Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

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Any discussion of the tenets of long-term investing includes the recommendation for diversification. This concept is delivered almost without thought – after all, as children we are taught “Don’t put all your eggs in one basket!”. But have you ever stopped to consider just why we should diversify?

Of course, in the example of the saying about the eggs, it’s simple spreading of risk: if you have all your eggs in one basket and you drop that basket… all your eggs have broken! By spreading your eggs into a second basket, if one basket is dropped, only those eggs in that basket will break, and you’ve still got one basket of good, unbroken eggs.

What if we add a third basket? A fourth? As you might imagine, it soon becomes too clumsy to carry so many baskets (potentially one for each egg). One person couldn’t possibly manage twelve baskets effectively just to harvest a dozen eggs. So, while diversification makes sense to a degree, you always must keep in mind that it can be applied to an extreme and you lose the efficiency of the basket, plus your costs increase.

Enough about eggs for now though. Why do we preach diversification in investing? The root of this concept (at least in the modern age) come from something called “Modern Portfolio Theory”, which was developed by a fellow named Harry Markowitz. The overall theory is pretty weighty so we won’t cover it completely here (although I’d be happy to discuss it with you if you wish). The gist of the benefit of diversification follows.

Decisions about investments are always made in an environment of uncertainty. This is because, even though we have a belief that our investments will hold their value and will increase in value over time, there is no certainty that this will be the case. We can study the past performance, the present activity, and many pieces of information about the particular security – but we have no surety that the increase we hope for will occur.

This uncertainty is due to the continuous up and down volatility in investment prices. As an example, if a stock is worth $20 now and was worth $15 last week, we have no idea if it will be worth $30 tomorrow or possibly even $10. This shouldn’t be a surprise: how many times have you seen something in the news that seems like a good thing for the economy, like an interest rate cut – only to see the market drop like a stone at the release of the news? The opposite happens just as often.

So – what’s a guy to do? Enter diversification.

Diversification – Your Key to Reduce Volatility

It’s not hard to understand that every dollar you save in taxes and overall costs of investments equates to an increase in your bottom line total return. What may be difficult to follow though, is that diversification of risk can reduce volatility, and therefore reduce loss. An example may be the best way to get this point across.

Let’s say you have $1,000 in your overall portfolio, and through the year you have achieved a 20% gain. Shortly thereafter, your investment experiences a correction, amounting to a 20% loss. Most folks would think that you’ve just held ground and broke even in your account – but most folks would be wrong to think so. What happened is that your account gained 20% to a value of $1,200, and then the account lost 20% or $240 (.20 times $1,200), so in the end you have actually lost a net amount of $40. Just for grins, the result is the same if you work things in the reverse as well: a 20% loss gives you a balance of $800, and then a 20% gain ($160) gives you a final balance of $960, for a loss of the same $40.

For purposes of comparison, let’s look at another situation: a 10% gain followed by a 10% loss. From our previous example, we know that this isn’t just “holding ground” – we have lost a total of $10 in the process. We started with $1,000 and gained 10% to a value of $1,100, and then experienced a 10% loss ($110), for a final balance of $990.

What’s truly important to note about these two examples is the relationship of the volatility (the percentage size of the gains and losses) to the actual dollar loss realized. In the first case, the volatility was double that of the second (20% versus 10%), but the resulting loss was quadrupled!

If we took the first example and changed the volatility to a 40% swing in either direction, the resulting loss is even greater – a gain of 40% gives us $1,400, and the following loss of 40% ($560) brings us to a final balance of $840, for a loss of $160, which is sixteen times the loss we suffered in the 10% example. If you’re a mathematician, you’ll notice the relationship here: the level of volatility that we experience results in an exponential loss in the account. If we had a 50% gain followed by a 50% loss, our overall loss would be twenty-five times the loss in the 10% example, and so on.

It doesn’t take long to understand why it is important to keep volatility in your portfolio low: the smaller the “swings” of volatility, the lower your potential loss. When you increase the “swings” of volatility by a factor of one, your potential losses increase exponentially.

So – if I’ve done my job and explained this properly, the question on your mind at this point should be: “How do I get myself some of this low volatility?” And if you’ve been reading carefully up to this point, the answer should be obvious: diversify.

And how do we do that? Much the same as the eggsample from earlier, you want to find a place (or group of places) to invest your money that will result in less volatility. All investments are affected by various things around them – oil and gas companies are impacted by the cost of crude oil, banks are impacted by interest rates and the credit crunch, department stores are impacted by inflation, employment, and the seasons. What we look for are investment vehicles that are diverse enough to not all be impacted by the same kinds of things in the same magnitude at the same time. Therefore we diversify into different capitalization-weightings, different countries, and different sectors, all in an effort to reduce the overall risk of loss (volatility) in our portfolio.

For example – by investing in the S&P 500 index, we are diversifying across many different companies, sectors, and industries in the US marketplace. In addition to this investment, we might add a holding in the EAFE index (Europe, AustralAsia and Far East), further diversifying across different countries, companies, sectors and industries. By doing so, if something happens that makes United States Steel’s stock to lose 20% in value, the impact on our portfolio is minimized, since US Steel is only a very small portion of our portfolio. By the same token, if an event should occur that caused the stock market in Singapore to suddenly crash, and this event was limited in its exposure to just Singapore, then as before, since we’re diversified among many countries, our exposure to volatility is minimized.

I hope this explanation helps you to understand one of the very basic pillars of investing discipline. I would be remiss, though, if I didn’t point out that diversification can also have a negative impact on your gains. When you reduce the volatility in your investments, you’re not only reducing the downside swing, but the upside swing as well. What we give up is the “once in a lifetime” homerun-type of investments.

For example, if you happened to put all of your money in Google at it’s initial offering in August of 2004, by the end of that year you could have doubled your money. In the diversification example using the S&P 500, you would have had a small percentage of your portfolio in Google, and your overall return from August to December in 2004 would have been 10.8%. For an example on the other side of the coin, if you had placed your nest egg in Enron stock in late 2000, by mid 2001, you could have virtually nothing left, while the S&P 500 had fallen by a mere 17% during the same period. Reducing volatility, while it causes you to give up the spectacular gains, will also save you from the spectacular crashes. And we all know which one happens more often.

Posted on Sep 16th, 2015

by author: jblankenship.

