David Swensen, a profoundly influential American investor, wielded significant influence in moulding the investment strategies of institutional funds. Having served as the Chief Investment Officer of the Yale University Endowment for close to four decades, David Swensen authored notable works such as “Pioneering Portfolio Management” (2000) and “Unconventional Success” (2005).
Revered beyond the university for his groundbreaking contributions to investment management and mentorship of future leaders in the field, Swensen was equally esteemed within Yale for his dedication as an educator, astute advisor, and spirited member of the university community.
David has bestowed upon the financial world a multitude of investment principles, a selection of which are outlined below.
Focus on asset allocation
Asset allocation represents a nuanced strategy that extends beyond mere diversification. Below is a breakdown of its fundamental components.
Rebalancing: Rebalancing necessitates periodically readjusting the proportions of various asset classes within your portfolio to uphold your desired allocation. Market valuations fluctuate. Rebalancing enables you to seize opportunities by acquiring undervalued assets while averting excessive exposure to overvalued ones.
Risk management: Although diversification plays a significant role in risk mitigation, it’s not the sole factor to consider. An integral aspect of asset allocation entails evaluating the inherent risks associated with each asset class alongside your overall risk tolerance. This could entail implementing measures such as mitigating exposure to high-risk assets amid market volatility, employing hedging techniques to safeguard against particular risks, and choosing investments that match your risk tolerance.
Returns matter
David aimed to highlight asset classes likely to yield higher long-term returns, albeit at the expense of sacrificing a significant level of short- and intermediate-term liquidity. This clarifies why Swensen didn’t limit his investments to conventional stocks and bonds. He sought asset classes offering the prospect of superior long-term returns, even if they lacked liquidity (meaning they couldn’t be readily bought or sold). This readiness to trade off liquidity for potentially greater returns is a fundamental element of the investor’s Yale Model.Also Read: 10 investing principles of Kirk Kerkorian that elevated him to the status of a billionaire
A measured approach towards diversification
David Swensen’s approach to asset allocation was not characterized by a rigid, one-size-fits-all strategy. The Yale Model is recognized for its diversification across multiple asset classes, and one approach he endorsed is a straightforward, equal-weight allocation. Here’s a breakdown of this method:
Various asset classes: The portfolio is segmented into approximately five or six discernible asset categories, such as domestic equities, international equities, real estate, and fixed income.
Equal allocation: Each asset class is allocated a similar proportion of the overall portfolio investment. This streamlines portfolio management and guarantees extensive diversification.
Active management helps
Swensen’s conviction in the value of active management forms the foundation of the model. It emphasizes the utilization of proficient investment managers who strategically select assets to surpass market performance, thereby providing a means to bolster portfolio returns. This differs from individual investors attempting to identify the “hot” stocks independently.
The Yale Model emphasizes investing in asset classes where active management stands a greater chance of success. These often include less efficient markets such as private equity or venture capital, where information may be less readily accessible. Conversely, Swensen acknowledged the challenge of consistently outperforming the market in highly efficient markets like large-cap US equities.
Don’t try to time the market
Swensen recognized the perils associated with market timing and its potential to undermine the success of the Yale Model. Forecasting short-term market fluctuations is notoriously challenging. Swensen likely understood that even the most sophisticated analyses couldn’t ensure success in timing the market. The investor emphasized a long-term investment horizon. Making frequent adjustments based on short-term trends could disrupt the overarching strategy and potentially result in prematurely selling profitable investments or purchasing overvalued assets.
Market timing decisions are frequently guided by emotions such as fear or greed. Swensen probably grasped the significance of disciplined, rational investing founded on thorough research and long-term objectives.
Research well before investing
David Swensen’s focus on extensive research was a cornerstone of the Yale Model and a significant factor in its achievements. Below is an analysis of why meticulous research held such significance for him:
Understanding investment dynamics: By conducting deep research, Swensen aimed to gain a comprehensive understanding of the forces driving an investment’s performance. This included factors like market trends, industry competition, and the company’s business model.
Assessing uncertainty: Investments inherently entail a degree of uncertainty. Swensen utilized research to quantify this uncertainty through the analysis of historical data, simulation exercises, and the evaluation of potential risks.
Assessing competitive edge: A robust competitive position is pivotal for ensuring long-term investment success. Swensen’s research likely centred on identifying companies possessing enduring advantages over their competitors.
