Happy Holidays

I've always felt a sense of inertia during the holiday season. Thanksgiving passes and then time seems to speed up as the end of the year rapidly approaches. As I've done in prior years, my plan is to take a couple weeks off from writing this blog to spend a little extra time with family.

My next post will be on January 8th, but I'll still be working in the meantime. Please feel free to reach out if you have any last-minute needs or burning questions.

That next post will also be my Quarterly Update, and we'll recap the fourth quarter in the markets as well as the rest of the year. Who knows how the next handful of trading days will work out, but at this point 2018 seems to be one of those "in with a bang, out with a whimper" years. More to come on that topic.

Until then, from my family to yours, Happy Holidays! I hope you get to spend time with family and friends and appreciate the little things that make your life wonderful.

Let's review two more finance terms from the YouGov poll we've looked at in recent weeks: Capital Gains and Losses, and Adjustable-Rate Mortgages. Roughly half of Americans polled had little or no knowledge of these terms. Think about that.

Capital Gains and Losses – When you invest, you put up cash ("capital") and, assuming you sell in the future for more than your original investment, the difference is referred to as your capital gain. This might sound simple, but in practice it can be hard to understand. Here's an example:

Say you invest $5,000 by purchasing shares of a mutual fund. The share value increases over several years and then you sell for $10,000. The $5,000 you invested is your capital and the second $5,000 is your gain. Since you held the shares for over a year, the government considers this a long-term gain and taxes it at a rate lower than what you pay on ordinary income (15% versus maybe 20+%... some taxpayers pay 0% in capital gains taxes, by the way).

The opposite scenario is also important to understand. If your $5,000 investment declines to $1,000 in the same timeframe and you sell, what you unfortunately have is a capital loss of $4,000. As sort of a consolation prize the government lets you claim up to $3,000 per year in losses as a tax deduction.

The government gives investors this special tax treatment on capital gains and losses because it wants to stimulate investment in stocks, bonds, real estate, small business ownership, you name it.

Investments have to be sold before a gain or loss can be "realized". Otherwise, gains and losses are said to be "unrealized" and can be left as such for a long time, hopefully long enough to ensure gains.

A bonus question: Say you sold an investment this year for a $5,000 gain but then sold another investment for a $3,000 loss. What's your "net realized capital gain" for tax purposes? Since the loss offsets some of the gain, you'll need to pay taxes on the difference, or $2,000.

Adjustable-Rate Mortgages – Traditional mortgages are "fixed", meaning they're paid off based on a straightforward amortization schedule (we talked about that term a few weeks ago) covering perhaps 30 years. ARMs, as they're known, are more flexible but also complicated.

Maybe you think you'll only own your home for the next five years, or maybe you're willing to gamble a bit that interest rates will stay low or even decline in the future. Maybe you need a lower monthly payment to help make your first home more affordable. Each of these is an example of where an ARM can be helpful.

But this flexibility comes at a cost. ARMs often have a lower introductory interest rate (leading to a lower initial monthly payment), say for the first five years, but then the rate floats up or down based on an index. This can work for or against you. If interest rates trend down while you have the ARM your monthly payments go down. If rates rise the opposite occurs and, if you're not ready for it, you can find yourself behind the eight ball.

Borrowers need to be very careful to understand the mechanics of what they're signing up for. ARMs usually have caps for how much rates can change each year, but the "adjustable" nature of these loans adds uncertainty to home ownership.

For this reason, folks planning for a retirement that includes having a mortgage should ensure it's of the fixed rate variety and not an ARM. Yes, ARMs are more flexible, but certainty can be more important when thinking about budgeting during retirement.

Here's a link to a summary of the YouGov poll:


Have questions? Ask me. I can help.

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