Posted in: diversify, fiduciary, investing.
Tagged: diversification · investing

Do You Have The Will?

Sep 14th, 2015

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Photo credit: malomar

Statistics show us that approximately 70% of all Americans don’t have a valid will. Are you one of them? With that statistic, chances are that you don’t. This means that in a circle of four people, three probably don’t have a will.

This situation begs an obvious question: Do I need a will? One simple way to determine if you need a will is if you can’t truthfully answer “No” to both of the following questions:

Do you care who gets your money and property when you die?
Do you care who is appointed guardian of your minor children if you die?

If you answered “Yes” to either or both of those questions, you need a will! Otherwise, state laws will determine the outcome of those situations – and it’s not likely that you would have made the same decisions that the state would.

Why should you have a will?

A will is appropriate for anyone, not just the rich, no matter how much money or property you have. A will is your instructions for how you’d like your belongings and assets distributed at your passing. Without a will, the courts will decide to whom your property will go – without regard to your wishes. The courts, according to state law, have a specific succession path that they will follow in distributing your assets. They won’t account for the fact that you loaned some money to your first child when they purchased their home, and as such you had intended to “equal things out” with the other two kids at your passing, for example.

In addition, anyone with minor children should definitely have a will. Only you (and presumably your spouse) should be making the decisions about who will care for the children as their guardian in the event of your untimely death. No one wants to think about death as a near-term event – but it happens every day. If it should happen to you and you don’t have a will in effect, your family and loved ones will be thrown into a confusing world of decisions that they aren’t prepared to make, on top of the very difficult situation that they already have in dealing with your death.

A third reason to have a will is for tax benefits. By utilizing your will to pass along your assets that have grown in value through the years (as opposed to making gifts during your lifetime), your heirs will receive the property at a “stepped up” value as of the date of your death (in most cases). For example, let’s say you own a piece of farmland that you purchased for $100,000 many years ago. Today, the land is actually worth something like $1,500,000 due to appreciation in land values. If you were to give this land to your son as a gift during your lifetime, and the son sold the land, he would owe capital gains tax on $1,400,000 (the growth of the value of the land), which would amount to something like $210,000 at a 15% rate. On the other hand, if you bequeathed the property to your son via your will (assuming that your overall estate was worth something south of $5.45 million), then there would be no tax owed, either on the transfer of the property or when your son sells it, if he sells immediately. This is because the act of inheriting property causes a “step up” in the value of the property, and so the tax basis of the property is $1,500,000, leaving no capital gain to tax (assuming again that the son sells the property for $1,500,000).

So – how do you get started? As mentioned above, there are a few things you need to consider when setting up a will. Some of the most difficult decisions generally surround the idea of guardianship for the children. Think through this decision carefully, along with your spouse (if you have one), and then talk to the person or persons you’ve chosen to be guardians. I generally recommend that you choose a guardian for the children and a trustee to manage funds that have been set aside for the children’s care (two different people). This way you have a separation of powers, and two heads working together for the benefit of the kids. In addition, many times if there is only a guardian who has the additional duty of administering funds, the guardian may tend to over- or under-utilize the funds on the children’s behalf. Having a separate trustee to help with this process can make sure that the funds are used as you intended.

The second person that you need to name in your will is an executor. This individual will be responsible for administering your will and your estate when you pass. Depending upon the circumstances, this person may need to be very skilled in working with others (your beneficiaries) to ensure that your instructions are properly enacted.

The specific instructions that you wish to have carried out completes the picture. In some cases, especially those including children, you’ll want the will to establish one or more trusts, requiring the naming of a trustee or trustees. This will help to ensure that your funds are used as you intended. You’ll also need to think about how the rest of your assets, money, and property might be distributed.

Start by gathering the names, addressses and dates of birth for you, your spouse, your children, other beneficiaries, your proposed guardian(s), and your proposed executor(s). I used plurals for guardian(s) and executor(s) because it can be very helpful to have “backup” people named for the event your original choice predeceases you.

Next, gather together your debt information – mortgages, car loans, credit cards, student loans, and any other loans you might have. Then list your assets – property, stocks, bonds, accounts, homes, personal property, etc.. Take pains to specifically identify each item of debt and assets, so that it is very clear which item you are referring to.

Lastly, gather copies of other existing legal documents, including divorce decrees, prior wills, trusts, prenuptual agreements, and any other document that might affect the legal distribution of your assets.

When you talk to your attorney, he or she will likely have other items that you need to gather, but this should head you in the right direction. And I do advocate using a lawyer – this is much too important for a “do-it-yourself” job. When you think about the consequences of doing it incorrectly, the cost for the attorney is a pretty small sum by comparison.

So – if you happen to be “one of the other three” in the circle of four, don’t delay. There’s no sense in putting your family and beneficiaries through the hassle of probate if you can help it – and you can. If you have the will.

Posted on Sep 14th, 2015

by author: jblankenship.

Posted in: estate planning, estate tax.
Tagged: estate planning · estate tax

Are You Biased? (Hint: Yes, You Are!)

Sep 11th, 2015

by sraskie.

2 comments

There are several behavioral heuristics and biases that can lead to poor financial decisions. For brevity, we will focus on a few; mental accounting, the endowment effect, loss aversion and status quo bias. For each bias, we will provide a definition and then provide examples of how the biases can lead to poor financial decisions. Mental accounting is the way individuals code and evaluate transactions, investments and other financial outcomes.

An example is when employees with access to company stock have 50 percent of company stock in their retirement plan and the remaining money split evenly between stock and bond funds. These employees make the mistake of owning too much company stock (not enough diversification). Mental accounting puts company stock into its own “asset class.”

The endowment effect, developed by Richard Thaler is the tendency to place more value on an object once an individual owns it; especially if it’s a good not regularly traded. Poor financial decisions arise when individuals hold on to losing stocks (or mutual funds) as the endowment effect places more value on these securities than they’re worth. An individual then holds onto an asset they should otherwise sell.

This same example can also explain loss aversion. In loss aversion, losses hurt more than gains feel good – about twice as much. This was a monumental discovery made by Daniel Kahneman and Amos Tversky and their famous “S” curve. In the prior example, the individual may hang onto the losing security since it hurts much more to realize that loss. For now, his losses are only “paper losses”. He can avoid the pain of losing by not selling. This of course, can be detrimental to his portfolio. In other words, due to loss aversion, individuals take more risk to avoid losses.

