Seven Deadly Sins of investing

The single most important risk to a portfolio of investments is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. You will need to resist the psychological pressures of investing:

Consider these “seven deadly sins of investing”:

  • //gluttony//– hoarding cash when you should invest or evaluating by only one category when you should look at the big picture;
  • //greed//– looking for big winnings when time and patience pay off;
  • //pride//– not selling your losers or old, familiar holdings when a new idea is better;
  • //lust//– listening to the information barrage and adjusting your portfolio constantly rather than filtering it out to stick with a plan;
  • //envy//– chasing fads or looking at a friend who has “winners”, making investing look more like gambling, when actually you should sell your best and buy trailing but good positions (as in the “dogs of the Dow” technique);
  • //anger//– not forgiving yourself for mistakes and moving on; and
  • //sloth//– changing beliefs to fit your decisions or portfolio rather than applying the lesson that you should review a portfolio intellectually and objectively and decide if you would still buy the holdings today.

You should review your asset allocation at least annually. A stock market rise will leave you over-weighted in stocks, meaning that you should sell out of stocks and buy into bonds and cash to maintain the allocation. If the stock market goes down, you should do the reverse. In fact, you should sell from your better mutual fund managers and buy the managers that have not done as well recently because those excelling and those lagging are both likely to return to the mean over time. Reallocating may seem wrong, especially when bond yields are low and CD rates are low. Nonetheless, history tells us to override the psychological urges, take “profits” from those currently doing well, and re-deploy them with assets that are more likely to provide future returns.

Adhering to a sensible investment strategy is how money is made over time. You may feel that you missed out compared to someone who is all in the right stocks now. However, you will also be glad to miss out when that person’s holdings go down faster than the market and you have non-stock investments that increase in value. Also, when there is a new influx of capital, you need to have a strategy so you can sensibly filter the barrage of information from people wanting to help you handle you finances.

The results from retirement calculations on different websites vary. Why?

Results from online financial calculators are not equal. But, why do the results differ? Usually, it is because different assumptions were used. That is, the calculators control the variables in different ways.

Performing complete and accurate calculations well is difficult, and thus designing a web-based calculator can be expensive. The variables a retirement calculator must address include rate of inflation, rate of return on investment, life expectancy, how much of current salary you need to support yourself at retirement, and social security benefits. Some calculators offer Monte Carlo simulations (click here for an explanation of Monte Carlo Simulation ) to help you predict your retirement funding. On this, my vote is to ignore the Monte Carlo simulation for the same reason many websites will tell you not to count on past returns as to predict your future investment results.

Some calculators allow you to alter their assumptions. However, none of them is able to accommodate either decreasing spending in later years, which is typical of most people during retirement, or the cost burden of major health problems. Any attempt to address these issues would be quite costly.

Others take an easy out by limiting variables, e.g., keeping your contributions flat. This facile solution provides little insight into what your retirement savings will actually look like because it ignores your ability to save more as your income increases. Also, by assuming flat contributions, your need to act will look more urgent due to the big shortfall in saving to meet your retirement goal. The company using this assumption may hope you contact them to help you solve the retirement problem that their formula, in part, has created. A calculator that assumes annually increasing savings makes more sense.

We have designed formula for the website we launched in 2015 (then took down in 2016). Our approach allowed you to alter almost all variables. This may or may not be a good thing, as shifting some variables too much could lead to unrealistic results and misdirect you. Nonetheless, this approach should allow you to test all of your concerns so you can establish a good retirement strategy.

In the end, using any of these calculators gives you a sense of where you stand //vis a vis// your retirement goal. If you are far off, it gives you impetus to act so you get on track; and if you are on track, then you it gives you a sense of security. For me, the most important result from using any calculator should be assessing and sticking to a good strategy for saving and investing with a long-term perspective.

Here are links to the most popular retirement calculators, which will come up in a web search:

AARP, Bloomberg, CNN, Fidelity , Schwab and Vanguard.

