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By Nancy Burner, Esq.

Nancy Burner, Esq.

In December 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”).  This tax bill was an overhaul of the tax law affecting individuals and businesses in many ways. One of these changes substantially increased the Federal estate tax exemption.  

At the time the law was inked, the Federal Basic Exclusion Amount for an estate was $5.49 million ($5 million, indexed for inflation).  This meant that no taxes would be owed on the estate of a person dying in that year with a taxable estate less than that.  For estates over that amount, the overage was taxed at 40%.

The TCJA stated that for deaths in 2018, the exemption increased to $10 million, indexed for inflation.  Currently, in 2023, the estate tax exemption is $12.92 million.  This is an individual exemption, so a married couple enjoys $25.84 million between them.  

While this increased exemption is helpful for many families, it is not a long-term solution.  The law expanded the exemption but only for a limited period of time.  Barring any action by Congress to extend this further, this and other provisions of the TCJA sunset at the end of 2025.  As a result, where an individual dies on or after January 1, 2026, the exemption will return to the pre-2018 scheme of $5 million, indexed for inflation (likely to be just under $7 million).  For single persons with less than $7 million in assets, and couples with less than $14 million between them, there is no cause for concern when it comes to Federal estate taxes, even after the sunset.

With this looming sunset of the exemption amount, couples and single individuals may be able to take advantage now of the higher exemption amount with proper planning.  An alphabet soup of tools are available including SLATs, GRATs, IDGTS, etc.  The general idea being to remove assets from your taxable estate while you are alive, utilizing your expanded exemption, thus reducing the taxable assets at the time of death and passing more along to your beneficiaries.  There are also planning mechanisms for the charitably inclined that will serve to further reduce one’s taxable estate.

For New Yorkers, the State estate tax, currently $6.58 million, has been the larger concern.  Unlike the Federal, the New York exemption is not “portable” between spouses, meaning that the exemption of the first spouse to die cannot be saved to be used when the second spouse dies. Planning must be done to utilize each spouse’s exemption at the time of their respective deaths. 

Not all planning opportunities will suit your individual circumstances.  Determining the proper estate planning tools will depend upon your family structure, asset structure, and intended beneficiaries.  You should speak with your estate planning attorney today to better plan for tomorrow. 

Nancy Burner, Esq. is the founder and managing partner at Burner Prudenti Law, P.C. with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

When a couple gets divorced, the court attempts to divide the marital property as fairly and equally as possible. 

This doctrine of Equitable Distribution considers factors such as the length of the marriage, age and health of each party, and the earning power of each spouse. Under New York State law, “marital property” is broadly defined as property acquired by one or both spouses during the marriage. “Separate property” is defined as property acquired by an individual prior to marriage. Separate property is not subject to Equitable Distribution.

However, certain types of assets acquired during marriage are not subject to Equitable Distribution. Inheritance, gifts received from individuals other than one’s spouse, and personal injury compensation are considered separate property.

At first glance, it may appear that your child’s inheritance does not need protecting, but this is not the end of the story. Separate property can become marital property if “commingled” with marital property. 

For example, if your child were to deposit their inheritance into a joint account with their spouse, use inherited assets to purchase a home titled jointly, or your child’s spouse contributes to the maintenance and capital improvements of inherited property, the assets would become commingled and thus subject to Equitable Distribution upon divorce.

The best action you can take to prevent this from occurring is to leave your child’s inheritance in a trust. You could name your child as trustee or appoint someone else, and you would be able to limit distributions from the trust as you see fit. Importantly, the trust adds a layer of separation, better protecting the inheritance from a divorcing spouse and creditors by maintaining its status as separate property.

Moreover, with a trust you can control the remainder beneficiaries of the property you leave your child after his death. If you were to leave them their inheritance outright, your child’s own will would dictate how their estate were to pass. But with a trust you could stipulate that upon your child’s death any remaining assets pass to whomever you wish. This could be your grandchildren, your other children, or your favorite charity.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner Esq.

Nancy Burner, Esq.

Revocable trusts have become increasingly popular estate planning tools to avoid probate. A  trust allows for the orderly and private administration of your assets at death without court  involvement. 

