Paul Jacobs

Ride share services are popular and may look like a great place to start investing, but there is a lower-risk way to attain growth.

Investors should not be hasty to jump into Lyft and Uber. They could be taken for a ride.

Uber’s initial public offering (IPO) is expected the week of May 6, and many investors are lining up to climb aboard. Lyft’s stock made its debut in March. While its share price shot up initially, it has declined since.

It’s easy to see why many investors are excited about Uber’s potential. Ride-hailing apps have made getting around cheaper and easier, whether you’re away from home or not. But it’s important to separate how you feel about the company’s service as a customer from how you view it as a potential investor.

Many IPOs are priced with an intentional built-in “pop”: a significant jump in price immediately after the shares go public. Such a pop does not represent free money. It arises from companies deliberately leaving money on the table when they go public. Whether Uber will do this remains to be seen.

But investors should instead focus on the company’s long-term prospects. Like many other tech startups, Uber has long emphasized growth over profits. Uber announced it lost $1.8 billion last year. Excluding a one-time gain from the sale of unprofitable businesses in Russia and Southeast Asia, that loss grows to a whopping $3.3 billion.

While Uber could be profitable someday, no one knows if or when that will happen. It might gain millions of customers and still not be profitable.

Although Uber is the dominant player in the ride-hailing space, it still faces serious competition, primarily from Lyft. Furthermore, traditional taxi companies are making moves to catch up. Some have launched their own apps, while others work with services like Curb, which connect riders to taxi companies rather than individual drivers.

Uber remains the market leader by far, but its position is not unassailable. People also have the option of not taking rides at all. Given how relatively new ride-hailing services are, we have yet to see how they perform in an economic downturn.

Uber seems eager to set itself apart from the competition through technology, especially self-driving cars. While Lyft and others are also pursuing this goal, Uber has tried to get out in front where autonomous vehicles are concerned.

It seems likely that self-driving cars are coming eventually, but how close are we? Uber faced a major backlash after one of its autonomous vehicles struck and killed a pedestrian in Arizona in March 2018. Even the CEO of Waymo, currently the leader in self-driving car development, recently conceded that we are decades away from widespread self-driving cars and that they are unlikely to perform under all weather conditions.

The biggest issue that should give investors pause is Uber’s existing business model. Part of the reason Uber has dominated until now is that it has subsidized prices in pursuit of market share. Uber’s leaders have always been open about the fact that its low prices are intended to be temporary.

Will riders stick with Uber if those low prices go away?  In a place like an airport, with many ride-hailing companies and taxi services to choose from, Uber’s low fares currently give it an edge. But if Uber increases prices, will customers stay loyal? And if Uber continues subsidizing prices to keep customers, how will it become profitable?

I am not suggesting that Uber — or Lyft – is necessarily a bad investment. Either company or both may work out how to thrive. But most individual investors should be wary of jumping into an IPO, even for a company whose services they like, when the road to profitability is dicey.

The answer isn’t “exciting,” but it is proven. The best investment strategy, tailored to your individual circumstances, is to buy low-cost funds that let you diversify your investments among small and large stocks in the U.S. and abroad.

Index funds are the best choice for the majority of your equity investments. But actively managed funds should play a role too. In specialized areas, such as emerging markets and natural resources stocks, they can help lower risk and potentially boost returns.

Rebalance regularly so that your basic asset allocation—the split between stocks and bonds&mdash;stays roughly constant over time. This also serves to reduce risk.

As the stock market hits new all-time highs, you may be tempted to invest everything in the market. Or do the opposite and sell everything. Neither is a wise choice.

If you decide to invest in Uber, Lyft or both, go easy. If you want to have some fun with “recreational” investing, a small position won’t hurt you if it doesn’t work out. But for serious investing, you need a 

Paul Jacobs, Certified Financial Planner (CFP

) is the chief investment officer of Palisades Hudson Financial Group, based in its Atlanta office. He is a contributor to the firm’s newly revised book on financial and life planning, “

Looking Ahead: Life, Family, Wealth and Business After 55

 is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at 

Articles

Lyft and Uber are sweeping the country with their popular and easy to use ride share services. However, don't get lost in how much you like them as a consumer before you make an investing decision concerning either of these companies.

