Personal Finance – Washington Square Capital Management

Critical financial documents

By subir | January 12, 2013

An article in the New York Time today reminds us all how important it is to have our financial act in order before a life-changing event occurs. We always advise clients to prepare a will, health care proxy and medical directive as part of our initial conversations with them. We’ve worked with numerous legal and estate professionals to tackle these tasks for clients. Without these documents, families can find themselves facing a morass of complex legal issues at the worst possible time.

In most cases, for young families, term life insurance and good disability insurance are cost-effective ways to ease the financial stresses of losing an income. We always evaluate these options as part of our comprehensive financial planning process with each client. Our regularly updated financial plan also contains a consolidated balance sheet to provide a view of all your financial assets and accounts in a single place. Such an accounting can make re-organzing your finances after a disaster much easier.

2012 Q3 Letter: Quantitative Easing – To Infinity and Beyond!

By subir | November 2, 2012

We hope all of you in the north-east made it through Hurricane Sandy safe and sound. For many of us, it was a reminder of the awesome power of mother nature, the interconnectedness of our modern lives and the fragility of our beautiful planet. US stock markets were closed for two days straight, and our offices in lower Manhattan will be without power till the weekend. We have been working remotely, and it has been a good test of our disaster readiness procedures.

The big economic news of the third quarter was the Federal Reserve’s decision to take the unprecedented step of intervening in the capital markets during the home stretch of a presidential election campaign. We’ve noted in previous letters that as a non-partisan institution, the Federal Reserve prefers to avoid any appearance of political favoritism, often going to great lengths to maintain this reputation. By intervening in the capital markets at the height of election season, the Fed risks the appearance of favoritism towards the incumbent party. Expansionary monetary intervention can drive stock market rallies and boosts investor confidence, benefiting the party in power – in this case, the Obama administration. Using this logic, our thinking was the Fed would abstain from announcing any new stimulus plans until after the election. It turns out we were wrong.

On Thursday September 13th, by a vote of 11-1, the Federal Reserve board voted to launch QE3, their latest and greatest stimulus plan effort. Unlike past plans, this one is unique in that it is open-ended, there isn’t a set expiration date or monetary cap. And instead of purchasing US Treasuries, which the Fed has done in the past, QE3 involves a $40 billion monthly purchase program of agency mortgage-backed securities. In addition to QE3, the Fed also announced that it expects to keep interest rates close to 0% through the end of 2015 (having previously stated that rates would remain at this level through 2014).

These policy announcements come on the heels of the Fed’s June 20th decision to extend Operation Twist through the end of 2012 and the European Central Bank’s Sept 6th decision to initiate their own open-ended “no limit” bond buying program to purchase European sovereign debt as and when needed. Four years after Lehman Brothers’ failure, the Fed and ECB continue to reload their monetary “bazookas”.
So why is the Fed stepping in now with such a bold plan given the upcoming election and their recent action in June? Well, with a muddled employment picture and a relatively stagnant housing market, the Fed sees monetary stimulus as a necessary crutch to keep the economic recovery moving forward, especially since the current Congress has no interest in passing any further economic stimulus. By purchasing these bonds, the Fed hopes to lower rates and encourage companies to borrow and expand operations (hire more people), and nudge individuals to buy large ticket items (spend more money) and take on mortgages (buy homes).

Sounds good, right? What could be wrong with encouraging corporate hiring and consumer spending? Well, several things, actually:

Inflation: If the economy recovers sooner than expected, food, materials and energy costs may rise much faster than the economy.
Weak dollar: A weaker currency makes imports more expensive and can drive inflation further. The flip side of this is that a weaker dollar makes US exports more competitive.
Encourages speculation: Low interest rates imply cheap credit, so speculative investors – the kind whose actions led to the credit crisis — can afford to take on more risk through leverage and loans. And as high-risk assets outperform, these speculators are financially rewarded.
Punishes savers: Conservative investors – the ones who were fiscally responsible during the housing mess – are punished. These investors (often retirees) who normally keep their money parked in savings accounts, short term CDs or Treasuries are being forced into riskier asset classes because interest rates are so paltry. More money heading into riskier or longer-dated bonds drives those rates even lower, so savers have to be even more aggressive than ever to generate decent returns.
Using all their bullets: Now that the Fed has given the market what it wants – a virtually unlimited supply of stimulus, QE to infinity – how will they ever top this? If things turn south in the global economy, what can the Fed do to calm nervous investors?
Sets the housing market up for a fall: Real-Estate prices are extremely sensitive to interest rates since most buyers borrow some portion of the purchase price of their home. Higher interest rates lead to higher monthly payments, which in turn drives home prices down. At the moment, low rates are propping up home prices, when they begin to rise, this support will disappear and home prices may well stagnate or fall.

