Jon Erickson on LinkedIn: I tend to have a love/hate relationship with annuities. I love a lot of… (2024)

RSUs and really any sort of Incentive Stock Plan has an interesting issue, you can often times create great wealth but when it comes time to diversify you often times have years of capitals taxes to deal with, Net Investment Tax, and Washington State Capital gains taxes if you live in Washington State to deal with.You also have an emotional issue of potentially decades of better than diversified market returns and now you have an entire industry coming and telling you that isn’t ok anymore, you need to consider diversifying.I wanted to focus on my younger workers as opposed to my usual retirees and suggest some ideas you might want to do before you get to retirement.1.You are allowed to take risks and diversify if that is your risk profile.Here is what I mean, when an RSU accrues it is taxable to you already in most situations.However, at that point you can sell it and have a very small taxable issue.You can then buy other stocks that fit your risk/return profile.You can look at Private Equity, etc.You don’t have to massively de-risk, just maybe don’t put all your eggs in one basket.2.When you re-invest watch out for passive taxation or things that are focused on income as to their investment style.You often have a specific problem that you are in your highest income earning years and you are making more than the rule of $250k.(a personal rule of thumb I created).You typically want to go for tax deferral of capital gains so that when you get out of the net investment tax.3.Don’t forget to harvest losses as you go.Selling stocks when they are down and purchasing other appropriate equities or even the same positions once you get past wash rules can improve your current tax situation.4.You may want to look at direct indexing to go along with your tax loss harvesting.5.Are you time poor?Sometimes you just need to hire work out.Overall RSU’s have been a great option to growth wealth and even explosive when you are with the right company, but they aren’t fool proof.Knowing your process and the risks you are owning and future taxes can be a good starting point.

With Costco selling gold bars that the public can buy and reportedly earning $200 million in revenue a month, it got me thinking should I buy a gold bar for fun?Being a financial advisor, I can’t use myself as an example of whether to do something or not, but I thought it would be interesting to show the process I went through thinking about this.First, I had to figure out could I handle the loss of liquidity.No matter how much my family loads up the Costco cart at the end of line, I can’t whip out my gold bar to pay for it. I had to figure out what I was losing to buy the gold bar.Gold is generally priced on something called the gold spot price which is an averaging of the different markets around the world such as COMEX, NYMEX, CME.But when I buy gold, I am not getting the spot price, I am getting a more expensive price to buy the gold and it looks like I might be paying 2% or more to buy the Costco gold.Good thing I get money back from Costco on purchases, I am surprised they aren’t limiting that on this. Ok, I have my gold bar.How am I going to store it?Do I now need to own a safe?Will my wife even let me put a safe in the house and is it any fun to have gold in a safe? What about selling time, how much of a hassle is this going to be.Remember that spot price, gold is priced on.Well, you apparently can’t just walk into a business and demand that as cash.In fact on the backend, it appears the losses can be significant to sell this back based on the current spot prices.You know that store in town that says coins that have been around forever that you can’t figure out how they stay in business?This is one of the ways they do it.It pays to look at bids because selling it back can have offers of 90% to 98% of spot value or much lower such as 75%.So, let’s assume I can sell my gold for 95% of spot value. Simplistically I am taking $100, losing an upfront amount such as 2% and losing a back-end amount such as 5%.I have the hassle of storing gold, and no matter what video games tell me, it doesn’t appear I can spend it at my local merchant in the apocalypse.The returns here then really matter, if gold is up 10% in a year and as I keep it, it grows at 10% a year this might be worth it.But I would suggest you need to have a reason or process for why you are doing this. That doesn’t mean I may not purchase an ounce to try it.I tend to work with retirees and soon to be retirees and one thing I mention to them, is how much of a hassle will this be for your kids someday if you go down this road?

