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My Identity Was Stolen!

And Maybe Your Was Too!  IRS Allows Hackers to Steal Millions of Individual Tax Records. 

I returned home today to find a lovely letter from the IRS.  No, not an audit announcement – I wish it were!  Instead I learned that my tax information was among a large number of records the IRS lost to hackers recently.

If you receive a similar letter – DO NOT IGNORE IT!  This is much more serious than credit card records stolen from Target or Home Depot.  If someone steals your credit card, they may be able to make some unauthorized purchases which result in inconvenience to you, but rarely much more than that.  A quick call to the credit card company, file a fraud report, get your money back, get a new card – and all is well.  The loss of tax data is another story altogether.

With access to my tax data, the perpetrators have access to all the personal information they need to obtain new credit in my name.  They have my social security number, they have my wife’s social security number – they even have my KIDS social security numbers.  They know our address, maybe even bank account information which was used to process refunds.  They have more than enough information to obtain fraudulent credit in my name, with potentially devastating impacts on my credit history.

Not only could a perp use my personal information for nefarious purposes, he could also file fraudulent tax returns, which is a growing problem for the IRS.

The agency indicates in their letter that they are taking steps to flag my account so that this does not happen, including assigning me a PIN that will be required to file my tax return in the future.   They have also arranged to pay for one year of identity theft protection for my own identity with Experian – but it is uncertain if they are providing the same offer for my wife and children who were included on my return.  I also don’t know if it could impact my adult daughter who wasn’t on my 2014 return – but was in prior years.  Do I need to purchase protection for all of them?  Will the IRS pay?  At this point I do not know.

If you find you were also a target of this theft, I would strongly recommend to either take the IRS up on its offer and obtain the identity theft protection, or obtain your own service from a trusted firm such as Lifelock.  Even if you do not receive notice that your identity has been stolen, it is a good idea to review your credit report from time to time.  Go to www.annualcreditreport.com to obtain a free report once each year, with no catch.  (the credit agencies have to provide this consumer service by law).

If you have any questions, or if we can be of any help, give us a call.  We are not the world’s foremost experts in identity protection – but looks like I am learning the hard way.

 

 

Repeating Mistakes: Investors Pull out of Markets

Investors Should Heed Lessons from Past Downturns

Abstract vector illustration of a man running from a downward graph

Man Flees Falling Graph

According to the attached article from Bloomberg News, no sooner had the stock market fallen by 11% in the last week or two than investors started pulling money out of their stock investments.  How many times do we have to go through this before people learn that pulling money out after the market falls is a bad idea.
Once again the market staged a nice bounce over the last couple of days which all those people who pulled money out would have missed.  Furthermore, I have observed over and over again that once investors pull money out of their investments, it becomes very difficult for them to “choose a time” to get back in.

The truth is, there is never a time that does not look scary.  Either the market is falling due to bad news (“with all that’s going on it can’t be a good time to invest”) or the market has been going up like a rocket (“with the market up so far, it must be due for a fall”)

The best approach to investing is to measure your risk appetite BEFORE the market falls, choose an investment strategy that does not expose you to more risk than you can afford, and then STICK WITH IT.  You and I cannot predict – no one can predict – where the market will go tomorrow, but over almost every 10 year period over the past 90 years a diversified portfolio has gone up.  But only for those who are actually invested.

Dimensional Fund Advisors Report

Morningstar recently completed its stewardship report for Dimensional Fund Advisors, please click the link below to see the Morningstar report.

As many of you know, we are strong advocates of Dimensional’s mutual fund products, and rely on them for the majority of the stock exposure in our portfolios.  The Morningstar article explains many of the reasons we like the company and its products.

Dimensional_Morningstar_Stewardship

How Should Investors React to Greece, etc.

Wes Wellington of DFA Funds (always the smartest guy in any room he happens to be in) discusses how investors should react to events like the Greek financial crisis – and considers similar historical events and outcomes as well. Good investment advice to keep in mind.

Low Cost Student Loan Refinancing

A Low Cost Student Loan is now Available to Creditworthy Borrowers – but not Without Some Added Risk

Many finance startups and even some well established banks are seeing gold in student loan debt. We have all read about the student loan crisis – youngsters graduating with $50,000, $100,000 or in extreme examples, $200,000 or more of debt. Some of that debt comes with a pretty high price tag considering that we are in an era of ultra cheap money. Well, in our free enterprise system, even the government can’t keep nimble competitors at bay.

These companies that have realized that there is money to be made undercutting the federal student loan programs interest rates – as well as established private student loan lenders. Borrowers have options now to consolidate loans with rates as low as 1.9% (variable rate) based on some of the lending firm’s websites. Is there a catch? Naturally! The firms only want the most creditworthy borrowers. In particular, those grads with good jobs, good credit scores, and high incomes.