Alignment of time horizons: Various asset classes possess differing investment horizons. Swensen utilized research to ensure that investments aligned with the endowment’s long-term objectives and liquidity requirements.
Exploring upside potential and exit strategy: Research contributed to pinpointing the prospective upside of investment and devising a well-defined exit strategy to capitalize on those gains when appropriate.
Contingency planning for worst-case scenarios: Astute investors don’t solely concentrate on favourable outcomes. Swensen’s research probably involved stress-testing potential investments to comprehend their performance under adverse economic conditions.
David Swensen’s enduring legacy persists long after his passing. His insight into the complexities and opportunities confronting investors in their pursuit of successful investment strategies has empowered and informed investors to devise novel approaches to capitalizing on market opportunities and generating returns.
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It’s the Canadian way to believe in houses as an investment.
In a recent RE/MAX poll, 73 per cent of participants said they believe home ownership is the best investment they can make in 2024, a similar number to last year. Now for a reality check.
The national average housing price peaked at $816,720 in February, 2022, and then sank to $659,395 in January of this year. This drop of 19.3 per cent doesn’t kill the idea of houses as investments narrative, but it does offer some perspective.
Expect to hear a lot about housing this spring. Affordability for first-time buyers can only be described as awful, even if prices are well off the peak levels of a few years ago. Meanwhile, mortgage rates have edged lower and there are signs of revival in the housing market in several cities. Properties are selling faster and there’s even talk of bidding wars in Toronto.
Economic conditions on the surface don’t seem conducive to a housing rally – interest rates remain high, living costs are a challenge for many, late debt payments and defaults are on the rise and economic growth is barely perceptible. Demand for housing is partly fed by population growth and the natural flow of people buying property and starting families. But the RE/MAX poll suggests that another factor driving sales is the view of houses as investments.
One of the basic rules of selecting investments is that past returns are an imperfect indicator of what’s to come. Housing has been excellent in the past – the average annual increase in the national average resale price the past 10- and 20-year periods is roughly 6 per cent, according to Canadian Real Estate Association data. If a home is your principal residence, that gain is tax-free. But even with high levels of immigration, there’s reason to question if housing prices can keep up that pace of growth in a slow-growing economy where borrowing costs remain high.
The best investment you can make this year is in a diversified portfolio of bonds and Canadian, U.S. and international stocks that you hold for at least 10 years. Houses may outperform, but at what cost? Ten more years of 6 per cent annualized growth in house prices would give us a national average resale price of $1.2-million. At that point, houses turn into luxury goods.
The RE/MAX poll offers some insight into how people will afford homes both now and in the future. Almost half of participants said they would consider alternative ownership models like buying with friends or family, buying a home with a rental unit or a rent-to-own arrangement.
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Rob’s personal finance reading list
The inevitability of hot housing
Bidding wars are back in Toronto. I’ve been asked a few times lately what’s ahead for housing and right now I’m seeing signs that the slump of the past year or so is over. Now for a look at the cities with the highest percentage of houses listed for sale at or above $1-million.
Cheapest cars in Canada
I was surprised to find two vehicles still under $20,000, and a few others around $25,000. The average vehicle price these days is close to $46,000.
The investment case for gold
Gold prices have soared recently, and that means more chatter about the benefits of adding exposure to gold to an investment portfolio. I can’t see the point of gold myself because it’s so unpredictable, but many would disagree.
The battle for Rocco Jr.
A court case that involved custody of a deceased owner’s pet dog is a reminder to consider your pets when writing a will. The dog involved is a bull terrier named Rocco Jr.
Ask Rob
Q: I wonder if you plan to review the Wise card?
A: The Wise card is a great way to cut the cost of foreign exchange when paying for purchases outside Canada. I wrote about Wise in a column last year.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools, explainers, guides and charts
“Can someone please explain GICs to me?” – a Reddit thread
The Money-Free Zone
As I was cueing up a Willie Hutch song for today, I heard that Eric Carmen died. Mr. Carmen’s opus All By Myself pretty much defines the mellow rock popular back in the 1970s. Mr. Hutch was a soul/R&B singer on the Motown label whose creative peak was happening while All By Myself played endlessly on AM radio. His soundtracks for the movies Foxy Brown and The Mack are great from top to bottom, but the song I Choose You stands out for its shining production and vocals. It’s been sampled a bunch of times by other musicians.