Status quo bias refers to the bias in favor of remaining in the current economic state. Poor financial decisions may arise from status quo bias where it’s in an investor’s best interest to switch companies and investment portfolios (due to high commissions and expense ratios) yet the individual remains with the poorer economic choice of the more expensive portfolio. Yet they know they should move.

Another example, in retirement savings plans, there is less participation for employees that have to “opt-in” versus plans requiring them to “opt-out.” In other words, more employees are likely to go with the status quo (that is, they are likely to stay with the option requiring the least amount of effort) in retirement plans that require “opt-in” versus “opt-out.”

There are many biases that affect the finances of individuals. These are just a few. By learning about these different biases individuals can have a better understanding of why they act the way they do regarding their financial decisions and whom to seek out to receive objective advice to resist the urge to give in to biases.

Posted on Sep 11th, 2015

by author: sraskie.

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Posted in: fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning

Exception to the Divorced Spouse Remarriage Rule

Sep 9th, 2015

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Generally speaking, when a divorcee is receiving a Social Security spousal benefit based on an ex-spouse’s record, the recipient must remain unmarried in order to continue receiving the ex-spouse benefit. (For more details on this, see Coordinating Social Security Benefits in Matters of Divorce and Remarriage.) In many cases,when a divorcee remarries, the spousal benefit based on his or her ex-spouse’s record will end.

However, there is an exception to this rule that I recently became aware of. It’s in part because the circumstances surrounding this exception have recently become more common – so let’s get to the exception.

The Exception

If the person who is receiving a spousal benefit based on an ex-spouse’s record marries someone who is currently receiving widow(er)’s, mother’s, father’s, divorced spouse’s, or parents’ benefits, the spousal benefit will continue. That’s a mouthful! Let’s play out an example:

Jane is divorced from Gerald. Jane has been receiving spousal benefits based on Gerald’s record for the past couple of years. Jane is engaged to marry Sheryl. Sheryl’s husband Ed died several years ago, and she has been collecting a widow’s benefit (survivor benefit) based on Ed’s record for a couple of years now.

Since Sheryl is receiving the survivor benefit based on Ed’s record, the exception applies for Jane’s ex-spouse benefit, and Jane will be eligible to continue receiving this benefit after the marriage. If Sheryl was not currently collecting the survivor’s benefit (or one of the other excepted benefits), Jane’s ex-spouse benefit would end upon their marriage.

One important factor here is that Jane and Sheryl are both currently receiving the benefits (in Social Security parlance, they are entitled to the benefits). If Jane is not currently receiving the ex-spouse benefit when she and Sheryl get married, she would not be allowed to begin receiving the ex-spouse benefit based on Gerald’s record while she and Sheryl are married.

Likewise, if Sheryl was not receiving the survivor benefit or one of the other excepted benefits on the date of the marriage, Jane’s ex-spouse benefit would end upon their marriage.

Posted on Sep 9th, 2015

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: divorce, Social Security, Social Security spousal benefit.
Tagged: divorce · ex-spouse · Social Security · spousal benefit

Spousal IRAs for Stay at Home Parents

Sep 4th, 2015

by sraskie.

3 comments

Many parents make the decision that after their child is born one parent will stay at home to be with the child. Some of the reasons include saving on daycare expenses, and wanting at least one parent to bond and be with the child during those precious first few years of development.

Whatever the reason, the stay at home parent may leave a job and lose access to certain benefits – mainly their employer sponsored retirement savings plan. Although the stay at home parent has lost this benefit, it doesn’t mean that they have to stop saving for retirement.

One benefit the stay at home parent can take advantage of is the spousal IRA. Spousal IRAs aren’t a specifically titled IRA. In other words, the IRA needn’t be titled “Spousal IRA”. It’s simply an IRA in the stay at home parent’s name – no different than if they had an IRA and were currently working.

Generally, in order to contribute to an IRA a person needs to have earned income. This means W2 wages from employment. Since the stay at home parent is no longer working, this may seem like an insurmountable obstacle. The solution however is pretty easy.

The stay at home parent can still contribute to the Traditional IRA or Roth IRA as long as the working spouse has enough earned income for the stay at home spouse to make a contribution. For example, let’s assume that Mary is a stay at home parent and her husband Hank works a full time job earning $60,000 per year. For 2015, both Mary and Hank can make maximum IRA contributions of $5,500 to each of their IRAs (we’re assuming they’re under age 50). Hank is able to contribute off of his earnings and Mary is allowed to contribute since Hank has enough earned income and Mary takes advantage of this as his spouse.

Although Mary may have lost access to her prior company’s 401k plan, she can still save for her retirement as long as Hank has enough earned income. Finally, Hank and Mary’s contributions are limited to Hank’s earned income for the year. In other words, if Hank only had earned income of $8,000 for the year, he could put $5,500 in his IRA and only $2,500 in Mary’s IRA for a total of $8,000 – his maximum earned income for the year.

More information on IRAs and spousal IRAs can be found here. Or check out Jim’s book, An IRA Owner’s Manual.

Posted on Sep 4th, 2015

by author: sraskie.

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Posted in: IRA, iras, Roth IRA, roth ira.
Tagged: IRA · spousal IRA

Timing of Delay Credits

Sep 2nd, 2015

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When you delay filing for your Social Security benefits past Full Retirement Age (FRA – age 66 if you were born between 1943 and 1954) you earn Delay Credits for each month that you delay. The credit amount is 2/3% per month, or a total of 8% for every 12 months of delay.

When you file for benefits after delaying, these credits are applied to your PIA. The timing of the application of your credits is not immediate, though. Delay credits are added to your benefit only at the beginning of a new year, so this can cause a bit of confusion as you begin receiving benefits.

Example

For example, Janice was born on October 14, 1949, so she will turn age 66 on October 14, 2015. Janice’s PIA is $1,000. If you’ll remember from this post (When is Your Social Security Birthday), Social Security considers Janice to have reached FRA on October 1, 2015. Janice intends to delay filing for her Social Security benefits until her 68th birthday in order to accrue 16% increase to her benefits.

So upon reaching her 68th birthday, Janice contacts SSA and files for her benefit to begin in October, 2017. Beginning in October, Janice will receive a benefit that is equal to her PIA plus 10%, a total of $1,100 per month. She will receive this benefit for October, November, and December of that year.