If You Invest in Lyft or Uber, You Might be Taken for a Ride

Moving to another state for lower taxes is an option many people choose, but make sure you're preparing for tax traps that may show up along the way. 

Many people used to be able to deduct all state and local taxes (SALT) on their federal return. That took some of the sting out of living in a high-tax state. But the new tax law rubs 

into the wound by capping the SALT deduction at $10,000.

Well-off people now have more incentive to move from high-tax states to low-tax ones such as Florida, Nevada, or Washington. But high-tax states—New York, California and others&mdash;do 

 like to let go. They want to keep collecting taxes on people they believe have not truly moved away.

Residency and domicile are related but separate tax concepts. Both are important when it comes to state taxes. You may be a resident of more than one state in a given year, but you can be 

Your domicile is your main home, the place you intend to live permanently and where you return after traveling. You are automatically a resident in the state where you are domiciled. The burden of proof for establishing a new domicile typically rests with the taxpayer. If you can’t prove it, you can be stuck paying taxes to your old state.

New York, for instance, wins more than half of its tax residency audits

 Some of these may be individuals trying to cheat the system. But many are likely taxpayers who did not take sufficient care in documenting their lifestyle.

Changing your domicile involves cutting old ties and establishing new ones. If you are moving entirely from state A to state B, a brisk, well-documented moving process is your best chance of avoiding a dispute with state A’s tax authorities.

Save dated moving receipts, copies of your lease or closing documents on a new residence, and any other supporting evidence that will allow you to establish the timeline of your move. Notify your former state’s tax authorities of your move as soon as possible. Renounce any homestead exemption you might have claimed there.

The situation becomes more complex for people who spend substantial amounts of time in multiple states. Creating a paper trail is vital if you retain property in or ties to your old state. Steps may include:

		Updating your mailing address, especially for financial accounts and bills.

		Transferring your voter registration to your new home state and then voting there.

		Transferring your driver’s license and vehicle registration.

		Establishing memberships in religious institutions, professional organizations, or clubs in your new state.

		Selecting a doctor, accountant, or lawyer in your new location.

Domicile, though, is inherently subjective. Consider the “teddy bear test.” Where do you keep your sentimental items, such as photographs, collectibles, wedding albums, Mr. Teddy, and your pets (if any)?

But it’s not foolproof. One man kept a variety of valuable and sentimental items in Florida, but his business and family ties remained in New York. New York was also where he received mail, saw doctors and dentists, and kept most of his clothes. As a result, he lost his case when New York challenged his claim that he was domiciled in income-tax-free Florida. Spouses who live in different states may face an uphill battle in establishing separate domiciles, especially if the states have very different tax regimes.

Auditors have also taken advantage of technology in recent years when attempting to determine residency. They now may track cellphone records, review social media feeds, and even look at veterinary records, according to a recent 

Some New York auditors reportedly have conducted in-home inspections that included checking out fridge contents. Remember, nobody is obligated to allow an auditor in the door or even to talk directly to an auditor.

Tech may be able to help keep your estates straight. 

 recently reported on apps that automatically track the owner’s location and can issue alerts if users are approaching a state’s threshold for residency. These apps aren’t foolproof, however. You shouldn’t rely on them exclusively.

Auditors know that taxpayers could load the app on a phone and then leave that phone in the state where they want to claim domicile and take a second phone when they travel to their original state.

So, while these apps can be helpful, the real problem for most taxpayers is not simply how to count days in a given location (though you should do so in whatever way works for you). Tracking your location is only one piece of a larger puzzle.

