November 09, 2021

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TOGETHER WITH

Good Tuesday to you all. FYI, thanks to the IRS' cost of living adjustment for 2022, contribution limits into 401(k) and 403(b), most 457 plans and the federal Thrift Savings Plan have increased from $19.5K to $20.5K. Can you guess what percent of US savers into these plans actually contribute up to the max limit? a. 1.5%, b. 8.5%, c. 16.5%. Follow the 🌊 below for the answer.

Here are the topics we cover today 🧐:

The season of selling is here
Do actively managed funds really outperform?
What is the metaverse exactly?

TAX STRATEGY

The season of selling is here

The final quarter of any given year marks the start of a lot of things. It's most notably known for the holidays, but you've also got open enrollment, the start of a new fiscal year, seasonal depression, and of course tax-loss harvesting. Wait, which one of those doesn't belong?

It's historically been the most volatile time of year for the markets, making it a good time to cut some losses just before the 2021 tax year comes to a close. The season of selling may be a little dreary in some respects but provides a window of opportunity in others.

Losing money for a good cause

ICYMI: In the simplest of terms, tax-loss harvesting is the act of clearing out losing positions in your portfolio in an attempt to decrease your taxable capital gains.

Of course, Uncle Sam is watching though, and this tactic is no secret. Because of that, we have what's known as the wash sale rule, which bars investors from selling an asset for a capital loss and then buying it (or a "substantially identical asset") right back within 30 days.

Generally speaking, engaging in tax-loss harvesting is only worth it if it saves you more in taxes than your loss, or the investment with a negative return is just a lost cause.

🌰 Here's a visual from Schwab on how this all works in a nutshell, assuming you have two investments—one with a $20K capital gain and another with a $25K capital loss—and a tax rate of 35%:

Other implications & what this means for us

Now that you've got a high-level refresher on how to legally manipulate your tax bill, it's worth noting that there are a few other benefits one can reap come harvest season this year.

You might get some discounts: It'll take a lot of scouting and knowing the right stocks, but if you can find a company you believe in that has a lot of bag holders at the moment, it might be a good candidate to drop by year's end, giving you a better opportunity to buy-in.
Using losses to reduce taxable income: Using this strategy can also be used to reduce your ordinary income if you're in the red entirely and have no net capital gains for the year. You can deduct up to $3,000 of capital gains losses, and carry over any excess to next year's tax return.
Reevaluating your strategy: Taking losses on our investments can and should cause us to reflect. Tax-loss harvesting is a good consolation prize, but it won't outweigh bad investing habits, so use this as an opportunity to assess the nature of your losses.

💡 Here's Finny's lesson on Tax Loss Harvesting if you want to learn more:

Tax Loss Harvesting

Investing

7 mins

INVESTING

Active managers aren't shining

It's no secret that US investors love their mutual funds. With the first of its kind created nearly a century ago in 1924, US mutual funds today boast $23 trillion in assets under management.

But with lower-cost index funds and exchange-traded funds taking a bigger market share of an investor's core investment position, it's only natural to ask: are mutual funds are still worth the cost?

Zooming in on some data

Periods of high market volatility are known to be the hunting ground for active managers and a prime opportunity for them to shine. And in fact, the more volatile the better because of their ability to quickly digest markets and make fast decisions.

But when reviewing their track record, the story isn't exactly as we'd expected.

Lackluster performance. According to Morningstar, there's actually little merit to the idea that active mutual funds are more capable of navigating market volatility than their passive counterparts. About 47% of the nearly 3,000 active funds in their analysis outperformed passive funds from June 2020 to June 2021. That's about what you'd expect with a coin toss.
Performance vs. benchmarks gets worse over time. According to Market Sentiment, not only do US equity funds underperform their benchmarks, but it gets worse with age.

Oh and the fees: Likely the biggest drawback to an actively managed mutual fund is the higher expense ratio. You might be thinking a 1% or 2% fee doesn't sound like a lot, but those fees can add up over your lifetime thanks to compounding. You can see how significantly a seemingly small fee can eat into your account balance over a 30-year period:

Some perspective

Not all mutual funds are created equal and there are some great funds out there that may align nicely with your goals, time horizon and risk appetite.

And while it's true that "past performance doesn't guarantee future results," understanding that active investments with higher fees have to consistently overcome these expenses and their performance tends to suffer over the long term versus lower-cost options will serve you well.

So if you're focused on the long-term and haven't looked into passive options, now may be a good time to do just that.

🤔 If you haven't yet taken this bite-size lesson on how to create a simple, passive 3-fund portfolio, here it is:

Create a Simple 3-Fund Portfolio

Investing

6 mins

THE FUTURE

What is metaverse?

Look, if we're not already living in a simulation, it seems we will be eventually. We all knew that though, right?

Facebook's name change likely invokes readers with thought of either a utopian society or... the Netflix series Black Mirror. It's all about perspective though.

But seriously, what the heck is the metaverse, and what does it mean for us as investors and curious folk?

The metaverse is: It's a portmanteau of the words meta and universe. The implied meaning is essentially the blending of reality and the internet by way of virtual spaces that are interconnected, and a place where people can interact for countless purposes. Imagine being able to walk on the moon, watch your favorite sports game, or go shopping at the mall or even to school. Think immersive virtual experience.
This isn't new: Facebook has been dabbling in this for a while, as you've likely seen their controversial VR (virtual reality) boardroom application already, but there's more where that came from. Gaming companies like Roblox and Epic Games already offer metaverse experiences (e.g., games, virtual concerts), with big tech companies and gaming companies already building out their platforms.
Investing: The VR sector has an expected CAGR of over 45% for the next 6 years, with an expected market size of $84 billion by 2028. And by then, it'll still be considered a nascent industry.

📊 ASHU'S CORPORATE CORNER

Today's Movers & Shakers

GE (+7%) has decided to split into three publicly traded companies focusing on aviation, health care and power
Palantir (-2%) in spite of topping the street's revenue estimates; profits came in as expected
Coinbase (+2%) on the back of Bitcoin topping $68K
Nucor (-1%), the steel firm, on a Citigroup downgrade
Roblox (+25%) on better than expected results
TripAdvisor (-8%) on missed earnings
Robinhood (-3%) as info on millions of customers were stolen in a data breach
SmileDirectClub (-22%), the digital dental firm, missed on profit estimates
Airlines are up as the international travel ban ends and travel returns to the US

This commentary is as of 9:02 am EDT.

🌊 TRENDING ON FINNY & BEYOND

Answer: It's 8.5%, according to the CRS per data from 2018. Do take note that IRA and catch-up contribution limits will stay unchanged for 2022 (Syracuse.com)
First US business school to accept cryptocurrency from program participants (Coindesk)
Finny lesson of the day: Since it is TLH season and market volatility has presented us with trading opportunities too, let's be sure you're aware of the IRS wash sale rule:

What's the Wash Sale Rule?

Investing

6 mins

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Finny is a personal finance education start-up on a mission to make your money work for you. We offer a personalized learning experience through bite-size, jargon-free lessons, money trends & insights and investing tools.

The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice. The editorial team: Austin Payne, Chihee Kim. Ashu's Corporate Corner is brought to you by Ashu Singh.

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