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✔️ Mid-year financial check-up

July 13, 2021 Sign up
TOGETHER WITH Finny

Happy Tuesday. Can you guess what percent of food produced in America heads to the landfill or is otherwise wasted? a) 10%, b) 20%, c) 40%. See the answer in the "Trending" section below.

  • The consequences of your investment holdings being sold-out 
  • Your mid-year financial check-up. Don’t forget to do these 5 things
  • Save more with the 1% rule

INVESTING

The consequences of your investment holdings being sold-out

A mutual fund is typically meant to be a calm environment to watch your retirement savings grow steadily over the decades, right? Funds of course have multiplicities of positions along the proverbial sliding scale of riskiness, but these investment vehicles are generally sought out for their typically diversified nature and security.  

Fund managers may be putting that classification at stake though when they lend out the underlying holdings your mutual fund contains. It's a well-known yet contested topic in the financial community called "securities lending," but one that is not too often discussed.

Securities lending, simply put

A stock mutual fund or ETF will usually hold thousands of shares of different stocks. If there is a short-seller who wants to borrow those stocks and agrees to post some collateral and pay the fund a fee for doing so, a fund will lend them out and make a little extra dough. It's a clever way to make incremental revenue by fund managers.

But, is there a catch? Could lending out your fund holdings actually be detrimental to your money in the long run?

In short... possibly

A study done by Derek Hoystermyer, a finance professor and contributor to the Wall Street Journal, found that active fund managers who’ve made it a habit of lending out north of 1% of your funds' underlying holdings in a given year eventually end up underperforming by 0.62% across multiple classes when compared to funds that don’t lend out shares. 

For example, when it came to US large-cap-based funds, those that loaned out less than 1% of their holdings averaged returns of 13.29% per year, while actively managed funds that lent out more than that averaged 12.93%, or 0.36% less per year. Fund performance gets worse for those that lend out more than 2%, not to mention the fund's increased volatility. 

A 0.36% annual return different looks like a small number, but for hypothetical's sake, if you had 1 million dollars invested in both a fund that lends out less than 1% of its holding and a fund that lends out more than 1%, your average account balance difference 10 years later would be roughly $107K ($3,480,000 vs $3,373,000). 

For us, what we can do

But all fund practices aren't created equal. Fund securities lending policies are not uniform across the board. For example, income earned from securities lending for certain ETFs is estimated and accrued daily into its NAV which may result in returns that can partly offset fund management fees—a potential benefit.

If this seems like a matter that may be relevant for you, make sure you read the fund or fund's parent company's prospectus, semi-annual or annual report so you know what its securities lending policy is. All in all, simply be aware so you can make the most prudent decision for yourself.

FINANCIAL HEALTH

Your mid-year financial check-up. Don’t forget to do these 5 things

Some of us go to the doctor once a year or even more often, and some not so much as having to call and schedule an appointment seems like a bit too much human contact, especially after the last year. 

Nevertheless, financial checkups can be done in spite of your introversion or fear of doctor's offices from almost anywhere. Good habits will eventually allow you to put this on auto-pilot to an extent, but it’s important to run the numbers sometimes to see where you stand.

Here are a few things to check on.

  • Review your employee benefits. Now is a good time to review your work benefits to see what you might have missed or to prepare for open enrollment that is coming up in a few month's time. For example, if you have a high deductible health plan, max your contributions to an HSA (health savings account) because they offer a triple tax benefit. Yep, you read that right.
  • Check your credit report. Some of us obsessively check our credit scores every month when they come out like it’s the newest CPI report or something. If that’s you, great, if not, check it. You can also get a free annual credit report from annualcreditreport.com, a site jointly owned by the country’s 3 biggest credit reporting agencies. 
  • Explore where you can get a tax break. Take advantage of opportunities to lower your taxable income by contributing to tax-advantaged retirement accounts like an IRA or a 401(k). If you have a retirement plan at work, make sure you’re contributing at least enough to get the entire match (aka, "free money") from your employer.
  • Look at your portfolio and reassess. If you’re not an active trader, you might not be logging into your brokerage account every day to check on your retirement account balance. Because ya know, time in the market. Nevertheless, it’s still a good idea to be checking in from time to time to make sure your allocations are prudent.
  • Protect what you have or your family. Every year, evaluate your insurance needs to make sure you have the right amount and type of insurance to cover unforeseen events that could seriously impact your finance. Life insurance may be a good place to start and is mainly designed to replace lost income. Also, consider estate planning—we're talking about wills, trusts, power of attorneys and health care proxies. They aren't as daunting as they seem.

📚 Estate planning, you say? What is that exactly? Learn about it in 6 mins. 

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BUDGETING & SAVING

Save more with the 1% rule

There's a litany of rules and guidelines out there that want to advise you on how to allocate your money. You’ve got the 30/50/20 rule, the 20% rule, the 15% rule, and seemingly neverending different rules of thumb proposed by varying financial gurus. 

The reality is that none of these rules are gospel, they’re just general guidelines to point you in the right direction, and the truth is that everyone’s percentages will be different from one another.

Insert the 1% rule into the mix now too

The 1% rule is for those earning under 200k per year. So like 95% of the American population. It states that if you find yourself wanting to purchase something that will cost more than 1% of your annual salary, you should wait a day before you decide to buy it.

That means, if you make $60,000 and you want to purchase anything over $600, then you’re gonna need some time to think about it.

We usually make better decisions after giving them more thought, so do some pondering on the purchase. Go sit outside and think about your life. Why are we here? What’s the point? Do I really need that Apple Watch? Will I ever find love? Can I afford that boat? You know, just the important questions.

ASHU'S CORPORATE COLOR

Today's Movers & Shakers

  • Pepsico beat top and bottom-line estimates while raising their guidance (+1.5%)
  • $JPM also topped revenues and profits with a caveat: they released $3 billion in loss reserves (-1.3%)
  • $GS is up 1% after the bank also topped earnings and revenues numbers
  • $BA (-2%) after saying that it would slow production of the 737 Dreamliner due to “production-related issues”.
  • ConAgra, the food producer, had good results but cut their full-year forecast (-3.5%)
  • Nokia (+8.4%) after the firm said it expects to announce an “improved outlook” when it releases its Q2 results on July 29th
  • Hanesbrands (+3%) after Wells Fargo upgraded the stock to overweight
  • J&J is down 1% after a warning from the FDA (yesterday) that the vaccine can (in a small number of cases) lead to a neurological disorder called Guillain-Barre syndrome

This commentary is as of 9:16 am EDT.

✨ TRENDING ON FINNY & BEYOND

  • ANSWER. 40% of food produced in America heads to the landfill or is otherwise wasted. The lie of “expired” food and the disastrous truth of America’s food waste problem (Vox)
  • You're not the only one who's had enough: 95 percent of workers are considering quitting (NBC)
  • Finny lesson of the day. If you are a renter, did you know that your renters insurance covers damage done to your stuff, like your phone? Find out all about it in this bite-sized quiz: 

Finny is a personal finance education start-up offering free, game-based personalized financial education, a supportive discussion forum, and simple stock and fund tools (aka Finnyvest).  Our mission is to make learning about all things money fun and easy! 

The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own bosses! Finny does not offer investment or stock advice. The Gist is sent twice a week (Tues & Thurs). The editorial team: Austin Payne and Chihee Kim. Thanks to Ashu Singh for Today's Movers & Shakers.

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