Oppenheimer & Co. Inc.The Israelite Group ofOppenheimer & Co. Inc.500 W Madison Suite 4000Chicago, IL 60661312-360-5624dan.israelite@opco.com

August 2016Investors Are Human, Too

Be Prepared to Retire in a Volatile Market

Understanding the Net Investment IncomeTax

Should I pay off my student loans early orcontribute to my workplace 401(k)?

The Israelite Group Monthly NewsletterInvestors Are Human, Too

See disclaimer on final page

Five weeks ago the United Kingdom votedto leave the European Union. The day afterthe vote we received several calls askingwhat we thought about putting in place amore conservative investment strategybased on fear of the unknown. Threeweeks later, the US markets hit an all-timehigh and we are now receiving calls todiscuss making portfolios more aggressive.

We encourage everyone to read the firstarticle in this month’s newsletter that talksabout the fear and greed cycle and theinfluence it has on investors. While we areall subject to these emotions, it is ouropinion that creating investment strategiesbased on long term objectives rather thanshort term news is the most suitable way tobuild portfolios.

If something material has changed in yourlife (retirement, new family member, etc.)we should discuss how this will impact yourinvestment strategy. Otherwise werecommend continuing on the currentinvestment path even with all of theuncertainty surrounding us.

In 1981, the NobelPrize-winningeconomist RobertShiller published agroundbreakingstudy thatcontradicted aprevailing theory thatmarkets are alwaysefficient. If theywere, stock prices

would generally mirror the growth in earningsand dividends. Shiller's research showed thatstock prices fluctuate more often than changesin companies' intrinsic valuations (such asdividend yield) would suggest.1

Shiller concluded that asset prices sometimesmove erratically in the short term simplybecause investor behavior can be influenced byemotions such as greed and fear. Manyinvestors would agree that it's sometimesdifficult to stay calm and act rationally,especially when unexpected events upset thefinancial markets.

Researchers in the field of behavioral financehave studied how cognitive biases in humanthinking can affect investor behavior.Understanding the influence of human naturemight help you overcome these commonpsychological traps.

Herd mentalityIndividuals may be convinced by their peers tofollow trends, even if it's not in their own bestinterests. Shiller proposed that humanpsychology is the reason that "bubbles" form inasset markets. Investor enthusiasm ("irrationalexuberance") and a herd mentality can createexcessive demand for "hot" investments.Investors often chase returns and drive upprices until they become very expensiverelative to long-term values.

Past performance, however, does notguarantee future results, and bubbleseventually burst. Investors who follow the crowdcan harm long-term portfolio returns by fleeingthe stock market after it falls and/or waiting toolong (until prices have already risen) toreinvest.

Availability biasThis mental shortcut leads people to basejudgments on examples that immediately cometo mind, rather than examining alternatives. Itmay cause you to misperceive the likelihood orfrequency of events, in the same way thatwatching a movie about sharks can make itseem more dangerous to swim in the ocean.

Confirmation biasPeople also have a tendency to search out andremember information that confirms, rather thanchallenges, their current beliefs. If you have agood feeling about a certain investment, youmay be likely to ignore critical facts and focuson data that supports your opinion.

OverconfidenceIndividuals often overestimate their skills,knowledge, and ability to predict probableoutcomes. When it comes to investing,overconfidence may cause you to tradeexcessively and/or downplay potential risks.

Loss aversionResearch shows that investors tend to dislikelosses much more than they enjoy gains, so itcan actually be painful to deal with financiallosses.2 Consequently, you might avoid sellingan investment that would realize a loss eventhough the sale may be an appropriate courseof action. The intense fear of losing money mayeven be paralyzing.

It's important to slow down the process and tryto consider all relevant factors and possibleoutcomes when making financial decisions.Having a long-term perspective and stickingwith a thoughtfully crafted investing strategymay also help you avoid expensive,emotion-driven mistakes.