Watch this
Important stuff to know about buying a home with a friend or family member.
On social media
Food inflation in February – pass the Tums.
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- 🎧 Catch up on Stress Test: Why millennials and Gen Z are Alberta-bound for a more affordable life • Rising interest rates brought pain for new homeowners – and opportunity for house hunters • Why more Canadians are choosing to be child-free or delay parenthood • Love in the time of inflation: How to manage rising costs when dating • You’re not bad at money – you’re suffering from money shame • Retirement might look different for Gen Z and millennials. Here’s how to plan for it • Recession-beating tips for the job market, housing, investing and the cost of life • Is the middle class dead for millennials and Gen Z?
- ✔️ The housing file: A house isn’t special. Get your head straight about the reality of home ownership • The good, the sad and the unaffordable: Saving for a home down payment in Canada’s big cities • Property taxes are popping in some cities – how worried should you be about other tax hikes? • Our other real-estate problem – people have too much wealth tied up in houses • Borrowers and savers, here’s how to time the eventual rollback of interest rates
- 📈 Investing: Canada’s top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer’s guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle
Britons will get a tax break to encourage investment in the London stock market, the U.K. government said as it set out a spring budget that also cut workers’ employment taxes, as the Conservative party looked to boost its election hopes.
Chancellor of the Exchequer Jeremy Hunt told a packed Parliament on Wednesday that new British Individual Savings Accounts would allow an extra £5,000 in tax-free investment into U.K. equities. Rules currently allow investors to put £20,000 a year into the accounts, which are exempt from capital-gains tax.
The move is an attempt to revive the London stock market, which has been suffering from a lack of liquidity, low valuations and a scarcity of IPOs. A recent report from Calastone found that British investors are increasingly selling their U.K. holdings to purchase shares in the U.S., particularly tech stocks.
The FTSE 350
UK:NMX,
an index of large- and midcap U.K.-listed stocks, is down 2.9% over the past 12 months, whereas the S&P 500
SPX
on Wall Street is up 27.9%.
As part of the drive to encourage more investment in the London stock market, Hunt confirmed plans to introduce a new requirement that pension funds must disclose their allocations to the U.K. and said he would consider what “further action” could be taken to stimulate domestic investment by funds.
“We strongly welcome the chancellor’s announcement of a British ISA,” said Charles Hall, head of research at investment bank Peel Hunt. “It is an important initiative that should encourage saving, start to reverse the outflow from U.K. equity funds and support investment in our growth companies.”
Shares in ISA providers such as Hargreaves Lansdown
HL
and AJ Bell
AJB
rose 2.2% and 2.7%, respectively, on the news, although AJ Bell chief executive Michael Summersgill played down how much of a boost Hunt’s decision would provide the London bourse.
“Increasing investment into U.K. companies is a laudable aim, but this ill-conceived, politically motivated decision will simply not achieve that objective,” Summersgill said.
“Fifty percent of the money our customers currently invest through their stocks-and-shares ISAs is invested into U.K. assets, so this new allowance will have no impact whatsoever on their investment behavior,” he added.
Still, the FTSE 250 index
UK:MCX,
which is populated by domestically focused midcap stocks, was up 1.4% Wednesday afternoon in the U.K.
The spring budget came ahead of a U.K. election that must be held this year, with the incumbent Conservatives heading for a heavy defeat, according to polls. Capital Economics, the London-based research boutique, titled the occasion: “Jeremy Hunt goes shopping for votes.”
There were some crowd-pleasing fiscal tweaks. The most notable was a two-percentage-point cut in national insurance taxes, which according to Financial Times calculations would add £29.04 (the equivalent of $36.95) to the monthly take-home pay of someone on a £30,000 annual salary.
Hunt also extended the freeze on alcohol duty to 2025, a measure he said would support “the great British pub.” Shares of pub giant J.D. Wetherspoon
JDW
rose 2%, and smaller competitor Marston’s
MARS
added 1.9%.
Another popular measure supports reducing the cost of driving, so Hunt said he would maintain the 5-pence cut on fuel duty and freeze it for another 12 months, a move he said would save the average driver £50 next year.