While there is no surefire way to convince the tax authorities that you have left a high-tax state behind, aside from cutting all ties with the previous state, creating a big-picture case with lots of concrete evidence will work in your favor. The more work and effort you put into demonstrating that you really have moved your domicile, the better your odds that it will be an open-and-shut case when the tax authorities come calling.

What Are the Differences Between a Traditional IRA and a Roth IRA?

), IRS Enrolled Agent (EA), is the chief investment officer of Palisades Hudson Financial Group, based in its Atlanta office. He is a contributor to the firm’s newly revised book on financial and life planning, “

 is a fee-only financial planning firm and investment manager based in Fort Lauderdale, Florida with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at 

Moving to a low-tax state can backfire without the proper planning and documentation. Here's how to avoid any tax traps you may not realize are waiting for you.

Avoid Falling into a Tax Trap When You Move to a New State

Don't get wrapped up in the downturns and plunges of the market as you try to predict the future, instead look for opportunity to grow your portfolio.

Investors can get queasy when the stock market plunges. But there’s a bright side. During a downturn, stocks are on sale. The recent drop—and inevitable future plunges&mdash;can provide opportunities that investors have not seen for quite some time.

The key is to keep calm during downturns and stick to your long-term investment plan. It’s important to keep your head during big rallies too.

 had fallen about 8 percent from its all-time high in September. After years of sunny skies, the autumn downturn has created the same stomach-dropping sensation as rain clouds appearing in the middle of a picnic. The market rallied in November and early December, only to plummet again.

When the stock market declines, investors can usually identify one or two obvious culprits. This time, however, it’s not so simple.

Initially, some observers blamed a rise in interest rates. Some investors fear that rates are rising too fast, making debt more expensive for businesses and consumers alike. In addition, in December a portion of the yield curve became inverted. This happens when longer-term interest rates are lower than shorter-term rates. An inversion has preceded several economic recessions.

Still, interest rates have not changed much at all during this period of volatility, and the yield on 10-year U.S. Treasury bonds has declined since the stock market peaked in September.

There are many other factors that could have caused the reversal, together or separately. Some investors are worried about the escalating trade dispute between the U.S. and China. But both sides are negotiating, and it is clearly in both sides’ interest to work out a deal.

Others worry that U.S. economic growth and corporate earnings growth have reached their peak. Stock prices build in investor assumptions. Some of these assumptions may have been too optimistic, especially for high-flying technology stocks such as Facebook, Amazon and Netflix. When investor assumptions about a company’s long-term growth prospects change, even slightly, the stock can nosedive.

There are other possible sources of investor worry, too. Slowing economic growth in China, the world’s second-largest economy, is sparking concerns. Italy faces a budget crisis. Europe is nearing the end of quantitative easing, and the Brexit process remains a major source of uncertainty for global investors.

As for the question of whether the downturn will continue, no one can honestly answer, because no one knows. It is impossible to say for sure when, how long or how severely stocks might decline. This downturn could continue, or stock prices could quickly rebound. There might be a period where prices are largely unchanged. Nothing in investing is guaranteed, now or ever.

But there are a few key truths investors should keep in mind.

After years of almost uninterrupted gains, more volatility may represent a return to normal conditions. We have not seen a bear market (a stock market decline of 20 percent or more) in almost 10 years. The last correction (a decline of 10 percent or more) was in 2016.

Since March 2009, the S&P 500 has quadrupled without accounting for dividends. Stocks are supposed to be somewhat volatile, not appreciate month after month, year after year, with no dips along the way. Cycles are a normal part of investing.

In addition, by most measures, our economy is still very strong overall. The Commerce Department reported that the economy grew 

, a strong showing in both historical and global contexts. Unemployment is at the lowest level since 1969, and U.S. consumer confidence recently reached an 18-year high. No economy can expand forever, but the basic fundamentals underpinning the stock market are sound and unlikely to evaporate overnight.

Keeping this in mind, investors should view current market conditions as an opportunity, not a disaster. As always, it pays to understand your investments and realistically assess your own risk tolerance. You should stick to your long-term financial plan and resist the urge to try to time the market.

