Monthly Archives: April 2015

One in five Americans dies broke.

A University Michigan study on health and retirement indicates that 20% of Americans age 85 or older died without any assets other than a house.  One in eight (12%) didn’t even have a house and one in ten (10%) died owing money.

It’s the biggest financial worry for anyone saving for retirement: will I outlive my savings and die broke?  Based on surveys repeatedly pointing to dismally low levels of retirement savings, most American households have reason to be concerned.

While my opinion is not based on a survey, but on experience, I believe that this problem is not based on lack of earnings but on other factors.  I would like to highlight two of them.

One of those factors is that many people place saving for retirement low on their order of priority.  There are always other things that seem to be more interesting, or fulfilling, than putting money away for a far distant future.  Earlier generations had less of a social safety net and were more future oriented.  They knew that they had to take care of themselves as they got older or move in with their children.  The government programs that have been put in place over the last 85 years have made the specter of destitution at old age seem less dire.

A second factor is lack of knowledge.  Far too many middle-income income people are either unaware, or afraid, of the traditional ways people have accumulated money for retirement.  Many a family gathering will include a fair number of people who believe that an IRA is something you do with a bank.  Others will tell you that investing is gambling and are deathly afraid of anything having to do with stocks, bonds or mutual funds.

For many retirees, the end of life comes with major medical costs that can wipe out savings.  But others have little savings to begin with.  “Many more people who have very low financial assets at the end of life have been bumping along with low assets through most of their retirement,” he said.  “They just hadn’t saved very much.”

That brings us to Baby Boomers who are either retired or rapidly approaching retirement age.  Recent data shows that 40% have not saved anything and over 20% have less than $100,000 saved.

People in this situation need professional help.  They are not going to make it on their own.  They really need to seek out an advisor, preferably an RIA, who will take them under their wing, educate them, and be willing to work with them before it’s too late.

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It took 15 years, but the NASDAQ is back.

Fifteen years after it soared to its peak at the height of the dot-com era, the Nasdaq Composite Index cruised to a record closing high yesterday.

In the year 2000, the NASDAQ, driven to ridiculous heights by the technology stock bubble (often referred to as the bubble) collapsed, taking lots of people’s dreams with it.

A spike in stock prices driven by greed collapsed as people fled the technology sector in fear. As an aside, it provided a great opportunity for those who had the courage and skill to find outstanding bargains amidst the rubble.

The tech bubble of the 1990s is a great lesson in investor psychology. When values are driven by hope rather than by reality, people stop being investors and turn into speculators. The sad story of that time is that even mom and pop investors were caught up in the frenzy. And the collapse ruined many plans and some lives.

We read today about how great index investing is. It cheap, it’s effective and it works … until is stops working. Those who bought the NASDAQ index in 2000, if they had the fortitude to stick it out, would have found themselves breaking even after 15 years of being financially under water.

A good investment strategy always looks at risk. We know that “trees do not grow to the sky” and things that look too good to be true … are not. The first rule of making money is not losing it.

Our investment philosophy is focused on risk control. What that means in real terms is that when the market takes one of its periodic tumbles, it won’t take us 15 years to get even.

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Why is Berkshire Hathaway is not on the “Too Big To Fail” list?

It appears that the Bank of England sent a letter to the U. S. Treasury asking why Berkshire Hathaway is not on the list of “too big to fail” institutions.

If you are on the list it is deemed that you are a financial institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.”

MetLife, along with a number of other primary insurers, has sued the U.S. government about it’s designation as an SIFI (‘Systemically Important Financial Institution.”)  Being designated an SIFI brings along with it considerably more regulation.

New regulations under the Dodd-Frank legislation, mandate that financial institutions that fit SIFI qualifications, will have to meet higher capital standards and develop contingency plans for potential future failures.

But here’s something that most people are not aware of: insurance companies often take out insurance against catastrophic losses from other insurance companies.  The companies that insure the insurance companies are called “reinsurers.”  Berkshire Hathaway, run by Warren Buffett, is the largest of these reinsurers in the U.S. and the third largest in the world.

So who is more important to the financial stability of the financial system, retail insurance companies or the big global reinsurance companies that insure the insurers?  To me, the answer seems obvious.

To use your local bank as an example.  If it goes broke (and many have) it’s no big deal because your money is insured by the FDIC (Federal Deposit Insurance Corporation).  But if the FDIC went broke, that would be a BIG DEAL.  Then no one’s bank deposits would be safe.

