4 Key Truths That Lead to Investing SUCCESS

Many of us have heard the phrase, “Luck favors the prepared.” I suggest a different idea:

SUCCESS favors the prepared.”

Every person defines success differently… whether it means the open doors of opportunity, personal accolades, a substantial financial foundation, wealth in the form of relationships. The one common theme among these varying definitions of success is the intentional planning and action required to realize that success. Strong relationships don’t materialize because you wish them to. They are the product of time invested in people. The same is true of a strong financial house. It is the product of intentional action toward stated financial goals. And that requires a thoughtful plan.

Core Elements of a Solid Plan

As wealth advisors, we have seen a fair number of financial plans. The most successful ones – the ones that withstand whatever is thrown at them – have a few commonalities:

  • Stated Measurable Goals
  • A Diversified Financial Foundation Built on a Disciplined Investment Strategy
  • Support from Experts to Assess & Develop Solutions to Key Challenges

It is exceptionally difficult to avoid all turmoil in life. Trials, tribulations, and unsteadiness are around us at every corner. Yet, success in our financial journey requires that we have a strategy to combat this turmoil and maintain resilience in the face of it.

During this particular season, the turmoil du jour is in the form of political uncertainty. Like many things in life, this challenge is merely a variation on an age-old theme: unchecked fear and anxiety over upsetting events can activate our most human instincts of “fight or flight”. When it comes to experiencing fear around investing – even the most seasoned investor can be moved to “flight” if their emotions take the driver’s seat. This is almost always to their financial peril and lasting regret. This is why it is important to have a disciplined investment strategy in place to guide and keep you seated throughout all market cycles.

Enter: The Disciplined Investment Strategy

“The first rule of compounding is to never interrupt it unnecessarily.” – Charlie Munger

TRUTH #1: Negative events cannot have lasting impact if your plan remains intact.

  • Your stated, measurable goals are the guiding light of your plan.
  • The plan is designed to aim toward your most important goals.
  • Once an investment plan is designed and implemented, it will work most effectively if you have the patience and discipline to stick with it.

TRUTH #2: Significant market declines are a normal and expected part of investing. Your disciplined investment strategy incorporates the expectation that market declines may be precipitous at times.

  • 1 in every 5 years since WWII, broad stock markets (as measured by the S&P 500) have declined an average of nearly 30%, so we expect stock markets to go down roughly 30% every 5 years.
  • Three times in the last 50 years, markets have declined by about 50%.
  • The stock market has compounded at 10.7% per year since January 1973.

Our conclusion? Broad market declines are temporary (and necessary) for long-term advances.

TRUTH #3: Historically, it has been far more fruitful for long-term growth to be an owner versus a lender.

  • To be an investor in the stock of a company is to be an owner. To be an investor in the bonds of a company is to be a lender.
  • Historically, long-term investors have been rewarded for taking on the risk that comes with stock ownership. Owners of companies have compounded their wealth at rates that far outpace those that lenders have grown their wealth. For example, over the last two decades $10,000 invested in the US Stock Market (via the Russell 3000) would have grown to $51,870 versus an investment in US Bonds (via the US Bloomberg Aggregate Bond Index) that would have grown to only $18,860. That’s nearly three times the growth!

TRUTH #4: Prepare to be an opportunist, not a victim.

  • If we know that market declines are a part of investing, come regularly, and are planned for, the smart investment strategy provides for an approach that capitalizes on the opportunity a down market provides.
  • Historically, the stock market’s very best days come very quickly on the heels of the worst and most highly panicked days.
  • As institutional investors, we understand that there are greater factors at play when the market moves. We are able to help our clients maintain their disciplined strategy because we see the playing field without emotion. Our approach has planned for these times and see them as opportunities to buy shares of the good companies when they are ‘on sale’.

How does one experience a successful financial life journey? Preparation.

And your Sterling Team is here with you all along the way providing expert guidance, solutions and collaboration. Thank you for being part of our family.

Smart Tax Planning: A Primer on Tax Loss Harvesting

A key element to the effective management of your taxable investment portfolio is the implementation of “tax loss harvest” opportunities. While we know it is harvest time here in Central Illinois, this strategy has nothing to do with corn and beans and everything to do with your income taxes. We thought we’d take a moment to highlight exactly what it is and how it is of benefit to you and your long-term wealth management plan.

What is tax loss harvesting?

Tax loss harvesting is a strategy used to potentially lower or defer tax bills by realizing losses on certain investments and utilizing those losses to offset gains or income in other areas of an investment portfolio.

Let’s consider a recent real-life example – going back in time to March of 2020, the S&P 500 dropped abruptly by 34% between February 19th and March 23rd. This precipitous drop presented a huge opportunity for tax loss harvesting whereby investors with loss positions could sell at the lowest point of the market while immediately purchasing replacement investments so that they did not lose out on the swift recovery. On paper, many investors were able to realize “taxable losses” while they reinvested their positions to maintain market exposure thereby not losing out on the recovery growth. These “taxable losses” could then be used to offset capital gains (in current and future years) and on a smaller scale to offset taxable income.

