- Hevel Capital: Monthly Newsletter
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- Hevel Capital: Monthly Newsletter
Hevel Capital: Monthly Newsletter
Financial Insights That Matter
Welcome to the first official newsletter of Hevel Capital!
Introduction
While I’ve written a lot over the course of my 13-year finance career, this is my first time writing a newsletter; an exciting, yet daunting endeavor. My hope and goal for you, the reader, is to learn a bit more about the investments world in a light and easy-to-read fashion. Every month I will share market insights, financial planning strategies and personal/company updates. I truly appreciate your consideration and time!
Please consider joining our upcoming webinar luncheon on Wednesday, May 29 (Link is here) that is exclusively for San Diego’s Tech and Biotech Workforce where we will discuss strategies to optimize equity compensation plans (e.g., RSUs, ESPPs, ISOs, etc.) in a tax-savvy way.
Hevel Capital: Focused on Making an Impact
While Hevel Capital was officially formed in February 2024, it was birthed from a two-year journey of desiring something more. I’ve always had an entrepreneurial spirit about me but chose the “safe” job every time throughout my career. Don’t get me wrong, these were good career moves and I am grateful for each one of them as I spanned the gamut of finance experience from wealth management, stocks, and real estate. I’ve worked on a lot of neat projects over the years from directly serving clients to supporting advisors to underwriting multi-billion dollar financing deals. While there have been a lot of interesting deals and impactful experiences, I’ve realized that it was missing a key ingredient and that is working more directly with individuals on things that matter. Through this epiphany and a series of closed doors, Hevel Capital was formed.
I didn’t want to just start another financial firm (or join one) but deeply pondered my why and value add to clients.
My Why:
1. Work directly with clients on things that matter. A lot of people get worked up on things in life that don’t matter and many in corporate America (hand raised) have this problem. Life is too short and I have a bit of yolo in me, hence the move to start Hevel Capital. The name ‘Hevel’ is a reminder to myself and others to focus on things in life that do matter or more precisely to NOT focus on what doesn’t matter (see here for more on choosing the name ‘Hevel’ Capital)
2. Create flexibility and autonomy over my schedule. Simply put, I want more freedom for myself and to give the best possible life to my family (for my wife and 4-month-old Jonah who has completely changed our life for the better…I’ve found that the best things in life can also be the hardest). While my hours are longer currently, it’s a worthwhile tradeoff (at least for me) when it’s your own business that is centered around serving others
3. Grow a brand that creates positive change. Hevel Capital was formed not just to serve households, although this is the primary focus, but to reach more individuals through brand-building efforts that create positive change in the world. We are here to serve clients and other stakeholders on financial matters that make a difference
Value-Add to Clients (Top 3 Reasons):
1. Create financial peace of mind. My job is not rocket science but advanced planning strategies and developing AND monitoring a sound investment strategy takes significant time. Additionally, the stakes are high and markets and the IRS are unforgiving. Hevel Capital is here to alleviate this ‘burden’, save clients time, and partner with households on their financial journey
2. Customized financial plan. Hevel Capital develops, implements and monitors a comprehensive and customized financial plan with a time-tested investment strategy. We provide holistic plans on a complimentary basis with no strings attached
3. Income-based tax planning. Effective tax planning can prevent headaches and significant money during tax season. We provide strategies to minimize taxes through tax loss harvesting, retirement withdrawal strategies, Roth conversions, employee stock bonus guidance, charitable giving, and much more
Market Update: Growing Concerns in US Stocks
There are significant moving pieces and powers at play in global markets and I am not an economist nor have any desire to be one. However, my expertise is in investments and have been quoted in major financial publications (e.g., WSJ, CNBC, Bloomberg, etc.) dozens of times in prior roles. I’m not sharing this to brag but to bring perspective…which is that there are a lot of ‘talking heads’ out there but nobody can consistently and accurately predict the future. There are always unforeseen events (black swan events) that are by nature unpredictable (e.g., COVID). Market fluctuations and black swan events are why having a diversified portfolio across asset classes that is dynamically rebalanced to meet your tailored goals is essential. I think this is enough for a long-winded disclaimer and mini-plug…now onto the market update.