In terms of spending, Hunt said the government would allocate £6 billion ($7.6 billion) in additional funding for the NHS, which included £2.5 billion to cut wait times for appointments, a particularly sore point for many Brits.
Hunt said that the government was in a position to help families with permanent tax cuts given that inflation has slowed. “Lower tax means higher growth. And higher growth means more opportunity, more prosperity and more funding for our precious public services,” he said.
The pound was little changed at around $1.2724 after the budget was delivered, though government bond yields were quite choppy, with the 10-year later trading down 1.8 basis points at 4.088%.
Concerns about extra gilt supply came after the U.K.’s debt-management office said Britain aims to sell £265.3 billion in government bonds in the 2024-25 fiscal year, higher than analysts’ forecasts of £258.4 billion, according to Reuters.
Hunt said that the Office for Budget Responsibility, the independent fiscal observer, estimated that inflation would likely fall back to the Bank of England’s 2% target in a few months’ time, a move in line with the central bank’s own forecasts.
The OBR expects the economy to grow by 0.8% this year and 1.9% next year.
I’m struggling with the idea of selling a rental property that has both a high monthly maintenance fee and a high mortgage rate. The costs to keep this house are currently higher than the monthly income it generates.
I recently refinanced in order to pull out $100,000, so now I owe $420,000 on the property, which is worth approximately $750,000.
My recent refinancing increased my mortgage rate from 5.14% to 7.9%, essentially eating up all my cash flow.
I’m on the fence. Should I sell, or should I refinance for a better rate to free up cash flow?
Losing Money Fast
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Losing,
The fact that you’re bleeding money from this rental is not good. You need to either bring down your interest rate or raise rents so you can turn a profit in order to make it a worthwhile investment. But keep in mind that many people are sitting on the sidelines waiting for interest rates to fall, so you might not get your desired price if you decide to sell.
Your mortgage rate is likely the biggest reason your monthly costs have jumped so much. Rates are expected to fall to around 6% or lower by the end of the year. You could refinance then, but do the math to see if it’s worth it.
You’ve already been through the wringer with refinancing, and you likely paid various application, appraisal, attorney and origination fees — in addition to closing costs — to extract that $100,000. All of that is expensive, and now you’re thinking of going through it again.
Even if you refinance again at a lower rate, would that be enough to make a profit? Were you able to turn a profit on that property when rates were at 5%? If not, would you be able to raise rents for your current tenants or perhaps find new tenants who would be able to pay more? And is the house in need of repairs or upgrades?
Unless you can make a profit on the property in the next couple of years, there’s little reason for you to hold onto it, unless you believe that it’s in an area that will experience a significant appreciation in value — you’d want to see appreciation of 20% or more, given the fees you would have to pay upon selling.
Part of your retirement plan
At the same time, a second property is nearly always a good investment. Do you think there will be considerable demand for the rental in the medium to long term? Is it in an area where you might be able to find tenants who would pay enough to cover your costs in the near term so you can at least break even? If so, it’s a good idea to try to hold onto the property, especially if it’s part of your retirement plan.
Provided that you have enough savings to help you get through this current era of 7% rates, and you have the money to refinance down the road to get your monthly costs down to a level where you can have a healthier cash flow, it may be worth keeping the home.
Selling isn’t an easy or simple decision. Because this is not your primary home, you’ll need to factor in the capital-gains taxes you would have to pay, along with 6% in real-estate commissions.
If you do decide to sell at some point in the future, you could roll that money into another like-kind property in order to qualify for a 1031 exemption, in addition to a lower rate.
The bottom line: You need to think like a real-estate investor and leave emotion out of this decision. If the property is not making money or it’s not going to at least break even at some point, you have your answer. But keep in mind that the real-estate market can surprise on the upside and that once you sell the home, you will not be able to take back that decision.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
The numbers: Home prices in the 20 biggest U.S. metros rose for the 11th month in a row and hit a record high amid a persistent shortage of resale homes for sale.
The S&P CoreLogic Case-Shiller 20-city house price index rose 0.2% in December compared to the previous month.
Home prices in the 20 major U.S. metro markets were up 6.1% in the last 12 months ending in December.
A broader measure of home prices, the national index, rose 0.2% in December and was also up 5.5% over the past year. All numbers are seasonally adjusted.