We also see the election and the forthcoming budgetary debate having an impact on municipal bonds and US state finances. Over the next few months, one of the major ratings agencies will revise the way it accounts for the long-term pension liabilities incurred by municipalities. Many state budgets and finances are still in a weak state after the crisis, and this revision may lead to some ratings downgrades. In addition, we expect the US federal deficit to take center stage after the election. Regardless of which party controls congress or the presidency, we expect to see federal support to states weaken further. This means states will have to fend for themselves, implying weaker municipal credits, absent a very strong recovery.

So how should investors respond to these new policies? We prefer a conservative balanced portfolio of stocks and bonds for most investors. We are reluctant holders of interest-rate sensitive or cyclical stocks and longer-term bonds, recognizing that the Fed’s policies are driving prices up in those sectors. We retain a preference for high quality, dividend-paying stocks and utilities. In the bond market we continue to limit holdings to high-quality corporate, municipal and international emerging market debt, keeping maturities short. We realize this is not a recipe for outsized returns, but we would rather be safe than sorry.

As we approach the holiday season, we recommend all clients consider the following year-end planning items:

Review your 401K contributions (you have until Dec 31 to use the 2012 limits), and IRA contributions.
Consider re-allocating between securities as the Bush tax cuts sunset and capital gains rates may go up.
For those with taxable estates, it is worth reviewing the special gifting opportunities available in 2012.

As most of these items involve tax-planning, and since we do not provide tax-advice, we do recommend consulting you tax professional prior to taking any action. We are, as always, happy to assist.

2012 Q1 Letter: Austere Growth and the Summer of Discontent

By louis | May 10, 2012

Before we begin our quarterly market commentary, we wanted to give you a few quick updates. Louis was recently profiled in the Wall Street Journal online where he discussed the mobile budgeting app we are developing. The genesis for the idea came from speaking to both clients and non-clients who have expressed a need for on-the-go assistance in tracking their spending habits. We’ll keep you posted on the app’s progress and let you know when it’s in beta.

Over at the WSQ Capital blog, Subir wrote a blog post examining the fundamental differences between Google and Yahoo in how they approach the internet. He wrote a second piece where he sites Pandora as a case study for how entrepreneurs can run into trouble if they sell too much equity to outside investors. And to complete the tech trifecta, he wrote a third piece looking at Facebook’s growth prospects just as the hype machine for the company’s IPO grinds into high gear. Meanwhile, Louis wrote a post that provides a primer for investors interested in learning what makes an investment socially responsible.

We look forward to speaking with you over course of the summer.

This has been an eventful quarter in the global markets. We now know that the UK has slipped into a double-dip recession with negative growth in the past two consecutive quarters. The jury is still out on whether this was driven by the relatively austere economic policies adopted by the Tory government and the Bank of England or the general weakness in broader Europe. Looking out east, we see a carefully choreographed political transition in China becoming unexpectedly messy. A very senior official, who was expected to join the nine-member Standing Committee of the Communist Party has been removed from his position in the Politburo and remains under house arrest amidst allegations of wire-tapping and murder. Meanwhile, the housing bubble in China continues to deflate.

Against this background, US stocks continued their upward trajectory. The S&P 500 index (a broad measure of large-cap US stocks) finished the quarter up over 150 points, closing at 1,408.47 – cracking the 1400 point threshold for the first time since 2008. This represented a quarterly gain of 12.59% (which, if annualized, would be 50.36%). These are gaudy returns and we don’t think it’s realistic for investors to expect stocks to continue performing at these levels for the remainder of 2012. So what’s been driving this rally? There has been a confluence of factors:

1. The primary explanation is extraordinary stimulus provided by the Federal Reserve over the past few years in an effort to stabilize the US economy. In addition to its 0% interest rate policy – intended to drive down mortgage rates, boost lending and encourage both investors and savers to flee cash and take on more risk – the Fed has played a direct, directional role in the bond markets via quantitative easing. So far, there have been two major rounds of quantitative easing (QE1 in 2008/09 & QE2 in 2010/11). Both rounds helped prop up equity markets as investors expected the Fed to be ready with its safety net protecting them against catastrophic losses.

