Unexpected Loss

Behavioral Finance defines several investor biases that tend to inhibit financial success.  The recent news of JP Morgan’s $2 billion loss demonstrates the danger that an overconfidence bias can be to your portfolio.  Overconfidence bias is fairly self explanatory, but usually occurs when people believe they are smarter than others.  Through the financial crisis, JP Morgan CEO Jamie Dimon was praised for keeping the company profitable.  This may have led to overconfidence in both the CEO and JP Morgan employees, who overestimated their ability to hedge risks in derivatives trading.  Dimon admitted to reporters, a “flawed, complex, poorly reviewed, poorly executed and poorly monitored” trading strategy.

The firm’s recent fall from grace illustrates how an overconfidence bias can negatively impact your portfolio.  Making one or two great stock picks may lead an investor to think they have an edge and resist adherence to a proper allocation or diversification strategy.  However, as history indicates, no one approach to investing produces superior returns year after year.  Hot performance tends to shift from industries, countries, sectors and market caps; highlighting the need for a diversified long term approach.  This also brings to mind the tired statement on the bottom of all of your account statements…”past performance is not a guarantee future results.”

Stay tuned for more investor biases and the hazards they can have to your wealth…

Photo Credit: DragonFlyEye

US politics are still a significant risk, as some politicians may recreate the debt default threat like in 2011, or allow very contractionary tax hikes and spending cuts to take effect at the start of 2013. Both parties have good reasons to compromise, but that doesn’t mean they are certain to.

Neither of these wildcards changes our longer term outlook for the US economy, which we believe will improve once residential construction is again building at a sufficient pace to keep up with population growth as we discussed in last year’s post here .  We are in fact seeing what could be the beginning of a return to those levels as discussed here.

Car sales and production continue to do well as we expected from last year’s post here.  US auto makers are running their plants at a very high level as discussed in this story.

We should also be approaching the point at which local and state governments’ tax revenues are stabilizing and starting to improve, which should lead to the end of large scale government layoffs which have added quite a bit to the unemployment rolls over the last couple of years.  If they merely stop cutting jobs, it will actually be a boost to GDP growth.

These themes are why we remain optimistic about the five year outlook for the US economy.  The wildcards may create a recession and stock market sell off in the short term, so we have gotten a little more defensive, but we are also mindful that the longer term outlook is good so if we do get a sell off, we will use that opportunity to buy stocks with funds from sales we made earlier this year.

Keep an eye out, as we’ll be posting more detailed analysis soon on the two wildcard themes, Europe and US Politics.

Putting their internal financial management aside, let’s think about a few of the reasons our Postal Service is in this mess:

• Technological advances make sending and receiving information easier, cheaper and faster.
• Increased environmental awareness has influenced businesses and consumers to change to electronic delivery.
• ‘Opt-Out’ regulations have allowed consumers the ability to stop unsolicited marketing from credit card companies.
• Businesses give customers incentives for going ‘paperless’- lower monthly fees, reduced interest rates, and in some cases, discounts on their goods and services.
• With much of the USPS former services going towards handling promotional materials and consumer bills, multimedia has taken over as a more cost effective alternative of sending information.

While USPS may change their structure of ownership and management in the future, say becoming more of what the other big shipping companies are today, the concept of ‘snail mail’ will most likely never go away, with the help of the following:

• ‘Original documents’ for items like real estate transactions and financial paperwork often require original signatures, seals or raised stamps.
• Greeting cards, personal letters and small gifts are still sent happily through regular mail (though not as often as they used to)… and we still enjoy receiving them.
• People often prefer reading a magazine, newsletter or catalog while holding it, rather than viewing it on a screen.
• There is a generation of people that do not have nor want electronic delivery.

Legislation, internal practice improvements and raising postal costs may be necessary to give the USPS a re-boot, but it is the people the USPS serves that can start the rebuilding process now.

So go ahead and send a handwritten note to someone. I bet you will make both a postal worker’s and a friend’s day.

Photo credit to imurf.

