Monthly Archives: March 2016

Thoughts From Willis | Understanding Your Asset Allocation

Asset Allocation Awareness

Why is it important to understand your asset allocation for your financial future?

 

 

Diversification is key in managing the volatility of an investment portfolio. One of the major components is the allocation of stocks to bonds. A major part of assessing a person’s risk tolerance is understanding his or her withdrawal rate.

 

The withdrawal rate is simply the percentage of funds one removes from an account over a period of time. The accumulation phase occurs early in one’s career while the distribution phase occurs during retirement years. It is important to speak to your adviser at least 18 months in advance of implementing a systematic withdrawal plan or changing the percent of funds taken out of the account. We feel you should increase bond exposure based on the amount withdrawn. Our rule of thumb is as follows:

 

3.5% withdrawal or less          –>             65-35 equity-to-bond ratio

3.5% – 5.0% range                  –>             50-50 equity-to-bond ratio

5.0% or higher                        –>             30-70 equity-to-bond ratio

 

 

If you have any questions on this topic or in your account(s), please do not hesitate to contact your adviser. In conclusion, it is imperative to adjust the risk profile of your asset allocation based on your withdrawal rate. It is also important to plan at least a year and a half out in order for your adviser to have time to rebalance your portfolio.

 
Willis Johnson, CFP®
President and CEO
 

 

 

The information provided is not intended to be a substitute for specific individualized tax, legal or estate planning advice. Individual situations will vary. We can assist you in making informed decisions. No single solution meets all investor’s needs. Investing involves risk including the potential loss of principal. No investment strategy, including diversification, asset allocation and rebalancing, can guarantee a profit or protect against loss.
Willis Johnson & Associates is a registered investment advisor. Insurance and additional investment advisory services offered through Willis Johnson & Associates.

 

 

Comparing Education Level to Unemployment Rates

Achieving a higher level of education plays a big role in lowering the unemployment rate.

Did you know that as of November 2015 unemployment for the college educated population is around 2.5%? The graphic further illustrates the value of pursuing higher education.

Financial Fact March 2016

The information provided is not intended to be a substitute for specific individualized tax, legal or estate planning advice. Individual situations will vary. We can assist you in making informed decisions. No single solution meets all investor’s needs. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

What Nick’s Reading | What You Need to Know About 83(b) Elections

Published: March 18, 2016

Oil and Gas Executives Should Consider Making 83(b) Elections This Year on Their Performance Shares

Missing out on 83(b) elections could mean missing out on saving tax dollars, especially if you work in the oil and gas industry.

 

It has been a volatile start to the year in the market, and an even rougher last twelve months for anyone in the energy business.  As of the end of February, West Texas Intermediate Crude oil traded near all-time lows at $26.21. Realizing how stressful this is for our professional and executive clients, we want to emphasize how this could be a tax opportunity for energy professionals that receive restricted stock. Some energy companies refer to restricted stock by various other names like performance shares, stock awards, or plan awards.

 

Before getting into the potential tax benefits of an 83(b) election, it is important to understand how restricted stock units are granted, vested, and taxed. Companies have a lot of leeway in structuring how they compensate their employees. Most large energy companies use restricted stock units to align the employee’s compensation with the performance of the company over an extended period of time. Let’s look at the tax ramifications of a standard non-83(b) election example:

 

John receives a restricted stock grant of 1,000 shares of company stock in 2016. The current share price for the company stock is $50 (current value of the grant is $50,000). The stock vests in 2019 and the company stock price is significantly higher since oil rebounded over the last three years. It is now trading at $100 per share ($100,000 value). John pays taxes at his ordinary income tax rate for $100,000 of company stock. Let’s say his marginal tax rate is 35%, thus he pays $35,000 in taxes in 2019.

 

 

The 83(b) election allows an employee to pay ordinary income taxes when they receive the grant and then pay long term capital gains on any growth between the grant date and the vesting date. If an individual has a high level of conviction that the granted company stock is going to be worth significantly more down the road, then he or she should consider making the 83(b) election. Let’s look at an example:

 

In this alternative scenario, John’s adviser informed him of the 83(b) election, since oil was near recent all-time lows. They both believe oil would trade higher three years out, so John made the 83(b) election within 30 days of receiving his stock grant. John paid ordinary income taxes in 2016 on the value of the grant amount. $50,000 * 35% = $17,500. The stock vests in 2019 at $100 per share. John does not owe any taxes in 2019 upon the vest date since he paid those three years earlier in 2016. John then sells the company stock soon after it vests. He has to pay long-term capital gains taxes on the growth in the value of the stock between the grant date and the vest date ($100,000-$50,000 = $50,000). This $50,000 growth is taxed at his long-term capital gains rate of 15%, causing him to pay $7,500 in taxes upon the sale, for a total tax bill of $25,000. 

