.

This has been an eventful year for the market, which has built on gains that have totaled 359%¹  since the beginning of the rally in March 2009. Our clients have been happy with the performance, but also a little nervous. They are aware that every eight to ten years on average, the U.S. market goes through a correction or downturn in the market. It's actually healthy for the market to find its correct price, cool down, and eventually go on to hit new highs.

We believe the expected correction will be a relatively mild one, because the underlying U.S. economy is very strong, much stronger than most global economies. On that basis, many economists feel that the market should do well for at least the next couple of years, even if we have a correction.

Investors who have a broad, globally-diversified portfolio should do well. Diversification means spreading your risk as widely as possible, just the opposite of putting all your eggs in one basket. This approach helps alleviate a correction because different assets behave differently, often just the opposite of one another. When the U.S. market goes through a rough patch, the international market tends to do quite well, and pick up the slack. It's fortuitous that currently, the international market is already doing very well, hitting record highs.

Thanksgiving is also the time of year that we send out Required Minimum Distributions on retirement accounts (like an IRA, 401k, 403b, etc.) for our clients who are age 70 ½ or older. This is mandatory, and the penalties for non-compliance are harsh -- if you don't take your RMD like you're supposed to, the IRS can penalize you 50% on what you should have taken out. If your financial advisor is on top of things, he or she should have already calculated your RMD for this year, and let you know that it will be sent to you before the end of the year. If you haven't already received this notice, you may want to be proactive and make sure that your RMD is in the works.

Your Required Minimum Distribution is re-calculated every year. Your financial advisor will take the value of your retirement account on December 31, 2016, and divide it by a factor based on your age. At age 70 ½, your RMD is about 4%. The percentage gradually increases as you get older. Many people think that the value of their retirement account will decrease once they start taking RMDs, but this doesn't have to be the case. It's not unreasonable for a retirement account to grow 7% per year or more on the average in a highly-diversified strategy. Even if you have to take a 4% RMD, your account can still grow. This can give you the peace of mind that you're not going to run out of money in retirement.

The end of the year is a good time to harvest losses in your investment. Tax loss harvesting is the practice of selling a security that has experienced a loss. You are able to offset taxes on both gains and income. If you have a passive gain (e.g., from selling an investment or real estate), you can wipe out or reduce the taxes by harvesting a similar loss. If you have no passive gains, you can reduce up to $3,000 per year of ordinary income with a long-term passive loss.

If you have carry-over passive losses from previous years, you can take advantage of those losses by selling some investments at a gain. Your Certified Financial Planner™ and CPA can collaborate to match gains and losses. This way, you can sell some investments on which you would normally pay capital gains taxes, and pay no taxes at all!

Finally, this is a good time of year to consider supporting your favorite community organization, church or temple with a charitable contribution. If you donate appreciated investments, you can escape paying capital gains taxes, and the charitable organization (because it pays no income or capital gains taxes) will receive the full amount. It's a win-win. 

If you haven't decided which organizations you want to benefit, but want to take the tax deduction this year, think about opening a Donor Advised Fund. You'll be able to take an immediate tax deduction, and decide later on who you want to gift to. Because you can keep the money invested and growing in a Donor Advised Fund, it's the type of gift that can keep on giving.

You can donate your Required Minimum Distribution as well. One of the most effective ways to do this is through a Qualified Charitable Distribution. The QCD is written directly from the investment to the organization. This way, your Required Minimum Distribution bypasses the calculation for Adjusted Gross Income, and helps to keep down the taxation of your Social Security benefits, and your Medicare premium.

Consult with your Certified Financial Planner™ or CPA to determine what type of contribution would benefit you the most.

We hope you have a happy and healthy holiday season!

¹ WSJ 11/18/2017, based on the performance of the Standard & Poors 500 index

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Behavioral Finance Takes Nobel Prize for Economics

This month, University of Chicago economist Richard Thaler was awarded the 2017 Nobel Prize in Economics by the Royal Swedish Academy of Sciences. This was a controversial decision, for a number of reasons. 

Thaler is a proponent of behavioral finance, which is the study of economics and finance from a psychological perspective. Up until recently, mainstream economic theory was based on the assumption that people behave rationally. Professor Thaler's theories, on the other hand, pioneered the view that people, especially when it comes to personal finance, often behave in ways that contradict traditional economic rules and reason. 

The traditional economic approach was to view human financial choices like particles in physics. The outcome could be predicted by a few established rules. All of us—and especially professional financial planners—know that these assumptions are far from what we have observed in the real world. After receiving the award, Professor Thaler commented, "In order to do good economics, you have to keep in mind that people are human." 

Thaler spent his entire career exploring the differences between these unrealistically idealized economic assumptions and actual human behavior.  He demonstrated that people take mental short-cuts—called “heuristics”—when they make what they believe to be logical decisions.  He showed that in the real world, human decisions are often impulsive, and self-control is more often an aspiration than a reality. Although investment selection and globally-diversified asset allocation are important investing tools, it is often behavior that ultimately determines whether a portfolio will help an investor achieve fulfillment and satisfaction in life.

Thaler also developed a theory of “mental accounting,” which explained how people make financial decisions by creating separate accounts in their minds—one for college funding, say, and another for retirement, and still another for vacations or a new car.  He explored those mental short-cuts and found that people tend to expect more in the future of what they’ve recently experienced (short-term bias), and often believe they have more knowledge about their decisions than they actually do. 

Although his views have been regarded by radical by some traditionalists, they have already had broad impact in the real world. In his 2008 book, "Nudge," Thaler and his co-author Cass Sunstein discussed ways to help people make better financial decisions, and argued for public policy changes that would help average people by "nudging" their behavior in a positive direction. For example, there was a pervasive problem that most people were not saving enough for retirement. It was difficult for many people to control their impulses. If they had money in their hands, the tendency was to spend it, rather than put it away for the future.

Thaler suggested "opt-out" retirement savings plans. Previously, employees had to take individual action to enroll in their company's 401(k) retirement plan. Even though the money they contributed to the 401(k) would grow tax-deferred, would reduce their taxable income, and in many cases would be supplemented by an employer's matching contribution, many employees failed to enroll. Thaler's studies sparked a sweeping shift towards automatic enrollment into employer-sponsored retirement plans. In other words, participation is now the default option, and you have to take individual action if you choose not to enroll. This shifted inertia to the side of the preferred decision.

Thaler's thinking is especially relevant today. In a perfectly rational world, all-knowing investors and consumers would never have market bubbles or market crashes, since every market price is right and fair at any particular moment. We have had 8 years of fairly-sustained growth in the market, but we know that every 8 to 10 years on the average, we have a market correction of 10% or more. This is normal and healthy for the market, and is a way for stocks to find their true value. If we were perfectly rational people, we would recognize that the market has always recovered from these corrections, and will likely proceed to hit new highs. However, the emotional, irrational side of us could take over, and cause us to sell all our holdings at the bottom on the market. Not only would we be locking in the losses, but losing the long-term growth could prevent us from accomplishing important, long-term goals. As financial advisors, we do our most important and valuable work when markets are down, guiding our clients through those difficult periods and helping them manage their behavior.

Thaler’s prize suggests that the world of economics is starting to catch on to the messy decision-making that actually goes on in the real world.

 

Sources:

* Washington Post, 10/9/2017

* The Guardian, 10/11/2017

* New York Times, 10/9/2017

* The Economist, 10/23/2017

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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EDUCATIONAL WORKSHOPS

2019 TENTATIVE SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

10:00 a.m. - 12:00 p.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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