Note: All investments are subject to marketfluctuation, risk, and loss of principal. Whensold, investments may be worth more or lessthan their original cost.1 The Economist, "What's Wrong withFinance?" May 1, 20152 The Wall Street Journal, "Why an EconomistPlays Powerball," January 12, 2016

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Be Prepared to Retire in a Volatile MarketIn an ideal world, your retirement would betimed perfectly. You would be ready to leavethe workforce, your debt would be paid off, andyour nest egg would be large enough to providea comfortable retirement--with some left over toleave a legacy for your heirs.

Unfortunately, this is not a perfect world, andevents can take you by surprise. In a surveyconducted by the Employee Benefit ResearchInstitute, only 44% of current retirees said theyretired when they had planned; 46% retiredearlier, many for reasons beyond their control.1But even if you retire on schedule and haveother pieces of the retirement puzzle in place,you cannot predict the stock market. What ifyou retire during a market downturn?

Sequencing riskThe risk of experiencing poor investmentperformance at the wrong time is calledsequencing risk or sequence of returns risk. Allinvestments are subject to market fluctuation,risk, and loss of principal--and you can expectthe market to rise and fall throughout yourretirement. However, market losses on the frontend of your retirement could have an outsizedeffect on the income you might receive fromyour portfolio.

If the market drops sharply before your plannedretirement date, you may have to decidebetween retiring with a smaller portfolio orworking longer to rebuild your assets. If a bigdrop comes early in retirement, you may haveto sell investments during the downswing,depleting assets more quickly than if you hadwaited and reducing your portfolio's potential tobenefit when the market turns upward.

Dividing your portfolioOne strategy that may help addresssequencing risk is to allocate your portfolio intothree different buckets that reflect the needs,risk level, and growth potential of threeretirement phases.

Short-term (first 2 to 3 years): Assets such ascash and cash alternatives that you could drawon regardless of market conditions.

Mid-term (3 to 10 years in the future): Mostlyfixed-income securities that may havemoderate growth potential with low or moderatevolatility. You might also have some equities inthis bucket.

Long-term (more than 10 years in thefuture): Primarily growth-oriented investmentssuch as stocks that might be more volatile buthave higher growth potential over the long term.

Throughout your retirement, you canperiodically move assets from the long-term

bucket to the other two buckets so you continueto have short-term and mid-term fundsavailable. This enables you to take a morestrategic approach in choosing appropriatetimes to buy or sell assets. Although you willalways need assets in the short-term bucket,you can monitor performance in your mid-termand long-term buckets and shift assets basedon changing circumstances and longer-termmarket cycles.

If this strategy appeals to you, considerrestructuring your portfolio before you retire soyou can choose appropriate times to adjustyour investments.

Determining withdrawalsThe three-part allocation strategy may helpmitigate the effects of a down market byspreading risk over a longer period of time, butit does not help determine how much towithdraw from your savings each year. Theamount you withdraw will directly affect howlong your savings might last under any marketconditions, but it is especially critical in volatilemarkets.

One common rule of thumb is the so-called 4%rule. According to this strategy, you initiallywithdraw 4% of your portfolio, increasing theamount annually to account for inflation. Someexperts consider this approach to be tooaggressive--you might withdraw less dependingon your personal situation and marketperformance, or more if you receive largemarket gains.

Another strategy, sometimes called theendowment method, automatically adjusts formarket performance. Like the 4% rule, theendowment method begins with an initialwithdrawal of a fixed percentage, typically 3%to 5%. In subsequent years, the same fixedpercentage is applied to the remaining assets,so the actual withdrawal amount may go up ordown depending on previous withdrawals andmarket performance.

A modified endowment method applies a ceilingand/or a floor to the change in your withdrawalamount. You still base your withdrawals on afixed percentage of the remaining assets, butyou limit any increase or decrease from theprior year's withdrawal amount. This could helpprevent you from withdrawing too much after agood market year, while maintaining a relativelysteady income after a down market year.

Note: Asset allocation is a method used to helpmanage investment risk; it does not guaranteea profit or protect against investment loss.1 Employee Benefit Research Institute, "2016Retirement Confidence Survey"

Market losses on the frontend of your retirement couldhave an outsized effect onthe income you mightreceive from your portfolio.