In a variation on this theme, the Fed announced “Operation Twist” on Sept 21, 2011. It would sell $400 billion in short-term Treasuries to buy longer-dated bonds, driving down long-term rates. The policy took effect in October and is set to expire in June, 2012. At the time of its announcement, the stock market was mired in a summer slump with investors increasingly jittery about muted economic data and continued problems with the European debt crisis. Once Operation Twist took effect on Oct 1st, the US stock market began its renewed run upward to where we are today.

We recognize that these stimulus policies have been implemented to support the fragile US economy as it slowly emerges from the Great Recession. The catch, however, is that risk-taking investors have come to rely on the Fed’s intervention in the markets. Like clockwork, once these policies are set to expire, equity markets (and other risk assets) have sold off until a new iteration of the policy is announced. This is a dangerous precedent for the Fed to set. A constant cycle of interventionist policies skews market prices and encourages the type of herd-driven speculative behavior that caused the crisis in the first place.

2. In addition to continued Fed stimulus, the stock market has benefited from improving economic data (albeit from very low levels). Unemployment – while still stubbornly high – has continued to drift lower with recent monthly numbers beating expectations. Corporate earnings have beenstrong, especially for large-cap US conglomerates, which have continued to benefit from a weak dollar. Several of these companies have cut costs by reducing head-count and used the savings for share buy-backs and dividend distributions. With interest rates at historic lows, blue chip stocks with dependable dividends are attractive to conservative investors in search of income.

3. The equity rally has also been strengthened by the threat of inflation. The Fed’s policies have brought trillions of dollars of liquidity into the markets over the past few years. This liquidity has weakened the US dollar and driven up commodity prices. The consumer price index (CPI) – which measures changes in the price level of set basket of consumer goods and services purchased by households – has steadily crept upwards over the first three months of 2012. This trend suggests inflation could be closer on the horizon than expected, despite continued high unemployment levels and a stalled housing recovery. Since companies can adapt their strategy and pricing to changed conditions, stocks tend to be a better hedge against inflation than fixed income.

4. As the economy emerges from recession, an overheated economy becomes a very real concern. A majority of the board of governors in the Federal Reserve have stated that they expect interest rates to remain historically low through the end of 2014. However, this is not written in stone. If the economy does rebound and inflation picks up, the Federal Reserve will need to raise interest rates before 2014. Since the Fed can’t lower interest rates any further than where they are now, they will go up at some point. The question, of course is when. Once interest rates do start to rise, stocks will outperform bonds.

As the second quarter is now underway, we have seen a few of these drivers fading (which, not surprisingly, coincided with a selloff in stocks). The Federal Reserve has given no indication that another round of quantitative easing is imminent once Operation Twist expires in June. Corporate earnings continue to be strong, but US economic data, which was strong during the first quarter, has started to flag. If the macro-economy weakens materially, both inflation and the potential for an interest rate hike prior to 2014 become less of a concern and the Fed’s attention will turn back to unemployment. The monetary quiver though, is virtually empty, and there is not much we feel the Fed can do beyond keeping rates low.

So what does this mean for investors?

While we still view equities on the whole as over-valued, there are pockets of value in certain industries, and in individual stocks. We prefer large cap, blue chip stocks with strong balance sheets and dependable dividends. We favor short term, high quality bonds, with a preference for inflation protected or stepped coupon/variable rate securities. We continue to think that there will be an opportunity to buy stocks at an attractive level in the near future.

Louis Berger Subir Grewal

Why Entrepreneurs Should Take A Look Inside Pandora’s Boombox

By subir | March 7, 2012

The true tragedy at Pandora Media is not that the stock traded below its IPO price within 24 hours (though investors who bought shares in the secondary market on the first day may disagree). Rather, it’s that the founder (who was one of three co-founders) holds only 2.25% of the outstanding shares. Meanwhile, two venture capitalists, both of whom are former Wall-Streeters, individually own over 20% each. Pandora is not making its founder, or the people who work there, wealthy. But it has turned out to be a very lucrative investment for the venture capitalists who took the company public.