US stocks finally took a small setback in April following strong gains over the past year. Following steep declines in 2022, markets recovered (US stocks leading the way) due to expectations for an accommodating Federal Reserve as inflationary forces subside. The ‘market’ is made up of individuals who buy and sell securities based on perceived fair value. Value is assessed through expectations for future performance. Simplistically, US stocks have performed well over the past year due to market expectations for lower inflation numbers and subsequent Federal Reserve interest rate cuts. However, inflation has remained stickier than expected and therefore the Fed has paused its ‘cuts’ causing the market to slightly sell-off in April.
There are growing reasons to be concerned with US stocks (long-term, US stocks tend to climb the ‘wall of worry’ so market timing has proven to be a futile task) including high valuation levels, geopolitical risks, and inflation that just won’t go away. Let’s tackle each of these in more detail.
1. High valuation levels:
US stocks are trading at a price / earnings multiple above their historical average and at premiums to the rest of the world which has led to strong market performance. However, returns have been concentrated in Large Cap Tech over the past few years due to market exuberance around artificial intelligence. While you’ll never time the ‘top’ just right and is why ‘time in the market’ is more important than ‘timing the market’, high-flying growth stocks will likely mean revert over time…even AI companies. Therefore, it is important to diversify your portfolio to include international and emerging markets despite inferior performance over the past decade and the temptation to overweight expensive tech stocks.
2. Geopolitical Risks:
Geopolitical risks are always prevalent but as the world de-globalizes and becomes a multi-polar world, there is a higher risk of disruptions. This happened when Russia invaded Ukraine resulting in a prolonged war and thousands of lives lost. From a financial perspective, the war has disrupted the commodities market (Ukraine was one of the top exporters of grain and wheat with a global market share of 10%+) and during the pandemic as the entire world shut down for various lengths of time. The pandemic shutdowns led to inventory shortages in most industries as supply chains were disrupted and the government (including the Fed) inflated demand through stimulus and rate cuts. The economy is still working through inflationary impacts from this supply-demand shock (e.g., elevated house prices due to lack of supply as homeowners are stuck in place due to low mortgage rates).
Geopolitical risk is much broader than the upcoming US election and increasing polarization on the home front. In fact, there is a record-breaking 77 global elections this year. Conventional wisdom states that geopolitical risks generate more noise than impact but this year will challenge that notion.
3. ‘Sticky’ Inflation
Inflation has broad-based negative impacts on the economy. We’ve all witnessed this ourselves at the grocery store or gas station. Demand was pulled forward while supply was severely limited during the pandemic (as stated above) leading to aftershocks. High inflation has caused the Fed to wait on lowering interest rates because cutting rates stimulates the economy, leading to increased demand (e.g., increase in housing transactions, business loans, etc.). The ‘dark’ side of increased demand is often higher inflation which remains the number one concern for Americans today. Rates have stayed higher for longer due to the perception that the economy is not weakening. However, there are increasing signs of a slowing economy, which ironically may be positive for the markets as it allows the Fed to start cutting interest rates.
However, if inflation remains high (Fed Target: 2%) and the Fed continues to delay rate cuts it hampers business growth. Higher-than-expected inflation is why stocks slightly sold off in April and remains the largest known risk for US stocks in my opinion.
Bonds have also performed poorly due to multiple Fed rate hikes in 2022 and 2023 (higher rates = lower bond returns). However, bonds provide much better yields than a few years ago with high-yield savings accounts at ~5%. While these rates will likely come down if and when the Fed lowers rates, diversified bond portfolios should benefit (lower rates = higher returns) following a really tough stretch over the past few years. Bonds play an important income generation and principal protection role in investors’ portfolios.
Required Minimum Distributions: The Basics
RMDs confuse many but once you understand the nuances you can plan effectively and potentially save a lot in taxes.
When Do You Need To Start Taking RMDs?
