Blog - Page 12 of 71 - NorthStar Capital Advisors

This is why I’m an optimist

“The toilet paper had armed guards.”

“We celebrated my birthday with a dinner party over Zoom.”

“My officemate jumped on my desk and drooled on my keyboard during a meeting.”

One day, we’ll look back on these strange days and tell stories about the COVID-19 pandemic of 2020.

But right now, we’re getting through it. One day at a time.

How are you doing? What stories can you share with me about your life right now? Email me at chrismullis@nstarcapital.com and tell me. I’d love to hear about them.

In difficult times, it’s easy to think we are alone. Especially when our loved ones and support system are far away or reduced to virtual connections.

We are all learning how to adjust to a new world and stay grounded when headlines are blaring and our very health and well-being are under threat.

I’m working on being grateful for the great things in this life.

I’m grateful for my wife.

I’m grateful for our children.

I’m grateful for our family, friends, and neighbors.

I’m grateful for work that allows me to help people in my community get through times like these.

I’m grateful for you.

What are you grateful for?

Like WWII and 9/11, we’re living through days that will define future generations and change the very fabric of our society.

I don’t envy the policymakers making grim trade-offs between life, death, and the economy. How long do we socially distance? What about the 10 million+ who have lost jobs?¹ Or the businesses that have been forced to close?

I hope with all my heart that each one of them has a financial plan and someone they can go to for advice. But my head knows better. I know that most Americans can’t survive a $1,000 emergency and only 17% have a financial adviser to help them.²

What trade-offs are we willing to make to protect those at greatest risk from the disease? We can’t put a dollar figure on human life. But we can put a dollar figure on the human cost of jobs lost and businesses closed.

The next few weeks are going to be tough for all of us. And I want you to know that I’m here for you.

Layoffs and furloughs are happening and I’m helping affected clients create a game plan to get through the next few months. If this happens to you or someone you love, please let me know immediately so I can help you determine if you’re eligible for special assistance. And, also please remember our COVID-19 pro bono program that we’ve launched to serve people who don’t normally have access to fiduciary advice.

How do we make good decisions with so much uncertainty and mixed information?

We make a choice:

We can choose to crumble under the weight of fear and uncertainty…

We can choose to simply hunker down and endure…

We can choose to grow, flourish, and come out stronger on the other side. We can be grateful for our blessings and focus on what’s within our control: our mindset, our behavior, and the actions we take.

I am fundamentally optimistic about humankind’s ability to weather this crisis and use it to grow.

I’m optimistic about how our society will adapt and change due to this crisis. Some of the greatest changes and innovations in history grew out of frightening, pessimistic times.

I’m optimistic about the heroes fighting the disease on the front lines.

I’m optimistic about the people helping friends, neighbors, and strangers stay safe and comfortable.

I’m optimistic that those with jobs will continue working to keep this country going while we wait and heal.

I’m optimistic about the innovators staying up late in labs, workshops, factories, and offices around the world to create vaccines, treatments, and tools to beat the virus.

I’m optimistic about the new inventions and technologies that will grow out of necessity.

I don’t know what challenges the world will throw at us in the coming days and weeks. I do know that I am grateful to be surrounded by smart, motivated people who push me to do better.

How can you show up for the people around you? How can you be your best self in these times?

How can I help you do it? Email or call and let me know.

Be safe and be well,
Chris

Chris Mullis, Ph.D.
Founding Partner
NorthStar Capital AdvisorsFinancial Planning.
Wealth Management.
Since 2006

AskNorthStar.com
(704) 350-5028

¹_{https://www.marketwatch.com/story/the-us-officially-lost-701000-jobs-in-march-but-in-reality-millions-vanished-2020-04-03}

²_{https://www.bankrate.com/banking/savings/financial-security-january-2019/}
_{https://www.cnbc.com/2019/04/01/when-it-comes-to-their-financial-future-most-americans-are-winging-it.html}

WCCB TV Interviews Dr. Chris Mullis

Source: WCCB TV / Local Financial Advisors Say “Stay the Course” Following Historic Market Drop

Dr. Chris Mullis, NorthStar’s Founding Partner, did an on-air interview with WCCB TV news anchor Drew Bollea discussing how people should think about their investments in the midst of a global panic induced by the coronavirus. (click image to watch video)

Ironically, this interview was recorded on March 9, 2020 — exactly 11 years to the day since the crescendo of global panic that marked the bottom of the 2007-09 bear market.