A revocable trust is a trust that you create during your lifetime designed to give you flexibility and control over your assets. You may act as your own trustee, thereby  maintaining complete control over your assets. Assets can be transferred in and out of the  trust at your discretion and you may change or revoke your trust at any time. 

A revocable trust can hold any asset. Common assets include real property, non-qualified  investment accounts, bank accounts, certificates of deposit, and life insurance policies. Qualified retirement accounts should never be transferred to a revocable trust as it would  cause a taxable event.  

Assets titled in the name of your revocable trust pass to the beneficiaries automatically,  thereby avoiding probate. Likewise, any assets with designated beneficiaries pass directly to  beneficiaries. Assets in your sole name that do not have designated beneficiaries must go  through probate.  

Why do people want to avoid probate? Probate is time consuming and can be expensive. When a person dies with a will, the nominated executor must file a probate petition with  the Surrogate’s Court before having the authority to act. First, the Executor will file the  original will, certified copy of the death certificate and the probate petition in Surrogate’s  Court. Then, notice is given to the decedent’s next-of-kin who would have inherited had  there been no will. The next-of-kin will either sign waivers and consents or be issued a  citation to appear in court to have the opportunity to object to the Executor. 

After  jurisdiction is complete and issues with the will, if any, are addressed, the Surrogate’s Court  will issue a decree granting probate and Letters Testamentary. Only then can the Executor  gather the assets and distribute them according the directives in the will.  

When a person dies without a will (intestate), the process is similar. It is necessary to file an  Administration Petition with the Surrogate’s Court. Here, a close relative of the decedent  applies to become the decedent’s Administrator. As with a probate proceeding, all interested  parties must be given notice and must either sign a waiver or be served with a citation issued by the court. The Court will then issue Letters of Administration appointing them as Administrator.  

By creating and funding a revocable trust, your beneficiaries will avoid having to go through  this probate process. This avoids the attendant costs and delay, which can be substantial if  there is a will contest or hard to find relatives. Additionally, because of the backlog created  by the pandemic and the recent ransomware attack on the Suffolk County government this  past fall, the courts are extremely behind.

Even “straightforward” probate matters take months, even years, to make their way through the court system. This explains why more and more people  are deciding to create revocable trusts so that their spouses and children can inherit their  estate seamlessly, free from court interference. 

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

When the SECURE Act passed in 2019, the biggest impact on estate planning was the elimination of the “lifetime stretch” for most beneficiaries of individual retirement plans (IRAs). 

Before the SECURE Act, a beneficiary of an IRA had the option to take distributions over their own life expectancy. This allowed families to pass down tax-deferred accounts and accumulate wealth tax free across generations. Now, the only beneficiaries eligible for the stretch are spouses, disabled or chronically ill individuals, minor children of the plan owner, and those not less than ten years younger than the plan owner. For non-eligible beneficiaries, the 10-year rule applies. This rule requires that the beneficiary withdraw the entire inherited retirement account within 10 years.

The new SECURE Act 2.0, passed on January 1, 2023, brought new rules and clarifications. The original SECURE Act was silent on whether the 10-year payout rule required distributions on an annual basis. SECURE Act 2.0 clarifies that the beneficiary must take out at least the required minimum distribution each year, with a full payout by the tenth year. Luckily, anyone who inherited an IRA before the clarification will not be penalized for failure to take out the required minimum distribution. 

SECURE Act 2.0 has brought relief for stranded 529 Plans. Unused 529 funds can now be rolled over into a Roth IRA without a penalty. Beginning in 2024, the beneficiary of a 529 Plan can roll funds (capped at $35,000.00) into a Roth IRA. It used to be that a 10% penalty was imposed, and the withdrawals taxed if not used for qualified educational expenses. To qualify, the 529 account must have been open for at least 15 years. Keep in mind that there is a limit to the annual contribution amount, which is currently set at $6,500 for 2023. So it would take five years to move the maximum amount allowed into the Roth.

The new SECURE Act also fixed the issue of leaving a retirement account to a Supplemental Needs Trust. The Supplemental Needs Trust was not being afforded the lifetime stretch if the remainder beneficiary was a charity. SECURE Act 2.0 allows for a charitable remainder beneficiary without the loss of the stretch for the primary disabled beneficiary.