But while you don’t want to act hastily, there are some reasonable actions you can take to make the most of a stock market slump. You may want to rebalance your portfolio in order to keep your asset allocation on track.

When stocks are cheaper, it can be a great time to add to underweight positions. For instance, you may be underweighted in small U.S. stocks or foreign stocks. Especially if you have a long time horizon, a downturn can ultimately help your portfolio overall, as long as you do not panic and lock in your losses by selling when markets are down.

A downturn may also be a smart time to consider tax-loss selling. If you hold securities that have lost value in a taxable account, selling to realize capital losses and then investing the proceeds in similar securities can reduce your tax bill.

We don’t know exactly what’s next for the stock market, and you shouldn’t believe anyone who claims to. But for investors with a well-designed, long-term investment plan in place, a downturn offers a time to readjust your portfolio strategically.

The stock market is often fickle and as much as we try to predict it, it can be unpredictable. So, don't panic when the market plunges, instead search for opportunity.

Keep Calm When the Stock Market Plunges It Can Create Opportunity

If you want to give money to your favorite charities every year, a donor-advised fund may be the perfect solution.

	Your 2017 tax return provides valuable clues for planning for your 2018 taxes, but with tax reform, the exercise is more complicated this year.  

When reviewing your 2017 return, look for things that cost you money. Take a few extra minutes and start planning for 2018.

For example, you may have an investment that has an unrealized loss and is tax-inefficient. Selling it now won't change your 2017 tax bill, but it will help lower your taxes in 2018 and beyond. It’s also too late to make 2017 contributions to your 401(k) or 403(b) plan, but if you’re skimping, boost them now.

Also, understand how the new tax law will affect your taxes. Federal marginal tax rates have been lowered across the board. If you haven’t been itemizing deductions, your taxes will probably go down unless your income rises significantly.

Nevertheless, some people will see their taxes increase. It’s important to get a handle on how tax reform will affect you.

Some people can do this calculation themselves, but because of the complexities of tax reform, many will need a knowledgeable tax preparer to help them. Then you can see if you’re likely to get a refund next year or will owe money. This will help you figure out if your payroll withholding is too high or low.

If you pay estimated taxes quarterly, you should calculate your expected 2018 taxes so that you won’t overpay. 

Many Taxpayers Won't Benefit From Itemized Deductions Anymore 

The new tax rules double the standard deduction. In 2018, it’s $24,000 for married couples filing jointly and $12,000 for singles. People aged 65 and over, and the blind or disabled get an additional deduction.

Because of the higher standard deduction and a new limit of $10,000 in deductions for state and local taxes, many people who previously itemized will no longer benefit from doing so. That doesn’t necessarily mean your tax bill will increase. It might, it might not.

If you paid alternative minimum tax in 2017, it’s unlikely that you will come April 2019. It’s estimated that the number of taxpayers hit by AMT will drop by 96 percent.

Once you know your situation, then you can make some savvy tax-planning moves.

If your expected deductions are just below the new standard deduction, it can make sense to bunch charitable contributions so you’ll still receive a tax benefit.  

Instead of making annual charitable contributions that aren’t deductible, you may choose to make several years’ worth of contributions in one year to get a tax benefit.

If you want to give money to your favorite charities every year, a donor-advised fund may be the perfect solution. These funds let people make charitable contributions, receive an immediate tax benefit and then recommend grants to charities from the fund over time. 

You could give, for instance, $10,000 to a donor-advised fund in one year instead of giving $2,500 a year to charities directly over four years — and you don’t have to give cash. A 

 will gladly accept appreciated securities. 

Many Business Owners and Self-Employed People Get a Big Break

A new 20 percent qualified business income deduction lets certain business owners and self-employed people take a 20 percent deduction against their 2018 income.

Taxpayers who own or have an ownership stake in a pass-through business entity such as a partnership, a limited liability company (LLC) or an S corporation are eligible, along with self-employed individuals (sole proprietors).

