Strategies to Maximize Executive Compensation

In the parable of the two business executives, I reveal 3 strategies to maximize wealth with employer benefits.

Podcast Details:

Podcast Title:  Strategies to Maximize Executive Compensation
Podcast Series: Financial Literacy Boot Camp
(Video and illustrations available on our YouTube channel here.)

Powerpoint Slides

In my previous positions and just through a lot of reading on executive compensation, we’ve developed an expertise.  So any of you listening out there that have executive compensation like RSUs, restricted stock, NSOs or ISOs, you want to give us a call so we can evaluate whether not you are maximizing your wealth potential and saving yourself money in tax liability.  Today, I’m going to share a little parable that gives a high-level overview of how we help our clients.

In previous articles, we’ve have mentioned the importance of having a specific strategy to maximize your wealth building potential through executive compensation program.  In our practice, we notice many highly-skilled and hard-working professionals don’t maximize their executive compensation programs either due to lack of knowledge or lack of time.  This article will focus on some of the strategies that can be utilized in order to not incur unnecessarily high taxable income in any given year that awards are given, exercised or vested.  To illustrate a specific strategy we will use the parable of Ron Smith.

 

The Parable of the Two Business Executives (6:00)
Ron Smith is the vice president of sales for MegaPharma, Inc. a thriving pharmaceutical company based in the US.  Ron has been with the company for nearly fifteen years and has experienced great success.  Such success he is now contemplating hiring a financial professional to help him manage his finances.  Before this time he had managed pretty well he thought, at least according to his peers, but the events of the past six months have caught his attention.  About seven months ago, his close friend and fellow colleague, Bruce Davis, who works for AlphaBioTech was laid off after serving his company for ten consecutive years.  That was bad news indeed, but Bruce was a great saver and his wife works also so they would be fine financially.  The real problem was what Bruce shared with Ron during a pharma conference they attended together.

 

Ron’s Situation(10:15)
Several weeks go by and Ron meets with Bruce’s financial advisor.  The financial advisor uncovers several things.
Ron has 4 wealth building tools that are offered to create retirement income:
  1. Defined Contribution Profit Sharing Plan or “401(k)”; The company matches up to 6% dollar for dollar (see episode 42)
  2. Defined Benefit Cash Balance Pension Plan; The company contributes 7% of Ron’s salary to the plan annually
  3. Restricted Stock Units; These have a 3-year vesting schedule
  4. Non-Qualified Stock Options; These have a 3-year vesting schedule and 10-year expiry
Observations (16:00)
  • The Advisor has also noticed a high concentration in MegaPharma’s stock across these 4 accounts
  • Ron is currently in the 33% tax bracket and concerned with his new salary and bonus he will be in the highest bracket of 39.6%
Three Planning Strategies (17:22)
After review, the financial advisor advised Ron to employ these three strategies to help Ron.
1) He recommended that Ron avoids exercising his options until after he had earned enough income year-to-date to avoid paying social security taxes and thereby reducing his take home pay.  This will put 6.2% back into his pocket.
2) After creating a schedule of all Ron’s RSUs and NSOs, an exercise schedule was created to incorporate a system to “average-out” selling company shares to diversify his retirement portfolio.  This minimized taxes while taking into consideration historical company share performance, Ron’s risk tolerance, and his financial goals.
3) Transfer property out of his estate by donating to a charity and use the subsequent tax deduction received to offset some of the W-2 income tax generated at exercise.

 

Addidtional Resources:

 

#executivecompensation #restrictedstock #stockoptions #taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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What Do You Need to Know Before Working with a Financial Planner?

As an industry insider and one that has a concern for those that consume financial services, there are things you should know before working with a financial planner/advisor/professional. This episode will teach you what you need to know.

Podcast Details:

Podcast Title:  What Do You Need to Know Before Working with  a Financial Planner?
Podcast Series: Financial Literacy Boot Camp
(Video and illustrations available on our YouTube channel here.)

I really wanted to use this show as a way to update my article:  “Five Tips to Consider Before Choosing an Advisor”.  As an industry insider and one that has a concern for those that consume financial services, there are things you should know before working with a financial planner/advisor/professional.

Some of this has been covered previously through the above-referenced article and Episode 10-“Putting the Serve Back into Financial Services”, however, after recently giving a talk at a conference about this subject I felt I should update “the list”.