Then beginning in January, Janice will receive an increase up to the full amount of delay credits, 16%, for a total benefit of $1,160 per month. Janice will continue to receive this benefit for the remainder of her life, unless at some point in the future she becomes eligible for a Spousal or Survivor Benefit that is greater than her own benefit.

Exceptions

There are two exceptions to the way that delay credits are applied: upon reaching age 70 or at your death. If you start your benefits at age 70, no matter what month of the year it is your full delay credits are applied to your benefit on the first month. Likewise, upon your death all delay credits are applied to your survivor’s available benefit no matter what month the survivor begins to receive the benefit.

Posted on Sep 2nd, 2015

by author: jblankenship.

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Posted in: Delayed Retirement Credit, DRC, Social Security.
Tagged: delayed retirement credit · DRC · Social Security

Vacation Home Rentals and Your Income Taxes

Aug 31st, 2015

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You may have a vacation home that you only spend a small amount of time at each year, and the rest of the time you rent the home out to other folks who wish to vacation in your little slice of heaven. The rents that you receive is considered taxable income, to the extent that it exceeds the applicable expenses. Plus, if the vacation home is partly used for your own purposes, the expenses (allocated to the time the property is rented) cannot exceed the amount of rent income from the property (you can’t claim a loss). here are some tips on collecting rent on time.

Recently the IRS issued their Summertime Tax Tip 2015-03 which details some tips you should know about Vacation Home Rentals for your tax reporting purposes.

IRS Tips about Vacation Home Rentals

If you rent a home to others, you usually must report the rental income on your tax return. However, you may not have to report the rent you get if the rental period is short and you also use the property as your home. In most cases, you can deduct your rental expenses. When you also use the rental as your home, your deduction may be limited. Here are some basic tax tips that you should know if you rent out a vacation home:

Vacation Home. A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.
Schedule E. You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
Used as a Home. If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
Divide Expenses. If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.
Personal Use. Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
Schedule A. Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
Rented Less than 15 Days. If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income. In this case you deduct your qualified expenses on schedule A.
Use IRS Free File. If you still need to file your 2014 tax return, you can use IRS Free File to make filing easier. Free File is available untilOct. 15. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.

You can get forms and publications on IRS.gov/forms at any time.

Additional IRS Resources:

Tax Topic 415 – Renting Residential and Vacation Property
Rental Income and Expenses – Real Estate Tax Tips

Posted on Aug 31st, 2015

by author: jblankenship.

Posted in: income tax, itemized deduction.

Advice to the Masses May Not Apply to Individuals

Aug 28th, 2015

by sraskie.

1 comment

Last week on my ride home from a meeting I had the opportunity to tune into a nationally syndicated talk show regarding personal finance. The host is very popular among listeners and has written several best sellers. Many churches and schools follow the financial program designed to educate individuals on how to set a budget, get out of debt and save for retirement. Generally, the advice given is applicable to many individuals.

Sometimes it’s not.

A listener called into the show and explained that she had approximately $100,000 in an annuity in an IRA. The annuity paid an interest rate of 2% and had a current surrender charge of 4% – just over $4,000. The caller was asking the host whether or not she should surrender the annuity and roll it over to a non-annuity IRA invested in mutual funds.

In a matter of seconds the recommendation was to surrender the annuity, pay the surrender charges of over $4,000 and find one of the host’s endorsed providers and find a mutual fund that pays 6%. The reasoning was that if the annuity was paying 2% and the surrender charge was 4%, the caller would need to find a fund that makes 6% to “break even.”

There are a few things not necessarily ideal in this situation. First, why wouldn’t the advice be to wait out the surrender period and still receive 2% interest? This was a guaranteed 2% rate! Second, why pay 4% in surrender charges to move from a guaranteed rate to a vehicle (mutual fund) that is not guaranteed? Admittedly, if the caller was looking for a higher potential rate of return, moving to a riskier investment makes sense. However, the host could have advised the caller to wait until the surrender period was over to make the move.

Finally, the caller doesn’t realize that moving their money to one of the endorsed providers ensures they’ll get a commissioned salesperson offering them front-loaded mutual funds. For many popular mutual fund companies a common break point (the point at which front end loads are reduced) for $100,000 in assets is 3.5%. This means that when the investor moves out of her annuity, they’re losing the 2% guarantee, 4% in surrender charges and another 3.5% in front end loads (commissions).

In other words, the investor would need to find a fund that would make them 9.5% in the first year just to break even. The advice on finding a mutual fund that pays 6% was not only inaccurate (mutual funds don’t have guaranteed rates) but the advice on only needing 6% to break even was erroneous!

I do agree that the annuity should be rolled over to a non-annuity IRA. Generally, an IRA annuity is overkill. You have a tax-deferred vehicle (the IRA) in a tax-deferred wrapper (the annuity)*. However, perhaps the advice would have been better if the host would have told the client to wait until the surrender charges were done (about a year or two) and then roll it over. On the host’s recommendation she’ll be out approximately $9,400 (9.5% based off of 6% lost in total from surrendering the annuity, and another 3.5% on the approximately $96,000 rolled over to the endorsed provider) and will need to make that in 1 year just to get into the black.

Generally, the advice on the host’s radio show is good for individuals needing to get out from under credit card debt or get control of their personal finances. However, this particular situation identifies an area of concern for listeners who otherwise wouldn’t know the true cost of the advice they’re receiving.

*Special thank you to David Hultstrom at Financial Architects for this terminology.

Posted on Aug 28th, 2015

by author: sraskie.

Posted in: annuity, fee-only, fiduciary, financial planning, IRA, rollover.
Tagged: fiduciary · financial planning · IRA · rollover

Traveling for Charitable Purposes

Aug 26th, 2015

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Sometimes charitable work involves travel – such as for the Red Cross, for example. Did you know that your travel expenses for charitable work can be a tax deduction? Recently the IRS sent out a Summertime Tax Tip (2015-12) that outlines some valuable information about this deduction.

