Month: October 2021

Money and emotions have long gone hand-in-hand, and this is no more apparent than during significant financial crises. From the 2008 market crash to COVID-19’s economic impact, we’ve seen first hand how money has the ability to impact our stress levels, mental health and personal relationships. And yet in times of particular financial strife—or likely because of it— many people take actions with their money that often undermine their emotional wellbeing, sacrificing long-term happiness for short-term pleasure without even realizing it at the time.

This trend toward short-termism grew in 2020: people stuck inside, on screens all day and kept from their normal activities sought new ways to fill their time and energy. Many took up day trading, culminating in one of the wildest rides at the beginning of 2021 (and recent surges demonstrating people are still trying to head to the moon) with Gamestop, AMC, Blackberry and other retail stocks caught in the middle of a clash between amateur retail and institutional investors.

Following this eventful start to the year, Betterment was curious to see both the immediate and long-term impact this had on investors, particularly those involved in the action. In this report — a survey of 1,500 active investors conducted by a third party — we took a look at the rise of day trading activity and the impact it did (or didn’t have) on people’s behavior. From their own forecasts, it looks like “the rise of the day trader” is here to stay — but forecasting is hard. None of us would have bet on the pandemic and the changes it’s causing. People actually aren’t very good at forecasting their own preferences and behavior in the future, so it will be interesting to see if said forecasts actually come to fruition.

Regardless, at Betterment we welcome the addition of consumers looking to learn more about the markets and, ultimately, how to balance their portfolios for the long-term too.

Section One: The Rise Of Day Trading Activity

With movie theaters, stadiums, bars and restaurants closed, many people took up day trading during the COVID-19 pandemic. Half of our total respondents said they actively day trade investments, and nearly half of those day-traders (49%) have been doing it for 2 years or less.

While most day traders indicated their main reason for doing so was that they believed they could make more money in a shorter period of time (58%), many (43%) also indicated it was because it is fun and entertaining. Of those who look to day trading for fun/entertainment, half (52%) said it was to make up for the bulk of their other hobbies—like sports, live music, social gatherings, gambling—not being available due to COVID-19.

 

And these day traders have fully acknowledge that COVID-19 played a big impact role in their market activity overall: 54% indicated they trade more often as a result of COVID-19; and interestingly, 58% said they expect to day trade more as normal activities return and COVID-19 restrictions are lifted, likely as a result of what they learned during this downtime. Only 12% said they expect to trade less.

More than half (58%) are using less than 30% of their portfolio to actively trade individual securities or stocks. Nearly two thirds also allow an advisor (either online or in-person) to manage a separate part of their portfolio.

Betterment’s Point Of View:It is interesting to see more respondents expect to day trade more after the pandemic than are currently day trading: we imagine it is hard for people to forecast themselves into the future and imagine doing things differently than they are now. However, what is positive to see is these people aren’t using an excessive amount of their portfolio to day trade. The majority of investors day trade with a minority of their total investing balance, and delegate day-to-day management of the larger portion of their portfolio to an advisor.

Passing hobby or not, how educated is the average day trader on what they’re buying and what they stand to gain—or lose? Sixty one percent rely on financial news websites to decide which stocks to buy, but nearly half (42%) are influenced by social media accounts, showing just how powerful “memestocks” can be.

Betterment’s Point Of View:More than half of the respondents suggested they buy stocks based on company names they’re familiar with, but we’ve seen this lead to issues in the past—with “ticker mis-matches,” where people trade the ticker of a stock that isn’t the correct company. For example, after a tweet from Elon Musk about Signal (a non-profit messaging app), a different company’s stock was sent soaring 3,092%.

We also asked day trader respondents if they consider capital gains taxes when deciding to sell their investments. While the majority (60%) indicated that it influences them to hold onto stocks longer to avoid short-term capital gains, 14% said they weren’t aware there was a difference in taxes based on how long they hold a stock. Another 17% said they simply don’t care about the short-term capital gains tax.

Who invested their stimmys?

Almost all (91%) respondents received some stimulus money, and nearly half (46%) invested some of that money; of those who did invest it, 70% invested half or less of their stimulus. Day trader and male respondents were more likely to invest then their counterparts, as represented in the graphic below.

This is in contrast to our COVID-19 investor sentiment survey from 2020, where only 9% of respondents indicated they put some of their stimulus money towards investment. Last year’s response pool was primarily focused on building out their emergency funds, with 40% putting money into a safety net. This is a good indication that respondents are more comfortable with their financial situations this year, compared to the throes of the pandemic.