Families also face an emotional decision as best intentions often run head first into the realities of paying for four years of college.  We all want what’s best for our kids and paying for their college education is certainly best for them, right?…  Maybe not.

According to a new study, Affording Emerging Adulthood: Parental Financial Assistance of their College-Aged Children, having your children help pay for their own college education can reap benefits beyond those of being debt free upon graduation.

The structure of having a job, for instance, can help to limit distractions that too much free time so often brings.  The kids who were fully funded by their parents, including discretionary spending, were more likely to be heavier drinkers and drug users.

There is, however, an implication that a balance should be sought, as too much of the burden transferred to the child can often lead to extending the amount of time it takes to complete a degree or even dropping out of school altogether.

A suggestion that comes to mind is to remain flexible.  There are a variety of paths to a four year degree, including starting in a community college.  Also, options for funding through loans are available that can help families spread resources over longer periods of time.

Sending your kids to college can be intimidating for everyone in the family, and preparing financially is only one aspect to consider.  Allowing them some ownership in the process can help them add some critical tools for when they are on campus by themselves.

Here are some more of our thoughts on college education:

• Bang for your College Buck
• College Planning in an Uncertain World

Photo credit: James Almond

How well do you know your target?

A few years ago I wrote about the rise of target date funds in retirement plans.  At the time, the Senate Special Committee on Aging was proposing legislation that would require target date fund managers to take on fiduciary responsibility.  The evaluation of target date funds continues and a recent SEC investor survey found that the funds are frequently misunderstood by investors.

While the move toward making long term investing easier is positive, we also tend to recommend against a “one size fits all” approach.  We have also found that the use of target date funds can leave investors with a false sense of security.  While the intention is to reduce risk as the target date approaches, this does not necessarily mean that the fund will be risk free at the end of the period.  There will likely still be some stock exposure and risk even past the target date.  All target date funds are not created equal and the amount of stock exposure from one 2030 fund to another can vary significantly.  The costs may also be higher than investing directly in the underlying funds.  Due diligence is still required and further regulation and standards for these funds are necessary.  While a “set it and forget” strategy may be appropriate for some investors, we have found a customized approach to be more successful over the long term.

Photo Credit: HikingArtist.com

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Whether you’ve watched him on Headline News, listened to his radio program or read one of his books, Clark Howard has established a loyal following.  He is a national financial voice who’s known for helping consumers “save more, spend less and avoid getting ripped off.”  Clark has long been a supporter of independent advisors for individual investors.  More specifically Clark endorses NAPFA, the National Association of Personal Financial Advisors, as a resource for people to find quality fee-only planners.

Clark ‘s shows are generally full of sound and easy to implement tips which educate consumers on finding great deals. Like most financial celebrities, the nature of Clark’s advice is designed for the masses which can be effective for most, but not all.  While he does a great job of teaching listeners about the qualities of different investment accounts, we don’t agree with much of his advice on investment strategies.

Active vs. Passive

A few of his overarching recommendations encourage investors to use index funds and target-date funds in their portfolios.  He claims that by using other (active) mutual funds you “almost always will make less money over long periods of time.” While passive investing is a valid strategy for some, we believe we can achieve better performance by using a more active approach.  This is why we offer our actual composite results to new clients which demonstrate how our strategy has outperformed over time.  It is true that not everyone can be above average when investing, but that doesn’t mean that no one can.

Target-date funds align portfolios on the set it and forget it strategy which can add extra risk when stocks make big moves.  Using a continuous strategy instead, allows for adjustments as the market changes, which helps avoid missed opportunities.

In our effort to keep the client’s interest first, we want to employ the very best investment strategy available to accomplish their objectives, which is why we use these same strategies for our own investments.  Contact us to learn more about our continuous investment strategy and the results it has produced.

Photo by: Shea Hazarian

Have you ever wondered what it means to be able to call oneself a CFP®? Or, what does it mean to be a member of NAPFA or FPA?

At Financial Symmetry, we understand that it can become easy to get lost in the long list of acronyms that financial planners use. Some planners use letters after his or her name, while other mention specific membership affiliations.

Let’s take a look at the credentials and membership affiliations of Financial Symmetry’s primary advisors.