The deduction will lower taxes for many business owners and the self-employed, and some will save thousands or more in federal income tax.

In general, to qualify for the full deduction, your taxable income must be under $157,500 for single filers or $315,000 if you're married filing jointly.

C corporations do not get the new deduction, although the top federal tax rate for C corporations has been cut to 21 percent. If you’re the owner of a C corporation, it’s wise to investigate if converting to an S corporation or LLC would be worthwhile, and vice versa.

Check your payroll withholding to make sure you're not paying too much or too little during the year. The withholding tables that employers use have changed, and many people are finding that they need to adjust their withholding allowances in order to avoid a bad surprise next year. The more withholding allowances you claim, the less tax will be withheld from your paycheck.

While people love getting refunds, a large refund isn't necessarily a good thing. It usually means you paid too much to the government during the year and missed out on the income or investment appreciation you could have earned.

If you get refunds every year, consider reducing your withholding so you're not making interest-free loans to the government each year — you need the cash flow more than they do.

Paul Jacobs, Certified Financial Planner (CFP), Enrolled Agent (EA), is chief investment officer of Palisades Hudson Financial Group, based in its Atlanta office.

 is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.  The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at 

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2017 Tax Return Points Way to Tax Savings in 2018 and Beyond

	Since a GRAT is a grantor trust, all tax items realized by the GRAT during the annuity term, such as income and capital gain, will be taxable on the grantor’s personal income tax return. 

A grantor retained annuity trust, commonly called a GRAT, allows a grantor to pass assets to a beneficiary while minimizing his or her federal gift and estate tax burden. While GRATs offer some undeniable advantages, like any estate planning technique they are not right for everyone. 

A grantor places assets in a trust that pays the grantor an annuity for a set period of time. After the trust’s term is up, any remaining assets pass to the beneficiaries — often the grantor’s children.

A well-executed GRAT allows you to pass along appreciation in the assets free of transfer tax while also receiving an income stream to meet your own needs. The GRAT’s tax benefits mainly come from the way the Internal Revenue Service (IRS) values the transfer to the trust.

The IRS calculates a grantor’s taxable gift to his or her beneficiaries based on two things: the amount of the annuity payments and the rate of expected return on the trust assets, which is pegged to a monthly figure called the Internal Revenue Code Section 7520 rate. The 7520 rate is based on the mid-term applicable federal rate at the time the grantor sets up the trust. GRATs are more attractive during times of low interest rates, because of the lower hurdle rate for trust assets to clear.

While some characteristics of a GRAT are set by regulation, a grantor does face some choices in structuring the trust. A GRAT’s term is, in most if not all cases, established for a set number of years when the GRAT is created. Annuity payments can be made once per year or more frequently, and they can remain flat, increase or decrease over time. Because of the annuity stipulation, GRATs have a minimum term of two years.

A short-term GRAT mitigates some of the vehicle’s risks, such as the grantor dying before the term is over or the trust assets underperforming. For this reason, many people choose to set up “rolling” or “laddered” short-term GRATs. The idea is to create a series of consecutive short-term GRATs, funding each with the previous trust’s annuity payments. Rolling GRATs can capture rapid asset appreciation and offer the flexibility to stop at any time.

In addition to the trust’s term, a grantor will need to decide whether or not to “zero out” the GRAT. If you choose to make the present value of the annuity payments, discounted using the 7520 rate, equal to the amount you transfer to the GRAT, the IRS will not consider the transfer a gift for federal tax purposes. After all, in theory, you are not transferring any value.

In a world where the 7520 rate accurately predicted appreciation, you would get back the entirety of the trust’s assets in annuity payments, leaving nothing for the beneficiaries. In reality, though, trust assets may well earn more than the 7520 rate; such earnings go to your beneficiaries free of gift tax.