The 20-city and the national index are at an all-time high.
Key details: San Diego posted the biggest year-over-year home-price gains in December. Prices were up 8.8%.
All 20 major markets reported yearly gains for the first time in 2023, S&P said.
Home prices rose the slowest in Portland, increasing by 0.3%.
Cities | Change from last year |
Atlanta | 6.3% |
Boston | 7.2% |
Charlotte | 8% |
Chicago | 8.1% |
Cleveland | 7.4% |
Dallas | 2.1% |
Denver | 2.3% |
Detroit | 8.3% |
Las Vegas | 4.2% |
Los Angeles | 8.3% |
Miami | 7.8% |
Minneapolis | 2.9% |
New York | 7.6% |
Phoenix | 3.8% |
Portland | 0.3% |
San Diego | 8.8% |
San Francisco | 3.2% |
Seattle | 3% |
Tampa | 4.1% |
Washington | 5.1% |
Composite-20 | 6.1% |
A separate report from the Federal Housing Finance Agency also showed home prices rose 0.1% in December from the last month, and were up 6.6% in the past year.
The FHA also noted that the housing market has experienced annual home price growth every quarter since the start of 2012.
The median price of a resale home was $382,600 in December 2023, and a newly built home was $413,200.
Big picture: Even though rates went to 8% in 2023 and dried up demand, that did not push down home prices significantly, per the Case-Shiller index. However early analysis of the data indicates that some markets are seeing home price declines.
But with the 30-year dropping below 7% in December, home prices may see a boost as demand picks up. And with a persistent and severe shortage of homes for sale, home prices could be pressured upwards again.
What S&P said: “Looking back at the year, 2023 appears to have exceeded average annual home price gains over the past 35 years,” Brian D. Luke, head of commodities, real & digital assets at S&P Dow Jones Indices, said in a statement.
“While we are not experiencing the double-digit gains seen in the previous two years, above-trend growth should be well received considering the rising costs of financing home mortgages,” he added.
And the company said it was able to see the early impact of higher rates on home prices. “Increased financing costs appeared to precipitate home price declines in the fourth quarter, as 15 markets saw lower values compared to September,” Luke noted.
Shelby Davis, the visionary investor and creator of Davis Funds, has gained legendary status for his adherence to a value-driven investment strategy and commitment to a long-term investment philosophy. Noteworthy similarities exist between Shelby Davis’ investment strategy and the present market conditions.
At the age of 38, Shelby Davis initiated his investment journey with $50,000. Over time, he accumulated a wealth of $900 million, securing a position among the Forbes 400 wealthiest individuals before his passing at the age of 85 in 1994. Here are a few valuable investment insights that we can glean from his experience:
Emphasize value-based investing: Davis advocated for acquiring stocks priced below their intrinsic value. This involved a thorough examination of companies, seeking those with robust fundamentals like consistent earnings growth, a formidable competitive edge, and a stable balance sheet.
Exercise patience: Davis, as a proponent of long-term investing, upheld the practice of retaining stocks for extended periods, even if their values experienced short-term declines. Recognizing the cyclical nature of the stock market, he acknowledged that, over time, sound companies would ultimately witness their stock prices align with their genuine worth.
Manage your emotions: Recognizing the susceptibility to market emotions like fear and greed, Davis emphasized the importance of maintaining discipline. He counselled investors to adhere to their investment plans, especially during periods of market volatility.
Don’t fall for high-flying stocks: The strategy of “buying stocks at any price” is flawed and, in the long run, unsustainable. It is imperative to engage in investing with a more nuanced and disciplined approach. Paying above a company’s intrinsic value exposes you to potential losses if the price adjusts to align with actual worth. Concentrating solely on hype or short-term trends disregards essential factors such as the company’s financials, business model, and competitive landscape.
Make debt work for you: Leveraging debt has the potential to enhance returns. When employed judiciously, borrowing funds for investments can amplify gains, potentially expediting the accumulation of wealth. Davis achieved success by adeptly identifying undervalued stocks and generating returns that surpassed the interest on his borrowed capital.
Write regularly to think better: Contemplating thoughts in our minds can be nebulous and disorganized. Transcribing them onto paper compels us to express ideas, recognize connections, and arrange them coherently. This method fosters a more profound comprehension and unveils any potential gaps or inconsistencies in our thought process.
