DAFs – A Tech Surveillance System or a Nifty Giving Strategy

With the recent continuation of the markets’ irrational exuberance, many of us have some horse-choking gains in our non-IRA accounts so how can we make the best of a taxing situation? First, let’s acknowledge that paying capital gains, even at the highest rate of 20¢ on a dollar, means we’re still walking away with 80¢ we didn’t have before so, to be perfectly honest, we are moaning just a bit about being fortunate. That notwithstanding, is there a way we can avoid that 20¢ or perhaps even spin a little gold from the straw we’re being given? Of course there is (otherwise I’d be writing about something else this week) – donating some of those appreciated holdings.

As we touched on a few months back, there are a several ways to make donations – you can write a check or give a group cash, you can donate the appreciated position directly to the charity (which assumes they are set up to receive something like this), or you can donate the position into a Donor Advised Funds (DAFs). Think of DAFs as a soup tureen you can pour a whole bunch of appreciated stock(s) into all at once, taking the charitable deduction for that year, then gradually spoon out just what you want to donate over the subsequent years. Furthermore, while you are deciding what you’d like to support, your donation continues to appreciate (or depreciate – this is an investment after all), you can rebalance the position into other investments (without the capital gains), and if you get hit by a bus, you can have a charities designated as beneficiaries, which is a lot less complicated than having them as the beneficiaries in your will or on your account.

Let’s walk through an example. Say you normally give $100/mos to your local spiritual organization, which means that over 4 years you would have given $4,800. Now, perhaps you have a stock or mutual fund you inherited from your granddad that’s been sitting in an account, ignored for most of your adult life and that account has accumulated boatloads of capital gains over the years (meaning, to touch it is to tax it). You could open a Donor Advised Fund and donate a portion ($4,800) of that account to the DAF. For the year you move grandpa’s stock into the account, you can add a charitable contribution to your itemized deduction, which will, with a little planning, make your deductions more valuable than the standard deduction. Then, over the following years, you can donate $1,200/yr. to the organization of your choice.  Four years later, you can repeat the process. Now you are getting a little tax benefit for something you were already thinking of doing, not to mention perhaps cleaning up your portfolio a little.

What if you’re not sure that you want to do something like this now, while you are young(ish) and may spend all your money to die broke? You can make a DAF part of your estate planning by naming the Donor-Advised Fund you set up (but didn’t fund) as a beneficiary of your will or your retirement account. That way, if you get hit by that bus before you’ve spent all your money (responsibly or irresponsibly – this is a no judgement zone), the remainder will flow into the DAF and the dollars can be distributed based on your intentions. You can even dictate a schedule for the DAF to use the dollars.

Where might you find these little charitable curiosities? Many of the bigger investment firms now have them (Fidelity, Schwab, Vanguard) or you could work with a local community foundation to help you establish one. One advantage of the local community route is that they often fund smaller organizations that you won’t see (or don’t qualify) for the bigger firm’s lists. Some DAFs provide little checkbooks so you can write out a donation if you’re at an event and many have a fairly sophisticated electronic donating system where you use a few dropdown boxes then click a few buttons and you’re finished in time to grab that mojito before dinner.

So, if you are charitably inclined, consider checking out a Donor Advised Fund for your giving strategy.  Using one might just save you a few tax dollars and almost certainly will make donating anything other than the $20 in your pocket easier.