Another boon is that the age that a person must start taking their required minimum distribution has increased to 73 from 72. The penalty for not taking timely distributions has also decreased. For those 64 or younger, SECURE 2.0 increases the minimum age to 75 starting in 2033. This allows individuals to keep money in their retirement accounts longer, allowing it to grow without incurring taxes on withdrawals.

The SECURE Act and SECURE Act 2.0 have made major reform to longstanding retirement planning. It is advisable to speak with your estate planning attorney to discuss if these changes warrant updates to your estate plan.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Michael Christodoulou

When you’re working, you may spend decades contributing to retirement accounts such as your 401(k) and IRA. Once you’re retired, though, you’ll likely need to begin withdrawing from these accounts to help pay for your living expenses. In fact, you’ll be required to take money from them at a certain age — but that age requirement is changing, and it could lead to changes in your financial strategy.

Let’s look at some background behind this development. You put in pre-tax dollars to a traditional IRA and 401(k), so your contributions can lower your taxable income and your earnings can grow on a tax-deferred basis. Eventually, though, you must take withdrawals from these accounts or face tax penalties. (A Roth IRA does not have the withdrawal requirement; you can essentially keep the money intact as long as you choose.) 

As part of the SECURE Act 2.0 of 2022, the age at which you must take these withdrawals — technically called required minimum distributions, or RMDs — has increased from 72 to 73. So, if you turn 72 in 2023, you now have another year before you’re required to take RMDs.

The SECURE Act 2.0 also mandates that, in 2033, the RMD age will increase again — to 75 — so, depending on your current age, you may have even more time to plan for the effects of RMDs. Of course, you may need to start taking withdrawals from your retirement accounts before you reach either RMD age — 73 or 75 — so the additional time may not mean much to you. But if you can afford to wait until you must start taking RMDs, what issues should you consider?

Perhaps the most important one is taxes. Your RMDs, which are based on your life expectancy and account balances, are considered taxable income in the year in which you accept the money. If you have sizable amounts in your traditional IRA and 401(k), these RMDs could be large enough to bump you into a higher tax bracket, leading to greater taxation of Social Security benefits and a Medicare surcharge. So, the ability to delay taking RMDs can be beneficial from a tax standpoint, at least for a time. On the other hand, by delaying RMDs, you might eventually have to take bigger taxable withdrawals from your accounts that may have larger balances because they’ve had more time to potentially grow.

You could address the issue of taxable withdrawals by converting your traditional IRA to a Roth IRA before you’re faced with RMDs — and now, you have more time to do so. Roth IRAs have no RMDs, and since a Roth IRA is funded with after-tax dollars, your withdrawals are tax free, provided you don’t begin taking them until you’re at least 59½ and you’ve had your account at least five years. Again, though, taxes are the issue — any pre-tax dollars you convert from a traditional IRA to a Roth IRA will be taxable in the year of the conversion. To reduce this tax hit, you could space out the conversion over several years.

When thinking about delaying RMDs or doing a Roth IRA conversion to avoid RMDs, you’ll need to consult with your tax advisor. But the new RMD age limits do give you more flexibility in these areas, so think carefully about how you might benefit from the added time.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Various types of property, such as bank accounts and real estate, can be owned jointly with another person(s). Depending on the type of joint ownership, the property may pass automatically to the joint owner, outside of probate and those named in the will.

A will only governs assets in the decedent’s sole name that do not have a designated beneficiary. For example, if a co-owner of a checking, savings, or deposit account were to pass away, the account would automatically become solely owned by the surviving owner, outside of probate, and the will of the deceased owner would not apply.

Real estate can be jointly owned in several different ways, each coming with a different set of rules:

Joint Tenancy: Also known as “Joint Tenancy with Rights of Survivorship,” Joint Tenancy provides that upon the death of a joint owner, that owner’s share automatically goes to the surviving joint owner and does not pass through probate and is not governed by a will. 

For example, if Mary and Bob owned property as Joint Tenants and Bob passed away, Mary would automatically become the sole owner even if Bob’s will directed that all his property should pass to his children. When Mary passes away the property would pass according to her will since she is now the sole owner. The main advantage of Joint Tenancy is that it avoids probate upon the death of the first Joint Tenant and probate (the process by which the court verifies the validity of a will) is typically costly and takes several months to complete.

