Sonnet Financial Technologies, 52 Hillcrest Avenue, Lodi, NJ (2026)

02/18/2022

So it’s tax season right now and your accountant probably looking for deductions since most Americans will now be taking the standard deduction ($12,950 for single and $25,900 for joint). He may ask you to deposit money into an IRA account. For 2021 you can deposit $6,000 ($7,000 if you are above the age of 50). You can actually double that before the tax filing deadline because you can do prior year and current year contributions. You can further double that again if you’re married filing jointly—$24,000 (there are some restrictions if you’re employed with a qualified plan).
Did you know there are two types of IRAs? Traditional IRAs give you an immediate tax deduction, so you can decrease your taxable income. That means if you deposit $7,000 and you’re in the 32% tax bracket, then you just saved $2,240 in in federal taxes! You also don’t pay any annual taxes on dividends, interest, or capital gains. Sounds good right? Well let’s assume that $7,000 grows to $50,000 and you want to withdraw it—now you have to claim $50,000 in taxable income! So now you’re thinking, what if I just don’t touch it? Well, when you’re 70 1/2 you have required minimum distribution‘s and MUST take some out! If you’ve done a good job saving and investing, then you might actually be in a higher tax bracket when you retire than while working!
What’s the other option? In 1998 Delaware senator William Roth created the Roth IRA! These funds are after-tax, so you don’t get any deductions. This is basically dead money to the IRS, so all the gains, interest, and dividends are tax-free! The IRS realized this is a bad deal for them, so they created income caps for contributions (so if you make too much money you can’t contribute). However, there’s a loophole! You can do a Roth conversion: contribute however much you want into a traditional IRA, take the tax deduction, then convert into a Roth IRA and pay the taxes. It’s a silly loophole that the IRS doesn’t bother plugging because they make so much money on that realized tax!
So which one should you do? Well it depends on whether or not you need a tax deduction. If you’re young and in a higher tax bracket and need funds now then maybe do the Traditional IRA. If you don’t need a deduction, then that tax-free growth is invaluable. Maybe do both? Reach out to Sonnet Financial for specific IRA advice regarding your situation!

02/05/2022

“This too shall pass”…famous words of a Chinese monk. The stock market goes up and it goes down, BUT it tends to go up more often than it goes down. This is what you need to tell yourself during these volatile times. You also need to remember that some of the largest greatest gain days were right after big red days! For example, If you invested $10,000 in 1980 it would be worth $700,000 right now! Let’s say you sold and missed five of the biggest gain days, then you’d only have $458k! Big difference! If you missed 10 days then only $341k. 30 days on the sideline would give you $132k! Panicked and missed 50 days, then you’d only net $62k!
Also remember that gains to recoup losses compound.
If you lose 10% then you need 11% to break even. 25% loss needs 33% gain. 50% needs 100%. 80% loss needs 500%!!!
The best thing to do is review your financial plan. Are you on track? Did the Monte Carlo simulation take into account dips or a 40% confidence? Reach out to the advisors at Sonnet FinTech to review your goals and make sure you don’t shoot itself in the foot because of short-term volatility!

01/24/2022

A common question I get is “are index funds or ETFs better?" OK, not really...I mostly get asked about Crypto, but now that crypto is down ~45% over the last month--not as much. Index Funds were popularized by John C. Bogle; however, the first one was actually created in the 1971 by Mac McQuown at Wells Fargo bank. In 1976, Bogle started Vanguard after getting fired from Wellington Funds! He started with an IPO target of $150M, but only raised $11M! It was termed "Bogle's Folly", but he never gave up! Today more than 40% of all funds invested go into Index Funds. Index funds were the undisputed kings of indexing until Nate Most of the American Stock Exchange thought up a new way to trade indexes (and generate more revenue for the exchange)--the Exchange Traded Fund or ETF. In 1993, he convinced State Street Global Advisors to create the SPDR, or "Spider" (Ticker: SPY). Fun Fact, John Bogle once said “Why would anyone want to buy the S&P 500 at 10 o’clock in the morning and sell it at 2 o’clock in the afternoon?”. Now SPY is worth $463.7 billion (fun fact: SPDR stands for Standard & Poor’s Depositary Receipt). Which is better? Well both have relatively low fees. The major difference is that Index Funds trade mutual funds, or at close of business. ETFs can be day-traded in and out all day. The biggest difference is taxes! ETFs are very efficient, but index funds tend to pass capital gains to investors, so you may pay taxes even if you don't sell (not a problem in IRAs). Which is better? Up to you. If you prefer long-term, then index funds are fine. Some index funds even give you quicker settlement. Most Index funds usually have a minimum, but the min for ETFs is one share. Still not sure which is right? Then reach out to Sonnet FinTech for a complimentary consultation!