Here’s the memo that we sent clients and friends ahead of this interview that elaborates on the points made during the news report:

March 9, 2020

At this morning’s opening level of 2,764, the S&P 500 is down over 18% from its all-time high, recorded on February 19. Declines of that magnitude are fairly common occurrences — indeed the average annual drawdown from a peak to a trough since 1980 is close to 14%. But such a decline in barely a month is noteworthy, not for its depth but for its suddenness.

As we all know by now, the precipitants of this decline have been (a) the outbreak of a new strain of virus, the extent of which can’t be predicted, (b) the economic impact of that outbreak, which is equally unknown, and (c) most recently, the onset of a price war in oil. (That last one is surely a problem for everyone involved in the production of oil, but it’s a boon to those of us who consume it.)

The common thread here is unknowability: we simply don’t know where, when or how these phenomena will play out. And in my experience, the thing in this world that markets hate and fear the most is uncertainty. We have no control over the uncertainty; we can and should have perfect control over how we respond to it.

Or, ideally, how we don’t respond. Because the last thing in the world that long-term, goal-focused investors like us do when the whole world is selling is — you guessed it again — sell. Indeed, I welcome your inquiries around the issue of putting cash to work along in here.

On March 3, the erudite billionaire investor Howard Marks wrote, “It would be a lot to accept that the US business world — and the cash flows it will produce in the future — are worth 13% less today than they were on February 19.” How much more true this observation must be a week later, when they’re down 18%.

Be of good cheer. This too shall pass.

Mortgage Rates Hit All-Time Low (time to refi? let’s do the math)

Growing your wealth is a combination of making money and saving money. Today we’re focused on the latter half of that equation. Current trends in the debt market could save thousands of dollars per year for mortgage borrowers.

Mortgage rates fell to their lowest level on record today, pulled down by fears that the spread of the coronavirus could weigh on the U.S. economy.

The average rate on a 30-year fixed-rate mortgage fell to 3.29% from 3.45% last week (see chart). This is its lowest level in its nearly 50-year history. The 15-year fixed-rate mortgage dropped to 2.79% from 2.95% the prior week.

Mortgage rates are closely linked to yields on the 10-year Treasury, which this week dropped below 1% for the first time following an emergency Federal Reserve rate cut on Tuesday. Expectations are that the 30-year fixed rate could even drop below 3% in the next few weeks.

These historically low interest rates represent a special opportunity to potentially save thousands of dollars per year by refinancing your mortgage.

Whether it makes sense to refinance depends on a host of factors.

We want to help you do the math and decide if you should refinance. We invite you to share the key parameters of your mortgage loan confidentially and securely using this link:

Mortgage Loan Questionnaire
(if you own multiple properties, please submit one form per property)

We will dig into your data and make a detailed evaluation. We will come back and advise you on how much you could save now, or what’s your future trigger point for capturing significant savings as rates continue to evolve.

We’re strong believers in the abundance cycle. Please share this offer to family & friends and share the wealth!

The most valuable holiday gift for 2019?

(Holiday decorations & countdown courtesy of a very excited 11-year-old named Benjamin Mullis)

Let’s face it. Buying meaningful gifts for our family and friends is really, really hard. If you want to give something that has a larger impact long after the holiday season has passed, why not give the gift of financial education and wisdom for living a fulfilled life?

Given the academic background of our firm, I know the following is going to be a big shocker. Here at NorthStar, we love reading books and we love giving books as gifts! Below you’ll find the NorthStar Guide to Gifts That Pay Off. It’s full of our favorite book and money-related gift recommendations for those ages 4 to 94!