Invest in three steps: Getting entangled in the pursuit of quick “Earn” or “Return” is tempting, yet overlooking the foundational elements can result in challenges and overlooked opportunities in the future.
The importance of the learning phase is frequently underestimated, as individuals often hurry into the “Earn” stage without establishing a robust knowledge foundation. This hasty approach can result in suboptimal decisions, time squandering, and frustration. Achieving proficiency in intricate skills is a gradual process that demands time and unwavering dedication. It’s not a sprint; rather, it’s a marathon that necessitates persistent effort and patience.
Start investing early in life: Although initiating investments early is commonly perceived as beneficial, the case of George Davis investing later in life illustrates that substantial wealth can still be built, even with a delayed start. Despite commencing later, persistent and intelligent investing can leverage the power of compounding over time. If Davis managed to attain a notable average annual return, initiating investments at the age of 38 could have led to a substantial nest egg by the time of his demise.
Broaden your portfolio: Despite being a proponent of value investing, Davis underscored the significance of diversifying your portfolio across various asset classes and sectors. This strategy serves to mitigate risk and enhances the likelihood of realizing your long-term investment objectives.
Davis achieved success with his investment strategy, delivering substantial returns for his investors throughout his extensive career. Nevertheless, his approach comes with inherent risks. Value investing poses challenges, demanding a considerable amount of patience and discipline. Furthermore, the use of leverage can amplify both gains and losses, adding a layer of complexity to the strategy.
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- If you sold a home in 2023, part of your profit could be subject to capital gains taxes.
- Single homeowners can shield up to $250,000 of home sales profit from capital gains taxes and married couples filing jointly can exclude up to $500,000, provided they meet IRS rules.
- You can also increase the home’s “basis,” or purchase price, by tacking on the cost of certain improvements.
Witthaya Prasongsin | Moment | Getty Images
Despite a slump in U.S. home sales, many homeowners made a profit selling property in 2023. Those gains could trigger a tax bill this season, depending on the size of the windfall, experts say.
In 2023, home sellers made a $121,000 profit on the typical median-priced single-family home, according to ATTOM, a nationwide property database. That’s down from $122,600 in 2022.
But sometimes profits exceed the IRS limits for tax-free gains and “it’s a shock” for sellers, said certified public accountant Miklos Ringbauer, founder of MiklosCPA in Los Angeles.
Still, “the tax laws were written to encourage homeownership,” and many sellers qualify for a tax break, Ringbauer said.
Single homeowners can shield up to $250,000 of home sales profit from capital gains taxes and married couples filing jointly can exclude up to $500,000, provided they meet IRS eligibility.
If you’ve owned the property for more than one year, profits above $250,000 and $500,000 are subject to long-term capital gains taxes, levied at 0%, 15% or 20%, depending on your 2023 taxable income. (You calculate “taxable income” by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)
There are strict rules to qualify for the $250,000 or $500,000 capital gains exclusions, Ringbauer warned.
The “ownership test” says you must own the home for at least two of the past five years before your home sale — but that’s only required for one spouse if you’re married and filing jointly.
There’s also a “residence test,” which requires the home to be your primary residence for any 24 months of the five years before sale, with some exceptions. (The 24 months of residence can fall anywhere within the five year period, and it doesn’t have to be a single block of time.)
Both spouses must meet the residence requirement for the full exclusion.
A partial exclusion may also be possible if you sold your home because of a workplace location change, for health reasons or for “unforeseeable events,” according to the IRS.
Generally, you can’t get the tax break if you received the exclusion for the sale of another home within two years of your closing date.
If your capital gain exceeds the IRS exclusions, it’s possible to reduce your profits by increasing your home’s original purchase price or “basis,” according to certified financial planner Assunta McLane, managing director of Summit Place Financial Advisors in Summit, New Jersey.
You can increase your home’s basis by adding certain improvements you’ve made to the property to “prolong its useful life,” according to the IRS.
For example, you could tack on the cost of home additions, updated systems, landscaping or new appliances. But the cost of repairs and maintenance generally don’t count.
Of course, you’ll need detailed records to show proof of capital improvements, because “estimates don’t work when it comes to an audit,” Ringbauer said.