You are not required to set up a zeroed-out GRAT. If you choose, you can set a lower annuity amount and have some of your transfer treated as a taxable gift. This is often an inefficient tax strategy, since a GRAT’s main benefit is allowing you to transfer value without having to pay gift tax. In addition, if the assets funding the GRAT decline in value, rather than appreciating, you could end up paying gift tax on nothing. If the assets don’t surpass the 7520 rate, the transaction has created a taxable gift without any assets passing to your beneficiary, which is a lose-lose scenario (except for Uncle Sam).

Note that a GRAT is not an always the most tax-efficient choice for every beneficiary. For example, while a zeroed-out GRAT allows you to bypass the federal gift and estate tax, it does not negate the generation-skipping transfer (GST) tax. Generally, outright gifts to grandchildren or other “skip persons” will be more efficient than a remainder interest in a GRAT.

Since a GRAT is a grantor trust, all tax items realized by the GRAT during the annuity term, such as income and capital gain, will be taxable on the grantor’s personal income tax return. Annuity distributions are not considered taxable and, at the expiration of the trust term, all remaining assets are distributed to the remainder beneficiary, who becomes responsible for paying tax on any future income from the assets.

Another factor that may affect your GRAT’s structure is the nature of the assets you intend to use to fund the trust. For obvious reasons, you will want to focus on assets that are likely to appreciate beyond the 7520 rate, but this still leaves a wide range of options. Note that you cannot make additional contributions to a GRAT once you have created it, so you will need to make funding decisions upfront.

One popular technique is to fund a GRAT with assets that are discounted for transfer tax purposes, such as noncontrolling interests in family-controlled entities or fractional interests in real property. Such assets are especially good candidates for transfer to a GRAT if the trust’s term extends beyond the time when they are expected to be marketable, paired with another liquid source of funds to satisfy annuity payment requirements in the meantime. For instance, if you expect to sell the family business in the next few years, you can structure a GRAT so that it will include sufficient liquid assets to make the annuity payments until the business is sold, generating additional liquidity.

While illiquid assets are a common choice for funding GRATs, they can create complications. Since a GRAT requires distributions on a regular basis, you may be required to obtain a qualified appraisal each time a distribution of the illiquid asset occurs. Say, for instance, you fund a GRAT with privately held company shares and plan to have the GRAT distribute back shares equal to the required annuity payment each year. You will need to value the shares on the date you contribute them to the GRAT and again on each annuity payment date for the GRAT’s term. This will involve extra administrative costs.

If you want to protect the growth of more than one asset from transfer taxes, consider using separate GRATs for each. This technique will prevent underperforming assets from diluting the effectiveness of strong performers. While multiple GRATs add complexity, such separation can pay major dividends. If, for example, a GRAT contained both stock in company A and company B, losses in company A would offset any gains in company B, potentially leaving beneficiaries with nothing. In two different GRATs, however, gains from company B would still pass to the beneficiaries, even if company A underperformed.

GRATs are irrevocable, and a grantor’s mortality can render a GRAT less useful than intended. If a grantor dies before the end of a GRAT’s term, trust assets will be included in the grantor’s gross estate. Using short-term or rolling GRATs can reduce this risk.

As with any trust, you will need to hire professionals to set up and maintain a GRAT properly. For this reason, individuals who are unlikely to reach the gift and estate tax threshold may find it more efficient to just gift assets outright. And while you may be able to take advantage of economies of scale, setting up multiple GRATs at once can still add cost and complexity.

Statements from both the White House and Capitol Hill suggest that the gift and estate tax, at least on the federal level, may vanish sometime in the next few years. While you should always build an estate plan based on current law, rather than the prospect of imminent change, it may make more sense to favor short-term or laddered GRATs over long-term GRATs in this political atmosphere.