The age at which you need to start taking RMDs depends on the year you were born. If you were born in 1950 or earlier, you start at age 72. For those born between 1951 and 1959, it's age 73. And if you were born on January 1, 1960 or later, your RMD begins at age 75.
How Much Will Your RMD Be?
The amount you're required to take as your RMD depends on two things: the value of your account that's subject to an RMD and your age. The IRS has a life expectancy factor for each age. For instance, if you were born in 1950, your current life expectancy would be 26.5 years. You'd then take your IRA or pre-tax account balance as of December 31st of the previous year and divide it by 26.5.
Strategies to Minimize the Impact of RMDs
1. Start early: Understanding the rules and starting your planning early can help you avoid penalties and reduce your tax burden
2. Diversify your retirement savings: Having a mix of taxable and tax-free accounts can give you more control over your income and taxes in retirement
3. Consider a Roth IRA conversion: This can help reduce the size of your RMDs and potentially save you in taxes over time. A conversion will result in a taxable event for contributions from your pre-tax retirement account (e.g., Trad. IRA, 403b, etc.) to a Roth account. However, once the upfront taxes are paid on the conversion the new Roth account is tax-free from capital gains and distributions for yourself and your beneficiaries
What RMDs Mean For You
Understanding RMDs and how they work can help you plan your retirement more effectively, potentially saving you in taxes. Taxes are not the most fun topic but understanding and planning for them is an essential part of one’s overall financial plan.
Take Advantage of Your ESPP: ‘Free’ 17.6% Return
Learn what an employee stock purchase plan (ESPP) is and how to take advantage of it if your Company offers this plan. ESPPs are an underutilized wealth building tool (only ~37% of eligible employees participate in an ESPP, according to Deloitte) that effectively provides ‘free’ money to eligible participants if utilized properly.
Understanding ESPPs
ESPPs are a benefit offered by companies that allow their employees to buy up to $25,000 per year of company stock at a discount (typically 15%). The neat part about these plans is that most ESPPs have a 'lookback provision', allowing you to buy shares at an even lower price making it a power wealth-building tool. Once you enroll in an ESPP, you choose a percentage of your salary to go towards it. Your company then starts taking contributions from every paycheck until the end of the current purchase period (typically a 6-month window), at which point they buy discounted stock for you. It's a simple and effective way to boost your income.
Techniques for Maximizing Your ESPP
Choose to participate in your ESPP during the enrollment period
Decide what percentage of your income you want to invest
Understand the details of your ESPP, including any discounts or lookback provisions
Example of an ESPP in Action
Bob makes $90,000 a year and decides to contribute 10% of his salary to the ESPP. This ESPP has a 6-month purchase period with a 15% discount. A 10% contribution would mean $750 per month goes towards this plan for a total of $4,500 in 6 months. If the share price is $100, Bob can buy at $85 and lock in a 17.6% return if he sells immediately. An additional kicker is the lookback provision which many plans offer. With a lookback provision, Bob will receive the lower price set at the beginning of the offering period or the purchase date (six months later). Let’s say the price of the stock was $90 at the beginning of the period. With the lookback provision, Bob can buy the shares at a 15% discount from $90 or at $76.5 per share, locking in a ~31% risk-free return if he sells the shares immediately. By selling shares immediately, this is a disqualified disposition that is subject to short-term capital gains tax (same rate as ordinary income taxes).
Why Paying a Higher Tax Rate is Worth it for ESPPs
In most instances, selling the discounted stock immediately is the better option to lock in your gains and diversify your wealth. Don’t lose sight of the forest for the trees or let the tail wag the dog and focus all of your decisions on trying to save a bit on taxes. In many instances, you will come out ahead by waiting but the risk may not be worth it and your ‘risk-free’ investment becomes quite risky in a concentrated position at the company where you work. This is a great example of not putting all your eggs in one basket. Be grateful for your risk-free 17.6% return (which is higher in most cases) as many people do not have this option through their employer.
ESPPs are one of the best employee perks available at some public companies but are grossly underutilized by employees…make sure that you take advantage of this ‘free’ money.