01/17/2022

So last week we talked about uncovered calls as a way to make money when stocks go down (how risky it is!). Is it possible to trade options and make money when stocks go down, but with less risk? Yes! You can buy a PUT Option. Remember, options are the right but not the obligation, to buy or sell a stock at an agreed-upon price and date. Let's say Apple is a $100, but you think it will go down to $90, so you BUY a Put. If it hits $90, then you exercise the Option and someone must buy from you (i.e.: you can sell) 100 shares of Apple at $100. In theory, you'd buy 100 shares in the market at $90, then sell them for $100, thus pocketing the difference (less the premium you paid for the contract). Most traders don't bother actually exercising and just sell/close the contract for a profit right before the expiration date. Why bother with Puts? Well if you already own 100 shares of Apple, then it's nice to know you have a buyer in case there's a crash (this is called a "Married Put). Does your stock pay a nice dividend? Well use the dividend to pay for the premiums (it's like free insurance). Covered Puts give you limited upside (since the stock can only go to zero) and have high, but limited risk since you can only lose your entire premium if the stock never drops. Luckily, it's not infinite risk like the Uncovered Calls that we discussed last week!!! Covered Puts can be a great way to hedge your risk or speculate with limited risk if you think the market is bearish. Remember the #1 Rule of Speculating: Never trade more than you can lose. Trade a bit if you like, but reach out to Sonnet FinTech to strategize your core, long-term portfolio!

01/11/2022

So lately we've talked about diversified strategies and long-term investing, but what if you have some money to speculate with? The riskiest strategies are uncovered call options! Options are the right but not the obligation, to buy or sell a stock at an agreed-upon price and date. Let's say Apple is at $100 and you'd like to buy 100 shares at $110, so you BUY a CALL option for small premium. If it hits $120, then you just made $10, but if it never hits $110, then you just lost the premium you paid for the option (which is significantly less than the price of the stock). This is considered Speculation because you can lose all of your premium. But if you're really feeling crazy, then you can sell an UNCOVERED CALL option. This is when you think Apple will go down, so you SELL someone a Call at $110. If Apple goes down then you get to keep their premium...but if Apple goes up to $200, then you need to either buy back the call (at a much higher price) or buy 100 shares of Apple at $200 ($20,000). In theory your risk is unlimited because Apple can keep going up! Then why do it? Well if you are confident in your research then the risk may be worth the reward. You can also enter "Stop-Loss Orders" that will get you out of the trade at a certain point. You can "Cover the Call" by just already owning the underlying position (if you own Apple why not sell some options to create an "Extra Dividend"?) or buy an option to cover/hedge (called a straddle, but more on that next week). Remember the #1 Rule of Speculating: Never trade more than you can lose. Trade a bit if you like, but reach out to Sonnet FinTech to strategize your core, long-term portfolio!

12/30/2021

The United Van Lines Annual Survey showed that 70% of rentals are outbound vs inbound, meaning more people are leaving the Garden State (for the third consecutive year). Why? High taxes, SALT tax eliminations, and the crummy weather. One glimmer of hope: NJ is finally fixing its 529 Plan, which was ranked among the worst since created in 1997 by Gov. Christie Whitman.
Step One: Lower Fees. Most funds have around .40-70% expense ratios, which is higher than an ETF, but lower than the .90-2% in retail shares (A&C).
Step 2: Add a Match. The state will match up to $750 for taxpayers with incomes below $75,000 in order to encourage low-income families to save!
Step 3: Add a Scholarship. If you attend a NJ College (remember you can go to any state), then you can get a minimum of $1,000 and a maximum of $3,000. That might buy one book, but it's not nothing.
The last and biggest: Add a Tax Deduction. Families with incomes below $200,000 may be able to deduct $10,000 of contributions.
The tax incentive is expected to cost the state roughly $16 million in lost tax revenue annually and it will cost another $10 million for the matching funds perk, but hopefully the changes will incentivize more saving. The $750 match is expected to come from the fund fees and be tax neutral.
You can start a 529 plan with as little as $25! Reach out to Sonnet FinTech for help with college planning!

12/12/2021

We all know diversification is good, but what does it mean? Harry Markowitz won a Nobel prize 🏆 in economics in 1990 for creating “Modern Portfolio Theory (MPT)” (he actually shared the prize with Merton H. Miller & William F. Sharpe).
He theorized that there are 2 types of investments: high return/high risk and low return/low risk (Sidenote: if you find something that’s high return and low risk, then give me a call because I have a bridge to sell you).
Risk-averse investors can construct diversified portfolios that maximize returns without unacceptable levels of risk.
Pick your preferred return and then select a combinations of instruments that are not positively correlated (move in sync). Small cap, mid-cap, and large-cap stocks tend to move together. Bonds 📈tend to move in the opposite direction of stocks📉. Commodities and international stocks are completely different animals🐯. Plug the expected return and standard deviation (volatility) of all the different asset classes, then block them on a graph, and draw a line to figure out the “efficient frontier,” or the best risk-adjusted return.
Why would you want to get a 9% return and lose sleep every night or settle for a 1% money market return, when you can get 6% with an acceptable amount of volatility?
Perhaps the most serious criticism of the MPT is that it evaluates portfolios based on variance rather than downside risk. Two portfolios may be equal but one may have frequent small losses and the second few, but spectacular declines. The former would be preferable since frequent small losses are easier to endure.
The post-modern portfolio theory (PMPT) attempts to improve on MPT by minimizing downside risk instead of variance.
That being said, you want to always invest with a plan. Big deal that hedge fund strategy is getting huge returns. Are you going to be comfortable with the swings? There’s an old saying on Wall Street: “do you want to eat well or sleep well.” If you’re not sure what the answer is, then reach out to Sonnet FT, so we can put together a financial plan for you and figure out what your risk-adjusted return should be! Let’s eat🍽 moderately well and get plenty of sleep 🛌!