Finances and need for planning for young people or “millennials”

For many, when they hear the term millennial, they conjure up the image of an underemployed, tech-savvy twenty-something living in his parents’ basement. Many unfavorable stereotypes have been given to them, such as: entitled, lazy, and delusional.
In fact, millennials face many more financial challenges than previous generations. The average student loan debt of a 2012 college graduate is $29,400, while finding a decent paying job is difficult at best.
Just because you do not have great wealth, that does not mean you do not need sound financial planning and advice. No matter what your resources are, good financial planning and education are essential to long-term financial stability.
Unfortunately, millennials have not gotten this message. A study in the June issue of Kiplinger’s Finance Magazine found that only 40% of millennials have a retirement account and only 25% are willing to take investment risks in setting up a savings account. Many lack fundamental financial literacy, with little understanding of basic concepts like mortgage financing or inflation. More than 50% of millennials have used costly services, such as payday advances and pawnshops to obtain loans.
The good news is that there are many apps and online services available to help users plan and budget.
Spending and budgets: The Mint app tracks a user’s spending and income and provides an up-to-date snapshot of their current finances. There are also many budgeting websites, such as www.LearnVest.com and www.Mvelopes.com, which categorize expenditures and set target spending limits.
Saving and banking: There are apps available to help users save money and avoid ATM fees. SavedPlus.com, for example, automatically sweeps money from your checking account into your savings account every time you make a purchase. The MasterCard Nearby app allows you to search for nearby ATMs and filter your search based on criteria such as fees and 24-hr availability.
While there are many online resources available, none we found are comprehensive, and none actually provide the needed planning advice. Meeting with a trusted financial planner is always recommended.
As you read this, did think of your friends, your children, or your children’s friends, that is, does this apply to them? We hope to be addressing this with a dedicated site so all feedback is welcome.

Update on the impact of the 3.8% Medicare surtax

Experimented with some returns on our tax software, here is an example of the impact of the surcharge, from forms 8959 and 8960, on the taxes due.

For a client with high W-2 income, as well as interest and dividend income, shifting $100,000 of income from dividends to W-2 income decreased the surcharge by $3,630 (the taxes remained unchanged).

In contrast, shifting $100,000 of salary to dividends increases the surcharge by $3,601 as does shifting $100,000 of salary to capital gains.

The message so far is: when there is substantial earned income, minimizing investment income is worth over 3% for the amount you move. That means that, all other factors being equal, an investment that had no interest, dividend or capital gains distributions will have a better after-tax return than one that does.