Tenancy by the Entirety: Tenancy by the Entirety is a type of joint tenancy only available between spouses and is valid in a few states including New York. As with Joint Tenancy, upon the death of the first spouse their interest automatically passes to the surviving spouse outside of probate and is not governed by their will. 

In addition to avoiding probate, Tenancy by the Entirety provides several protections in that one spouse cannot mortgage or sell the property without the consent of the other spouse, nor can the creditor of one spouse place a lien or enforce a judgment against property held as tenants by the entirety. 

Tenancy in Common: Here, there is no right of survivorship and each owner’s share of the property passes to their chosen beneficiaries upon the owner’s death. Tenants in Common can have unequal interests in the property (e.g. 50%, 40%, 10%) and when one Tenant dies their beneficiaries will inherit their share and become co-owners with the other Tenants. 

A Tenant in Common’s share will pass according to their will (if they have one) which means the nominated Executor will have to probate the will by filing a petition with Surrogate’s Court. However, a Tenant in Common can still avoid probate if their share of the property is held in trust, in which case the terms of the trust (rather than their will) would control how the property passes at death and no court involvement would be needed.

A comprehensive estate plan with an experienced attorney ensures that probate and non-probate assets work in harmony. In addition, there are capital gains consequences when transferring ownership interests during your lifetime — and such “gifts” should never be done without consulting an attorney or accountant. 

One of the biggest problems we see with DIY wills is the testator failing to account for the different types of ownership and what assets pass through the will.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Michael Christodoulou

If you receive Social Security, you’ve probably already heard that your checks in 2023 will be bigger — considerably bigger, in fact. How can you make the best use of this extra money?

Here’s what’s happening: For 2023, there’s an 8.7% cost-of-living adjustment (COLA) for Social Security benefits — the largest increase in 40 years. Also, the monthly Medicare Part B premiums are declining next year, to $164.90/month from $170.10/month, which will also modestly boost Social Security checks for those enrolled in Part B, as these premiums are automatically deducted.

Of course, the sizable COLA is due to the high inflation of 2022, as the Social Security Administration uses a formula based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). So, it’s certainly possible that you will need some, or perhaps all, of your larger checks to pay for the increased cost of goods and services. But if your cash flow is already relatively strong, you might want to consider these suggestions for using your bigger checks:

Reduce withdrawals from your investment portfolio. When you’re retired, you will likely need to withdraw a certain amount from your portfolio each year to meet your expenses. A boost in your Social Security may enable you to withdraw less, at least for a year. This can be particularly advantageous when the markets are down, as you’d like to avoid, as much as possible, selling investments and withdrawing the money when investment prices are low. And the fewer investments you need to sell, the longer your portfolio may last during your retirement years.

Help build your cash reserves. When you’re retired, it’s a good idea to maintain about a year’s worth of the amount you’ll spend from your portfolio in cash, while also keeping three months’ of your spending needs in an emergency fund, with the money kept in a liquid, low-risk account. Your higher Social Security checks could help you build these cash reserves. (Also, it’s helpful to keep another three to five years’ worth of spending from your portfolio in short-term, fixed-income investments, which now, due to higher interest rates, offer better income opportunities.)

Contribute to a 529 plan. You could use some of your extra Social Security money to contribute to a tax-advantaged 529 education savings plan for your grandchildren or other family members.

Contribute to charitable organizations. You might want to use some of your Social Security money to expand your charitable giving. Your generosity will help worthy groups and possibly bring you some tax benefits, too.

While it’s nice to have these possible options in 2023, you can’t count on future COLA increases being as large. The jump in inflation in 2022 was due to several unusual factors, including pandemic-related government spending, supply shortages and the Russian invasion of Ukraine. It’s quite possible, perhaps even likely, that inflation will subside in 2023, which, in turn, would mean a smaller COLA bump in 2024.

Nonetheless, while you might not want to include large annual COLA increases as part of your long-term financial strategy, you may well choose to take advantage, in some of the ways described above, of the bigger Social Security checks you’ll receive in 2023. When opportunity knocks, you may want to open the door.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Nancy Burner Esq.

Nancy Burner, Esq.

Being a Trustee of a trust carries serious responsibilities and trustees are compensated for their time. 