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Understanding the Net Investment Income TaxIt's been around since 2013, but many are stillstruggling to come to grips with the netinvestment income tax. The 3.8% tax, which issometimes referred to as the Medicare surtaxon net investment income, affectedapproximately 3.1 million federal income taxreturns for 2013 (the only year for which data isavailable) to the tune of almost $11.7 billion.1Here's what you need to know.

What is it?The net investment income tax is a 3.8% "extra"tax that applies to certain investment income inaddition to any other income tax due. Whetheryou're subject to the tax depends on twogeneral factors: the amount of your modifiedadjusted gross income for the year, and howmuch net investment income you have.

Note: Nonresident aliens are not subject to thenet investment income tax.

What income thresholds apply?Modified adjusted gross income (MAGI) isbasically adjusted gross income--the amountthat shows up on line 37 of your IRS Form1040--with certain amounts excluded fromincome added back in.

The net investment income tax applies only ifyour modified adjusted gross income exceedsthe following thresholds:

Filing Status MAGI

Married filing jointly orqualifying widow(er)

$250,000

Married filing separately $125,000

Single or head of household $200,000

What is net investment income?Investment income generally includes interest,dividends, capital gains, rental and royaltyincome, income from nonqualified annuities,and income from passive business activitiesand businesses engaged in the trade offinancial instruments or commodities.Investment income does not include wages,unemployment compensation, Social Securitybenefits, tax-exempt interest, self-employmentincome, or distributions from most qualifiedretirement plans and IRAs.

Note: Even though items like wages andretirement plan distributions aren't included innet investment income, they are obviously afactor in calculating MAGI. So higher levels ofnon-investment income can still make adifference in whether the net investmentincome tax applies.

Gain from the sale of a personal residencewould generally be included in determininginvestment income. However, investmentincome does not include any amount of gainthat is excluded from gross income for regularincome tax purposes. Qualifying individuals aregenerally able to exclude the first $250,000--or$500,000 for married couples filing jointly--ofgain on the sale of a principal residence; any ofthe gain that's excluded for regular income taxpurposes would not be included in determininginvestment income.

To calculate net investment income, you reduceyour gross investment income by anydeductible expenses that can be allocated tothe income. So, for example, associatedinvestment interest expense, investment andbrokerage fees, expenses associated withrental and royalty income, and state and localincome taxes can all be factored in.

How is the tax calculated?You know your modified adjusted grossincome. You know your net investment income.To calculate the net investment income tax, firstsubtract the threshold figure (shown above) foryour filing status from your MAGI. Thencompare the result with your net investmentincome. Multiply the lower of the two figures by3.8%.

For example, assume you and your spouse filea joint federal income tax return and have$270,000 in MAGI and $50,000 in netinvestment income. Your MAGI is $20,000 overthe $250,000 threshold for married couplesfiling jointly. You would owe $760 (3.8%multiplied by $20,000), because the tax isbased on the lesser of net investment incomeor MAGI exceeding the threshold.

How is it reported?If you're subject to the net investment incometax, you must complete IRS Form 8960, NetInvestment Income Tax--Individuals, Estates,and Trusts, and attach it to your federal incometax return (you must file IRS Form 1040). Theinstructions for IRS Form 8960 provide anoverview of the rules that apply and can be agood source of additional information. If youthink you may be affected by the net investmentincome tax, though, it's a good idea to considerdiscussing your individual situation with a taxprofessional.1 IRS Statistics of Income Bulletin, Spring 2015

The 3.8% net investmentincome tax, sometimesreferred to as the Medicaresurtax on net investmentincome, originated inrevenue provisions includedin the Affordable Care Act of2010. Unlike payroll taxrevenues, funds collectedfrom this surtax aredeposited into the generalfund of the U.S. Treasury;they are not applied to theMedicare Trust Fund.

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Oppenheimer & Co. Inc.The Israelite Group ofOppenheimer & Co. Inc.500 W Madison Suite 4000Chicago, IL 60661312-360-5624dan.israelite@opco.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

The content herein should not beconstrued as an offer to sell or thesolicitation of an offer to buy anysecurity. The information enclosedherewith has been obtained fromoutside sources and is not theproduct of Oppenheimer & Co. Inc.("Oppenheimer") or its affiliates.Oppenheimer has not verified theinformation and does notguarantee its accuracy orcompleteness. Additionalinformation is available uponrequest. Oppenheimer, nor any ofits employees or affiliates, does notprovide legal or tax advice.However, your OppenheimerFinancial Advisor will work withclients, their attorneys and their taxprofessionals to help ensure all oftheir needs are met and properlyexecuted. Oppenheimer & Co. Inc.Transacts Business on all PrincipalExchanges and is a member ofSIPC.