Aren’t startups that make real products/services supposed to make their founders wealthy, not their financiers? What happened here?

Pandora launched in 2000, during the height of the tech boom, and has followed a long and circuitous path to becoming the ~~$2 billion plus~~ $1.75 billion company it is today. The business required a lot of outside capital, necessary to negotiate and acquire rights to music content and to build out its streaming capability. In addition, they have a large team of music analysts on staff to catalog tracks as part of the Music Genome project. Two of the co-founders (Will Glaser and Jon Kraft), left Pandora after the tech-wreck and the company required many successive rounds of financing to stay afloat. Pandora had a number of near-death experiences as the business model changed from subscription to advertising, and their focus shifted from serving music retailers to subscribers. It would have been easy to write them off about a dozen times over the years, but they managed to survive and go public in the end. It is a remarkable testament to their perseverance that they are now a business that has built a service offering a unique blend of algorithmic and curated content, combining both crowd-sourcing and expert analysis. And they have a devoted subscriber base that is growing.

How then, to explain the fact that a co-founder who has been at the company for twelve years, through numerous ups and downs, ends up with a minute share of the firm, while the financial sponsors walk away with many multiples of their investment?

As many entrepreneurs in the tech space already know, capital infusions almost always require giving up equity. And when a company requires several capital infusions, it means that equity is spread even thinner. But when a company is in danger of folding, lifeline capital infusions require deals that, in retrospect, may seem horribly one-sided (rarely in the founders’ favor).

There are mitigating circumstances, of course, and we’re not saying that Pandora’s founders are guilty of making horrendous deals – they likely did what they had to in order do keep the company afloat. Nor are we saying nice guys finish last (even though we think Tim Westergren is one of the nicest founders we’ve ever had the pleasure of meeting). We also recognize that Pandora’s trajectory is not one that other startups will necessarily follow. It’s just an illustration of one particular outcome, one which was spectacularly unfavorable to the founders monetarily.

So what should founders do?

The first thing is to understand the value and cost of venture capital financing. As a startup founder, you want your idea and work to reward you. If your business is as good as you believe it is, equity capital may turn out to be very expensive. Debt, could easily make more financial sense and leave you with more control of your company. It’s also important to understand the parameters of the deal you’re offered. Learn to read term sheets and, as always, get more than one quote. For instance, aggressive deal terms can dilute founders to a surprising extent. A few years of 8% coupons on compounding cumulative preferred can quickly add up. That said, there are certain advantages to working with a good VC. Some of the best can help you develop your business by providing good advice, and if they have a large following, help launch your product or service. A good VC’s experience and timely assistance can be invaluable. For example, it’s the VCs who suggested Pandora switch to a advertising model and get out of the subscription radio game.

As a founder, it’s important to understand that venture capital firms are not your friends. In fact, some of the more aggressive outfits will not balk at taking advantage of founders who don’t have a strong grasp on how to structure a capital deal. Pandora’s story underscores the need for entrepreneurs to have expert legal and financial advice in place early on in the game, so they can protect their personal interests when VC firms come calling. Ideally, this should come from an independent advisory firm that does not have a brokerage or investment banking arm which may be more interested in maintaining a continuing relationship with VCs.

Shameless plug: We can’t pass up the opportunity to say that Washington Square Capital Management was founded precisely so we could provide unbiased advice on investments and financial planning to our clients. As an added kicker, we enjoy working with entrepreneurs and technologists so much, we waive our minimum investment requirements. To get a flavor, read our post on Personal Finance 101 for Aspiring and Successful Entrepreneurs. To learn more, reach out to us via e-mail (info at wsqcapital dot com) or call us at +1-646-619-1156.

Image credit: F.S. Church

As of this article’s publication date, Washington Square Capital Management and its clients do not hold positions in either company, this may be subject to change. We may in the future acquire positions in other companies mentioned in this post. This article is not a recommendation to buy, sell or hold any securities mentioned.

What Makes an Investment Socially Responsible?