I was reading a CNN article that the stock market is shrunk from 7300 publicly traded companies in 1996 to 4300 today in favor of the private equity model.PE firms have grown from 1900 to 11,200 per that article.That appears to me to be a pretty fundamental shift for a variety of reasons and something to watch. There is a pretty big difference between the regulatory oversight of a publicly traded company versus a company in the Private Equity space.Often investors who want to purchase into the private equity space must be accredited or more which means you have the asset level to take the risk of total loss essentially.This lack of oversight might let these companies be nimbler, but it also makes it harder to spot problems early. I think this could represent an issue for middle America investors.If you look at a lot of popular retirement strategies, they use asset allocation models various equities such as small cap companies, fixed income, etc.But as the pool shrinks the ability to have asset allocation for middle America potentially shrinks as well.At the same time Wells Fargo is indicating PE might be outperforming small-cap equities which puts further pressure on this concept.If you look at 100 years of market history you might notice small caps could historically outperforming large caps but with recency bias that may not be true anymore.So, this overall represent an interesting shift to keep an eye on.I use private equity in my practice, but I usually don’t advise it unless I see someone has the assets, risk appetite and long-term outlook to handle it.

Diversification drives me crazy sometimes. I work in Bellevue, WA and around me are companies like Costco 10-year returns 21.32%, Microsoft 10-year returns 27.11%, Amazon 10-year returns 27.32%.These returns let large groups of people retire early, made significant wealth and general financial planning rules of thumb suggest you need to diversify away from this.Now you can’t guarantee this run will continue but I run into a specific problem all the time. You worked for Microsoft, had years of restricted stock units and all your recency bias for the last 20 years is market beating returns creating usually great wealth.Now you want to retire, and you have a basic problem do you diversify that or not?There are a variety of reasons to be careful here and one of the biggest to consider is taxation.I have something I generically call the rule of $250k where if you start creating income above this amount you create bonus taxes.Net Investment Tax and Washington State Capital gains taxes specifically.Because of the nature of these larger positions, you might trigger extra taxes if you diversify aggressively. The next problem is emotional.You worked your entire life for a company, made great wealth and you essentially trust your investment implicitly and now you have to consider moving money around to things you may not trust. Expected rates of return can be an issue.Microsoft has outpaced the S&P 500 over the long term at multiple points in its history.Just diversifying into the S&P 500 might mean less returns, are you ready for that?What about if you blend other asset classes that the S&P 500 outpaces to get further diversification?I think you need a process to consider, in this case Microsoft, may not always be a top 5 S&P 500 stock but moving away from it has risks of its own.I work with retirees and soon to be retirees and this process can be tough to go through but if you focus on your goals, taxation, risk tolerance and your emotions I think you are on the right track.

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What is up with the commercial real estate market?I mean didn’t they get the memo; Morningstar US Real Estate has a return of around -3.58% and the S&P 500 YTD is 11.18%.A 10-year return is showing 1.92% versus 10.88% for the S&P 500.We can’t guarantee these trends will continue, but what is going on?I think the one people get is that the pandemic changed how we work, specifically more remote work has been partially normalized.The pandemic changed how we shop; I swear Santa should turn in his red suit for an Amazon uniform at my house.But I think there is one other factor that we can miss. Commercial Real Estate can be incredibly interest rate sensitive.On the development side commercial real estate heavily uses leverage (loans) to build a property.Let’s say you want to buy a piece of land, build a office building and then rent it out and you have $500 million.You are probably using a loan to purchase the land and/or the building and let’s say your loan costs recently went up 4% in cost or $20 million a year in extra interest payments.If the overall loan rate is 12% for a hard money loan, that is $60 million annually you need to generate to break even.As you go through this process you might run into trouble, trouble brought on by say a pandemic and now you need to do everything you reasonably can to protect yourself.This entire process can cause commercial real estate valuations to plummet.If it goes on long enough and we have enough failures it can cause severe disruption.For me the fun part is this can have carry on effects to a variety of financial instruments structured around commercial real estate.If I could have told young Jon how much more fun it is be in finance over fighting fires, he would never have believed me. I work with retirees and soon to be retirees and I usually follow an order of operations of income, asset allocation and asset size as to how I handle commercial real estate positions in a portfolio.