Section 2309 of New York’s Surrogate’s Court Procedure Act sets forth how to calculate the amount of commission. Under the statute, Trustees receive  commissions on the amount of property paid out and annually. However, keep in mind that the trust agreement can override the statute. The creator of the trust (Grantor) and Trustee may agree to a different amount, or the Trustee can waive the right to commissions altogether.

The statute lays out that the Trustee is entitled to a commission of 1% of any trust principal paid out. In addition to the 1% commission on distributions of principal, the following fee schedule sets out the Trustee’s annual commissions: 

(a) $10.50 per $1,000 on the first $400,000 of principal 

(b) $4.50 per $1,000 on the next $600,000 of principal 

(c) $3.00 per $1,000 on all additional principal.

Take the simple example of a trust with $1 million dollars in assets that directs $200,000 be paid out to the beneficiaries upon the Grantor’s death. The Trustee is entitled to a $2,000 commission for the distribution and then $5,200 annually. The statute also provides for reimbursement for reasonable and necessary expenses.

The trustee can choose to collect the commission at the beginning of the year or at the end of the year. But once the Trustee chooses a time they must collect the commission at that time of year every year going forward. Any successor or substitute Trustee must follow the same schedule.

Pursuant to SCPA §2309(3), annual commissions must come one-third from the income of the trust and two-thirds from the principal of the trust. Unless the trust says otherwise, commissions are payable one-third from trust income and two-thirds from trust principal. The only exception is for charitable remainder unitrusts or annuity trusts. In such cases, the commissions are paid out of principal, not out of the annuity or unitrust payments.

When deciding what the Trustee’s commission should be, it is important to keep SCPA 2309(3) in mind. This is especially true when the only asset in the trust is the Grantor’s home. Until the home is sold and the proceeds paid out, the Trustee is not entitled to the 1% commission.  Likewise, if the home is not generating rental income, then the one-third of the trustee’s commission is not payable under 2309. This may not be important if the Trustee is a beneficiary, but there is no incentive for a non-beneficiary Trustee in this situation.

Determining how to calculate the correct commission owed a Trustee can be complicated. Consulting an experienced estate planning attorney can make the process much easier to navigate. These discussions should be had upon creation of the trust as well as when the Trustee starts managing the trust.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Michael E. Russell

Michael E. Russell

What a week!  Monday the Dow rose 765 points.  Tuesday the Dow rose 826 points.  Wednesday the Dow lost 40 points, a well-deserved rest. Back to the new reality.  Thursday the Dow dropped 347 points followed by a loss of 630 points on Friday. Still, a gain of 1.5% for the week. 

Is the market building a base at these levels? Were the gains of the past week what we used to call a “dead cat bounce” in a Bear market?  Really hard to say.

Earnings are starting to weaken while consumer debt increases. An example of the cost of debt this year is as follows: Let us say that a family wishes to purchase a home while secured a $480,000 mortgage. Last year the cost would have been $2023 per month with an interest rate of 3%. That same mortgage presently would cost $3097 per month with a rate of 6.7%. Over a 30-year period you would pay an additional $385,000 in interest. These increases are taking a substantial portion of the middle class out of the real estate market. This is only one segment of a problematic economy.

Expectations of how many more rate increases the Federal Reserve will make is a big part of what is driving the price action in the stock market. The present administration is having a problem with conditions overseas.  President Biden just met with the Crown Prince of Saudi Arabia. It was hoped that this meeting would lead to a production increase of 2 million barrels of oil per day.  

Guess what? Upon Biden’s return, the Saudi’s announced a decrease of the same 2 million barrels per day. Productive meeting! On top of this, the President stated that we are facing a “potential nuclear Armageddon” the likes of which have not been seen since the Cuban Missile Crisis that President Kennedy faced in 1962. Nice thought to go to sleep with!!

Time to ease up a bit. The Federal Reserve cannot start cutting rates until the Consumer Price Index drops in half from its current level of 8.3%. In the meantime, investors should be taking advantage of U.S. Treasury yields. The 30-year bond is yielding 3.6% while the one- and two-year notes are yielding in excess of 4.1%. This is called an inverse yield curve.  4.1% for one year sure beats the 0.001% the banks are paying. Not very neighborly!  