Tips on Travel While Giving Your Services to Charity

Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are several tax tips that you should know if you travel while giving your services to charity:

Qualified Charities. In order to deduct your costs, your volunteer work must be for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are qualified, and do not need to apply to the IRS. Ask the group about its IRS status before you donate. You can also use the Select Check tool on IRS.gov to check the group’s status.
Out-of-Pocket Expenses. You may be able to deduct some costs you pay to give your services. This can include the cost of travel. The costs must be necessary while you are away from home giving your services for a qualified charity. All costs must be:
- Unreimbursed,
- Directly connected with the services,
- Expenses you had only because of the services you gave, and
- Not personal, living or family expenses.
Genuine and Substantial Duty. Your charity work has to be real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
Value of Time or Service. You can’t deduct the value of your services that you give to charity. This includes income lost while you work as an unpaid volunteer for a qualified charity.
Deductible travel. The types of expenses that you may be able to deduct include:
- Air, rail and bus transportation,
- Car expenses,
- Lodging costs,
- The cost of meals, and
- Taxi or other transportation costs between the airport or station and your hotel.
Nondeductible Travel. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or a vacation.

For more on these rules, see Publication 526, Charitable Contributions. You can get it on IRS.gov/forms at any time.

IRS YouTube Videos:

Charitable Contributions – English | Spanish | ASL
Exempt Organizations Select Check – English | Spanish | ASL

IRS Podcasts:

Exempt Organizations Select Check – English | Spanish

Posted on Aug 26th, 2015

by author: jblankenship.

Posted in: charitable contribution, deductions, income tax, irs.
Tagged: charitable deduction · irs · tax deduction

Personality Influences Financial Decisions

Aug 24th, 2015

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Photo credit: jb

The recent volatility in the stock market has everyone a bit uneasy – even folks who have worked with a trusted financial adviser for years. But if you’ve never worked with an adviser before, you may be surprised to find that one of the first things he or she will do is ask you to fill out a risk analysis questionnaire. This questionnaire is designed to help you understand your financial decisions and the process of making decisions. It’s all tied to your personality, your own unique world-view.

Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – that should be understood at the outset. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will help shape every decision you make about money now and in the future.

The most important thing a risk analysis questionnaire can tell is what’s important about money to you. Trained financial advisers can determine your money personality through a process of questioning discovery. Planners can then guide investors within their money personality. Do you want certainty? Are you willing to take a little risk or let it roll because long-term results are more important than short-term volatility? Or will you take more risks with your money because you can always make more of it?

A financial planner tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:

What’s important about money to me?
What do I do with my money? What do I plan to do with my savings?
If money was absolutely not an issue, what would I do with my life?
Has the way I’ve made my money – through work, marriage, windfall – affected the way I think about money in a particular way?
How much debt do I have, what kinds of debt, and how do I feel about it?
Am I more concerned about maintaining the value of my initial investment or making a profit from it?
Am I willing to give up that stability for the chance at long-term growth?
What am I most likely to enjoy spending money on?
How would I feel if the value of my investment dropped minimally for several months? How about significantly over several months? What is a significant drop in value to me?
How would I feel if the value of my investment dropped minimally or stayed constant (no growth) for several years?
If I had to list three things I really wanted to do with my money, what would they be?
What does retirement mean to me? Does it mean quitting work entirely and doing whatever I want to do or working in a new career full- or part-time? Or would I take on volunteer work in retirement?
Do I want kids? Do I understand the financial commitment?
If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to help with paying for their college education?
How’s my health and my health insurance coverage?
What kind of physical and financial shape are my parents in? Are they enjoying retirement, and what does retirement look like for them?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting plan – from investments to insurance, savings to estate plans – should feel like a perfect fit for you.

Posted on Aug 24th, 2015

by author: jblankenship.

Posted in: fiduciary, financial planning, investing.
Tagged: fiduciary · financial planning · investing

A New-Hire Checklist

Aug 21st, 2015

by sraskie.

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Starting a new job can be very overwhelming. Often, new-hires go through a barrage of training, information overload and multiple booklets covering procedures, processes and application. Somewhere in that mix is the benefit package. Here is where the new employee can sign up for important health insurance coverage, retirement savings plans, and other benefits such as life insurance and disability. In the stress and whirlwind of the on-boarding process, sometimes benefits can get pushed to the side, and then after time, forgotten about.

Here’s a checklist of what a new employee can do to make sure they sign up for these precious benefits and some information on how to move forward.

Select the appropriate health coverage. Some employers have one carrier that provides coverage with different options from that carrier. Options may include HMO, PPO or HSA plans. The premiums the employee pays will depend on the deductibles in the respective plans and the different benefits offered. More information can be found here.

Sign up for group life insurance. Generally, this is going to be the cheapest life insurance the employee can get. There’s often little underwriting involved and employees can get anywhere from 1-5 times (sometimes more) of their annual salary in coverage. Some plans allow for spouse and child coverage as well. This coverage should be in addition to the personal policy. The reason being is the coverage may be forfeited if the employee loses their job or changes employers.

Start saving into the retirement plan. Whether a 401(k), 403(b), or other plan such as a SIMPLE or 457 employees should start to defer (save) into these plans as soon as they are eligible. Some employers will match an employee’s contributions up to a certain amount. This is free money – never leave it on the table. Additionally, employees should consider saving a percent of their income versus a fixed dollar amount. As the employee receives raises, so too does their contribution increase. This isn’t the case with a fix dollar amount.

Sign up for short and long-term disability. This covers an employee’s income (up to a certain percentage) if they become disabled and cannot work for a short or long duration. Premiums are very affordable since it is group coverage and the definition of disability is generally much more favorable than that of Social Security (any occupation).

Consider other benefits. These other benefits could be discounts on health club memberships, flexible spending accounts, employee discounts, etc. Flexible spending accounts (FSAs) allow an employee to use pre-tax dollars to fund an account that may be used to help pay for certain expenses. More information on FSAs can be found here.

These are just a few things to consider when becoming a new employee. As always, questions can be directed to the employee’s HR department or a competent financial professional.

Posted on Aug 21st, 2015

by author: sraskie.

Posted in: benefit, disability benefits, employer plan, fee-only, fiduciary, health insurance, health plans, health savings account, life insurance.
Tagged: financial planning · qualified retirement plan

Everything But The Retirement Plan!

Aug 17th, 2015

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Photo credit: malomar

Conventional wisdom says that when you leave a job, whether you’ve been “downsized” or you’ve just decided to take the leap, you should always move your retirement plan to a self-directed IRA. (Note: when referring to retirement plans in this article, this could be a 401(k) plan, a 403(b), a 457, or any other qualified savings deferral-type plan).