So what’s the most valuable holiday gift of 2019? A fun lesson in financial literacy and living your best life!

Happy shopping,
NorthStar Capital Adivsors

2019 NORTHSTAR GUIDE TO GIFTS THAT PAY OFFAges 4 to 10

Money Savvy Pig
The piggy bank for the 21st century!
http://www.moneysavvy.com/assembled/money_savvy_pig.html

Ages 11-16

Cash Cache
The award-winning personal finance organizer for teens!
http://www.moneysavvy.com/assembled/cash_cache.html

Ages 13-18

O.M.G. Official Money Guide for Teenagers
How to turn pocket money into power and freedom
http://www.moneysavvy.com/assembled/omgt.html

What Color Is Your Parachute for Teens
Career guide for teens to help zero in on their favorite skills and find their perfect major or career
https://www.parachute4teens.com/

High School Graduates (plus Recent Retirees and New Entrepreneurs)

5 Book
Where will you be five years from today?
https://www.live-inspired.com/catalog/product/books-by-kobi-yamada/5-where-will-you-be-five-years-from-today/

College Students

O.M.G. Official Money Guide for College Students
Don’t send your student off to college without first tucking this essential reading into their book bag!
http://www.moneysavvy.com/assembled/omgc.html

They Don’t Teach Corporate in College
A twenty-something’s guide to the business world
https://www.alexandralevit.com/books

College Graduates

Generation Earn
Young professional’s guide to spending, investing, and giving back
http://www.kimberly-palmer.com/

Parents with Young Children

Raising Financially Fit Kids
Help prepare your children for a lifetime of smart money decisions
https://www.amazon.com/Raising-Financially-Fit-Kids-Revised/dp/1607744082

The Opposite of Spoiled
Raising kids who are grounded, generous, and smart about money
https://ronlieber.com/books/the-opposite-of-spoiled/

Adults

Happy Money
Are you getting the biggest happiness bang for your buck?
https://www.amazon.com/Happy-Money-Science-Happier-Spending/dp/1451665075

The One-Page Financial Plan
A simple way to be smart about your money
https://www.amazon.com/One-Page-Financial-Plan-Simple-Smart/dp/1591847559

50+ Adults

Life Reimagined
The science, art, and opportunity of midlife
http://www.barbarabradleyhagerty.com/life-reimagined

The Charles Schwab Guide to Finances After Fifty
Answers to your most important money questions
https://content.schwab.com/web/retail/public/book/

Caregivers

Being Mortal
Medicine and what matters in the end
http://atulgawande.com/book/being-mortal/

On Living
An uplifting meditation on how important it is to make peace and meaning of our lives while we still have them
https://www.amazon.com/Living-Kerry-Egan/dp/1594634823

What Issues Should You Consider Before the End of the Year?

The end of the year provides a number of financial planning opportunities and issues. These include tax planning issues, issues surrounding investment and retirement accounts, charitable giving, cash flow & savings, and insurance & estate planning issues.

We use the checklist below to proactively scan for many actionables to help serve our clients. In this checklist, we cover a number of planning issues that you need to consider prior to year-end to ensure you stay on track, including:

Various issues surrounding your investment and retirement accounts including matching capital gains against any investment losses in taxable investment accounts and ensuring that all Required Minimum Distributions (RMDs) are taken.
Tax planning issues including moves dependent upon your prospects for higher or lower income in the future. You will also want to review where you sit relative to your tax bracket as this is a good time to make moves to fill out your tax bracket for the current year that also might prove beneficial down the road.
For those who are charitably inclined there are several strategies that will also help reduce your tax liability that can be considered based upon your situation.
For those who own a business, tax reform has created some opportunities surrounding pass-through income from your business to your personal return. Accelerating or deferring business expenses presents another solid planning opportunity.
It’s wise to review your cash flow situation as you near year-end to see if you can fund a 529 plan for children or grandchildren or to see if you can save more in an HSA or employer-sponsored retirement plan like a 401(k).

