Only The Disciplined Will Survive

Earnings season is among us. If you’re not familiar, it’s a time when publicly traded companies release their quarterly earnings reports. It’s usually the busiest time of the year for those who work in and watch the markets. Many analysts set their expectations for specific quarters, so the results reported by the companies during earnings season often play a significant role in the performance of the stock. Considering most of the country is on lockdown, and unemployment claims are at their highest in history, you can expect things to get a little rocky for Q1 2020 earnings report. Word of advice: only the disciplined will survive. 

Beyond performance, successful investing requires understanding what matters and, at the same time, recognizing what you can control. 

Financial planning is a process, not an endpoint.

Financial planning isn’t a destination; it’s a process. Similar to iterating and agile development — it involves agile planning, evolutionary development, continual improvement, and encourages rapid and flexible responses to changes in life. Inherent in its nature, real financial planning will focus on being smart with your money, and it will equip you with the solace needed in moments of uncertainty. 

Concentrate on long-term goals and objectives.

Buying an investment and holding it for the long haul can help keep you focused on your goals and reduce the anxiety that is often experienced with short-term volatility. While short-term profits can often entice investing neophytes, long-term investing is essential to greater success. Not to mention, long-term planning allows you to abandon a hand-to-mouth approach and set a priority list for the things in life you genuinely value. All in all, you should invest for your goals, not just for the sake of investing. Your financial success depends less on what markets do — and more on figuring out who you are and what you want out of life. 

Focus on reaching goals, not beating benchmarks.

Investing, now more than ever, is about controlling the controllable. You can’t control the markets. But you can control how you react to the markets. Be that as it may, I’m an advocate of goals-based investing or setting a personal benchmark. After all, would you be upset if you achieved all that you wanted in life, but didn’t beat the S&P 500 consistently? Probably not. From my experience, no one has ever mentioned benchmarks when we talk about their life goals and values. Why? Because it’s not the benchmark that’s truly important to you.  

Maintain a disciplined approach in good and bad markets.

Only the disciplined will survive. That reigns true in both good and bad markets. Disciplined investors understand that the market is cyclical, and there will be periods of growth and decline. Sure, discipline sounds nice in theory, but it’s certainly challenging to execute in the real world where market conditions change, incomes fluctuate, and personal needs and desires evolve. 

Because of this, it’s easy to get caught up in the whirlwind of emotions and make costly mistakes. If you genuinely want to be a disciplined investor, you must create and stick to a game plan that allows you to be both flexible and steadfast for decades to come. Put your finances on autopilot. Have automated processes in place that forces you to make systematic moves not based on how you’re feeling at any particular moment or based on the movements of the markets. Remember, only the discipline will survive.

Invest broadly and globally; asset allocation is key.

Although you have no control over your investment returns, asset allocation is still one of the most important investment decisions you can make. Besides your risk tolerance and time horizon, it also tells the unique story of who you are as an investor. 

If it helps, try to decide on an investment philosophy that aligns with your goals and objectives. For example, my philosophy is to continuously invest in globally diversified passive vehicles while paying a low fee. It’s nothing fancy, but it’s a prudent way of getting the job done. 

Reduce investment and tax costs when possible.

Limiting your investment-related fees and expenses is a critical aspect of investing. Think about it in this fashion — every dollar saved is a dollar that remains in your portfolio working for you. It’s fair to wonder if lower-cost investment vehicles will yield lower returns. However, time and time again, we’ve learned that low-cost index funds outperform the vast majority of their actively-managed peers in the long run. Go figure. As for tax costs, that’s simply a matter of displaying patience and holding on to your picks for the long-term. 

Rebalance as necessary.

Investing isn’t a one and done activity. In fact, it’s quite the contrary. Selecting the right allocation of stocks, bonds, and funds is a delicate balancing act that should be revisited periodically. It may not seem obvious, but investments can, and do, change in value. Markets and economies change, and individual businesses change. Similarly, holdings may increase or decrease in market value or have changes to the dividend. Because of this constant change, it’s wise to rebalance your portfolio to the target allocation regularly.

Selling Company Stock To Raise Cash

 Believe it or not, selling stocks require a strategy that is just as important and detailed as buying them. There are a few scenarios where selling your company stock to raise cash makes sense. It generally has little to do with market activity and a lot to do with your personal circumstances as a Millennial in tech.

As history proves, successful investing isn’t a matter of timing the market. It’s more about responding to changes in your life and your portfolio. For reasons beyond your control, you may find yourself in a position where you suddenly need to come up with cash. In an ideal world, you would have a cash reserve in a high yield savings account to meet urgent or unexpected expenses. 

Alternatively, the proceeds from selling shares of your company’s stock, acquired through equity compensation, can be a useful source of income as well. However, you must proceed with caution when selling company stock to raise cash.