Tax Loss Harvesting involves four important steps:

1. Monitoring investments to identify positions with losses

2. Selling positions with losses

3. Immediately replacing the positions sold with a suitable replacement . The replacement position cannot be too similar to the position that was sold to realize the loss. For example, if you were invested in an ETF tracking the S&P 500, you should not replace your loss position with another S&P 500 index fund. The IRS would see this replacement as “substantially identical” and the loss would be disqualified. 

4. After a period of 31 days, you would be eligible to sell the replacement security and re-purchase your original position. If you buy back the same position (or substantially identical) before the end of the 31 days, you will trigger the “Wash Sale Rule,” which again would make your loss disqualified.

Why tax loss harvest?

This strategy may help lower tax bills by reducing or deferring capital gains, reducing taxable income, and offsetting future gains and income. It can only be utilized for taxable investments (assets held outside of retirement accounts). Using this strategy to defer taxes today may achieve higher ending wealth through the potential growth of assets not used to pay taxes.

Tax Loss Harvesting is a strategy that we implement when the market provides opportunities – whether the stock market pulls back broadly or there is a correction in a particular asset class, we are ready to act. These opportunities often arise at times where investor sentiment is at its lowest (remember March 23, 2020?) and it may be difficult to see the opportunity through the fog of pessimism that surrounds the situation. But hindsight has shown us time and time again that uncertainty creates opportunity for the disciplined and we have seen the benefits of this strategy realized over time for our clients.     

While this is an important tool in our professional toolbelt, it is one that we implement with great caution. The IRS has published much guidance on the issue and there are many nuances (which we have not gone into great detail here) that can make this strategy very tricky for individual investors. We advise that this is a strategy to be considered after consultation with your Sterling Wealth Advisor and tax advisor.

Sources: yCharts. Cruz, Ashley. “Tax Loss Harvesting: A Primer for Investors”, research paper, Dimensional Fund Advisors, October 2024.

Launching the Younger Generation to Financial Success

There are many personal finance activities that we engage in as adults that are almost second nature, from working to saving to borrowing and building credit. We’ve compiled some simple actions you can take (and when) to increase your child’s financial success as they mature.

Grade School Age +
1. Encourage them to get experience with a job (in or outside the house)
> Let children get experience managing their own cash flow – learning about how much money comes in (and when), how to spend wisely, and how to save for future expenses both large and small.

Junior High/High School Age
1. Help them open their own checking & savings account (& obtain a debit card)
> In addition to learning about how to manage money with a bank, this is a critical step before engaging in any future lending.
> Provide experience for managing money the way most of us do today (digitally).

2. Open a secured credit card (or make them an authorized user on your card) – build credit!
> Building credit is an often-overlooked aspect of setting young people up for financial success.
> A secured credit card allows you to build your credit with significant guardrails in place
– Allows for building credit with very low (and secured) credit limits
– Available to people with poor or no credit
> To start, authorizing a child as a user on your card may be a good way to allow them to learn to make purchases, build & manage credit, while still allowing you to monitor their spending and ensure their success.

3. Go through a tax return with your teen
> At school, kids learn a lot – however, as you may have experienced in your own life, the intricacies of a tax return is not one of them. Help your younger generation understand what taxes they are paying & why.

College Age
1. Understand the difference between “good” debt & “bad” debt
> With credit, comes the need to discern how to use credit wisely. Teaching young people the difference between high interest rate credit cards, auto loans, and federal/private education loans is critical to making informed decisions about debt.
> Review the costs and benefits of particular schools & majors when determining when (and how much) to borrow for school – it’s critically important as college costs & student loan debt continues to balloon.

2. Take them to a meeting with your financial advisor
> Be open about your financial journey & allow them to learn from your successes & failures.
> Make the most of the resources available to you – we would be more than happy to help be a part of your young person’s financial success.

A Different Way to Invest in Our Tumultuous World

Everyone loves a good story. It’s what keeps you hooked watching a movie or reading a book…it’s also what keeps investors committed to poor investment solutions. Investors like a good story that keeps them engaged, and that story usually involves a savvy manager. But there is a different narrative—written by financial scientists.

Now, academic finance isn’t exactly an engaging story. However, it has changed the face of investing and market analysis for every investor. In the 1960’s, University of Chicago romance-language-scholar-turned-economist Eugene Fama and his protégé’s (namely, Michael Jensen of Jensen’s Alpha performance measurement “fame”)  first used the power of advanced computing and the capital asset pricing model (CAPM) to price securities and study what impacts returns. Their breakthroughs in finance led to an understanding that, on average, mutual fund managers don’t outperform the market, as well as the idea that there are other factors in the marketplace that contribute to investment returns.

Enter: Evidence-based investing Read more

Recession-Proof Your Retirement Portfolio

Sharon Allen, CEO and Co-Founder of Sterling Wealth Management was recently interviewed by Money Magazine about tips for investors to prepare their portfolios for retirement. Click here to read more: | Money https://swmi.co/moneymag-recession-proof-portfolio