But there are a few instances when it makes sense to leave the money in the former employer’s plan. You have several options of what to do with the money in your former employer’s plan, such as leaving it, rolling it over into a new employer’s plan, rolling it over to an IRA, or just taking the cash.

The last option is usually the worst. If you’re under age 55 you’ll automatically lose 10% via penalty from the IRS (unless you meet one of the exceptions, including first home purchase, healthcare costs, and a few others), plus you’re taxed on the funds as if it were ordinary income. For the highest bracket, this can amount to losing nearly 50% or more of the account balance to taxes and penalties.

In addition, by cashing out you’re derailing the retirement fund that you’ve put so much effort into setting aside. If you cash it out, you’ve got to start over from scratch and you’ve got less time to build the account back up. A 2005 change in the tax law requires your old employer to automatically roll over your account into an IRA if it is between $1,000 and $5,000 (if you don’t choose another option), to keep folks from cashing out. If your account balance is more than $5,000, the old employer is required to maintain your account in the old plan until you choose what you’re going to do with it.

Another option has become available for your old account: you can roll these funds over into a new employer’s retirement plan, as long as the new plan allows it. In many cases this may make good sense, especially if the new plan has good investment choices and is cost-effective.

If the new plan doesn’t suit you or you’d like more control over your investment choices, you can always roll the funds from your old employer’s plan into an IRA. You’ll then be able to decide just how you want to allocate the investments, choosing from the entire universe of available investment options, rather than the limited list that many plans have available. Caution is necessary when doing this type of rollover, as a misstep could cause the IRS to treat your attempted rollover as a complete distribution, having the same tax effect as cashing out. Always choose a direct transfer to the IRA (rather than a 60-day rollover) and seek the help of a professional if you are unsure about how to deal with this situation.

But when would you leave the funds at the old employer? If the old employer’s plan is a well-managed, low-cost plan, and you’re happy with how your investments have done, then you might just want to leave it where it is. In addition, if you happen to be over age 55, you have the option available to access the funds immediately without penalty, rather than waiting until age 59 1/2 – but only if you leave the funds in the original employer’s plan. Plus, if your plan is a 457 plan (generally only available to governmental employees, such as with a state or local government), you may be able to tap the plan upon your ending employment without penalty as well.

Another good reason to leave the fund at the old employer is if you believe that there is a high probability that you may return to employment with this same employer. Especially in the case of working for a governmental unit, it probably makes sense to leave those funds in the old plan when you think there is a better than average possibility that you may return to work with the government (even another agency). This is because there are benefits available in some governmental plans that you would be giving up if you moved your account to an IRA, and you’re not likely to be able to move those funds back when you return.

So – hopefully this quick conversation has helped to clear up some questions, and perhaps it has brought up some new questions for you.

Posted on Aug 17th, 2015

by author: jblankenship.

Posted in: 401k, 403 b, 457, investing, IRA, retirement plan.
Tagged: 401k · 403b · 457 · IRA · retirement plan

Social Security Trustees Report – 2015

Aug 14th, 2015

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Every year, the Trustees of the Social Security and Medicare trust funds release reports to Congress on the current financial condition and projected financial outlook of these programs. The 2015 reports, released on July 22, 2015, show that, despite some encouraging signs, both programs continue to face financial challenges that should be addressed as soon as possible, with the Disability Insurance Trust Fund needing the most urgent attention.

What are the Social Security trust funds?

The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security trust funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.

(Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) trust funds. However, these projections are theoretical, because the trusts are separate, and one program’s taxes and reserves cannot be used to fund the other program.)

Trustees report highlights: Social Security

The combined trust fund reserves (OASDI) are still increasing and will continue to do so through 2019 (asset reserves increased by $25 billion in 2014, with year-end reserves totaling $2.8 trillion). Not until 2020, when annual program costs are projected to exceed total income, will the U.S. Treasury need to start withdrawing from reserves to help pay benefits. Absent congressional action, the combined trust fund reserves will be depleted in 2034, one year later than projected in last year’s report.
Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 79% of scheduled benefits in 2034, with the percentage falling gradually to 73% by 2089. This means that 20 years from now, if no changes are made, beneficiaries could receive a benefit that is about 21% less than expected.
The OASI Trust Fund, when considered separately, is projected to be depleted in 2035 (one year later than projected in last year’s report). At that time, payroll tax revenue alone would be sufficient to pay 77% of scheduled OASI benefits.
The DI Trust Fund is in worse shape and will be depleted in late 2016 (the same as projected last year). The Trustees noted that the DI Trust Fund “now faces an urgent threat of reserve depletion, requiring prompt corrective action by lawmakers if sudden reductions or interruptions in benefit payments are to be avoided.” Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay just 81% of scheduled benefits.
Based on the “intermediate” assumptions in this year’s Trustees report, the Social Security Administration is projecting that there will be no cost-of-living adjustment (COLA) for calendar year 2016.

What are the Medicare trust funds?

There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).

Trustees report highlights: Medicare

Annual costs for the Medicare program have exceeded tax income annually since 2008, and will continue to do so this year and next, before turning positive for four years (2017-2020) and then turning negative again in 2021.
The HI Trust Fund is projected to be depleted in 2030 (unchanged from last year, but with an improved long-term outlook from last year’s report). Once the HI Trust Fund is depleted, tax and premium income would still cover 86% of program costs under current law. The Centers for Medicare & Medicaid Services (CMS) has noted that, under this year’s projection, the HI Trust Fund will remain solvent 13 years longer than the Trustees predicted in 2009, before passage of the Affordable Care Act.
Due to increasing costs, a Part B premium increase is likely in 2016. However, about 70% of Medicare beneficiaries will escape the increase because of a so-called “hold harmless” provision in the law that prohibits a premium increase for certain beneficiaries if there is no corresponding cost-of-living increase in Social Security benefits. If there is no COLA for 2016, the increased costs may be passed along only to the remaining 30% not eligible for this hold-harmless provision–generally, new enrollees, wealthier beneficiaries, and those who choose not to have their premiums deducted from their Social Security benefit. If so, these individuals could see the base premium rise to $159.30 in 2016, up sharply from $104.90 in 2015.

