Wealthable

Able Wealth Management's blog on personal finance, financial planning, investing, taxes, and the behaviors and decisions that influence our actions.

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Transitioning to a new job is a significant life event that comes with its own set of challenges and opportunities. One of the most critical tasks during this period is choosing the right benefits package. Given that most companies have a 30-day enrollment window, it's essential to make informed decisions quickly. In this article, we'll guide you through the 4 key tips for enrolling in benefits.

Estate planning is a complex endeavor, and one of its most intricate components is the "step-up in basis." This mechanism can significantly influence the after-tax value of assets, especially when considering the difference between a full and partial step-up. Financial advisors play a pivotal role in guiding clients through this maze, ensuring they maximize their wealth for themselves and their heirs.

Backdoor Roth IRAs present an enticing avenue for high-income individuals aiming to optimize their retirement savings. However, this path is laden with potential hazards. This article aims to demystify the complexities of Backdoor Roth IRAs, highlighting common missteps and providing advice on how to circumvent them.

The world of investments is vast, with every option promising high returns and enticing success stories. One such avenue that has long been regarded as the ultimate path to riches is rental real estate. It’s hard to ignore the success tales of people who made fortunes through property rentals. Often touted as the epitome of passive income, this venture is painted in the brightest colors by many real estate gurus. But is this picture entirely accurate, or is there a darker side to it?

There's a tendency in our world today to view financial decisions as a series of disconnected snapshots. We make isolated choices, focusing on the immediate impact without considering the broader narrative of our lives. This approach, though seemingly practical, is akin to viewing a tapestry thread by thread, missing the grand design that emerges only when we step back.

As people age, it becomes increasingly important to recognize the early signs of cognitive decline, as this can have a profound impact on their ability to make sound financial decisions. However, identifying the onset of cognitive impairment is not always easy. During the early stages of cognitive decline, individuals are more likely to make mistakes […]

Navigating the world of taxes as an artist can seem daunting, but it's a crucial aspect of your financial success. As an artist, you're essentially running a business, and this comes with certain tax implications. Your income isn't only derived from the sale of your artwork; it may also come from teaching, commissions, royalties, and grants. All these income sources are taxable and must be reported on your tax return.

This comprehensive guide provides an in-depth understanding of Donor Advised Funds (DAFs), a unique philanthropic tool that allows donors to make tax-deductible donations, maintain advisory privileges, and manage their charitable giving flexibly and efficiently. However, potential donors must consider certain drawbacks such as limited control, administrative fees, and minimum contribution requirements, and are advised to consult with financial professionals to ensure DAFs align with their financial and charitable goals.

At first glance, financial planning, with its focus on numbers and logic, may seem worlds apart from the realm of cognitive neuroscience and the study of brain hemispheres. However, the work of esteemed psychiatrist and author Iain McGilchrist offers a fascinating bridge between these two seemingly unrelated fields.

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Volatility Drag

Volatility drag, often unnoticed by many investors, plays a significant role in the performance of investment portfolios, especially in markets characterized by high volatility. Understanding volatility drag is crucial for making informed investment decisions and managing long-term investment performance.

Understanding Volatility Drag

Volatility drag refers to the negative effect of investment volatility on compound returns over time. It occurs because losses have a more significant impact on portfolio value than gains of the same magnitude. For example, if an investment loses 10% one year and gains 10% the next, the investment will not return to its starting value due to the mathematical asymmetry between gains and losses. This phenomenon underscores the importance of minimizing large fluctuations in investment value to protect long-term returns.

The Mathematics Behind Volatility Drag

The mathematical principle underlying volatility drag is relatively straightforward but profound in its implications for investors. The key concept is that percentage gains and losses are not symmetrical. A 50% loss requires a 100% gain to break even, not a 50% gain. This asymmetry means that volatility (up and down movements in price) can erode the compound growth rate of an investment, even if the arithmetic mean of the returns seems healthy.

Example of Volatility Drag

Consider an investment with the following annual returns: +20%, -15%, +10%, and -5%. While the arithmetic mean of these returns might suggest a modest positive performance, the compound annual growth rate (CAGR) would tell a different story, factoring in the volatility drag and showing a lower effective return than the arithmetic mean would suggest.

Implications for Investors

  • Risk Management: Understanding volatility drag emphasizes the importance of risk management strategies, such as diversification and the use of derivatives for hedging, to minimize significant downturns in portfolio value.
  • Investment Strategy: Investors might consider investment strategies that aim for steady, consistent returns over those with potentially higher but more volatile returns. Such strategies might include investing in low-volatility stocks, index funds, or using dollar-cost averaging to mitigate the impact of market fluctuations.
  • Psychological Aspects: Volatility drag also highlights the psychological challenge for investors who may overreact to short-term market movements. A long-term perspective is crucial for successful investing, as frequent trading in response to volatility can exacerbate the drag on returns.
  • Performance Evaluation: When assessing investment performance, considering both the arithmetic mean return and the compound annual growth rate (CAGR) can provide a more comprehensive view of an investment’s performance, factoring in the effect of volatility.

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