Have you heard about the newest employee perk?What's one of the mostcutting-edge employeebenefits right now?Company-provided studentloan assistance for employees

who are paying back student loans.

With a record amount of student loan debtattached to the incoming workforce (visitfinaid.org to see a student debt clock that nowtops $1.3 trillion), companies that rely on acollege-educated workforce--and want to attractand retain the best workers--are starting to offerstudent loan assistance to meet this immediatefinancial concern of many employees.

How do these programs work? Generally, anemployer will contribute a certain amount eachmonth toward an employee's student loans,typically from $100 to $250 per month, up to alifetime cap (for example, $10,000). Programsmay restrict participation to employees whohave been with the company for a minimumperiod of time, and may require employees toremain at the company for a certain period oftime after they receive loan repayment benefits.

But participants beware: Unlike matching401(k) contributions that companies may giveto employees, money given to help repay

student loans is considered taxable income. Yetfor college graduates facing thousands ofdollars of debt and years of loan repayment,this employee benefit can be an attractive perk.Along with the actual financial help, borrowersmay get a psychological boost from knowingthat they have a plan in place to successfullypay off their loans and that their employer isinvested in the outcome.

Even with the early hype, company studentloan repayment programs are still a relativelyuncommon employee benefit. According to a2015 employee benefit survey by the Societyfor Human Resource Management, these planswere offered by only 3% of the more than 450companies surveyed. Essentially, a handful oflarge employers that hire a large number ofcollege grads are at the forefront of this trend.

Industry observers expect a lot of pent-updemand for this employee benefit asmillennials' student debt burdens continue togarner widespread attention and employeeretention efforts intensify as the economyimproves. A company's contribution probablywon't cover 100% of a young employee'sstudent debt, but it might make a meaningfuland welcome dent.

Should I pay off my student loans early or contribute tomy workplace 401(k)?For young adults with collegedebt, deciding whether to payoff student loans early orcontribute to a 401(k) can be

tough. It's a financial tug-of-war betweendigging out from debt today and saving for thefuture, both of which are very important goals.Unfortunately, this dilemma affects manypeople in the workplace today. According to astudent debt report by The Institute for CollegeAccess and Success, nearly 70% of collegegrads in the class of 2014 had student debt,and their average debt was nearly $29,000.This equates to a monthly payment of $294,assuming a 4% interest rate and a standard10-year repayment term.

Let's assume you have a $300 monthly studentloan payment. You have to pay it eachmonth--that's non-negotiable. But should youpay more toward your loans each month to paythem off faster? Or should you contribute anyextra funds to your 401(k)? The answer boilsdown to how your money can best be put towork for you.

The first question you should ask is whetheryour employer offers a 401(k) match. If yes, you

shouldn't leave this free money on the table.For example, let's assume your employermatches $1 for every dollar you save in your401(k), up to 6% of your pay. If you make$50,000 a year, 6% of your pay is $3,000. So ata minimum, you should consider contributing$3,000 per year to your 401(k)--or $250 permonth--to get the full $3,000 match. That'spotentially a 100% return on your investment.

Even if your employer doesn't offer a 401(k)match, it can still be a good idea to contribute toyour 401(k). When you make extra paymentson a specific debt, you are essentially earning areturn equal to the interest rate on that debt. Ifthe interest rate on your student loans isrelatively low, the potential long-term returnsearned on your 401(k) may outweigh thebenefits of shaving a year or two off yourstudent loans. In addition, young adults havetime on their side when saving for retirement,so the long-term growth potential of even smallinvestment amounts can make contributing toyour 401(k) a smart financial move.

All investing involves risk, including the possibleloss of principal, and there can be no guaranteethat any investing strategy will be successful.

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