In this illustration, John saved $10,000 in taxes by making the 83(b) election!

 

 

The 83(b) election can lead to a huge tax savings, but it is not for everyone. Listed below are a few important factors to consider to determine if an 83(b) election is right for you:

1. Taxes must be paid when the individual receives the grant instead of when the stock vests.
2. The Individual must have the capital to pay the taxes up front.
3. The 83(b) election must be made within 30 days of the stock grant.
4. If the employee does not end up receiving the company stock three years down the road, there is no way to recoup the paid taxes; they are gone.
5. Most people will need the help of a CPA to record the 83(b) election correctly.
6. Market risk must be taken into account.

 

 

For more information please speak with your advisor, or reach out to a member of the WJA team.

 

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. Investors should be aware that it is not possible to accurately predict all of the changes that may occur in the economy or the stock market.
Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed. Willis Johnson & Associates does not offer tax or legal advice. Federal tax laws are complex and subject to change. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
The information provided is not intended to be a substitute for specific individualized tax, legal or estate planning advice. Individual situations will vary. We can assist you in making informed decisions. No single solution meets all investor’s needs. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Willis Johnson & Associates is a registered investment advisor. Insurance and additional investment advisory services offered through Willis Johnson & Associates.

 


nickNick Johnson, CFA®, CFP®

CONNECT WITH ME ON LINKEDIN

 

Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 


 

The Markets (as of market close February 29, 2016)

Following steep declines in January and a rocky start to February, equities rebounded by the end of the month to finish close to their ending values from the prior month. The Dow actually finished up, gaining a little over 50 points by February’s market close. Each of the indexes listed here remained in negative territory for 2016, with the Russell 2000 and Nasdaq each down almost 9.0%. Investors may be feeling a little more confident in the U.S. economy despite global economic instability, as several domestic economic indicators have been favorable, including manufacturing, inflation, consumer spending, and the GDP.

Click for the Full Update

Thoughts From Willis: Discussing Distressed Energy Debt

What does it mean to invest in lowered energy debt?

We wanted to reach out to you and discuss an investment strategy we are considering.

Being in the energy capital of the world, we clearly see the pain that businesses face with the price of oil anywhere close to $30/barrel.  When we look at businesses, we must understand that there are fixed costs that cannot change and variable costs that companies try to adjust in bad periods. Some of these variable costs include reducing expenses and reducing staff. The most drastic and least likely measure is cutting dividends, which many companies have been forced to implement.

Given the current state of the economy, we see three categories of investment options in today’s energy markets:

  • First, if oil spikes to between $70 and $90/barrel, all oil companies should make money and buying stocks is probably the play in the energy arena.
  • Second, if oil moves north and sits between $60 and $70/barrel, most oil companies should do well, but stock selection is key.
  • Third, if oil plateaus in the $40 to $60/barrel range, companies with well-run management should outperform.

Under the third scenario we think a strategy investors should consider is buying energy bonds; even over buying energy stocks. The term for this play is investing in distressed energy debt.  Due to the distressed prices of energy bonds, the yields look quite attractive compared to alternatives. We have been looking in this arena for six months, but feel it is still too early to buy.

If you have any questions on this topic or in your account(s), please do not hesitate to contact your advisor.

Willis Johnson, CFP®                                                                                                                                                       President and CEO

 

In general, the bond market is volatile as prices rise when interest rates fall and vice versa. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. An issuer may default on payment of the principal or interest of a bond. Bonds are also subject to other types of risks such as call, credit, liquidity, interest rate, and general market risks.
No investment strategy can guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in and given market environment. The S&P 500 (Standard & Poors Stock Index) is a stock market index containing the stocks of 500 American corporations with large market capitalization that are considered to be widely held. The S&P 500 is unmanaged and cannot be invested directly.
 Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This presentation may contain forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions, however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market.

 

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