- “Smart beta” and factor investing: Practice policy strongly disfavors use of “smart beta” and factor funds and strategies. Factor tilts towards small market capitalization and value index equity funds may be considered according to client preferences, though are not recommended.
. . . [M]ost of the so-called anomalies that have plagued the literature on investments seem likely to be the result of data mining. We have literally thousands of researchers looking for profit opportunities in securities. They are all looking at roughly the same data. Once in a while, just by chance, a strategy will seem to have worked consistently in the past. The researcher who finds it writes it up, and we have a new anomaly. But it generally vanishes as soon as it’s discovered.
— Fischer Black, Beta and Return, 1993
- ESG (Environmental, Social, and Governance) investing, socially responsible investing (SRI), and stakeholder primacy: Not offered. Practice policy exclusively recognizes and uncompromisingly prioritizes shareholder primacy, profitability, and value, pursuant to our fiduciary duty to our clients.
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.
— Justice Russell C. Ostrander, Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919)
- “Slice and dice” portfolio strategies: Not offered.
- Leveraged and inverse funds: Not offered.
- Technical and fundamental analysis: Not offered.
- Derivatives (e.g., futures, forwards, options, swaps, etc.): Not offered.
- Commodities (e.g., metals, oils, gasoline, agricultural products, etc.): Not offered.
- Collectibles (e.g., fine art, coins, gems, alcoholic beverages, stamps, watches, automobiles, antiques, etc.): Not offered.
- Hedge funds: Not offered.
- Private equity, private debt, and venture capital: Not offered.
- Cryptocurrencies: Not offered. Cryptocurrencies are currencies. Currencies possess no internal rate of return (e.g., dividend income, interest income, rental income), thus cannot be considered productive investment assets. Cryptocurrencies may be acquired and held by speculators as speculative assets, where asset price appreciation is predicated entirely upon the willingness of other speculators to pay ever greater prices to acquire and hold the same assets (“Greater Fool Theory” or “Castle In The Air Theory”). While a given cryptocurrency may be programmatically and artificially restricted in supply, supply restrictions may be arbitrarily expanded. Furthermore, novel and competing cryptocurrencies may be introduced at any time, effectively offering a limitless supply of cryptocurrency denominations to the marketplace. Cryptocurrency denominations cannot be expected to reliably appreciate in value over the long term as supply of cryptocurrency denominations available to meet or exceed speculator demand is potentially limitless. Please reference “Our guiding principles and practice policies” topic.
- Forex (currency) trading: Not offered. Note that currency exchange for many common currency pairs is offered (please reference Portfolio Management Services).
- Active management strategies, day trading, high frequency trading, and short selling: Not offered.
The question is when is active management good? The answer is never.
— Eugene Fama
- High yield bonds or junk bonds: Not offered. High yield bonds or junk bonds neither offer the safety of investment grade corporate bonds or U.S. Treasury securities nor the greater expected returns of equity securities. If greater expected risks and returns are desired, equity securities represent a superior investment choice.
- Annuity contracts: Practice policy strongly disfavors use of annuity contracts. Qualified annuity contracts held inside of tax advantaged accounts are detrimental and strongly discouraged. Non-qualified single premium immediate annuity (SPIA) contracts or non-qualified deferred annuity contracts purchased as longevity insurance contracts may be considered in specific and limited scenarios in which clients close to or within retirement possessing limited retirement assets desire insurance against the risk of outliving their assets (longevity risk); this insurance must be weighed against the high annual operating expenses and fees associated with annuity contracts, illiquidity and complexity associated with annuity contracts, and unfavorable tax treatment of all annuity earnings distributions as ordinary income (additionally, the 3.8% net investment income tax, or NIIT, may apply to earnings distributions from non-qualified annuities). Unfavorable “last in, first out” (LIFO) tax treatment prior to annuitization, aggregation rules, and 10% early withdrawal penalties applied to earnings distributions prior to age 59.5 (with certain exceptions) also apply to deferred annuity contracts. Many additional limitations and restrictions apply to annuity contracts. Superior self funded strategies exist to mitigate risk of retirement expenses depleting assets (longevity risk and purchasing power risk). Additionally, purchase of Medicaid qualified immediate annuities (also known as Medicaid compliant annuities) might be considered by nursing home resident spouses with limited assets for the benefit of their community spouse as part of an asset preservation Medicaid planning spend down strategy in specific and limited scenarios, only applicable to residents of certain states and subject to certain requirements and restrictions (please reference “Long term care insurance contracts” topic).
- Universal life, whole life, permanent life, and cash value life insurance contracts: Practice policy is to utilize cost effective term life insurance contracts for the vast majority of clients needing life insurance contracts and to separate life insurance needs from investment needs; this strategy nets the greatest face value (death benefit) per dollar of insurance premium and the greatest investment return per dollar of investment contribution, in the most cost efficient manner. Universal life, whole life, permanent life, and cash value life insurance contracts may be considered in specific and limited scenarios where potential benefits clearly outweigh their heavy costs and many limitations; this may include meeting the liquidity needs of a decedent’s estate and as a component of estate conservation measures, in order to preserve the value of a decedent’s privately held companies or other assets, or may apply to specific and limited scenarios in which a decedent leaves behind one or more permanently disabled dependents. For individuals approaching or within retirement and holding universal life, whole life, permanent life, and cash value life insurance contracts, surrender of these contracts for the contracts’ cash surrender value or Section 1035 exchange on a tax free basis into non-qualified annuity contracts (e.g., single premium immediate annuity contracts or deferred annuity contracts purchased as longevity insurance contracts) should be considered. For individuals not yet approaching retirement and holding universal life, whole life, permanent life, and cash value life insurance contracts, surrender of these contracts for the contracts’ cash surrender value or exchange of these contracts into extended term life insurance contracts should be considered. Alternative nonforfeiture options may exist. Invest while you are alive and insure for your untimely death; do not insure your life to invest in your death.