Planning ideas for the impact of tax law changes in 2013

The only way that the American Taxpayer Relief Act of 2012 provides relief to high income taxpayers is by ending uncertainty. The wait is over and we now know what we can for tax planning; guessing based on the last news from Washington is over.
So, what planning can you do? Start with reviewing all the changes below. Then consider how they apply to you and what you can affect to bear less of a tax burden in this or future years – see the “action” items below in each section.
**Payroll**
**Social Security:** The payroll tax holiday ended so that the Social Security tax rates have returned to 6.2% (up from 4.2%) for 2013 wages up to the taxable wage limit of $113,700.
**Action:** //not much to do on this one, because it ends a set maximum each year, unlike the Medicare tax below.//
**Health insurance funding via additional Medicare tax:** The Patient Protection and Affordable Care Act adds a .9% tax applies to single individuals earning over $200,000 and married couples who earn over $250,000 and file jointly. This raises the rate from 1.45%, will rise to 2.35%. However, employers must withhold the Additional Medicare Tax from **all** workers, regardless of marital status, from wages exceeding $200,000.
Action: bunch income in one year (defer/accelerate if you can get below the range – see rates below).
**New Ordinary Income Tax Rate:**
For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with adjusted gross income (AGI) above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
**Action:** //bunch income into one year (defer/accelerate if you can get below the range – especially if you coordinate earned income with net realized gains). The goal is to shift income (and deductions, as discussed below) from one year to another so that the total tax for both years is less. This is easier for self-employed or owners of private companies, as they can shift income within reasonable limits. Also, with large portfolios, there is some ability to put net gains in one year rather than another. As stated below, you can move all dividend and taxable interest paying investments into qualified plans, keeping your asset allocation but lessening the tax burden.//
**New Long-Term Gains and Dividends Tax Rate:**
The tax rates on long-term capital gains and dividends are the same as last year for most taxpayers. However, the rate goes to 20% (up from 15%) for singles with AGI above $400,000, married joint-filing couples with income above $450,000, heads of households with AGI above $425,000, and married individuals who file separate returns with AGI above $225,000. When you add in the new 3.8% Medicare surtax, you get a combined rate of 23.8% on long-term gains and dividends.
**Action:** //Once again, shift net gains into one year and put dividend paying investments in qualified plans.//
**Stealth rate increases:**
**Personal and Dependent Exemption Deduction Phase-Out:** The 2009 phase-out rule for personal and dependent exemption deductions has been restored, so your personal and dependent exemption write-offs are reduced if not even completely eliminated. This phase-out starts at the following AGI thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
**Itemized Deduction Phase-Out:** As above, the 2009 phase-out rule for itemized deductions has been restored, so you can potentially lose up to 80% of your write-offs for mortgage interest, state and local income and property taxes, and charitable contributions if your AGI exceeds the applicable threshold: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, or $150,000 for married individuals who file separate returns. The itemized deductions are reduced by 3% of the amount by which your AGI exceeds the threshold, up to a maximum of 80% of the total affected deductions.
**Medical Expenses:** The floor above which medical expenses can be deducted goes from 7.5% to 10%.
**Action:** //for each of these, try to move deductions into one year, and bunch income to another, so that the total tax for both years is less.//
**Alternative Minimum Tax Help**
The AMT “patch”, which prevented millions having this add-on tax, has higher exemptions and allows various personal tax credits. The new law makes the patch permanent, starting with 2012. The change will keep about 30 million households out of the AMT.
**Action:** you can identify which AMT items affect you and bunch them into one year, to save taxes on another.

//**Gift and Estate Tax Rules Made Permanent**//
For 2013 and beyond, the new law permanently installs a unified federal estate and gift tax exemption of $5 million (adjusted annually for inflation, making it $5,250,000 for 2013) and a 40% maximum tax rate (up from last year’s 35% rate). Also, you can still leave your unused estate and gift tax exemption to your surviving spouse (the “portable exemption”).
**Action:** //review your assets to see if you can gift any now, even if in a trust for future ownership change, and also check to see if any such gifts help on state estate taxes. You may want to consider a second-to-die policy in an irrevocable trust, if your assets will exceed the credits after gifts.//

**Other changes**
**Action:** //see if any apply, then shift income and deductions so you benefit from them.//
**American Opportunity Higher Education Tax Credit Extended:** The American Opportunity credit, providing up to $2,500 for up to four years of undergraduate education, was extended through 2017.
**Higher Education Tuition Deduction Extended:** While this deduction was set to expire at the end of 2011, the new law restores it for 2012 and 2013, allowing for as much as $4,000 or $2,000 for higher-income folks.
Option to Deduct State and Local Sales Taxes Extended*: This option also expired in 2011 but is restored for 2012 and 2013, giving taxpayers with little or no state income taxes the option to claim an itemized deduction for state and local sales taxes.
**Charitable Donations from IRAs Extended:** This option also expired in 2011 but is restored for 2012 and 2013, allowing IRA owners who had reach age 70½ to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions.
For 2012, you can still act if you do so this month – it will be treated as a December 2012 transaction.
**$250 Deduction for K-12 Educators’ Expenses Extended:** Yet another deduction that expired in 2011 is restored for 2012 and 2013, allowing teachers and other K-12 educators a $250 “above the line deduction” for school-related expenses that they paid.
**$500 Energy-Efficient Home Improvement Credit Extended:** Finally, another credit that expired in 2011 is restored for 2012 and 2013, allowing taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.