Questions/Issues We’ll Address on this Episode:

The 5 Areas of Greatest Concern:

Experience (Qualfications, Education, Specialty, Etc.) – (7:47)

Let’s talk experience.  Now I covered in a previous episode (“The Low Down on Financial Advisor Credentials”) some of the more popular professional designations.  I’m going to stick with what I’ve said before that you want someone that has been working with clients for at least 5 years especially if they have their own firm.  If it is a larger firm obviously the collective experience will probably exceed that.  But you may also want to look for a specific expertise.  What is your particular pain point?  Why do you want their help?  Ask them specifically how they have helped people in your shoes.  This will get them talking about their experience and their service offering which should give you some answers

Fiduciary Role (Ethics, Conflicts of Interest, Etc.) -(12:55)

I think the first and foremost is making sure your advisor is a fiduciary.  I actually spoke with a prospective client the other day and he actually referenced this term.  He asked about my pay structure and how I’m compensated.  I applauded his level of knowledge because most individuals working with an advisor don’t even know how their advisor is paid.  And if you don’t know how they’re paid you don’t know if his or hers interest are aligned with yours.  So make sure they adhere to a fiduciary standard and are looking to serve client interests before their own.

Method of Compensation (commission-based  vs fee-based) -(15:00)

Question them about their methods of compensation.  I’ve covered this before in episode 24 ” The ABCs of Financial Advisor Compensation”.  Does your advisor receive commissions as compensation by the selling of products to you?  If so, ask them what method they use to choose certain products and the incentive pay from the advice they give.  Other advisors may be compensated via some type of fee structure which can be fee-based or fee-only.  These are questions you should ask and have the advisor explain to you.

 

Method of Service Delivery (financial plan, IPS) – (18:45)
Next point is to have an investment policy statement (IPS for short).  But I want to expand that by saying that you should start with a financial plan.  A lot of people don’t agree with me here but anything that you do successfully in life usually starts with a plan, so why not your finances? When you focus only on investments how is the rest of your wealth to be managed?  What about tax planning?  Risk management?  Estate planning?  In sitting down with a financial planner, you should be focused on them taking a comprehensive view of your situation.

 

The “Sniff” Test – (21:25)
Passing the “sniff” test is another point I want to bring up.  I believe gone are the days where the advisor holds hostage all the information from the prospective client.  Especially if this leads to intimidation.  Nowadays, clients are looking for a collaborative experience and that means a sharing of information.  So if you are sitting with someone that does not seem they espouse that philosophy, you may want to keep looking.

 

#taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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The Power of Compound Interest Explained

Discover the power behind compound interest!

Podcast Details:

Podcast Title:  The Power of Compound Interest Explained
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

Today we’ll discuss a topic that almost all of us have heard of “Compound Interest“.  Over the past couple of weeks, I’ve had conversations with prospective clients and they mentioned finding a way to let “their money work for them”.  I realized they meant “compound interest”.  So today we’ll answer the questions of:

  • How does it work? (4:30)
  • Why is it so powerful? (8:50)
  • How do I take advantage of it? (14:10)

Questions/Issues We’ll Address on this Episode:

How does it work?

The concept where every dollar of earnings becomes a candidate for earning interest [after the original investment] now, allowing you to earn “interest on your interest”.

Why is it so powerful?

So I’ll walk you through the math of a simple example.  And you will quickly begin to see why there is such a “power” in this concept and that the most powerful component (“arguably”) is time and not really the interest rate you earn. This is corroborated by one of the most successful investors of all time:  Sir John Templeton who said

“The best time to invest is when you have money.  This is because history suggests it is not timing which matters, but time”. Sir John Templeton

Before we go to Excel let’s look at the actual mathematical formula and then I’ll show you on a financial calculator since financial advisors use this all time.
compound interest
How do I take advantage of it?
Ironically enough, look at your credit card statement and you will not that daily compounding is used to calculate the interest you will be charged by the credit card companies.  People wonder when they pay the minimums on their credit cards, why they will never get ahead.  Well, it is because your minimum payment does not cover all the interest that has accumulated (or compounded) since your last purchase.  And if you pay later in the month utilizing the grace period, the compounding just continues.

#taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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Some Popular Questions and What They Mean

Some of the more popular questions about personal finance that I’ve seen.

Podcast Details:

Podcast Title:  Some Popular Questions and What They Mean
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

In episode 44, we discussed “Knowing Your Numbers” and this is a follow-up to that episode on some of the more popular questions I’ve come across.

