Insights

In this article, we reflect on the philosophy of one of the titans of investing: Peter Lynch.

Peter Lynch’s success as an investor is evident in the impressive performance of the Fidelity Magellan Fund under his management. During his tenure from 1977 to 1990, the fund achieved an average annual return of around 29%, significantly outperforming the broader market indices. His ability to identify and invest in successful growth stocks contributed to his reputation as one of the most successful mutual fund managers in history.

Some of Peter Lynch’s wisdom is captured in the following quotes:

“Invest in what you know.”

Personal experience is a powerful tool in the world of investing. By leveraging familiar industries or companies, an investor is better enabled to make well-informed decisions about their capital allocation. As an American wealth management company, we focus our individual stock selection primarily with US companies.

“The best stock to buy may be the one you already own.”

It can be unnerving when a stock you own decreases in value. Like many investors, Lynch’s emphasis on long-term investing draws from both his personal successes and failures. If you still like a stock and its future prospects then it usually works out to be patient and not overreact to short-term fluctuations.

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”

“Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part ownership of a business.”

Lynch points out the importance of distinguishing between price and intrinsic value. Knowing the current market price and technicals without understanding the underlying fundamentals can lead to uninformed investment decisions. Successful investors recognize that a stock’s long-term value is derived from strong fundamentals like financial health, current and future growth prospects, and overall market conditions.

Encouraging clients and prospects to explore opportunities in overlooked or undervalued stocks, Lynch challenges conventional wisdom and opens doors to potential hidden gems in the market.

“Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.”

Ever finish up a task or a chore, and then tell yourself you made that harder than it needed to be? The same thing happens with company leadership. This witty quote highlights the importance of resilience of investments. Over time, management changes are inevitable and a robust business should be able to withstand less-than-ideal leadership. When researching companies to invest in, simplicity and durability are key attributes to look for.

In closing, Peter Lynch’s legacy is not just a tale of remarkable returns. It is an atlas of insights that resonates with both seasoned investors and those at the start of their financial journey. As we reflect on Lynch’s contributions, we are reminded that the journey to financial prosperity involves knowledge, patience, and a touch of contrarian thinking.

Benjamin Graham emphasized the importance of striking a balance between aggressiveness and conservatism in investment.

As an accomplished analyst, investor, and mentor to some guy named Warren Buffett, Graham believed in the concept of “margin of safety,” which involves purchasing securities at a price below their intrinsic value to provide a buffer against potential losses. He also advocated for a middle ground with asset allocation, avoiding extremes in either direction. With this philosophy, Graham earned himself the title of “father of value investing”.

We see Benjamin Graham’s wisdom captured in some of his quotes:

“The essence of investment management is the management of risks, not the management of returns.”

This underscores the importance of thoroughly assessing potential downsides before pursuing potential gains. This includes understanding both the historical volatility and the potential volatility of a portfolio’s investments. Graham stresses that successful investment management revolves around a meticulous handling of risks rather than a myopic focus on returns.

“The intelligent investor is likely to need considerable willpower to keep from following the crowd.”

Here, Graham warns against succumbing to herd mentality, emphasizing the need for independent thinking. The intelligent investor, according to him, resists the impulse to blindly follow market trends and instead relies on individual analysis.

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

This highlights the temporary nature of market fluctuations. Graham urges investors to look beyond short-term market sentiment, whether panic or hype, and focus on the long-term intrinsic value of investments and the market as a whole.

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”

This points out the common pitfall of fixating on stock prices without considering the underlying value of investments. This cautionary advice urges investors to assess the fundamentals rather than getting swayed by short-term market movements.

“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

Here, Graham underscores the challenges of achieving superior investment results, urging investors to approach their endeavors with realistic expectations and a commitment to disciplined analysis.

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”

Graham acknowledges the psychological aspect of investing, recognizing that personal biases and emotions can pose significant challenges. This quote encourages investors to remain self-aware and disciplined in their decision-making.

Benjamin Graham’s words continue to resonate in the investment world, serving as a reminder to execute a value-based approach that balances the risk and reward.

In the world of wealth management, it’s surprising how many wealth builders, from their 30’s to their older years, underestimate the value of a personal financial plan. According to a 2023 Charles Schwab survey, around one-third of Americans have a financial plan for their goals.
Managing your wealth without a financial plan is like flying a plane without a map or navigation tools. Sure, the plane is filled with fuel, the wings and engine are working, and ideally you can see points of reference to guide you along the way. But without a flight plan, how effectively is the plane getting to where it wants to go?