By louis | February 17, 2012

If you’re new to investing and thinking about putting your money to work using an approach that incorporates social or ethical criteria, it’s important to know what types of strategies are available to you and how to differentiate between them.

When we consider the socially responsible investment (SRI) universe, there are five main strategies most often used by investment managers. SRI investors will usually incorporate some combination of these five when picking their investments.

1. Positive Screening. With positive screening, the investor looks for profitable companies that integrate corporate social responsibility (CSR) into their business practices and operations. Typically, this investor wants to see the company actively engaged in the following issues: environmental conservation, human rights, labor rights, fair trade and indigenous rights. This investor may also consider companies whose products or services directly address CSR issues, like a solar power company or an organic food manufacturer. However, it’s important to note that just because a company is engaged in a sustainable business, doesn’t necessarily mean they are exempt from other CSR considerations.

2. Negative Screening. With negative screening, the investor excludes certain companies that do not place a high value on CSR within their business practices. Often times, this approach means eliminating entire industries, like tobacco companies or defense contractors. Like positive screening, negative screening can be subjective, as each SRI investor has his or her own idea of what does or does not constitute an ethical company. For example, an investor who uses religious screening criteria may want to avoid a medical devices company that manufactures products used in abortion procedures. However, a pro-choice investor will likely not take issue with this company, and rather, may actually consider it as a candidate for a positive screen.

3. Best-in-Class. With best-in-class, the investor often targets a progressive company within an industry likely to have a poor CSR track record. An example would be an oil company that’s an industry leader in environmental conservation. While the type of business (oil drilling) may not be considered socially responsible, the way the company conducts their operations (making environmental protection a priority) is the chief criteria. In a way, this investor seeks to encourage and reward good corporate behavior with their investment dollars. It’s important to note, however, that this approach can be susceptible to greenwashing, as a company may market themselves as being an upstanding corporate citizen, but in reality, may not live up to that image. A prime example of this would be BP, which was once a top pick for best-in-class SRI investors prior to the Deep Horizon disaster.

4. Activist Investing. With activist investing, the investor targets those companies with poor CSR track records in the interest of changing the company’s business practices. This approach uses proxy votes and shareholder resolutions to pressure management to alter corporate behavior. This approach is most effective when used by large institutional investors (mutual funds, pension funds or foundations) or a coalition of smaller investors. The activist investor, while a bit unorthodox in their approach, can achieve significant long term CSR victories when successfully petitioning large corporations to change their business practices.

5. Community Investing. With community investing, the investor is less concerned about the financial returns of their investment then they are about the greater social impact. The main goal with this approach is to deploy investor capital to individuals, organizations or geographic areas that have historically been denied access to capital by traditional financial institutions. Often times, this style of investment is done by larger institutions. Individuals can also take part in this approach through microfinancing, for example.

In addition to considering the social and ethical approaches discussed above, it’s also important to make sure that an investment is a good fit for you, especially in terms of risk tolerance (how much risk you are comfortable taking – some investments can be riskier than others) and time horizon (when you will need access to your money – investors with short time horizons generally should stick to less risky investments).

As always, if you need help finding a socially responsible investment that’s a good fit for you, let us know and we’d be happy to schedule an introductory phone call.

Image Credit: Tom Magilery

Green Investing: The Old Rules Still Apply

By louis | June 27, 2011

So let’s say you’ve got some money you’d like to put to work in a socially responsible investment. Maybe you received a bonus at your job, maybe you inherited some money from a relative or maybe you’ve just been diligently saving over the past few years and want to earn more than the pitifully low interest rate your savings account is currently paying.

Like many other aspects of your life, you want this investment to reflect your values when it comes to social and environmental responsibility. So you’ve done some research and have read good things about a certain solar company — maybe a friend has invested in this company or maybe a green investment blog has mentioned it as a hot stock to own. You believe the future is in renewables and solar power will play a major role in transitioning our energy grid away from a reliance on fossil fuels. So you take your savings and invest it all in this one solar stock.

Good idea?

Probably not.

Here’s why:

By investing your life savings into one stock, you are essentially risking your financial future on the performance of that specific company. What happens if the renewable energy sector underperforms, like it has over the past few years? What happens if this particular company gets undercut by a Chinese competitor and loses market share? Â Or what happens if an emergency crops up and you need immediate access to your savings? If you’re forced to sell when the stock is down, you may end up taking a loss.