Questions/Issues We’ll Address on this Episode:

Q) What is a good debt ratio and what is a bad debt ratio? (5:23)

    A) Most experts would say for every dollar of income you should have no more than 36 cents of debt.  This would be anything you have a payment on (house, car, etc.).  As I explained in episode 44 about knowing your numbers, underwriters will use 43% to give you a loan, but this is a really high number.  Now let’s talk about some reasons people may want to ask this question.  I think it centers around the concept of “delayed gratification”.  How much can I afford to consume and not have a negative consequence is essentially what someone is asking when they ask this?  So let’s just illustrate the concept of bringing your future consumption to the present.  A good example of this is when someone buys a home.  You buy the home and of course, you are financing that purchase over a long period of time (e.g. 15-30 years).  So you are bringing a considerable amount of your consumption forward into the present.  However, when you start to purchase additional items to furnish the house this is when you may tend to go overboard.  The level of consumption generally speaking far exceeds what needs to be brought into the present.  So try and keep this inside 33%–that would be good.  Above 43% would be bad.
Q)  Can an individual contribute to both a Roth and a Traditional IRA in the same year? (10:30)

 

A) Yes;  as long the total contribution doesn’t exceed the IRS limit of $5500 ($6500 if over 50) per person.  But why would you want to contribute to both versus one or the other?  In a lot of cases, the contribution to a Traditional IRA can be deducted from gross income in the tax year you make the contribution.  There are some rules around this based on income and whether you participate in your employer’s retirement plan.  For instance,  if you can’t make a deductible contribution to a Traditional IRA you may want to make the entire contribution to a Roth IRA if you qualify.  You also may want to split the contribution between the portion that is deductible since it phases out and contribute the remaining amount to a Roth.
Q)  How did the financial crisis affect the banking sector? (14:09)

 

A)  The short version is that lending was constrained because there was a lack of trust in the system.  In most cases, you never see a banking crisis because there is always a “lender of last resort”.  This is the bank or collection of banks that will always buy a security that is offered as collateral so that the seller can use the cash to continue whatever operation it has.  Can this happen again?  There is a lot more liquidity in the system because the FED has purchased a lot of treasuries from banks and that cash has been “put” into the system for lending and “cushion”.  However whenever a large enough fear can be built into the system because asset prices get too high and form a “bubble”, then you have the makings for uncertainty again.

#financialadvisor #financialplanner #financialquestions #finliteracy #finlit

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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Know Your Numbers: The Most Important Financial Ratios/Formulas to Know

After this episode, you should be able to use this information to get a pulse on your financial health…

Podcast Details:

Podcast Title:  Know Your Numbers:  The Most Important Financial Ratios/Formulas to Know
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

In episode 40, we talked about whether we were winning the fight for financial literacy and I made a comment about understanding certain financial ratios when it comes to your personal finance. Today,  I’ll cover some of the most important financial ratios and formulas to know that are crucial to your financial picture.  After this episode you should be able to take these financial ratios and formulas to get an indication of where you are when it comes to spending, saving or investing.

Questions/Issues We’ll Address on this Episode:

  • Understanding Your Debt to Income Ratio (4:50) – Very popular ratio when it comes to receiving a loan.  A lot of underwriters and financial institutions use this to determine credit worthiness.
  • Understanding Your Emergency Fund Ratio (7:40) – Very popular ratio when it comes to determining your liquidity.  The saying “living from paycheck to paycheck” stems from a lower than needed emergency fund ratio.
  • How much House Can you Afford (14:45)–This is a formula that should be calculated when you buy a house or attempt to refinance your current home loan.
  • Personal Savings Rate and a Quick Lesson on how to calculate your retirement number (17:15) – This is the mother of them all–personal savings.  This will directly determine how much will be in your nest egg at retirement.  I break down how to get to this number.

#financialliteracy #finlit #finance #financialplanning #financialeducation #advice #financialadvisor #finlit #money #finances  #money #tips #retirement #investing #debtratio #knowyournumbers

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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The Infamous 401(k) Rollover…The Why and The How

You leave a job and you have money in a 401(k) what should you do with it?