If you’re considering selling your company shares, there are a few concepts and tax consequences you must know. To guide your decision making around this topic, I’ve put together some main points you should consider. 

Identify the best shares to sell

When you hold company shares you’ve received at varying prices and moments in time, it’s advantageous to clearly identify which shares are best to sell. This strategy is an investment accounting approach known as Specific Share Identification, where an investor’s objective is to optimize their tax treatment when selling company stock to raise cash. 

For instance, let’s say you’re awarded RSUs, and receive 1,000 shares that will vest over four years. Each year, the price per share, also known as your cost basis, is increased by $5. In this scenario, you’ll receive 250 shares at $10 per share in year one. In year two, you’ll receive 250 more shares for $15 per share. In years three and four, you’ll receive 250 shares, but at $20 and $25 per share, respectively.

As you can see, these shares will vest at different prices, and if you decide to hold them rather than selling immediately, they will have different holding periods. If an employee were to sell a portion of their company stock to raise cash, there would be different tax implications for each group of shares. Considering this, make sure to get clarification on how to indicate specific shares to sell through your brokerage firm (E-Trade, Vanguard, Fidelity, etc.).

Understand capital gains taxation

Capital gains are profits from the sale of a capital asset, such as shares of company stock. Notably, when you sell company stock, you will generate a capital gain or capital loss. The calculation is simple — it is the difference between the sales price and your cost basis. Once you’ve decided to sell your company stock to raise cash, the challenge becomes minimizing taxes on the income received. 

If you hold company stock for more than one year after exercising stock options, purchasing shares through an ESPP, or vesting of RSUs, it will qualify for long-term capital gains rates. If you hold the shares for less than a year, it will result in short-term capital gains rates.

The difference between the two is relatively simple. Short term rates are taxed as ordinary income, as high as 37%, while long term rates are capped at 20%. Because of this favorable tax treatment, you are incentivized to sell shares that will result in long-term capital gains as opposed to the alternative.

Know your holding period for ISOs and ESPPs

Capital gains taxation especially plays a role when dealing with ISOs and ESPPs. Holding company stock purchased in an ESPP for more than two years from the enrollment date and one year from the purchase date will lead to favorable tax treatment on the sale. In a like manner, holding shares exercised via ISOs for more than two years from the grant date and one year from the exercise date will lead to lower tax rates. 

On the other hand, selling the shares too quickly will result in a disqualifying disposition and will have different consequences for ESPPs and ISOs. To drive my initial point home further, this is another reason to carefully identify the shares you want to sell. 

Watch out for wash sales

A wash sale occurs when you sell a stock for a loss, and you also purchase a substantially identical stock within 30 days before or after the sale. You might be thinking, “why would I ever sell my stock for a loss?” Without getting into the weeds of tax planning, the IRS allows you to use capital losses to offset capital gains, resulting in a lower capital gains tax. In the investment world, this is called tax-lost harvesting.

Under wash sale rules, the loss and holding period are carried over to the new replacement shares. For example, let’s say you sold shares of company stock for a loss. Any RSU vesting, ESPP purchases, or option exercises can trigger the wash sale rules if they occur within 30 days of the sale. That is to say, your cost basis from the shares that were sold will be added to the cost basis of the new shares, resulting in a higher cost basis. 

Know your company’s post-termination rules for stock options 

For the most part, employees typically have 90 days to make a decision and exercise their vested stock options when they leave a company. If you can’t get together the necessary cash and plan for the tax implications for the exercise, you’re likely out of luck. All those vested stock options representing years of hard work will expire, and be rendered useless.

Some companies view this is as a serious burden that many Millennials in the startup world face when they leave a company. Thankfully, there are leaders like Pinterest, Coinbase, and Asana, who have extended post-termination exercise (PTE) windows that reflect their culture and gratitude to employees. 

P.s. I found a list of over 150 companies, all of which have extended PTE windows far more than the standard 90 days. I’ve only shared it in my weekly newsletter with The Equity Shop community 😜

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If I Were A Millennial In Tech

When I first launched Deane Financial, I was fortunate to leverage my fiancée’s design insight to build a wealth management firm exclusively for Millennials in tech. From the holistic lens of my business, service design plays a vital role in encouraging varying levels of innovation within the firm — whether it be incremental, adjacent, or disruptive. As you can imagine, my method of doing things is a bit different. I spend a good deal of time thinking like my niche to build the ideal firm that serves them. I’ll admit, sometimes I get so entrenched in the tech world, I feel like I’m in the industry myself. So, I thought, why not put myself in your shoes for this week’s blog post on personal finance?

So, here it is.

If I were a Millennial in tech, here’s what I would be doing right now when it comes to my financial life. 