Section Two: Memestocks Understanding And Involvement

We asked all respondents how well they understood what occurred in the stock market in January & February surrounding “memestocks” like GameStop, AMC, BlackBerry and other retail investments.

Most indicated having some level of understanding, but nearly a quarter (24%) of all respondents said they didn’t understand it well at all; and only half (51%) of day trader respondents said they understood what happened very well.

Nearly two-thirds (64%) of all survey respondents said they did not actively purchase any popular retail investments (GameStop, AMC, BlackBerry, etc.) during the stock market rally in January or February. But those that DID were primarily day traders.

Of all respondents that did buy in actively, 55% are still holding onto all their investments. Only 2% of those that sold these investments sold everything at a loss; 44% sold all for a profit and 54% sold some at a profit and some at a loss.

Of those that bought into memestocks, there is a near universal consensus that they will continue investing in stocks like these that get a lot of attention in the future—97% said they’re at least somewhat likely to invest.

 

Betterment’s Point Of View:It is interesting to see the majority of respondents holding onto their investments – are they expecting another high or holding on because they don’t want to admit they made a bad investment? Disposition Effect says people tend to hold on until they get back to zero loss; but seeing so few sell entirely for a loss is encouraging. However, 60% previously said thinking of short-term capital gains taxes encourages them to hold onto their investments longer, which is good to see.

Section Three: Money And Stress Factors

It’s no secret that money and stress are linked, so we wanted to take a look at respondents’ money habits and how that may be impacting stress levels. The consensus is that for better and for worse day traders and younger generations are more engaged with their finances.

 

We asked respondents how much they stress about their finances on a daily basis—three quarters said they stress to some degree. Interestingly, when we looked a layer deeper, day traders are much more stressed than non-day trader—86% indicated they stress to some degree, vs 65% of their counterparts.

Unsurprisingly, younger generations are more stressed about their finances than older ones.

 

In looking at the causes of the stress: respondents are nearly equally concerned about money in the short term, near term future, and long term future with the top 3 financial stress factors being their daily expenses (43%), how much money they will have in retirement (43%), and how much money they have saved (42%).

We asked respondents how often they are checking their bank account and investment portfolio balances –  39% are looking at their bank account balances every day, with 11% of those checking multiple times a day; 37% also check their investment portfolio balances every day, with 16% of those checking multiple times a day.

When we look a layer deeper, we find that day traders are checking both their bank account and investment portfolio balances significantly more than non-day traders.

 

Interesting Bank Account Habits

50% of day traders indicated they check at least once a day (18% multiple times) vs 29% of non-daytraders (5% multiple times).Men check their accounts more often—41% at least once a day (13% multiple times) vs 36% of women (8% multiple times).46% of Gen Z/Millennials and Gen X both said they check their accounts at least once a day, whereas only 28% of Boomers said the same.Those making more money actually check their accounts more often—42% respondents making $100K or more check every day, compared to 39% of those making between $50-100K and 35% of those making less than $50K.

Interesting Investment Account Habits

Unsurprisingly, 56% of day traders said they check their investment portfolio balances every day (25% multiple times a day), whereas only 18% of non-day traders said the same.41% of men check every day, compared to 30% of women.47% of Gen Z/Millennials check every day, compared to 41% of Gen X and 22% of Boomers.42% of those making 100K or more check every day, compared to 35% making between $50-100K and 30% of those making less than $50K.

Betterment’s Point Of View:The differences between men and women here are in line with research we’ve seen elsewhere. Women are less focused on market performance, and more focused on the end financial outcome. They also tend to invest at lower risk levels, so are less likely to see extreme ups and downs. Additionally, Women tend to be less competitive/score based in general, so are less interested in monitoring the game.

Encouragingly, when we asked people how they felt checking these accounts, the positive responses outweighed negative options for both. Interestingly, day traders were significantly more excited for both (21% for bank accounts, 25% for investments) than non-day traders (4% and 12%, respectively) as well.

 

Most respondents (89%) indicated they’re putting some money away every month, but it’s equally split as to where that money is actually going.

Conclusion

At Betterment, we have often compared day trading to going to Vegas—have a great time, enjoy yourself, but be prepared to come back home with fewer dollars in your wallet and a hangover.  The trends outlined in this report seem to indicate that more people are dipping their toe into the investing pool and (so far) few have decided to walk away. Whether this trend will continue—and the long term impact it will have on people’s finances, health, stress, etc.—remains to be seen.