Just because you want to be socially responsible with your money doesn’t mean you should ignore the fundamentals of investing. All the old rules still apply. So what are these rules and how should you apply them to a green portfolio?

1. Diversify. By investing your savings into one stock (like in the example above), you’re opening yourself up to a huge amount of risk. A diversified portfolio will help mitigate this risk. Instead of investing in one company, spread your money across several. And don’t just stick to solar stocks, or stocks in general, a diversified portfolio should have a mix of many different types of investments: stocks, bonds, CDs, some commodities and maybe even real estate. Mutual funds or ETFs (exchange traded funds) are often a good way to get diversified, as each fund share typically invests in dozens of different stocks or bonds.

2. Risk tolerance. If you’re new to investing, it’s important to have a handle on your risk tolerance. Stocks tend to be riskier than bonds, so if you prefer to stay on the more conservative side of things, stocks should only be a small portion of your overall portfolio. One rule of thumb in the investment world is for an investor to have bond exposure equal to their age. So, if you’re 25 years old, 25% of your portfolio would be invested in bonds. 75 years old = 75% in bonds. The thinking being that younger people can afford to take on more risk than those folks closer to (or in) retirement. Of course, everyone is different, and this rule generally applies to long term investing.

3. Time horizon. It’s also very important to know what your time horizon is ie when you’ll need access to your money. If you’re investing with a specific short term goal in mind (1 year or less), it doesn’t make sense to put your money to work in high risk investments like stocks since they may lose value and you’ll be stuck taking a loss when you sell. If your time horizon is longer, let’s say you have a retirement account you don’t plan to tap into for 20 years or more, you can afford to take on more risk and volatility that comes with exposure to stocks, commodities and real estate.

4. Emergency Fund. To avoid a scenario where you’re forced to liquidate your portfolio before you’re ready (you lose your job, there’s a medical emergency, a family member needs help, etc), you should have three to six months of living expenses set aside to cover any unforeseen events. It’s important to note that this account should be in cash, not CDs, since there are potential penalty fees if you need to sell out of a CD before maturity.

5. Keep Track of Your Investments. Even if you’re working with a professional advisor, it’s important to keep a close eye on your portfolio. You should plan to review your holdings at least once per quarter. Life events as well as market events can often impact how you will invest going forward.

If you incorporate these 5 rules into your investment approach, you should be well on your way to establishing a portfolio that is not only socially responsible, but financially responsible as well.

Image Credit: Vindiharet

This article first appeared on Just Means.

Personal Finance 101 for Aspiring and Successful Entrepreneurs

By subir | April 25, 2011

We read a number of startup, entrepreneur and venture blogs with great interest, and since many of our clients are entrepreneurs we have an interest in matters that touch on personal finance issues specific to them. We were struck by Fred Wilson’s blog post on his own experience recycling capital earned from investments in startups and how this has sometimes led to difficult times with his personal finances. He writes about how very early, concept-stage companies are financed in the US by angel investors and why that has been difficult to replicate elsewhere (i.e. not venture capital firms). His post is worth a read, and it got us thinking.

One thing that sets the US apart from most other parts of the world is a willing group of investors who are prepared to fund concept-stage companies, and who rely largely on their own experience founding similar companies in the past.

The second reason we think this happens in the US more than in other countries is far more tenuous and abstract. It’s trust. In many other parts of the world, legal systems and societies are not mature and trusting enough to permit someone to invest as an angel and not be branded a fool or worse if things go wrong. We also suspect that the number of charlatans masquerading as “entrepreneurs” is higher in other parts of the world than it is in the US.

Fred is focused on startup financing and advocates angel investing for successful entrepreneurs. Our view is a little different: we think successful entrepreneurs should capitalize on their unique hard-won insight into their industry and opportunities to judiciously fund startups, but we also believe there is a role for opportunistic investments in the public market (stocks, bonds) in a successful entrepreneur’s portfolio. We also firmly believe successful entrepreneurs should set aside an income generating, ring-fenced portfolio that is robust enough to support them and their families if their angel investments fail spectacularly.