To detail the significance of this invaluable tool, here are five reasons to put a financial plan in place and keep it updated.

Guidance for Life Transitions:
As people find themselves at the crossroads of various life transitions, be it changing jobs and careers, starting a family, sending kids to college, or preparing for retirement, a financial plan provides a roadmap tailored to your unique circumstances, helping you navigate those transitions. From adjusting investment strategies to optimizing tax planning, do your planning in advance so you can avoid missing out on strategic opportunities.

Risk Mitigation and Asset Protection:
A good portfolio manager will mitigate investment risks to the best of their capabilities, but that does not take into account all of the risks a wealth builder experiences. Risk mitigation starts with a diversified investment portfolio, but also includes insurance coverage, estate planning, and many other strategies that are reflective of your specific financial situation.

Reference Point for Financial Decisions:
Financial plans are a living document that should be updated annually or regularly. Making updates and seeing where things are and how things have progressed is a great reference point when making important financial decisions. A financial plan is the friendly reminder that yes, you’re still on the right track to financial success if you make that decision, even if-and-when life presents the occasional detour. And when those detours happen, financial planning is even more useful.

Long-term Investment Success:
Our financial plans are designed to align perfectly with your investment preferences and objectives. A financial plan provides insight to our portfolio management since we will know your current situation, long-term goals, risk tolerance, and time horizon. This disciplined approach helps us stay on the same page, helping you feel confident leaving the day-to-day investment management to us.

Peace of Mind and Empowerment:
Perhaps the most underrated aspect of having a comprehensive financial plan is the peace of mind and confidence that originates from knowing you have a well thought roadmap tailored to your specific financial aspirations. As we often say, partnering with us brings the peace of mind that comes with having a plan that is designed to help you achieve your goals. If you spend any time wondering about your financial progress, it will answer your questions and enable you to focus on what’s important to you. A financial plan empowers you to make informed decisions and “get a handle” on a subject that is exhaustive and bewildering to millions of people.

Whether you’re actively managing your portfolio or entrusting it to a financial advisor, having a strategic roadmap for your future is critical. According to Schwab’s survey, of the one-third of Americans who have a financial plan, 7 in 10 said they were more in control of their finances and 9 in 10 were confident they will reach their financial goals.

At IEC we have a Certified Financial Planner ready to help you build a financial plan and put it into action. Without one, you might as well be an airplane pilot with no flight plan.

Success in investing isn’t just about numbers and strategy. It also involves navigating the emotional terrain that comes with financial decision-making. To be a successful investor, how important is it to stay steady and level-headed?

Rash investment decision-making can be detrimental. Whether it’s the fear of a market downturn or the excitement of a potential windfall, emotions can lead investors to make choices that jeopardize their financial well-being. The emotional cycle of investing can result in chasing returns, panic selling, and letting a variety of emotional biases control one’s investment strategy – a recipe for financial disaster.

Maintaining a steady, emotionally resilient attitude despite what is happening in the markets is a lot to ask. But it allows investors to maintain a strategy and ensure that they make well-informed, objective decisions. Investors that can remain objective will approach their investments with a balanced, long-term perspective, making subtle changes as they go through market and economic cycles in order to add value.

But what if you can’t distance yourself emotionally from your investments? Consider enlisting professional assistance.

Many investors rely on wealth advisors to help them stay on track. When an investor enlists an advisor to help them develop a comprehensive plan that aligns with both their current situation and long-term financial goals, research shows the investor is more likely to be successful.

The Dalbar studies have consistently shown that individual investors often underperform the market due to behavioral biases, such as emotional decision-making and sub-optimal market timing. 

Vanguard, a prominent investment management company, has conducted research on the value of financial advice. The “Advisor’s Alpha” concept emphasizes the various ways that wealth advisors can add value, including from a behavioral coaching standpoint.

It’s important to note the value of a wealth advisor goes beyond just investment management. Financial planning, tax optimization, retirement planning, and other areas contribute to a well-rounded, comprehensive approach to wealth management. 

In the world of investing, not getting lost in the moment is critical in achieving financial success. Those who have mastered investment steadfastness developed it as a skill over the course of their experiences. Other investors may prefer to focus on other pursuits, and enlist wealth advisors to manage their investments. By understanding emotional resilience, investors can secure their financial future and reduce the emotional toll that comes with financial uncertainty.

As we approach the end of the year, it’s essential to turn our attention to strategies that can help reduce your federal tax bill.