This is a comprehensive checklist of the types of year-end planning issues that you should be discussing with your financial advisor to ensure you maximize cash flow and tax opportunities in the current year and beyond.

Issues You Should Consider Before the End of Year

ASSET & DEBT ISSUES

Do you have unrealized investment losses?
If so, consider realizing losses to offset any gains and/or write off $3,000 against ordinary income.

Do you have investments in taxable accounts that are subject to end-of-year capital gain distributions?
If so, consider strategies to minimize tax liability.

Did you inherit an IRA or 401(k) from someone who passed away last year but have not split the account yet (assuming there were multiple beneficiaries)?
If so, consider splitting the account before the end of the year to avoid calculating the Required Minimum Distribution (RMD) based on the oldest beneficiary.

Are you over the age of 70.5, or are you taking an RMD (from an inherited IRA)? If so, consider the following:
– RMDs from multiple IRAs can be aggregated.
– RMDs from multiple 403bs can be aggregated.
– RMDs from an employer retirement plan must be calculated and taken separately. No aggregation is allowed.
– RMDs from inherited IRAs can not be aggregated with Traditional IRAs.

TAX PLANNING ISSUES

Do you expect your income to increase in the future?
If so, consider the following strategies to minimize your future tax liability:
– Make Roth IRA and Roth 401(k) contributions and Roth IRA conversions.
– If offered by your employer plan, consider after-tax 401k contributions.
– If over age 59.5, consider accelerating IRA withdrawals to fill up lower tax brackets.

Do you expect your income to decrease in the future?
If so, consider strategies to minimize your tax liability now, such as Traditional IRA and 401(k) contributions instead of contributions to Roth accounts.

Do you have any losses for this year or carryforwards from prior years?
If so, consider the following:
– There may be tax-loss harvesting opportunities.
– You may be able to take the loss or use the carryforward to reduce taxable income by up to $3,000.

Are you on the threshold of a tax bracket?
If so, consider strategies to defer income or accelerate deductions and strategies to manage capital gains and losses to keep you in the lower bracket. Consider the following important tax thresholds:
– If taxable income is below $160,724 ($321,449 if Married Filing Jointly [MFJ]), you are in the 24% percent marginal tax bracket. Taxable income above this bracket will be taxed at 32%.
– If taxable income is above $434,550 ($488,850 if MFJ), any capital gains will be taxed at the higher 20% rate.
– If your modified adjusted gross income (MAGI) is over $200,000 ($250,000 if MFJ), you may be subject to the 3.8% Medicare surtax on the lesser of net investment income or the excess of MAGI over $200,000 ($250,000 if MFJ).
– If you are on Medicare, consider the impact of Medicare’s Income-Related Monthly Adjusted Amount (IRMAA) surcharges.

Are you charitably inclined and want to reduce taxes?
If so, consider the following:
– If you expect to take the standard deduction ($12,200 if single, $24,400 if MFJ), consider bunching your charitable contributions (or contributing to a donor-advised fund) every few years which may allow itemization in specific years.

Will you be receiving any significant windfalls that could impact your tax liability (inheritance, Restricted Stock Units vesting, stock options, bonus)?
If so, review your tax withholdings to determine if estimated-payments may be required.

Do you own a business?
If so, consider the following:
– If you own a pass-through business, consider the Qualified Business Income Deduction eligibility rules.
– Consider the use of a Roth vs. Traditional Retirement plan and its potential impact on taxable income and Qualified Business Income.
– If you have business expenses, consider if it makes sense to defer or accelerate the costs to reduce overall tax liability.
– Some retirement plans, such as a Solo 401(k), must be opened before year-end.

Have there been any changes to your marital status?
If so, consider how your tax liability may be impacted based on your marital status as of December 31st.