- Long term care insurance contracts: Practice policy strongly disfavors purchasing long term care insurance contracts. Their heavy costs and restrictions almost always outweigh any potential and limited benefits. Furthermore, as the need for long term care services is a highly probable outcome to aging, addressing the potential cost of long term care services is best accomplished via planning methods that do not rely on purchasing insurance contracts. As with retirement planning, superior self funded strategies exist to mitigate risk of long term care costs depleting assets. Additionally, Medicaid and Medicaid planning remain available safety nets to cover long term care costs when risking depletion of assets. Consider also that custodial care may be provided in the home in part or in whole by family members.
- Section 529 prepaid college tuition plans and adviser sold college savings plans: Practice policy favors use of direct sold Section 529 college savings plans. Section 529 prepaid college tuition plans and adviser sold college savings plans are strongly discouraged. Section 529 plans are also known as qualified tuition programs or QTPs.
- Borrowing from retirement plan accounts: Practice policy strongly disfavors borrowing from retirement plan accounts, such as pension plans, profit sharing plans, defined benefit retirement plans, and / or defined contribution retirement plans. Loans are typically offered within cash or deferred arrangement (CODA) type retirement plans such as 401(k) or similar plans. Loan funds do not earn investment returns (opportunity cost, loss of tax deferred or tax free growth); produce a net return of 0% (loan interest is paid by the borrower to the borrower); result in double taxation of funds repaid as loan interest unless contributed into Roth plans (after tax funds repaid as loan interest into traditional or pre-tax plans are taxed again as ordinary income upon distribution from traditional or pre-tax plans, no income tax deductions for interest contributions into plans); must be amortized within 5 years with payments made on a quarterly basis at the minimum (an exception to the 5 year repayment period may be allowed if loan funds are used for the purchase of a primary residence); may result in balloon payments of outstanding loan funds (either repaid into originating retirement plan accounts or as a loan offset if rolled over into new retirement plan accounts or IRAs) or income taxes and potentially 10% additional tax penalties for early withdrawal if employment is terminated or employer dissolves within the loan term; constitute borrowing from your own retirement.
- Flexible Spending Arrangements (FSAs): Practice policy disfavors voluntary employee contributions to Health Care Flexible Spending Arrangements (HCFSAs). Practice policy instead strongly favors contributions to Health Savings Accounts (HSAs) in conjunction with eligible high deductible health plans (HDHPs) when available, if HSA custodian fees are reasonable (the combination of HSA and HDHP is also known as a consumer directed health plan, or CDHP). HSAs may be utilized to save and invest for qualified medical expenses (including long term care insurance premiums, COBRA premiums, health insurance premiums while receiving unemployment compensation, and Medicare premiums at age 65 or older) in a tax advantaged manner (pre-tax contributions, tax deferred or tax free compounding of earnings, and tax free distributions for qualified medical expenses) with 100% vesting of contributions at the time of contribution; HSA distributions may be used to pay or reimburse qualified medical expenses incurred in the current year or any preceding years, up to the year of HSA establishment, thus allowing deferral of HSA distributions to maximize tax free compounding of earnings (applicable only if the same medical expenses have not been itemized for deduction from adjusted gross income). In addition, HSAs may be utilized as tax deferred supplemental retirement accounts, similar to Traditional IRAs; upon reaching age 65, distributions may be made for any purpose, only subject to payment of ordinary income tax on distributions that are not used to pay for qualified medical expenses (20% additional tax penalty ceases to apply upon reaching age 65). Notably, elective HSA contributions via employer payroll withholding through cafeteria (Section 125) plans are generally more advantageous than direct contributions to HSAs, as elective contributions via employer payroll withholding through cafeteria plans are not subject to Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) tax liabilities (federal payroll tax liabilities). Compared to HSAs, HCFSAs are associated with significant limitations including forfeiture of contributions if not used for qualified medical expenses within the same plan year or within a potential subsequent 2 month and 15 day grace period following the end of the plan year (“use it or lose it”, exceptions may apply), inability to withdraw funds for non-medical expenses or non-qualified medical expenses, forfeiture of the account upon termination of employment, inability to invest or earn interest on contributions, inability to amend contribution elections upon close of open enrollment periods, and lower contribution limits. Potential use scenarios for HCFSAs include contributions to cover anticipated or known qualified medical expenses during the plan year (excluding any insurance premiums). Additionally, contributions to Dependent Care FSAs (DCFSAs) may be considered to cover anticipated or known eligible dependent care services during the plan year; notably, contributions made to DCFSAs will reduce any potential Child and Dependent Care Credit (dependent care benefits excluded or deducted from income including pre-tax contributions to DCFSAs must be subtracted from the dollar limit when figuring the Child and Dependent Care Credit), which may result in a net positive or negative impact on overall tax liability depending on taxpayer adjusted gross income (AGI) as compared to receiving the full Child and Dependent Care Credit (contributions to DCFSAs typically provide a net benefit for taxpayers with AGI > $43,000).
- Realty flipping: Practice policy strongly disfavors flipping of realty. Note that realty exchanged in the trade or business of flipping realty for profit is not eligible for Section 1031 like-kind exchange as it does not fit the definition of realty held for productive use in business activity, trade activity, or production of income activity. Nor does it qualify for preferential capital gains treatment as a capital asset since individuals who flip realty for profit on a continuing basis (i.e., individuals engaged in the trade or business of flipping realty) are classified as dealers, not investors. Rather, realty exchanged by dealers is classified as inventory, subject to ordinary income treatment including Self-Employed Contributions Act (SECA) tax liability.