Cryptocurrency: When FOMO Becomes Uh Oh

Over the past year, I’ve fielded a number of questions about the feasibility of investing in cryptocurrency so I thought I’d give you “Kitty’s Take” on the whole “let’s invest in something that doesn’t really exist” situation.
What is cryptocurrency anyway? Right out of the gate, we need to understand that these are currencies, not investments, and there are a lot of them (more than 50 at last count). There’s Bitcoin (currently trading at ~$49,500 per token), Dogecoin (trading at $0.41), and PancakeSwap (trading at $29.35 per token), just to name a few. For comparison, the $5 bill in my wallet is trading at…wait for it…$5. Let’s put it another way, when you invest in a share of Ford Motor Company, you own a little itty bitty sliver of Ford Motor Company. When you invest in a bond mutual fund, you become a little itty bitty recipient of the dividends of a bunch of bonds. When you buy a token of a cryptocurrency, you’re holding the rights to a little itty bitty share of…of…an electronic promise. 
Cryptocurrencies are usually positioned as an alternative to cash and these tokens can be traded for services and things but only as long as the company selling you those services and things accepts the cryptocurrency as a form of payment. On a positive note, these currencies are run on the blockchain principle, which has some great recordkeeping features meaning no more missing or inaccurate cost basis. Every transaction involving every token is tracked and, in theory, can be pulled out of the ether when you need it (or by someone monitoring your activities but that’s a whole other rabbit hole). On the downside, from a currency standpoint, while the vendor you are negotiating with may take Bitcoin, if you hold PancakeSwap, you have to log on to an exchange, replace your PancakeSwap tokens for Bitcoin tokens, for a fee, then return to the place of purchase and exchange your tokens for whatever it is that you are buying.
So why are these currencies so popular? Mainly it’s the convergence of several different factors, including a whole lot of marketing savvy using social media, layered with a lack of anything resembling regulation, and a year of millions of people looking for anything, literally anything, to distract themselves from the COVID situation. Mostly though, it’s been FOMO—”Fear of Missing Out”. Now, FOMO isn’t anything new. It’s been around for as long as humans have been walking upright. FOMO is that Dutch Duke in 1636 spending his ancestor’s fortune on tulip bulbs because his fellow Dukes were all talking about them (and no, that didn’t go well for anyone involved), and it’s the guy on YouTube telling you he traded enough Bitcoin to buy a house (and because it’s on the internet, it MUST be true…).
Now, I’m sure you are catching the vibe of my thoughts on the viability of buying cryptocurrency so let’s exit my brain and talk about some real-life issues. First off, about 7 million people in the US and over 2 billion people in the world are unbanked—meaning this new currency is completely out of the reach of all of those people. That’s not really going to improve our wealth inequality situation. For those who are banked and are using some form of this currency, apparently, not only can it be harmful to your net worth, using it can be unhealthy for your relationship, too. According to a Bloomberg study, ~60% of people who “invest” in cryptocurrencies say their beliefs or their investments have had a negative impact on their personal relationships. What if you’re banked and single, or not overly worried about your relationships? How about the environment. These cryptocurrencies are complete resource and energy hogs. To keep these currencies humming, there is an increasing number of server farms parked all over the globe and some of these farms have an energy consumption that is on par with the energy used by smaller countries. Even if all of those farms used renewable energy (chuckle, chuckle), all of those servers need rare minerals to build and some put mining for rare minerals in the same category as blood diamonds. Mmmmm…
Bottom line—consider following two simple rules: 1) things that are intangible, lack regulation, and have a lot more in common with gambling over at Turning Stone probably shouldn’t be in your portfolio if you need those dollars to meet your long-term goals and 2) if you don’t understand it and/or if you (or your advisor) can’t explain it to your mother, you probably should be putting your money to better use.

The Market, Investing and You

Hello 2016, Goodbye 2015.  I am not normally one who looks backwards and rarely one who talks about the market. However, I am a CFP® so I do have to ask the question…how are things going with your portfolio these days?

With the market acting like a two-year-old throwing a tantrum, are you holding more stocks than you are actually comfortable with?  When you first invested, you may have thought yourself a daredevil but, recently, you feeling more like a backyard gardener.  Are you getting towards the stage when you are thinking more and more about retirement? Contrary to the commonly held belief, you can’t make up for lost time with a more aggressive portfolio and the last couple of days are proof positive of that. Even if you are in your thirties and the market volatility is driving you nuts, perhaps you shouldn’t have as much exposure because, rest assured, this isn’t the markets last roller coaster ride. The point is, it is important to reassess your risk tolerance and investment objectives at least once a year.

Too often, people pick an initial couple of investments and call it a day – the “once done and forget about it” style of investing. Unfortunately, your money is a little like that goldfish you had as a kid – forgetting about him means Mr. Goldfish is getting flushed down the toilet just like…well, you get the picture. Investments are just like that goldfish, they don’t need much but every once in a while they do need some attention.

Now, while the year is young, why not take a look at how your money is positioned? Give your portfolio some attention and make an appointment with your advisor to review your allocations. Perhaps you have some tax losses you can stock pile for when the market rebounds. However, try to focus more on how your portfolio is balanced and whether or not it matches who you are. That way when the market decides to throw a tantrum in the future, you may not have to worry so much.