After a home sale, the IRS receives a copy of Form 1099-S, which shows your closing date and gross proceeds. But you need paperwork to prove any changes to your home’s basis.
Failing to keep home improvement records throughout ownership is a “common mistake,” McLane said.
Over the past month, my 6-year-old son and I have been learning how to solve the Rubik’s Cube – and here is something that got me thinking. It is incredibly difficult to solve the Rubik’s cube, much like navigating the complexities of investing. The cube has 43 quintillion combinations, and if you stare at it long enough, you will find it mind-boggling. Similarly, even investors with several years of experience and expertise find investing challenging.
A Rubik’s cube has multiple interconnected parts; one wrong move can take you back to square one. Investing is similar – myriad factors, such as inflation, currency, interest rates, company profits, company management, etc., hold sway over investment success, and one wrong investment decision may lead to significant losses. No wonder those who crack the code, i.e., solve the cube or become successful investors, are raised to a pedestal, and treated as geniuses.
Does this mean that if you are not a genius, all your attempts at solving the cube or investing are in vain? Fortunately, no.
Here are some parallels that I figured between investing and solving the Rubik’s cube:
Building muscle memory is essential to succeed: Practice. Practice. Practice. Solving the cube on your first try would be nearly impossible. You need to keep practising, learn tricks along the way and build muscle memory such that it eventually falls into place.
Investing world parallel: The same principle applies to investing. Investors and advisors who spend decades investing develop muscle memory that makes them better investors. Their expertise stems from having gone through similar trends multiple times over decades – and they can leverage this experience to distil noise while advising clients.
Rule-based approach: In the Rubik’s cube realm, there is a stark contrast between a structured approach—often termed ‘algos’—and haphazard, erratic steps. Unsurprisingly, the structured approach is a clear winner. These ‘algos’ offer a streamlined path, enabling swift progression through the cube’s complexities and eliminating tedious backtracking. Over time, these algorithms become ingrained, eventually becoming second nature in solving the cube.
Crafting strategic foundation: Investing success also involves a series of processes with multiple checklists, protocols, and sub-activities that can institutionalise the process of investing. Jumping between steps or being haphazard is a recipe for disaster. Steps such as creating a detailed plan or an IPS (Investment Policy Statement), focusing on asset allocation, strategy around security selection, a stringent review mechanism and being vigilant on cost, can form a foundation on which to build your investing success. For experienced advisors, these steps almost come naturally, almost like Rubik’s Algos.
Role of imagination, innovation, and honing the cutting edge
The record time to solve the cube has come down from one month (1974) to 23 seconds (1982) to today’s world record of 3.13 seconds. This staggering reduction in solve time is due to profound innovation in three areas:
a) Physical attributes of the cube, for example, drift, speed cubes, etc., b) Worldwide acceptance and availability of resources and training, and c) Intuition-driven speed-solving algos such as F2L, CFOP, ZZ.
Transformative Shifts: Pertaining to the investment landscape of India’s sophisticated investors, we are witnessing transformative changes driven by innovation, deepening of talent pools and implementation of global best practices and supportive regulations. Consider this:
Innovation: Innovation in products and platforms such as REITs, private equity, AIFs, large value funds (LVFs), are expanding the HNI and UHNI investment landscape. Investors can choose from a wide range of portfolio managers, advisors or distributors that are the ‘right fit’ for them. This rapid innovation is unlocking phenomenal opportunities for sophisticated investors.
Talent pool: Enabling regulations such as the IBC Code, RIA regulations and more lowers entry barriers for talented managers, creates a level playing field and protects the rights of investors. This opens a large segment of the talent pool which looks at investing as a viable career – leading to greater innovation and better investment frameworks – a virtuous cycle!
Global best practices: India is embracing global best practices across Mutual Funds, PMS, AIF and RIA regulations. Through the GIFT City initiative, we are becoming a jurisdiction of choice, both for Indian investors to access foreign markets or for foreigners to invest in India. Not surprisingly, we are seeing ever-increasing flows into financial investments from across the ecosystem, including mature investors such as family offices and institutions.
Although there is no hidden formula for mastering the game, adhering to a consistent and disciplined approach can be the key to attaining the ultimate prize in both conquering the cube and excelling in the art of investing.
Himadri Chatterjee, Head, Advisory & Key Clients Group, 360 ONE Wealth
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