CASH FLOW ISSUES

Are you able to save more?
If so, consider the following:
– If you have an HSA, you may be able to save $3,500 ($7,000 for a family) and an additional $1,000 If you are over the age of 55.
– If you have an employer retirement plan, such as a 401(k), you may be able to save more but must consult with the plan provider as the rules vary as to when you can make changes.
– For 2019 the maximum salary deferral contribution is $19,000, plus the catch-up contribution if over the age of 50 of $6,000 per year.

Do you have a 529 plan? If so, consider the following:
– You can contribute up to $15,000 ($30,000 if a joint gift is made) each year without filing a gift tax return.
– Alternatively, you can elect the Five Year Accelerated Gift of $75,000.

INSURANCE PLANNING ISSUES

Will you have a balance in your FSA before the end of the year?
If so, consider the following options your employer may offer:
– Some companies allow you to roll up to $500 in your FSA account over the previous year.
– Some companies offer a grace period up until April 15th to spend the unused FSA funds.
– Many companies offer you 90 days to submit receipts from the previous year.
– If you have a Dependent Care FSA, check the deadlines for unused funds as well.

Did you meet your health insurance plan’s annual deductible?
If so, consider incurring any additional medical expenses before the end of the year at which point your annual deductible will reset.

ESTATE PLANNING ISSUES

Have there been any changes to your family, heirs, or have you bought/sold any assets this year?
If so, consider reviewing your estate plan.

Are there any gifts that still need to be made this year?
If so, you can make gifts up to $15,000 ($30,000 if a joint gift is made) per year to an individual without filing a gift tax return.

OTHER ISSUES

Do you have children in high school or younger who plan to attend college?
If so, consider financial aid planning strategies, such as reducing income in specific years to increase financial aid packages.

Money Lessons for Professional Athletes

“Many NFL, NBA and Major League Baseball players have a penchant for losing most or all of their money. It doesn’t matter how much they make. And the ways they blow it are strikingly similar.”
— Sports Illustrated

Barry Ritholtz gives a good run down on how professional athletes go broke:

Youth and inexperience: Most professionals see their salary gradually increase over the course of their career. By the time they are making the big bucks, age and experience has taught them (more or less) how to manage their finances.

Not so for the pro athlete. After being an unpaid student athlete in college, they suddenly have access to millions of dollars. I don’t know about you, but I am fairly certain that if someone gave me $2 million when I was 21, I would have died in a fiery Ferrari wreck or some other foolish thing. It is a simple formula: Youth plus inexperience with money equals bad outcomes.

Athletes have short careers: Injuries, trades and the sheer quality of competitive talent means a twenty-year sports career is the exception, not the rule. On the other hand, white-collar professionals enjoy careers that last 30, 40, even 50 years — more time to amass their wealth, as well as a much longer period to figure out how to manage it.

Young athletes spend too much money: Suffice it to say they spend lots and lots of money, often more than they actually have. Divorce, child support and the costs of an entourage all eat into the cash flow.

Dazzled by the lifestyles of veterans — whose longevity and endorsement deals put them way ahead of the average player in terms of income — these professional competitors may feel pressure to compete off the field. Trying to keep up is a recipe for disaster.

Everyone takes home much less than they realize: Holding aside the issue of unwise spending, let’s look at nondiscretionary spending. GQ analyzed the finances of the typical athlete making $5 million a year. Right off the top, Uncle Sam and the resident state where he plays takes a hefty share — about half for someone in that top tax bracket. Then you have the professional managers, lawyers, accountants, etc. The agent takes $250,000, while the manager may take up to twice that amount. Trainers, nutritionists, travel and courtesy tickets all eat into the net.

Before spending the first discretionary dollar, the typical $5 million player is already down about 70 percent of the gross, to $1.5 million. That sounds like a lot of money, but a naive kid who has a $5 million dollar budget in his head can quickly find himself way behind.

Barry’s five simple steps that athletes (and non-athletes!) can take to avoid financial crisis:

1 Be involved: It is important that a young investor becomes involved with financial planning from the beginning of a career. He should understand what his take-home pay is (after taxes and fees) — and know what he is spending money on.