Why are Social Security and Medicare facing financial challenges?

Social Security and Medicare accounted for 42% of federal program expenditures in fiscal year 2014. These programs are funded primarily through the collection of payroll taxes. Partly because of demographics and partly because of economic factors, fewer workers are paying into Social Security and Medicare than in the past, resulting in decreasing income from the payroll tax. The strain on the trust funds is also worsening as large numbers of baby boomers reach retirement age, Americans live longer, and health-care costs rise.

What is being done to address these challenges?

Both reports urge Congress to address the financial challenges facing these programs in the near future, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. As the Social Security Board of Trustees report states, “Social Security’s and Medicare’s projected long-range costs are not sustainable with currently scheduled financing and will require legislative action to avoid disruptive consequences for beneficiaries and taxpayers.”

Some long-term Social Security reform proposals on the table are:

Raising the current Social Security payroll tax rate (according to this year’s report, an immediate and permanent payroll tax increase of 2.62 percentage points would be necessary to address the revenue shortfall)
Raising the ceiling on wages currently subject to Social Security payroll taxes ($118,500 in 2015)
Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later)
Reducing future benefits, especially for wealthier beneficiaries
Changing the benefit formula that is used to calculate benefits
Changing how the annual cost-of-living adjustment for benefits is calculated

Regardless of the long-term solutions, Congress needs to act quickly to address the DI program’s imminent reserve depletion. According to this year’s report, in the short term, lawmakers may reallocate the payroll tax rate between OASI and DI (as they did in 1994). However, this may only serve to delay DI and OASI reforms.

You can view a combined summary of the 2015 Social Security and Medicare Trustees reports at www.socialsecurity.gov/OACT/TRSUM/. You can also access a full copy of the Social Security report from that page. You can find the full Medicare report at www.cms.gov.

Posted on Aug 14th, 2015

by author: jblankenship.

Posted in: #noTOP, 2015 tax year, Medicare, Social Security, social security administration.
Tagged: medicare · Social Security

Selling your home? Here’s the income tax facts

Aug 11th, 2015

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Summer is a time when many folks choose to move to a new home. It makes a lot of sense, especially if you have children in school – this way if the move is to a new school district, the children will not have to switch schools during the academic year.

Selling your home can have consequences for your income taxes. Recently the IRS issued their Summertime Tax Tip 2015-13, which details ten key tax facts about home sales. The text of the Tip is below:

Ten Key Tax Facts about Home Sales

In most cases, gains from sales are taxable. But did you know that if you sell your home, you may not have to pay taxes? Here are ten facts to keep in mind if you sell your home this year.

Exclusion of Gain. You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.
Exceptions May Apply. There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication 523, Selling Your Home.
Exclusion Limit. The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
May Not Need to Report Sale. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
When You Must Report the Sale. You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale, you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.
Exclusion Frequency Limit. Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
Only a Main Home Qualifies. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
First-time Homebuyer Credit. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.
Home Sold at a Loss. If you sell your main home at a loss, you can’t deduct the loss on your tax return.
Report Your Address Change. After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. You can find the address to send it to in the form’s instructions on page two. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.

Posted on Aug 11th, 2015

by author: jblankenship.

Posted in: income tax, real estate investment.

401(k) Mistakes (also applies to other Retirement Plans!)

Aug 5th, 2015

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Photo credit: nan

These days you’re pretty much on your own when it comes to planning for your retirement. Granted, many state and local governments have a pension plan, but beyond that, precious few employers provide a pension these days. Typically retirement benefits only include a 401(k) or other deferred retirement plan, which means it’s up to you! For the purpose of brevity, I’ll refer to 401(k) plans throughout this article; please understand that most of the information applies to 403(b) plans, 401(a) plans, and 457 plans as well as Keogh, SIMPLE, and SEP IRA plans.

For most of us, the 401(k) is the default account that must take on the role that the pension plan did for previous generations. Paying attention to and avoiding the following mistakes can help you to ensure that you have a financially-secure future.

#1 – Choosing Not to Participate
It’s amazing how many folks, young or old, don’t participate in their company’s 401(k) plan. If your employer matches your contributions, you’re effectively giving money away. You wouldn’t do that with a raise or a tax cut, would you? And even if your employer doesn’t match your contributions, the tax savings should be enough to spark your interest… If you’re not presently participating in your company-offered 401(k) plan, bear in mind that time is your greatest ally when it comes to building up your savings. Starting early and making regular contributions to your account will have an enormous impact on the results when you’re ready to begin using these funds in retirement.

For example, if you only put $1,000 into your account at age 25, with a compound rate of return of 6%, by age 65 your account would be worth over $10,000. By the same token, if you’d waited until age 30 to make that $1,000 deposit, by age 65 it would only have grown to $7,600. That’s roughly a 30% difference only because you delayed for 5 years!

If you put $1,000 aside each year beginning at age 25, at the example 6% return when you reach age 65 this would have grown to $154,000+. And if you delay 5 years, the result is $111,000, a difference of $43,000 for your extra $5,000 of deposits.

#2 Not Having a Plan
Blindly allocating your investments can have significant consequences as well. I have reviewed retirement plans where the participant believed that they were doing the right thing by “diversifying” across every fund choice in their plan. This results in diversification all right, but doesn’t take into account the time horizon for the investment, your own risk tolerance, and other factors. And most importantly, the diversification is not necessarily among different types of assets, only among different funds in most cases.

An acquaintance, age 26, had a conservative portfolio of investments in his account – amounting to more than 80% in bonds and fixed instruments. At that age, even the most conservative of investment plans should have you above a 50% ratio in equities, in order to take advantage of long-term stock market returns. Granted, stocks are more volatile than bonds and fixed income investments, but with a longer time horizon, bonds and fixed income investments can barely keep up with inflation, let alone provide any measure of growth. In addition, the longer time horizon provides the time to ride out any “bumps” in the market that may take place.

It makes good sense to analyze your potential investment choices, consider your time horizon, your risk tolerance, and ultimately your investment “mix”, in order to create a plan for your investments that will carry you toward that holy grail of investment success – a fruitful retirement.

#3 Set It and Forget It
While we shouldn’t obsess over every single market move every single day, we also shouldn’t make our investment and contribution decisions once and then leave them for 20, 30 or 40 years. Over time, your various investments are going to grow at different rates, eventually causing one or more of your holdings to become overweighted (with regard to your planned “mix”).

