November ACap ReCap
1. How much should I spend on gifts during the holidays?
The temptation to spend during Christmas is insurmountable – midnight sales, color-coded days, and of course snappy commercials entice us to whip out our credit cards. Unfortunately, few people enter the holiday season with a careful plan of how much they intend, and can afford, to spend – many end up with sticker shock in January when the credit card bill arrives. Here are some quick tips to help you start the New Year with more cash in your bank account.
What’s Your Budget?
Deciding exactly how much to spend can be the hardest decision. The best method is to start a Christmas fund in the beginning of the year, make monthly contributions, and by Black Friday, your Christmas budget will be exactly how much money you have saved throughout the year. Being that it’s now the end of November and holiday shopping season is in full swing, it’s too late to start that Christmas fund for this year. So for this year, spend only as much as you can easily payoff in one month without incurring revolving debt.
Make a List (and check it twice)
After you have decided exactly how much to spend, create a list of everyone you intend to buy presents for. Begin allocating the money to each person on the list. If there isn’t enough money to go around, trim your list until everyone on the list is covered. Remember that tangible gifts are not always the best gifts; in many cases, acts of service, quality time spent with loved ones, or even a handmade card have a longer-lasting impression.
Cash is King
Cash is King is frequently used in banking, but most definitely applies during the holidays too. Unless you payoff your credit cards in full each month, try to make all your holiday purchases in cash (or debit card). If you don’t have the cash, but instead carry a credit card balance, then make your list as short as possible, make a gift, and avoid the malls at all cost! Temptation can be too strong to overcome.
2. How do I go about setting financial goals for the New Year?
Getting personal finances in check is always a top 5 New Years resolution amongst the general public. The challenge, however, is to establish resolutions that are achievable and that you can stick to throughout the year. For many, having a long list of resolutions or changes can seem daunting and unattainable. To help create, and most importantly reach, your 2013 financial goals, make them short and clear. First, create a list of all your financial goals: maximize 401k, open an IRA, start a college savings plan, etc. Next, prioritize each item on the list, recognizing you will not be able to accomplish everything in a year and that you can only choose 3 goals. Once you have identified your 3 top financial goals, write down specific steps to accomplish each one. For example, if your top priority is to maximize your 401k, divide the total allowable contribution ($17,500) by 12 months to determine exactly how much you are committing to each month and whether it is financially doable. In this way, you will determine whether to proceed so as to prevent feeling deflated after the second month if you’re unable to maintain your commitment. Apply the same process to the other two goals. Breaking down a long list of financial goals into smaller chunks in this way will make the goals more easily attainable whereas a long list may seem overwhelming.
3. What is a stock split?
There are two types of stock splits: forward and reverse. The most common is a forward split whereby a company splits their stock into smaller pieces. Splits are denoted in ratios. For example, a two for one split is shown as 2:1. Assume you have 100 share of Intel stock worth $100 a share; in a 2:1 stock split you would get 200 shares and the stock price would then be worth $50 a share. As you can see, a stock split does not affect the total value of your investment ($10,000), but rather you simply have more shares with a lower price per share. Imagine you had a cake and you cut it into 4 pieces for your guests; the size of the cake doesn’t not change if you now have more guests and decide to cut the cake into 8 pieces instead. A stock split works the same way. Why do companies declare stock splits? For a variety of reasons. A high company stock price creates a barrier to entry for most people to buy the stock, so companies split their stocks to make owning shares of the company accessible to a broader audience. Research shows that if people own just one share of a company’s stock, they will tend to be more loyal to that company’s products (in other words, they will buy that product more which in turns yields more profit for the company). Also, a high-priced stock makes it difficult to diversify. For example, the price of Apple stock is currently $577. If someone were to purchase 10 shares, they would have to spend nearly $6,000 on just one stock. If their entire portfolio was $10,000, the Apple stock would represent 60 percent of the total portfolio. In addition, fewer numbers of shares make it difficult to rebalance (manage risk) a portfolio since you cannot trade fractional shares of a stock. Some companies like Warren Buffett’s Berkshire Hathaway have never split their stock, which is why each share currently costs $132,606 and too costly for most investors.
A reverse stock split, while rare, usually occurs when a company’s stock price is too low or is rapidly declining and the company wants to artificially boost the stock price to remain listed on an exchange. Reverse stock splits are rarely beneficial for shareholders because the stock price starts off at a higher price (remember your total value remains the same because you now have fewer shares), you have fewer shares, and the stock price continues to decline. If you experience a reverse stock split, you should take that as a sign to consider selling your stock.
4. Does a stock split change my cost basis? My Nike shares have split several times since I first bought them. Did my cost basis change?
If you have owned a growing company such as Nike for a long period of time, you have most likely experienced several splits over the years. A stock splits reduces your cost basis per share, but not your total cost basis. Let me explain, assume you invested $5,000 in Nike stock 10 years ago and bought 100 shares at $50. Lets also assume that the price of Nike stock is now $120 so the value of your Nike holdings is $12,000. If Nike declares a 2:1 forward split, you will then own 200 shares at $60 per share, note the total value of your holding is still $12,000. Your total cost basis remains $5,000, but your cost per share becomes $25 ($5,000 / 200 shares). Regardless of whether your stock splits, remember to always capture your transaction costs when calculating your cost basis. For example, if you buy 100 shares of Nike at $50 a share and pay $10 in commission, your cost basis per share is actually $50.10 a share. The reverse is true for net proceeds – if you sell 100 shares of Nike at $50 a share and pay $10 in commission, your net proceeds for tax purposes is actually $4,990
Have a question or need advice on how to manage your retirement accounts? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com