Be aware of the other numbers involved: What your career expectancy is. How much you are likely to make. What it is going to cost to live a certain lifestyle.

2 Have a plan: A young athlete should plan for three phases of a career: rookie years, top earning years and the life after sports.

In the first part of a career, the emphasis should be on improving your game, and saving money. Don’t worry about indulging in luxuries; you have the rest of your life to do that. Once you enter your prime earning years, you can loosen up a touch and spend more — but always within your means.

The last part of athletes’ careers is often the longest: when they are no longer playing professional ball. Having enough saved to carry them for the next 40 years is important. So, too, is having a second career — whether as an entrepreneur or a color commentator on TV sports broadcasts or as a coach.

Mapping out a workable plan for these three phases is crucial to avoiding that “other” phase: Bankruptcy.

3 Keep your costs low early in your career: Investors learn that costs, taxes and excessive fees are a killer of portfolios over the long term. So, too, are all of the small costs that eat into a professional athlete’s financial pie.

It helps to find a more seasoned and experienced teammate to walk you through what you should and should not be paying for.

4 Avoid debt and leverage: Learning to live within your means is a crucial financial skill for anyone. It is especially valuable for someone earning big bucks for what is likely a few short seasons. Debt simply means you are living beyond your means, even at those big salaries.

The latest snare waiting to trip up the unwary and impatient young athlete is the payday loan. For a very large fee, professional athletes can get huge advances on their salaries. These loans can be usurious, with fees and interest adding up to annual rates of 25 percent or higher. These are to be avoided at all costs.

5 Keep your investments simple: What most people think is the hardest aspect of finance is in reality the simplest: Avoid complex (private placements) or expensive (hedge funds or private equity) investments. Don’t make loans to friends or family. Don’t back start-ups. Don’t invest in new technology. Never buy fancy financial “products.” And whatever you do, for God’s sake, don’t put money into a restaurant.

Instead, have a simple asset allocation model of broad indices (U.S. equities, emerging market stocks, corporate bonds and Treasuries). You are in your early 20s, so you should have a 40- to 50-year time horizon for these investments. Don’t waste your time stock-picking or timing, just let the markets work for you. Build a portfolio of high quality, tax-free municipal bonds (especially if you live in a high tax state). These will pay you an income as long as you hold them.

Source:
Barry Ritholtz / WP

Inherited IRAs

Inheritances received via an IRA can be advantageous since you can choose to stretch the required distributions across your life expectancy, giving the assets more time to grow (plus taxes aren’t due until withdrawals are made). Here are key best practices to keep in mind:

When you inherit an IRA from anyone other than your spouse, you can’t roll it over into your own IRA
Instead, you have to retitle the IRA so it is clear the owner died and you are the beneficiary
If you move the account to a new custodian, make sure it is a “trustee to trustee” transfer”
If the check is mistakenly made out to you, the IRS will consider it a “total distribution” subject to tax and if you are anyone other than the surviving spouse, it would effectively end the IRA
Be aware there are deadlines for all of these actions
If the IRA owner dies after age 70 1/2 (when required withdrawals start) and didn’t yet take a withdrawal for the year, the heir has to do so by December 31
(if you miss the deadline, you are subject to a 50% penalty on the amount you should have withdrawn!)
If you are a nonspouse beneficiary, determine the required distribution by looking up your life expectancy on the single-life table in IRS publication 590
(most IRA custodians will calculate the required withdrawal amount for you but you need to make sure they are using the inherited IRA calculation)
Once you receive a 1099 form, confirm that the custodian properly indicated the distribution as a code “4”

HSA = Tax Triple Play!

Tis the season to select your health insurance plan either through your employer’s offering or the private insurance market. If you’re considering a high-deductible health plan (HDHP), keep in mind that many (but not all!) come with the fantastic opportunity called a Health Savings Account (HSA).