And for those who want to avoid the FOMO of the next big memestock, but aren’t sure of the best way to get started—a simple alternative is investing in a well diversified portfolio. That way, whenever someone asks if you own the hottest thing, you can say “yes”, regardless of what it is.

Methodology

An online survey was conducted with a panel of potential respondents from April 26, 2021 to May 3, 2021. The survey was completed by a total of 1,500 respondents who are 18 years and older and have any kind of investment (excluded if only 401k). Of the 1,500 respondents, 750 of them actively day traded their investments while the other 750 did not. The sample was provided by Market Cube, a research panel company. All respondents were invited to take the survey via an email invitation. Panel respondents were incentivized to participate via the panel’s established points program, regardless of positive or negative feedback. Participants were not required to be Betterment clients to participate.

Findings and analysis are presented for informational purposes only and are not intended to be investment advice, nor is this indicative of client sentiment or experience.

Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, unless stated otherwise.

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On May 5th, the House Ways and Means Committee unanimously passed the Securing a Strong Retirement Act of 2021. The bill is expected to be voted on later this summer by the full House, where it’s already seeing strong support.

The new bill, nicknamed SECURE Act 2.0, builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans.

Key provisions of SECURE Act 2.0 related to 401(k) plans include:

Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt.Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee.Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5).  The new bill increases the RMD age even further: to 73 in 2022; 74 in 2029 and ultimately 75 in 2032.Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2021. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64.Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes.One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to two years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan.Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act,  employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2022 to allocate profit sharing and elective deferrals for the 2021 plan year.Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years.Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification.Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP, and coverage testing.Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements.Retirement savings lost and found – SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants” are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs.Want a better 401(k)?
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In the US, approximately 33% of households have a taxable investment account—often referred to as a brokerage account—and approximately 50% of households also have at least one retirement account, like an IRA or an employer-sponsored retirement account.

We know that the medley of account types can make it challenging for you to decide which account to contribute to or withdraw from at any given time.

Let’s dive right in to get a further understanding of:

What accounts are available and why you might choose them.The benefits of receiving dividends.Betterment’s powerful tax-sensitive features.

How Are Different Investment Accounts Taxed?

Taxable Accounts

Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions.

Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars, and any capital gains you incur by selling assets, as well as any dividends you receive, are taxable on an annual basis.

While there is no deferral of income like in a retirement plan, there are special tax benefits only available in taxable accounts such as reduced rates on long-term gains, qualified dividends, and municipal bond income.

Key Considerations

You would like the option to withdraw at any time with no IRS penalties.You already contributed the maximum amount to all tax-advantaged retirement accounts.

Traditional Accounts

Traditional accounts include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs).

Traditional investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies.

Key Considerations

You expect your tax rate to be lower in retirement than it is now.You recognize and accept the possibility of an early withdrawal penalty.

Roth Accounts

Includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs)

Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies.

Key Considerations

You expect your tax rate to be higher in retirement than it is right now.You expect your modified adjusted gross income (AGI) to be below $140k (or $208k filing jointly).You desire the option to withdraw contributions without being taxed.You recognize the possibility of a penalty on earnings withdrawn early.

Beyond account type decisions, we also use your dividends to keep your tax impact as small as possible.

Four Strategies Betterment Uses To Help You Limit Your Tax Impact

1. We use any additional cash to rebalance your portfolio.

When your account receives any cash—whether through a dividend or deposit—we automatically identify how to use the money to help you get back to your target weighting for each asset class.

Dividends are your portion of a company’s earnings. Not all companies pay dividends, but as a Betterment investor, you almost always receive some because your money is invested across thousands of companies in the world.

Your dividends are an essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor—your portfolio is also getting a quick micro-rebalance that helps keep your tax bill down at the end of the year.

And, when market movements cause your portfolio’s actual allocation to drift away from your target allocation, we automatically use any incoming dividends or deposits to buy more shares of the lagging part of your portfolio.

This helps to get the portfolio back to its target asset allocation without having to sell off shares. This is a sophisticated financial planning technique that traditionally has only been available to larger accounts, but our automation makes it possible to do it with any size account.

Beyond dividends, Betterment also has a number of features to help you optimize for taxes. Let’s demystify these three powerful strategies.

Performance of S&P 500 With Dividends Reinvested

Source: Bloomberg. Performance is provided for illustrative purposes to represent broad market returns for the U.S. Stock Market. The performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific U.S. Stock Market funds in the Betterment portfolio will differ from the performance of the broad market returns reflected here.