We may be getting close to a market bottom plus or minus 10%. Many financial “gurus” are suggesting a large cash position in investor portfolios. Brilliant! This after a decline of over 30% in the market. Where were these people in January and February?  

Is crypto currency a viable investment now?  Bitcoin was supposed to be an inflation fighter. However, the worst inflation since the early 1970s has coincided with a 60% drop in Bitcoin’s price over the past year. It was also stated that Bitcoin is “digital gold.” Not proven true. Gold itself has outperformed Bitcoin, losing just 6% of its value. 

Ethereum, which is the second largest blockchain, has had a major upgrade which may fuel money going into crypto. Readers need to do their own research pertaining to crypto. My last thought on this topic: crypto strategist Alkesh Shah of Bank of America still feels that bitcoin and other cryptos are still viable long-term investments. As an aside, I really don’t have a long-term horizon. 

On a pleasant note, my wife and I just returned from Scotland where we visited our granddaughter at the University of St. Andrew, an incredible experience.

The economy there is booming. We did not see vacant store fronts. Much pride was shown in their communities; cleanliness and politeness were everywhere. I was very interested in the opinion of the Scots vis a vis the vote to break from the UK. 

I will breakdown opinions in three groups. The youth have little interest in the monarchy, the senior citizens still admire the monarchy due to their memories of WWII. The 40–60-year age group I found most interesting, although my questions were asked at a single malt scotch distillery. The point was made that Scotland is a land of 5.5 million, like Norway and Sweden. The British Pound is in free fall, which is threatening government and corporate pensions. The Scots are upset over Brexit. They wished to stay within the European Union. 

As we get closer to Thanksgiving, let us hope that the Russian people put pressure on Putin to leave office or better yet, the planet. Best regards to all and enjoy this beautiful Fall season. 

Michael E. Russell retired after 40 years working for various Wall Street firms. All recommendations being made here are not guaranteed and may incur a loss of principal. The opinions and investment recommendations expressed in the column are the author’s own. TBR News Media does not endorse any specific investment advice and urges investors to consult with their financial advisor. 

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

You may have heard that you can simplify your investment strategy just by owning index-based or passive investments. But is this a good idea? 

You’ll want to consider the different aspects of this type of investment style. To begin with, an index-based investment is a vehicle such as a mutual fund or an exchange-traded fund (ETF) that mimics the performance of a market benchmark, or index — the Dow Jones Industrial Average, the S&P 500, and so on. (An ETF is similar to a mutual fund in that it holds a variety of investments but differs in that it is traded like a common stock.) You can also invest in index funds that track the bond market.

Index investing does offer some benefits. Most notably, it’s a buy-and-hold strategy, which is typically more effective than a market-timing approach, in which individuals try to buy investments when their prices are down and sell them when the prices rise. Attempts to time the market this way are usually futile because nobody can really predict when high and low points will be reached. 

Plus, the very act of constantly buying and selling investments can generate commissions and fees, which can lower your overall rate of return. Thus, index investing generally involves lower fees and is considered more tax efficient than a more active investing style. Also, when the financial markets are soaring, which happened for several years until this year’s downturn, index-based investments can certainly look pretty good — after all, when the major indexes go up, index funds will do the same.

Conversely, during a correction, when the market drops at least 10% from recent highs, or during a bear market, when prices fall 20% or more, index-based investments will likely follow the same downward path.

And there are also other issues to consider with index-based investments. For one thing, if you’re investing with the objective of matching an index, you may be overlooking the key factors that should be driving your investment decisions — your goals and your risk tolerance. An index is a completely impersonal benchmark measuring the performance of a specific set of investments — but it can’t be a measuring stick of your own progress.

Furthermore, a single index, by definition, can’t be as diversified as the type of portfolio you might need to achieve your objectives. For example, the S&P 500 may track a lot of companies, but they’re predominantly large ones. And to achieve your objectives, you may need a portfolio consisting of large- and small-company stocks, bonds, government securities and other investments. (Keep in mind, though, that while diversification can give you more opportunities for success and can reduce the effects of volatility on your portfolio, it can’t guarantee profits or prevent all losses.)

Ultimately, diversifying across different types of investments that align with your risk tolerance and goals — regardless of whether they track an index — is the most important consideration for your investment portfolio. Use this idea as your guiding principle as you journey through the investment world.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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