CFP®

FPA

* We hope these tips are helpful as you’re preparing your tax return.  If you have questions, contact your personal tax preparer.

Make your IRA contribution.

You have until April 17th (this year’s filing deadline) to make contributions to your IRA accounts (Roth or traditional) for 2011.

There are rules to follow in order to be eligible to contribute: http://www.irs.gov/retirement/participant/article/0,,id=202518,00.html?vm=r&s=1

Reduce your Adjusted Gross Income.

Some available tax opportunities, education credits for example, are dependent upon staying below a certain AGI.

One of the best ways to keep your AGI as low as possible is to take advantage of employer benefits.  Max out your 401k, and look into the cafeteria options (health, dependent care, etc.).

Taking full advantage of these opportunities can give you a chance at other tax opportunities.

Watch out for the Social Security tax bubble.

There is a fairly complicated formula that is used to determine if any of your Social Security benefits will be taxed.  Understanding where that threshold is can save you a big tax bill.

Here’s a pretty handy calculator: http://www.calcxml.com/do/inc08

Don’t forget about HSA contributions.

Speaking of benefits provided by your employer: If you have an HSA account that is sponsored through your employer you may be eligible to make additional contributions if you haven’t reached the maximum.

Make sure that you have enough qualified medical expenses before you contribute.

Watch out for new reporting rules for sales of stock investments.

Form 8949 Sales and Other Dispositions of Capital Assets has been created by the IRS in response to new regulations that require financial institutions that custody investment assets to begin reporting cost basis on form 1099B.

Consider accelerating income into 2012.

No one knows for certain what the lawmakers in Washington DC will come up with after current tax laws expire at the end of this year.  If Congress does nothing then tax rates will automatically go up as they will sunset back to higher rates that were in place before President Bush came into office.

Strategies include: deferring itemized deductions to 2013, harvesting capital gains, deferring capital losses, taking additional IRA distributions, Roth conversions.

Don’t forget mileage deductions.

For 2011, the deduction for business miles is 51 cents per mile, for charity 14 cents and for medical miles 19 cents.

Looking ahead to 2012 the IRS has issued new rates: http://www.irs.gov/newsroom/article/0,,id=250882,00.html

Photo credit: 401K

Identity Theft

There you are awaiting your tax refund, only to find it has already been claimed by someone else.  Scammers are ever on the cutting-edge of new ways to swindle you out of your money.

One of the newest forms of thievery is the filing of fraudulent tax returns with stolen identities to claim tax refunds.  The scammers file a tax return under your name with your Social Security number before you get the chance.  In 2011, the IRS reported a 500% increase in fake tax returns from the previous year.  In response to this, the IRS is stepping up efforts to prevent and fight against this type of abuse which helped stop $1.5 billion in refunds from being sent to these criminals last year.  If this happens to you, the IRS will work with you to ultimately get you the tax refund, but the process can cost you up to 6 months of frustrations and time trying to clear your tax record.  Here are a few tips to help you spot if you may be next…

• Guard Your Info – Be careful about where you are giving your Social Security number.  The IRS never asks for your SS number by email or phone.  If you do receive fraudulent emails, report to phishing@irs.gov.
• Watch for Warnings – If you receive a formal letter from the IRS, contact the agency immediately to determine what you can do.
• Don’t Help the Thieves – Scammers are now using your social networks to acquire your SS number.  Particularly if you make your hometown and birthday public on the sites.

Photo Credit: Duodenum Rex

Tax Refund?

In the midst of tax season, the American Mustache Institute is proposing a tax benefit for people with facial hair.  The Institute is planning a Million Mustache March this April 1st to support the “STACHE ACT,” Stimulus to Allow Critical Hair Expenses.  The Act was conceived by Dr. John Yeutter, Ph.D., CFP® and based on his whitepaper, “Mustached Americans and the Triple Bottom Line.”  The movement is in good fun and has even attracted the support of H&R Block, which will make contributions to the charity Millions From One (link), for every march participant.  Millions From One provides clean drinking water for people in need.