A GRAT-based gifting strategy rests on the assumption that transferred assets will appreciate at a certain level. A GRAT that sustains major losses early in its term is unlikely to end profitably. You might consider purchasing an underperforming GRAT’s remaining assets and transferring them to a new GRAT. While GRATs are irrevocable, there is an exception for “bona fide sales made for an adequate and full consideration in money or money’s worth.” Such a purchase will have no tax consequences, because the IRS considers the GRAT the grantor’s property during its term; you are basically buying from and selling to yourself. With a fresh start, the GRAT will have a better chance of producing a profit to pass to your beneficiary.

On the other hand, a GRAT that performs better than expected upfront risks losing some of those gains to future poor performance. Purchasing assets from the GRAT and transferring to a new GRAT in this case will lock in those initial gains, regardless of later performance.

Another risk for grantors is the prospect of a dispute with the IRS over the value of assets in the trust. If you fund a GRAT with, for instance, a discounted interest in a family limited partnership, the IRS could later challenge your initial asset valuation. However, if you structure your trust so that the annuity is a percentage of the trust’s assets rather than a specific dollar amount, any increase in value will simply lead to a larger annuity payment. In this way, you can avoid the potential of unexpectedly owing gift tax, though such a scenario would reduce the amount passed to beneficiaries.

A GRAT is an excellent tool when considering ways to minimize your transfer tax obligations while passing assets to your beneficiaries. While not without risks, in many situations a GRAT may turn out to be the perfect fit.

Paul Jacobs, Certified Financial Planner (CFP), Enrolled Agent (EA),  is chief investment officer of 

, based in its Atlanta office.  The firm is a fee-only wealth manager serving affluent clients.  He can be reached at paul@ palisadeshudson.com. 

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Investors use index investing to replicate the performance of a specific index

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Indexing works more reliably in large, developed markets. From 2005 to 2015, just 18 percent of actively managed U.S. large-company stock funds equaled or beat the Standard & Poor’s 500-stock index, according to S&P Dow Jones Indices.

Actively managed midsize and small-company stock funds, in theory, should do better because those markets are a bit less efficient, but they did worse.  Only 12 percent of those funds outpaced their respective indexes over the same period, according to 

So why not just choose one or more of those outperformers?  Past performance does not predict future performance. A top fund in one decade may be among the worst in the next decade.

Index funds have the big advantage of minuscule expenses. The efficiency of major markets is another big hurdle. As more and more information becomes widely available and active-management fees remain high, it is becoming even more difficult for active managers to outperform index funds.

I also recommend index funds for the bulk of investments in other developed markets:  Western Europe, Japan and Australia.

Use active management for emerging markets, REITS and natural resources

Perhaps surprisingly for an advocate of indexing, I recommend putting about 40 percent of your equity portfolio in actively managed funds. In emerging markets and certain industries, active management can work.

Emerging markets—Latin America and Asia (except Japan)&mdash;do not have highly efficient, transparent stock markets.

Emerging market indexes often include weak or struggling companies that skilled portfolio managers can identify and avoid. They have a decent chance of outperforming and earning their fees.  

Lack of transparency means managers can find and use nonpublic information to get an edge when deciding which stocks to buy and sell. An astute manager can scoop up bargains and avoid duds.

I also use actively managed funds for investing in global REITS and natural resources stocks. A lot of international real estate opportunities are in Asia, where there is inefficiency.

Natural resources commodity prices can be very volatile. I like having a manager who has the flexibility to add or subtract exposure to different companies as commodities fluctuate.

Stay flexible. Neither indexing nor active management is set in stone as the best strategy forever.

I regularly revisit our decisions to use active or passive strategies for each asset class, and we’ve made some readjustments in the last few years. I want to make sure our recommendations are still appropriate in the current market environment.

®), is chief investment officer of Palisades Hudson Financial Group, based in its Atlanta office. 

 is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with more than $1.3 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.

The firm’s monthly newsletter covering financial planning, taxes and investing is online at 

www.palisadeshudson.com/insights/sentinel

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Index funds are growing so fast that some pundits fear the financial system someday will break down when no one pays attention to stock prices. But thatâ€™s not going to happen, so donâ€™t worry about it and keep indexing. Continue below to find out more. 