I generally recommend reviewing your quarterly statements just to see how things are going in your account, and choose one of the quarters to make rebalancing moves annually as needed. These rebalancing moves don’t need to be done until one or more of your investments gets to a 5% or more variance from your plan.

#4 Taking Out a Loan
This falls into the category of things you *can* do but shouldn’t. Kinda like jumping off a cliff. What happens here is that your contribution program goes on hold as you pay back the loan, and if you don’t pay it back, you’ll owe tax and penalties. In addition, you’re paying back your tax-deferred fund with after-tax dollars, which will eventually be taxed again when you withdraw the funds at retirement. In only the most extreme of circumstances should you consider this kind of loan – honestly, you’ll regret it if you do it in most cases.

Posted on Aug 5th, 2015

by author: jblankenship.

Posted in: investing, IRA, retirement accounts, retirement savings.
Tagged: investing · IRA · retirement saving

Strategies of Successful Investors

Aug 3rd, 2015

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Photo credit: jb

For a golfer looking to improve his game, it can be useful to study the top golfers’ strategies and methods. Investors can, in much the same way, learn from the “money masters”, the top group of the most successful investors. You might not have their resources or years of experience, but understanding their philosophies can help you in your own approach to investing.

Think Like an Owner, Not Like a Trader
This philosophy is as commonsense as the investor who is so famous for following it: Warren Buffett. Any list of the most successful investors of all time has to include the chairman of Berkshire Hathaway, and he’s typically at the top of the list. The Oracle of Omaha is well-known for his down-to-earth approach to sizing up investment opportunities.

Buffett invests in businesses however (not stocks), and prefers those with consistent earning power and little or no debt. He also looks at whether a company has an outstanding management team. Buffett attaches little importance to the market’s day-to-day fluctuations; he has been quoted as saying that he wouldn’t care if the market shut down completely for several years. However, he does pay attention to what he pays for a business; as a value investor, he may watch a company for years before deciding to buy. And when he buys, he makes a big play and plans to hang on to his investment for a long time.

Don’t Forget That Markets Can Be Irrational
George Soros feels that markets can be irrational. However, rather than dismissing the ups and downs, the founder of the legendary Quantum Fund made his reputation by exploiting macroeconomic movements. He once made more than $1 billion overnight when his hedge fund speculated on the devaluation of the British pound.

Soros believes in capitalizing on investing bubbles that occur when investors feed off one another’s emotions. He is known for making big bets on global investments, attempting to profit from both upward and downward market movements. Such a strategy can be tricky for an individual investor to follow. However, even a buy-and-hold investor should remember that market events may have as much to do with investor psychology as with fundamentals, and use that information to your advantage. You probably wouldn’t apply Soros’s philosophy in the same way he does, but nonetheless it can be a valuable lesson to remember.

Use What You know; Know What You Buy
During his 13-year tenure at Fidelity Investments’ Magellan Fund, Peter Lynch was one of the most successful mutual fund portfolio managers in history. He subsequently wrote two best-selling books for individual investors.

If you want to follow Lynch’s approach, stay on the alert for investing ideas drawn from your own experiences. His books contend that because of your job, your acquaintances, your shopping habits, your hobbies, or your geographic location, you may be able to spot up-and-coming companies before they attract attention from Wall Street. However, simply identifying a company you feel has great potential is only the first step. Lynch did thorough research into a company’s fundamentals and market to decide whether it was just a good idea or a good investment.

Lynch is a believer in finding unknown companies with the potential to become what he called “ten baggers” (companies that grow to 10 times their original price), preferably businesses that are fairly easy to understand.

Make Sure the Reward is Worth the Risk
Perhaps the best-known bond fund manager in history, the co-founder of PIMCO Bill Gross makes sure that if he takes greater risk – for example, by buying longer-term or emerging-market bounds – the return he expects is high enough to justify that additional risk. If it isn’t, he says, stick with lower returns from a more reliable investment. Because bonds have historically returned less than stocks and therefore suffer more from high inflation, he also focuses on maximizing real return (an investment’s return after inflation is taken into account).

Choose a Sound Strategy and Stick To It
Even though all these investors seem to have different approaches, in practice they’re more similar than they might appear. Each of their investing decisions has specific, well-thought-out reasons behind it. They rely on their own strategic thinking rather than blindly following market trends. And they understand their chosen investing disciplines well enough to apply them through good times and bad.

Work with your financial planner to determine a strategy that matches your financial goals, time horizon, and investing style.

Posted on Aug 3rd, 2015

by author: jblankenship.

Posted in: investing.

Book Review: The Opposite of Spoiled

Jul 31st, 2015

by sraskie.

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Last week I had the opportunity to read Ron Lieber’s book, The Opposite of Spoiled. The book centers on raising kids that are well-rounded and responsible when it comes to money.

As a father of two kids myself (and supposedly a financial planner), the book offered many insights to me as a father and as a planner. After all, even I have questions about how to get my kids to think about the way money works and the family finances.

Mr. Lieber’s book does an excellent job of how to answer the money questions kids ask. Naturally, kids see the world through different lenses and it’s in their nature to ask question. Such questions about money Mr. Lieber covers range from the “Are we rich?” to handling what kids see their friends have that they do not.

Taken right from the cover is Mr. Lieber’s take on how to teach kids to allocate their money. On the cover can be seen three clear jars. One is labeled Give, another Save, and the last, Spend. The book teaches how to allocate these amounts and to which jars. The wisdom from this idea alone is arguably one many adults can use as well.

Although geared mainly toward parents it’s also a book that I would recommend to grandparents. One of the main reasons why is to help grandparents understand the lessons their children are trying to teach the grandkids. This especially hits home when Mr. Lieber talks about how grandparents can overindulge their grandkids on birthdays and holidays which may contradict and impede the lessons parents are trying to convey. Granted, this can be a touchy issue. But it’s one the book may help parents and grandparents who deal with this matter on special occasions.

The Opposite of Spoiled is a fun, enjoyable book that will be read again as my kids continue to grow. The book’s guidance for parents is a wonderful asset to help us with teaching and encouraging our kids to think and talk about finances openly; rather than ignoring their curiosity or worse, raising kids who are afraid of money.

Posted on Jul 31st, 2015

by author: sraskie.