Some successful entrepreneurs may also need help controlling their urge to spend on expensive toys, but that is a different discussion.

The challenges faced by an aspiring entrepreneur are of a different cast.

Based on our own experience founding a business from scratch, and from working with clients who have done similar things, we’ve created a short check-list aspiring entrepreneurs should at least consider before diving head-first into a startup. Most of them relate to personal finance, some of them delve into the realm of personal fulfillment, a necessary discussion since starting a business can be such an emotional and stressful exercise.

Evaluate yourself: are you ready for everything the world and your startup are going to throw at you? Will you be able to work outside your comfort zone, sell when all you’ve done is analyze (or vice-versa)? Will you be able to view your friends who remain in the corporate world in the right perspective as they fly around business class and wield expense accounts? When the romance of being an Entrepreneur/Business-Owner/CEO dies and you’re fixing the thirty-eighth thing to go wrong this week or reliving the latest deal that fell apart, where will the reserve to keep going come from?
Evaluate the business you’re entering: particularly what the relative value of sweat and capital are in the business. This will tell you a lot about what you need to bring to the table and how you should treat partner’s contributions (in both sweat and capital).
Get buy-in from your family and friends: They are along for the ride. Whether you acknowledge it or not, you are going to cause them financial and emotional stress as your business gets going. Make sure they know that.
Be Cheap: You will have to become an arch conservative, make sure you are ready to cut expenses to the bone. Figure out what’s essential to retain your sanity and keep that.
Be fair to your partners: Your ultimate success will depend on this more than anything else. Joel Spolsky has a great post on how to allocate founder’s equity, you should read it.
Know when to quit (in advance): There’s a point where it makes sense to quit. Or regroup to fight another day. Think about what that point is for you along emotional, temporal and financial axes.
Protect your fortress of solitude: Keep a reserve of both emotion and money, so you can, if necessary, exit gracefully to stage right.

Five things you didn’t know about IRAs.

By subir | March 17, 2011

We’ve been fielding client questions about IRA contributions recently and thought a blog post would be in order. Here are the top five things many people aren’t aware of when it comes to IRAs:

Most people can make an IRA contribution for tax-year 2010 up till their tax-filing deadline (April 18 in most cases), and remember you need to file form IRS 8606 in many cases.
You may be able to take a federal tax deduction for your traditional IRA contribution. Some people may even be eligible for a tax credit equal to their contribution.
You can contribute to an IRA even if you are currently participating in a retirement plan at work (401k, 403b, etc.), but you may not be able to deduct the amount contributed.
You may be able to make a contribution to your spouse’s IRA, even if your spouse does not have earned income for the year.
The maximum amount you can contribute for 2010 to a traditional IRA is 5,000 for 2010 (6,000 if you’re over 50 years old).

For many people, Roth IRAs are attractive since distributions during retirement from Roth IRAs are not taxed. Distributions or withdrawals from traditional IRAs or retirement plans are subject to income tax in most instances.

In effect, you are saving more with a Roth IRA since you’re paying the taxes up-front. A $100 saved in a Roth IRA may mean lower income today than a $100 saved in a traditional IRA, but when it comes time to use the money, you will have more available since you pay no income taxes on regular withdrawals.

Here are five things people often don’t realize about Roth IRAs:

Income limits that govern who can contribute to a Roth IRA have risen slowly over the past few years, the 2010 limits are here.
Virtually anyone who has a traditional IRA can convert it to a Roth IRA (this started in 2010). The $100,000 income limit has been removed. You may have to pay taxes on part of the converted amount (typically contributions you claimed a deduction against and earnings).
Unlike traditional IRAs, there are no required minimum distribution rules for Roth RIAs, so you could leave your Roth IRA savings undisturbed after you turn 70 and a half.
Just like a traditional IRA, you could contribute to a Roth IRA for your spouse, but this is subject to income limits.
You may be eligible for a tax credit if you contribute to a Roth IRA, have income below certain thresholds and meet a couple of other criteria.

The IRS website on publication 590 provides the definitive overview on IRA plans (we’ve linked to many relevant sections of the document in the text above).

Of course, there are many other considerations when saving for retirement. We’re happy to answer questions you may have, just give us a call at 646-619-1157.

Category: Personal Finance