Check to see if you qualify for the 0% federal tax rate on long-term capital gains and qualified dividends. If your taxable income, excluding long-term gains and dividends, falls below $44,625 for single filers, $59,750 for head-of-household filers, or $89,250 for joint filers, then you may benefit from this favorable tax rate. It’s a great way to reduce your tax burden.

If you don’t qualify for the 0% rate, don’t worry – there are still opportunities to save. The 20% rate on long-term capital gains and qualified dividends starts at $492,301 for singles, $523,051 for heads of household, and $553,851 for couples filing jointly. The 15% rate applies to filers with incomes between the 0% and 20% breakpoints.

Business owners have a golden opportunity to save on taxes with first-year 80% bonus depreciation. This allows firms to deduct 80% of the cost of new and used qualifying business assets with a useful life of 20 years or less, provided they are purchased and placed in service by December 31, 2023. This deduction is available temporarily and will phase out in subsequent years.

In 2023, businesses can expense up to $1,160,000 of new or used business assets. This limit phases out if more than $2,890,000 of assets are put into service during the year. The beauty of expensing is that it doesn’t have the same taxable income limitation as bonus depreciation.
There are various tax breaks available for buyers of business vehicles. Pay attention to the first-year cap on depreciation, which varies depending on the type and weight of the vehicle.

If you’re a self-employed individual or the owner of a pass-through entity like an LLC or S corporation, you may be eligible for a 20% deduction on your qualified business income. Be mindful of income limits, and consider adjusting your deductions or income to stay within the thresholds.

Make the most of your annual gift tax exclusion by giving up to $17,000 to each person, or $34,000 if you are married. Recipients do not pay tax on these gifts, and they won’t trigger a gift tax return unless your lifetime gifts exceed $12,920,000. While the lifetime gift exclusion won’t affect most people, this number can be adjusted by Congress and has been lower in the past.

If you want to support your children or grandchildren with their college education, consider paying tuition directly to the school. This payment is nontaxable to the student, doesn’t count against the gift tax exclusion, and reduces your estate. Alternatively, contribute to a 529 plan to shelter significant amounts from gift tax.

When you implement one smart financial planning or tax strategy, it can have a compounding benefit for years to come.

With two months left before the new year, it may be time to focus on reducing your federal tax bill. This might not be everyone’s favorite subject area, but the benefits of doing so can be substantial.

For individual tax filing, look at the overall impact of potential strategies on 2023 and 2024-on. The goal is to be efficient with your taxes now and later. Most benefit by accelerating write-offs and deferring taxable income. Others take the opposite approach. Overall, it depends on your situation. IEC works with clients and with their tax professionals as needed to develop and move efficient tax strategies forward.

People who itemize deductions have the most flexibility in shifting write-offs. People whose deductions put them on the line between itemizing and taking the standard deduction could benefit from bunching itemized deductions every other year, and taking the standard deductions in alternate years.

Increase your 401(k) or other retirement plan to max out your yearly contribution before year end (IRAs have 4/15 deadline). If under the $10,000 cap and if allowed, pay your property tax bill for next year in December of this year in order to deduct it for 2023. If you pay your January 2024 mortgage bill before year-end, you can deduct the interest portion for 2023.

Bunch into 2023 charitable gifts you would normally give over multiple years, maybe with a donor-advised fund account.

When donating to charitable organizations, contribute appreciated property like stocks directly. If you’ve owned property for more than a year, you can deduct its full value when you itemize (in most cases). Neither you nor the charity pay tax on the appreciation if you transfer the property directly.

You can transfer up to $100,000 yearly from IRAs directly to charity, called a qualified charitable distribution. QCD’s count as RMDs, but they’re not taxable and they’re not added to your AGI. This can be a good strategy for taxpayers that take the standard deduction and don’t itemize. Qualified charities are generally 501(c)3 organizations.

If you already have high medical expenses (near or above 7.5% of adjusted gross income), think about incurring additional medical expenses before year end. Refer to IRS Pub. 502 for a list of eligible medicals.

Other quick points:
Contribute the maximum amount allowed to your Health Savings Account (HSA)
When you review previous year returns, review your withholding to ensure you are having the right amount of taxes withheld
Consider a Roth conversion by looking at current year taxes. Generally it’s smart to make a conversion if it’s a relatively low income year and you don’t mind incurring taxable income on the conversion.

Part 2 will cover investments, business taxes, and gifting.