Are you betting against tech, maybe you shouldn’t.I remember when I was working in an office tower in downtown Bellevue and during lunch I would look out and count the cranes in the skyline.That was some time ago and I remember in 2022 the Puget Sound Business Journal mentioned that Seattle had the second most construction cranes in the country, second to LA. If you look at the top companies of the S&P 500 in 2004, 20 years ago you will see Microsoft, Exxon Mobil, Pfizer, Citigroup, and GE.In 2024 you will see so far Apple, Microsoft, Alphabet, Amazon and NVIDIA.What happened to companies like Pfizer, were they bad?If you look at their 15 year returns you might see 8.51% roughly.I think most people would take that level of return.If you look at Amazon you might see a 15-year return of 29.46%, Apple 28.39% and in comparison it isn’t even close, over 15 years.A S&P 500 index ETF like SPY has 15 year returns of roughly 15.19%.The dominance of tech in historical returns can’t be understated, but neither can it be guaranteed to be repeated. I work with retirees and soon to be retirees and I am in the heart of one of the tech centers in the US.One of the issues I run into is diversification because we have these historical often repeating outsized returns driven by tech and if I diversify and these continue am I just hurting my clients portfolios?This conversation of goals, risk, potential returns amongst other factors is critical in having a healthy client relationship.Because if a client’s experience on the Eastside is Microsoft level returns and I am mentally thinking a balanced fund or some version of less risk, we need to figure out what that diversification plan is going to be that works for everyone.

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I subscribe to a fair amount of investment newsletters which means I am getting exposed to what could be a “hot” investment sent to my email box daily.I really believe in the concept of behavioral finance.Thus, I am invariably telling people to not treat this information emotionally and think about this before jumping into a stock tip that came to your inbox.I think there is an issue with how some people treat this information that can lead to some problems.Let’s say you get the hot stock tip that XYZ really is doing well and is taking off, I have 3 suggestions with how to treat this information. 1.Was this merely underpriced, the market figured it out and the rally is over?Meaning if you jump on the bandwagon now, will you not get the benefits of this rally. 2.Has this shot past a reasonable price point, you missed out and it could easily fall.Meaning if you buy in now, you start taking losses. 3.Is this like a core holding where this has a reasonable chance to keep growing and you might have just missed out on the first jump.If you buy now, you still might have gains occur. I personally don’t like following the hot stock tip.It is fun to play but that is for the play money side of the equation.Of course, to my chagrin occasionally, they explosively work out, but the reverse can more often be true.Since I work with retirees and soon to be retirees, I am always trying to create guard rails around this.

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If I ever want to shake my head frustrated, I think about inflation.I was looking at an inflation calculator and from 1960 to 2021 according to this calculator $1 in 1960 would need to be worth $9.15 today to keep purchasing parity.That is a 3.70% average inflation rate, and at that rate the price of goods doubles around 19 years.In real world terms that meant the average retiree would have the prices of goods and services double on them at least once.My dad loves to drink Manhattan’s and that $15 one he bought last week should be $30 when he is sipping them later in life. If we did the same math and looked at 2021 to 2023, we saw an average 6.04% inflation rate roughly.That means the price of goods doubled around 11.82 years.Uh, oh dad, better get ready for $15 to turn in $30, to potentially turn into $60 or even more.The good news is inflation cooled from those numbers and we hope it continues to do so but I think this shows the effect that inflation can have on the things you enjoy.Good news for my dad is he shares my sense of humor, so when I tell him to look on the bright side in a much more morbid fashion as he gets older, we can both chuckle.

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If I want to get someone’s attention I often talk about taxes.If you look at behavioral finance very few topics get the fear and greed motivators going like the term paying taxes.In fact, I have quite a few vendors who come asking me for client referrals with the theme being taxes and tax savings. The issue I find though when someone talks about taxes is they don’t focus on the net result only the potential tax savings.If I created a tax savings strategy that, has you give me $10 and in 5 years, I give you back $10, it doesn’t matter how much I claim I saved you in taxes the net result is a zero gain.If my gas saving strategy, is you just never drive your car, you might object when it comes time to pick up your kids from school. That doesn’t mean there aren’t good strategies to follow around investing, taxes and retirement planning but a well-rounded conversation focusing on your goals and looking at the net results is a pretty important component to consider.