Podcast Details:

Podcast Title:   The Infamous 401(k) Rollover:  The Why and The How
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

Powerpoint Slides

Questions/Issues We’ll Address on this Episode:

  • There are two buckets of money…qualified or non-qualified (5:00)
  • What is a 401(k)? (6:00)
  • Is it mine?  (6:35)
  • Can I roll this into my new employer’s plan?  (10:35)
  • Can I still participate in my former employer’s plan?  (11:30)
  • How should I invest my  401(k)?  (12:33)
  • What is an IRA?  (15:35)
  • Why would I want to rollover my 401(k)? (17:00)
  • The steps to a 401(k) Rollover (19:00)

 

#financialliteracy #finlit #finance #financialplanning #financialeducation #advice #financialadvisor #money #finances #taxes #tips #retirement #investing #401k #401kplanning

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

 

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The Importance of an Estate Plan: “Transferring Your Wealth and Wishes”

Podcast Details:

Podcast Title:  The Importance of an Estate Plan:  “Transferring Your Wealth and Wishes”
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
In today’s episode we continue the series we started about various case studies that I’ve come across and found interesting.  This week we’ll address the importance of an estate plan.  I think the general consensus from talking to many people is that they associate this level of readiness with something that has nothing to do with the importance of an estate plan.  What is the association?  I’m not going to die right now.  This association is misguided at best, and catastrophic at worst—I believe it is that they feel they have much longer to live and time to address the importance of an estate plan.  It also may be perhaps because they feel they don’t have a lot of assets to raise a fuss about, suffice to say, developing an estate plan is not as much about your date of death as it is about having a say.  Nonetheless, we will discuss what a properly formulated estate plan is really designed to do by using a couple of client case studies that underscore the importance of an estate plan.

  • The Common Misconception (2:25)
  • Giving yourself a Say (5:10)
  • Purpose of an Estate Plan (7:15)
  • Purpose of Probate Process (9:30)
  • Components of an estate plan (12:00)
  • Case Study of Mary (13:50)
  • Case Study of Suzy (16:17)

#estateplanning #wealthtransfer #financialadvice #financialplanning #financialliteracy

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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The Retirement Solution: “Finding What You Love to Do”

Podcast Details:

Podcast Title:  The Retirement Solution: “Finding What You Love to Do”
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
In today’s episode and maybe for the next couple weeks, I want to highlight some key takeaways from a few case studies that I’ve experienced in my years of practice around the subject of “retirement solutions”.  In addition to starting my own practice last year, I have had the benefit of serving about 600 families with another firm in the 6 years prior.  From that experience, I helped form several “retirement solutions” with several different financial planning strategies and techniques.  This week, I want to address a few key points that relate to success in determining a “retirement solution”.   This is such an important topic to address, so take the time to listen to see where you fit in.  I think everyone is concerned (or will be) about the amount of money they require to fully retire.  So I wanted to address that issue today.

Interesting Fact:  10,000 baby boomers will retire each day for the next 13 years and they will play a big role in wealth transfer over the next several years!

Take our FREE retirement assessment to see where you stand!

 

  • Challenges to the Retirement Solution
    • Changing Demographics (2:45)
    • The “new” Retirement Landscape (4:10)
    • Investment Environment (5:17)
  • Traditional vs. Non Traditional Retirement (7:50)
  • Case study of Ms. J (9:02)
    • Need to Save/Live Frugally (10:15)
    • Leverage Employer Benefits (15:37)
    • Delay Social Security Benefits (17:50)
    • Love what you do (19:25)

#retirementplanning #socialsecurity #financialadvice #financialplanning #financialliteracy

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

Where to Find Us:

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#FinancialLiteracyBootCamp

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Solutions to the Career Transition Problem with special guest Marques Ogden

Marques Ogden and I discuss the tools needed by young athletes to effectively transition from the gridiron to the boardroom!

Podcast Details:

Podcast Title:  Solutions to the Career Transition Problem with special guest Marques Ogden
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
A discussion of “Solutions to the Career Transition Problem”and the tools needed by young athletes to effectively transition from the gridiron to the boardroom!

Marques Ogden and I continue our conversation on “Solutions to the Career Transition Problem” by having a very candid discussion on the tools he used after leaving the NFL to begin his transition into the business world.  We discuss the development of his thought process, a strategic plan, and a business network to launch his next phase in life.  We also cover in the discussion practical examples on what business owners can do to boost their networks during the start-up phase of their business.  We also discuss ways that young professional athletes should be leveraging their brand with non-monetary “human capital” while still playing.  Last, we cover some statistics provided by the CFP Board on financial literacy and savings rates among Americans.  Don’t miss this exciting episode of “Solutions to the Career Transition Problem” brought you DJH Capital Management.