We love HSAs because they do two things:

They help you pay for your medical costs either today or in the future
They are triple tax advantaged

The government makes these accounts triple tax-advantaged because they want to incentivize you to save for your future medical costs. We know as the nation greys and gets older, we need to have a pot of money set aside to cover our potential out-of-pocket costs.

Here’s the triple tax saving advantage:

When you have an HSA account attached to a high-deductible plan, you get to take a tax deduction on your current your contribution. For families, it’s $7,000 in 2019 ($7,100 in 2020). This means you get to lower your adjusted gross income by $7,000, a tax savings of potentially around $2,000 if you take into account state and federal income taxes. That’s $170 of savings each month if you do a little rounding. That’s pretty incredible. That’s step 1 – you get a tax deduction in current year. If you’re age 55 or older, you eligible for a $1,000 “catch-up contribution” so your can lower your AGI by $7,900 (thus lowering your tax bill by ~$2,300 or $190 a month).
Layer two of the triple tax advantage is it grows completely tax deferred meaning it is growing without taxation on any appreciation, any dividends, or any income that’s going on a long as that money is sitting in the HSA account.
Here’s the third layer and really the knockout that makes it an awesome savings tool for the future. If you use the money in the future for medical expenses, your HSA distributions are completely tax free.
(Here’s another cool thing. Once you reach retirement, you don’t have to use your HSA for medical expenses, but if you want them to be tax free, it needs to be medical expenses.)

Be careful when you select a high-deductible health plan (HDHP) to make sure it qualifies for HSA eligibility:

HDHP minimum deductibles: self-only $1,350 in 2019 ($1,400 in 2020); family: $2,700 in 2019 ($2,800 in 2020)
HDHP maximum out-of-pocket amounts: self only $6,650 in 2019 ($6,900 in 2020); family $13,500 in 2019 ($13,800 in 2020)

HSAs can be one of your best friends for the future.

Know More, Make More

A new academic study finds that more financially knowledgeable people earn a higher return on their 401(k) retirement savings.

Dr Robert Clark (NC State University), Dr. Annamaria Lusardi (George Washington University), and Dr. Olivia Mitchell (University of Pennsylvania) analyzed a unique dataset that combined 401(k) performance data for 20,000 employees plus financial literacy data for the same workers.

Investors deemed to be more financially knowledgeable than peers enjoyed an estimated 1.3% higher annual return in their 401(k)s or other defined contribution plans than those with less knowledge.

According to the study’s authors:
“We show that more financially knowledgeable employees are also significantly more likely to hold stocks in their 401(k) plan portfolios. They can also anticipate significantly higher expected excess returns, which over a 30-year working career could build a retirement fund 25% larger than that of their less-knowledgeable peers.”

Financially savvy people tend to save more and are more likely to invest those savings in the stock market. But past studies haven’t clearly demonstrated that these people necessarily make better investment decisions. The authors look at patterns in 401(k) retirement accounts and find that more sophisticated investors do indeed get better returns on their savings.

Source: “Financial Knowledge and 401(k) Investment Performance”

Elite Colleges Don’t Buy Happiness or Extra Money for Graduates

Attention high school graduates that were rejected by their first-choice college

A new Gallup survey of 30,000 college graduates of all ages in all 50 states has found that graduation from an elite college provides no discernible advantage over Podunk U.

“It matters very little where you go; it’s how you do it” that counts, said Brandon Busteed, executive director of Gallup Education.

Gallup’s data demonstrate that people that feel the happiest and most engaged are the most productive. Those successful people got to that point by developing meaningful connections with professors or mentors, and made significant investments in long-term academic projects and extracurricular activities.

This new study’s results are well aligned with the existing body of academic research. For example, economist Stacy Dale published an insightful paper in 2004 that found that students who were accepted to elite schools, but attended less selective schools, went on to earn just as much money as their elite counterparts.

“Individual traits matter more than where you went,” Ms. Dale said. “It’s a lot more important what you learn later in life than where you got your undergraduate degree.”

Source: WSJ

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