Develop multiple streams of income

If we’re similar and your goal is financial independence, the roadmap is simple. Multiple streams of income. Once Kem became a designer, it didn’t take long for me to notice the potential Millennials in tech possessed when it came to their earning power. Like some Millennials, I like to reward myself with expensive nice things, but only when it’s earned. And I hate feeling like I need to cut back on expenses if I want to meet my financial goals. So, if I were a Millennial in tech, I would focus on the alternative. Things I can do to earn more income. 

Thankfully, we live in the age of the internet, where information spreads at zero marginal cost. If you have a personal brand, and you’re willing to put in the work, there are plenty of ways to develop multiple streams of income. For instance, if you have a technical skillset like design or engineering, you can do freelance projects making apps and SaaS products. If the educational route is more fitting, you can create online courses or ebooks. You can even do live trainings. Because I’ve been to a few and had great experiences, I would look to partner with specific organizations and host events like design sprints and hackathons. And because I’m all about passive income, I would be a Shopify Developer Partner. Without a doubt. 

Automate my financial life

Financial success is a lot like designing and engineering. It requires seamless systems and processes that promote end-user satisfaction. Considering my day-to-day responsibilities, keeping long-term goals in mind at all times requires entirely too much willpower and effort. Thankfully, having a process in place that replaces willpower makes it easier for me to remain disciplined. On a high-level, there are three personal finance rules that I live by:

  1. Spend less than I earn
  2. Spend money on the things that align with my values
  3. Prioritize saving and investing

While these standards aren’t always easy to follow, I’ve found that automating my finances gives me an enormous advantage. For me, it’s the best strategy to lock in future behavior as opposed to relying on willpower in the moment. Be that as it may, when saving and investing, it’s more than a goal that I’m hoping for. It’s an outcome that is virtually guaranteed. 

Here’s what it looks like in 5 simple steps:

  1. Compartmentalize my accounts. For example, I have three checking accounts — a joint account with Kem for our monthly bills, a personal account, and a business account. I also have a Roth IRA for retirement, and online saving accounts for my goals (buy a home, wedding, vacations, etc.)
  2. Set up my entire direct deposit to go to my primary checking account for fixed expenses. 
  3. Set up automatic transfers from my primary checking account to my secondary checking account for my personal allowance. This will be for day-to-day spending, variable expenses, shopping, etc. 
  4. Set up automatic transfers from my primary checking to my various savings and investment accounts for future goals.
  5. Because I’m all about simplicity, I would use a budgeting app like Tiller Money or TrueBill to track and review my expenses regularly.

Use company stock to fund my goals

This should be no surprise to you. If I were a Millennial in tech, I would make it a priority to know the ins and outs of my stock compensation plan.  Since company stock awards can vary widely, my first step to understanding its true value is identifying the specific plan type. Next, I would get familiar with key terms, important dates, tax consequences, trading restrictions, and the inner workings of my stock plan. 

Equity indeed has the potential to be a useful wealth-building tool due to the growth of the underlying company stock. But because uncertainty is inherent, I view it separately from salary and would resist the urge to perceive it as a “lottery ticket.” Instead, I would utilize a holistic approach to manage my stock compensation — amassing equity to meet my short and long-term goals. 

By clearly defining in advance events, dates, and price ranges that will trigger specific actions with company stock — I will be making investment decisions more straightforward and seamless. In fact, I have more of a rules-based personality, so I would likely create a decision flowchart to implement this aspect of my financial plan. Most importantly, if I were a Millennial in tech, I would review my financial plan periodically and adjust for any changes in my goals and circumstances.

Build an opportunity fund

We all know about the importance of saving to build an emergency fund. But what if I’ve been diligent with building financial stability and I already have that covered? What’s next? The way I see it, if I’ve saved for inevitable but unpredictable adverse events, I should also save for inevitable but unpredictable good events. This is the moment when my bonuses and an opportunity fund makes its way into the picture. I like to think of opportunity funds as a competitive advantage, particularly in economic downturns. In moments of fear and uncertainty, the best investment opportunities will go to those with lots of cash. 

For instance, as my personal and professional network expands, I am molding relationships with more people who might be starting a business or getting involved with an investment. I’m a calculated risk-taker, so I like to have money set aside to take advantage of opportunities. Under those circumstances, the two things I refrain from doing is pulling money from my retirement nest egg and dipping into my emergency savings. Given these points, this opportunity fund is strictly for “risky” investments that align with my tolerance and capacity for risk. 

As for where I would keep it? It would likely be in a money market mutual fund that invests in high-quality, short-term debt. They are considered a favorable place to park cash because they’re much less volatile than the stock markets, and is one of the safer investments you can make. Because you can earn interest of 1%-3% a year, these funds are useful for investors who want to protect their assets, but still earn interest. There may also be tax benefits since some money market funds hold municipal securities that are not included in federal and state taxes. Win, win if you ask me.