11/23/2021

A few weeks back we talked about inflation, but how is inflation calculated? The quick answer is not easily! Inflation is defined as a general increase in prices 📈 and a fall in the purchasing power of money 📉.
A little inflation is normal and even good for a healthy economy! Inflation becomes a problem when it grows too quickly. Money losing value at a rapid rate can lead the economy into a downward spiral!

Most investors use the Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS) which examines the weighted average of prices of a basket of goods and services that include transportation, food, and medical care, but the Bureau of Economic Analysis (BEA) calculates the Personal Consumption Expenditures Price Index (PCE) and tracks the prices businesses report selling goods and services for. PCE’s basket of goods is less fixed than CPI’s, which helps it account better for when consumers substitute one kind of good or service for another when it gets more expensive. As the price of beef rises, for instance, consumers may shift to purchasing more chicken. PCE updates to reflect this while CPI generally doesn’t.

There's also a Producer Price Index (PPI), which is calculated by how much it costs to build a product. Sorry for all the acronyms!

What's a good hedge against inflation? Commodities and gold do well. Bonds do poorly especially in a low rate environment. Value Stock do better than Growth stocks during inflationary times. What does the best? A diversified portfolio! Reach out to Sonnet Fintech for help building an inflation-hedged strategy, so you don't have to sorry about the alphabet soup of inflation indices!

11/13/2021

Last week we discussed protecting your portfolio against losses with annuities, but what do you do if you didn’t hedge? PANIC!?! Well maybe. First let’s talk about our monkey🐒 brains. We commonly suffer from “Loss Aversion Bias”. Behavioral scientists have found that the pain of a loss is felt more strongly than the pleasure of an equivalent gain. This leads to three common investor mistakes: first, fear of loss leads to overly conservative portfolios that do not deliver the returns they need to achieve their goals (especially in today’s high inflation environment); secondly, clients tend to sell during a stock market downturn simply to avoid further losses—which could mean they miss out on gains when the stocks they have sold rebound; and lastly, clients tend to hold on to investments that have declined in value to avoid realizing a loss in their portfolio, even when selling is the prudent decision.
What can you do? Well the best way to avoid making stupid mistakes is to stick with a plan! If you have a well-thought-out financial plan, then you have a roadmap that should guide you through the ups and downs of the stock market.

Don’t have a financial plan? Well reach out to Sonnet Financial Technologies, which uses MoneyGuidePro, one of the most powerful financial planning tools, to give you the best chance of having a successful retirement and avoiding as much pain as possible!

10/26/2021

We’ve talked about good annuities, but this week let’s talk about “bad annuities,” aka Variable Annuities (VAs), or figure out if they’re really as bad as Fisher Investments says they are.
First let’s talk about the elephant in the room: yes they have high fees. Sometimes greater than 2%! But what are you getting for that? You're getting insurance. Some offer a death benefit, so if you die beneficiaries get a bonus on the cash value. The best VA benefit is the Guaranteed Lifetime Withdrawal Benefit (GLWB). Basically, when you retire you start drawing down on the your savings to supplement your lost income, but what if you run out because the market drops or you take out too much? A GLWB makes sure you keep getting a check until you die even if your account balance goes to zero because of a stock market crash. The GLWB is usually based on a percentage of the account value and once started payments are fixed for your lifetime (or joint with spouse). Some things to be aware of: your cash value is still in a mutual fund, so it may go up or down (but usually there are lock-in points or bonuses even if the market drops); if you die with no cash value, then your beneficiaries don't get anything; you can get hit with penalties if you touch the cash value or lose some of your GLWB benefit; and of course the big fees don't help the cash value. However, a major benefit is the potential that it can keep up with inflation thanks to the mutual funds, unlike most SPIAs (see previous post).
Do VAs make sense? If you're not risk averse, looking for inflation protection, have enough liquid cash, and plan to draw down the account over your lifetime, then yes, but if not then don't pay the high fees for no reason. A SPIA or low-cost index fund may make more sense. Reach out to Sonnet FinTech to discuss your retirement plans and figure if a VA makes sense for you!

Sonnet Financial Technologies

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