2. Tax loss harvesting.

Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested.

When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill.

In fact, if losses outpace gains in a tax year you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years.

How do I do it?

When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure.

Ideally, you would buy back the same investment you just sold. After all, you still think it’s a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock.

Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is turn on Tax Loss Harvesting+ in your account.

3. Asset location.

Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix.

For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account.

In doing so, interest income from bonds—which is normally treated as ordinary income and subject to a higher tax rate—is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate, capital gains tax rates instead of ordinary income tax rates. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden.

Here’s what asset location looks like in action:

4. We use ETFs instead of mutual funds.

Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you.

While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In fact, most of the largest stock ETFs have not passed through any capital gains in over 10 years. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees.

We go the extra mile for your money.

Following these four strategies can help eliminate or reduce your tax bill, depending on your situation.

At Betterment, we’ve automated these and other tax strategies, which means tax loss harvesting and asset location are as easy as clicking a button to enable it. We do the work, and your wallet can stay a little fuller.

Learn more about how Betterment helps you maximize your after-tax returns.

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Key 401(k) Compliance Dates

While many of these responsibilities are handled by Betterment, as a 401(k) plan sponsor it’s important that you are aware of important dates and deadlines associated with administering your plan.

DateResponsibilityPrevious Plan YearCurrent Plan YearJan 31BettermentIRS Forms 1099-R available to participants.Feb 10BettermentAnnual Return of Withheld Federal Income Tax (Form 945) due.Mar 1ParticipantDeadline for employees who participated in multiple plans to notify sponsors of excess deferrals (402(g) excess).Mar 15BettermentDeadline for refunds to participants for failed ADP/ACP tests(s). Failure to meet this deadline could result in a 10% tax penalty for plan sponsors.Mar 15Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for incorporated entities.¹ Failure to meet this deadline could preclude plan sponsor from tax deductibility.Deadline to establish plan for the prior tax yearApr 1Plan SponsorDeadline to confirm that Initial Required Minimum Distributions (RMDs) were taken by participants who: turned 72 ² before previous year-end; are retired/terminated; and have a balanceApr 15 ³Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for LLCs, LLPs, sole proprietorships (unincorporated entities).¹ Failure to meet this deadline could preclude plan sponsors from tax deductibility.Apr 15BettermentDeadline to complete corrective distributions for 402(g) excess deferrals.Jul 29 ⁴Plan SponsorDeadline to distribute Summary of Material Modifications (SMM) to participants (only if plan was amended).Jul 31 ³Betterment ⁴Deadline to electronically submit Form 5500 (and third-party audit if applicable) OR request an extension (Form 5558).Sep 30Plan SponsorDeadline to distribute Summary Annual Report (SAR) to participants and beneficiaries (unless Form 5500 extension filed; deadline to distribute will be December 15).Oct 1Plan SponsorDeadline to establish a new safe harbor match 401(k) plan.Oct 15 ³Plan SponsorDeadline to electronically submit Form 5500 and third-party audit, if applicable, if granted a Form 5558 extension.Dec 1Plan Sponsor (Notices prepared by Betterment)Deadline to distribute supplemental safe harbor notice to participants for safe harbor (“maybe”) plans. ⁵Dec 1Plan Sponsor (Notices prepared by Betterment)If applicable, distribute to participants for next plan year: Safe harbor notice, Qualified default investment alternative (QDIA) notice, Automatic enrollment noticeDec 1Plan Sponsor (Amendment drafted by Betterment)Deadline to execute amendment to make a traditional plan any type of safe harbor plan (match or nonelective).Deadline to execute amendment to make a traditional plan a safe harbor match plan for following plan yearDec 15Plan Sponsor (SAR prepared by Betterment)Deadline to distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension.Dec 31Plan SponsorDeadline to make safe harbor and other fixed employer contributions.Deadline for Annual Required Minimum Distributions (RMDs). ArtDec 31Plan SponsorDeadline to execute amendment to make traditional plan a 3% safe harbor nonelective plan for the current plan year

 

¹ Assumes calendar tax year. Additionally, if your company files a tax extension, you have until the extension deadline to fund the contributions.

² This was increased from 70½ in 2019 and earlier years.

³ Or first business day thereafter.

⁴ 210 days after the year end of the effective amended date, which is July 28 in leap years.

⁵ Safe harbor “maybe” Plans (specified in the plan document) are able to adopt a safe harbor nonelective plan 30 days before the end of the plan year. Please review your plan document to confirm if the plan has adopted such a provision.

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