Insurance is Berkshire’s most significant business – accounting for 27% of net earnings last year – and providing Warren Buffett with the capital to invest in stocks and acquisitions.  But Warren Buffett has friends in high places which may explain the reason he’s not on “the list.”

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The Psychology of Wealth

Do personality traits have anything to do with the creation of wealth? An article in the December 2014 “Journal of Financial Planning” tries to determine what traits high income individuals have in common.

They defined “high income” as those individuals in the top 2.5% of earners in the United States – $154,000 and up – and compared them to those earning a median income of $80,000.

Success, measured as high income levels, is often ascribed to intelligence, hard work and education. But there is evidence that personality traits exceed these factors as a predictor of financial success. Among these traits are the ones that most people would assume:

  • Conscientiousness – the tendency to be dependable and self-disciplined is found as a common trait in successful people.
  • Emotional stability – being able to control impulses helps people be successful.
  • Openness to new experience and creativity is a key indicator of success.

But one interesting, and major, indicator of success is referred to as “Locus of Control.”   This refers to the extent to which the individual takes responsibility for the outcome of their lives. Someone with an internal locus of control views themselves as being in control of their future and see their actions determining where they are going. Both success and failure are their own making, and they do not ascribe either one to outside influences.

An opposite personality, someone with an external locus of control, views him or herself as being under the control of others. They view their lives as unrelated to their behavior, or the result of chance or luck. They view negative outcomes, not as the result of their own actions, but as the actions of others. “Society” “the Man” or some other malevolent influence keeps them for achieving their goals.  Things are never their fault.

Of course high income does not necessarily translate to happiness. It does, however, mean that you have access to things that may make you more comfortable, healthier and better educated. While satisfaction is not guaranteed, positive psychological traits combined with financial success “may enable individuals to maintain life satisfaction during difficult times.”

One other thing to note. These psychological traits will also make you happier even if they do not help you achieve great wealth. They are equally valuable traits to develop if you decide to live humbly and devote yourself to self-contemplation or good works. These traits are never wasted.

Take responsibility for your financial future by working with an experienced, professional Registered Investment Advisor (RIA).

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Avoiding the sales imperative

Have you ever gone to an “investment seminar” that was really a sales pitch for a product? If you live in an area that draws retirees, you can dine out almost any day by going to lunch or dinner seminars hosted by insurance salesmen or stock brokers.

Listening to a financial salesperson is perfectly appropriate, but most of the time people put the cart before the horse. The first step to achieving your financial goals is to determine what those goals are. They are not the same for everyone. One person may believe that he who dies with the most toys wins. Another may want to live the rest of his life in contemplation, to write or to practice spirituality.

One of my clients received a life-changing financial gift and now wants to share her bounty with her church and to provide scholarships to students because she recalls how difficult it was for her to finish college.

My role, the role of a true financial advisor, is to help her achieve her goals in the best, most efficient way possible.

The role of a financial advisor is primarily to help his clients achieve their goals, whatever they may be. In this role he may manage his client’s assets, he may provide tax guidance, he may provide estate planning, and counsel his clients on charitable giving. But note that the focus is on the client, not the sale of the annuity, life insurance policy or the mutual fund. The goals of the client are first, last and always the objective.


Paying a million dollars in taxes?

It’s time to pay our taxes and for many people it’s a painful chore. Whether you’re getting a refund or sending the US Treasury a check, the amount of money the government takes from our hard-earned income is never pleasant.

But I have told people that one year I would like to actually have to pay the government $1 million in taxes. Why? Because it means that I probably earned in the neighborhood of $2 million and that’s a nice neighborhood.

I have had a number of conversations this year with clients who have to write big checks to the government. The question always comes up “is there a way to pay less?” The answer is “yes” but the trade-off is not always to their advantage.

Tax free bonds (“munis”) have been a traditional way of avoiding taxes. Unfortunately the Federal Reserve’s zero interest rate policy has reduced the yield on munis to the very low single digit range. A triple A rated Virginia muni maturing in 10 years yields a touch over 1.5%. Unless you are very taxaphobic the idea of tying your money up for a decade at a rate below inflation is not very attractive.

Exchange Traded Funds (ETFs) have been touted for their tax efficiency. That’s true, but unless you buy and hold them forever, at some point you will have to sell them to get money for living expenses.  That’s when the tax comes due. And the tax rate could actually be higher.