  • Develop a Strategic Plan (3:15)
  • Develop a Network and Talk to People (4:50)
  • Join your Chamber of Commerce (6:30)
  • Leverage Your Brand (20:30)
  • 80% of Americans concerned about not saving enough…what about athletes? (25:35)
  • How to get out of your “comfort zone”? (28:55)

Helpful Links:

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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#FinancialLiteracyBootCamp

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Create Tax Free Income for Life with Municipal Bonds

Now that you’ve read the somewhat salacious title of this article, the real question becomes “is there any truth to it”? A second question might be similarly, “what’s the catch”? Well, I hate to disappoint you but there is no catch and it is possible to create a tax-free income stream for life. But how? It is done with an asset that has been around for literally ages—bonds.

 

Now that you’ve read the somewhat salacious title of this article, the real question becomes “is there any truth to it”?  A second question might be similarly, “what’s the catch”?  Well, I hate to disappoint you but there is no catch and it is possible to create a tax free income stream for life.  But how?  It is done with an asset that has been around for literally ages—bonds.

In particular, this strategy can be executed successfully by using tax-free, non-AMT municipal bonds (what is a AMT bond?).  Most investors shy away from bonds because they yield (or return) less than equities and tend to be more complex in nature.  However, the global bond market is larger than the global equity market by $30 Trillion (see here) although the portion we will discuss in this article is much smaller at just shy of $4 trillion.  So, why might you want to invest in municipal bonds to create tax free income for life?

What Are Municipal Bonds

First, municipal bonds represent an “I.O.U” issued by a governmental entity—usually state or local.  They get their “tax-free” status because the money raised by the bond issue is usually for a “public good or service” like schools or roads.  Money raised for these type of bonds are labeled as “general obligation” bonds and are backed by the full, faith and credit of the issuing entity’s taxing power.  Generally speaking, the more taxing power, the better the backing.  The idea behind tax-free interest from the bondholder comes from the fact that many schools and roads are usually funded by a large portion of taxpayer dollars.  Thus, tax-exempt interest was born to incentivize the public to keep paying their taxes to fund projects.  Ok, seems like a good deal, so why not use bonds in 100% of your investment portfolio?

There’s Still No Free Lunch

Well, like it’s been said before “there is no free lunch” and it is no different for municipal bonds. The rules of asset diversification apply even in the compelling case of tax-free income.  Bonds have historically had little correlation to equities except in market crises situations, so creating a portfolio of both equities and bonds makes a whole lot of sense as a long-term investor.  But when considering other fixed income vehicles like annuities or real estate which both generate taxable portfolio interest, individual municipal bonds make a good alternative.  Take the case with your typical annuity (fixed or variable) that carries an average 2-3% annual expense charge when you consider:  administrative, mortality and expense, mutual fund costs.  And although you may not see it, don’t forget there will be a commission paid to the broker that sold you the annuity.  So first year charges, can easily exceed 8%.  Finally, you still have to pay taxes on the annuity income stream on all gains beyond your cost basis.  Alternatively, you can invest the same amount into a diversified municipal bond portfolio and pay no taxes and receive tax free income until the bonds are called or mature.  As an added bonus, your estate will receive a “step-up” in basis at your date of death greatly reducing any potential capital gains.

Why Not Use a Bond Fund?

This is a good question, and the short answer is that individual bonds are actually cheaper and a much more effective way of achieving “tax-free income”.  Similar to annuities (mentioned above), bond funds have both explicit and implicit expenses.  The explicit expenses like marketing, administrative, sales loads, etc. show up in the annual expense ratio.  Granted, you can find a really low-cost index fund, but like actively managed funds, they have implicit costs which are not in the annual expense ratio.  For example, what happens when the fund manager receives new capital in the fund and is compelled to buy bonds in an expensive market, or alternatively faced with selling bonds into a cheap market.  This is referred to as liquidity premium (the former) or discount (the latter).  There is also “cash-drag” where the fund manager may hold extra cash just to satisfy “potential” fund redemptions.  Being a former portfolio manager myself, I realize not all bond fund managers effectively navigate these risks which translate in lower returns to fund investors.

“Buy and Hold”

Not the sexiest, but the “buy and hold” strategy for individual municipal bonds is by far the smartest.  Here’s a brief example of the power of compounding in this article.  Not only do you save the costs and expenses mentioned above, you also greatly reduce many of the risks that run off several other investors thereby creating a golden opportunity for the patient and savvy investor.

Check out these resources:

P.S. I apologize for the infrequency of written posts to my readers.  I’ve used the extra time to work on a book that I hope to have finished later this year.  Until then, enjoy the podcasts and these sporadicly written posts!