The same argument goes for buying individual growth stocks. At some point, you will want to turn them into cash that you can spend for, say, a new car, travel, or all the other things you need money for and that’s when the tax man wants his share. Keep in mind that today’s growth stock can be tomorrow’s bankruptcy. Trees don’t grow to the sky and at some point even Apple may find that there’s a worm in the core. Individual stocks are fine, but lack of diversification is one of the biggest risks to wealth.

The US tax rate reached 94% during WW II in 1944. In the years that followed the rate never dropped below 70% until 1981. Investments were offered whose primary goal was to shelter income from taxes. These were often extremely poor investments. One shelter I recall was an investment in an aircraft leasing company that owned used aircraft. When the price of fuel rose, these planes were sidelined for more efficient models.  Some of the used planes were sold for parts.  Most investors eventually broke even … after a decade or so. The lesson here is that you should not let tax avoidance drive your investment decisions.

Top federal tax rates
These “tax shelters” mostly dried up during the Reagan era when top tax rates dropped to 28% in 1988.

They have been rising gradually since then.

Regular garden variety mutual funds have been getting a bad press because their capital gains distributions are not predictable. However, they have two advantages: (1) they focus on the primary objective of growth of capital rather than secondary issues, and (2) they allow you to pay your taxes as you go. The benefit of that is that when you want to turn your mutual funds into cash to pay for groceries – or whatever is you need money for – most of your tax may already have been paid and the tax man will take a smaller bite.

The desire to avoid taxes is natural, but the best way to manage money is to focus on avoiding major losses and getting a fair return. If taxes bother you, vote for the candidate who you think will lower the tax rate. That’s the smart way to manage your taxes.

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The Dread of Weak Economic Data.

When I was younger I had a number of clients who were alive during the “Great Depression” of the 1930s. The experience shaped their lives. They were acutely aware of the effect that financial and economic panics had on their lives. Some lost their homes, even their families.  They were generally a cautious lot, ever concerned about a recurrence of those traumatic events.

Many of today’s investors wonder if the things that led to the “Great Recession” of 2008-2009 will recur. When weak economic data is released, some experience the beginning of panic.

Brian Westbury of First Trust puts it this way:

“Dread” is the perfect word for what many investors have felt in recent years. Some have experienced it daily since the bottom in March 2009. Some experience it whenever the stock market falls.

But dread really sweeps the markets when there is weak data, a change in fiscal or monetary policy or during market volatility. This means it has cast a pall over markets once or twice a year during the past six years.

Remember the feeling on September 2, 2011, when it was reported that payroll employment in August was a big fat zero? That was dread. Remember when real GDP in the first quarter of 2014 was negative? Dread! The thought of tapering? Dread! Or at least a tantrum.

Well, here we go again, except this time the bar for feeling dread has been lowered drastically. Payroll employment increased by 126,000 in March and some analysts reduced real GDP estimates to less than 1% for Q1. You guessed it: dread. Double dread!

There are a couple of things that have to be kept in mind. We have to take a look at a lot more than a single statistic, or even two; statistics which are by their nature volatile and subject to revision for months and even years. In addition, the recovery from the recession has been slow and labored; we have referred to it as the “Plow Horse economy.” When you’re growing at about 2.5% annually, bad weather, oil price changes, a West Coast dock strike or even normal volatility can bring you to low or even negative growth for a brief period. And then, of course, everyone’s worried about the effect that a rate increase by the Fed will have.

But none of this is going to choke off what we see is an almost irrepressible economy that is showing remarkable recuperative powers despite government policies that are not helpful.

While we expect to see a continuation of volatility, we also have faith in the entrepreneurial spirit of America. The funds that we have chosen are managed by experienced investors who have weathered many storms. With the return of warm weather, which brightens our lives and allows us to spend more time outdoors, we continue to invest with cautious optimism.

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Delaying Medicare Part B

When you turn 65 you become eligible for Medicare and are asked to sign up. Medicare has a number of parts.

Medicare Part A primarily covers hospital care as well as skilled nursing facilities, nursing homes, hospice and some other services. There is no cost to the individual for Part A.

Medicare Part B primarily covers services (like lab tests, surgeries, and doctor visits) and supplies (like wheelchairs and walkers) to treat a disease or condition. There is a monthly charge for Part B.

If people choose to continue working after age 65 and if they are covered by a group health plan they may not sign up for Part B.

If they do not sign up for Part B at age a 65, they may be subject to a “late enrollment penalty.” According to

Your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn’t sign up for it.”

However, this penalty does not apply of you can prove that you had medical insurance coverage for the time you declined the Part B.

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