Is it a good idea? The federal student loan program comes with a host of consumer safeguards – all of which you would give up if you choose to consolidate federal loans into a private consolidation loan. For instance you would sacrifice the rights to:

1. Income based repayment options. Borrowers of federal loans can opt to limit their loan payments to a percent of their income – even if that means they don’t even cover all of the interest payments. The balance would grow – but any balance remaining after 20-25 years may be forgiven entirely.

2. Forbearance options. In the event of a temporary income setback, federal loans offer options to defer payments for a period of time.

See http://time.com/money/3446538/refinance-federal-student-loans/ for details.

The practice of private firms consolidating federal loans is not without some controversy. It is noted that if private firms cherry pick the most creditworthy borrowers, that will leave the government holding all of the worst credit risk, which will increase cost to taxpayers and could increase the cost of the federal program for those who need it most.

Still, these loans may be appealing to some borrowers. Even parents with PLUS loans may benefit (especially since PLUS loans carry an even higher interest rate than student debt). I would recommend anyone considering such a move consult with their financial planner before making a commitment.
For a list of borrowers who are participating in private / federal consolidations click here.

Index Funds’ Achilles Heel?

Index Funds may have a built in trading disadvantage

There is little serious debate but that funds that track an index such as the S&P 500 for large cap stocks or the Russell 2000 for small cap stocks outperform the majority of actively traded funds.

For those unfamiliar with the terms – index funds simply buy the companies represented in the index in the exact proporitions that they are represented in the index and maintain those positions over time.  If the S&P 500 is comprised of 2.5% Apple, 2% GE, 1.5% Microsoft, etc. – this is what the index fund will own as well.  Since the index or its owner (i.e. Standard and Poors) decides which stocks should be in the index, the fund itself does not have to pay analysts, stock pickers, or managers to perform that task.  A computer can buy and sell the shares based on the composition of the index.

In contrast, most mutual funds have managers who pick which stocks to own, hoping to choose the stocks which would have higher returns than the rest of the market.

I won’t rehash the debate, it is pretty well worn by now.  Let’s just say evidence is overwhelming that most actively managed funds do not perform well enough to justify the costs of their own stock picking.  Only a small percentage of traditional mutual funds beat their benchmark index.

But that doesn’t mean indexes are without flaws.  As this Bloomberg article indicates, the index funds have a bit of an Achilles heel.  Indexes are not static.  The companies which comprise an index such as the S&P 500 or the Russell 2000 change over time.  Every year companies are added or removed for a variety of reasons.  Traders and hedge funds (and anyone who cares enough to pay attention) usually know in advance when companies will be added or deleted from an index.  When the change finally happens (officially) all index funds which track that index are forced to buy and sell the same shares at the same time, which will almost always drive up the share prices of companies being added to the index and driving down the price of those being deleted.  The traders and hedge funds know with a high level of certainty that this wave of selling will occur, and that the temporary spike or fall in price will present a temporary opportunity to earn a profit (at the index funds expense).

This not only means windfall profits for the traders – it means that index funds are forced to buy and sell when prices are abnormally high or low. In other words – index funds often have to pay too much for the stocks they buy, and earn too little on the shares they sell.  Bloomberg estimates that the cost to index funds is about 0.2% per year.  This isn’t enough for index funds to lose the battle for performance superiority over active management – but it does matter!  It might also make sense to assume that as index funds and ETFs continue to increase in popularity, this will become an ever greater problem.

One of the reasons we like Dimensional Funds is that although they are index based and enjoy all the advantages of index funds, they temper their indexing discipline with a hefty dose of common sense.  Dimensional provides their traders with enough flexibility so that they do not need to buy or sell when prices are unfavorable.  The firm pays close attention to trading costs and pricing and will delay or spread out purchases or sales when indicated, or even substitute a similar position, if needed to keep trading costs to a minimum and ensure that they are receiving a fair price from the market.

This is just one more way in which Dimensional takes a good idea (passive index investing) and takes it to the next level, with the aim of providing returns consistently superior to the indexes that most actively managed funds struggle to beat.

Note: investing involves risk, you can lose money. Indexing does not prevent risk of loss when the stock market falls in value. Past performance is not indicative of future results.   

Market Volatility Encourages a Fresh Look at Annuities

Single Premium Immediate Annuities are like buying a pension

Annuity has become a dirty word in the financial press. Well, except among insurance sales folks. And it is true that many (not all) of the variable annuities and indexed annuities that are being sold to investors today are overpriced, needlessly complicated, and just plain bad investments.

But let’s get back to annuity basics.

The basic idea of an annuity is to replace a sum of money with an income stream. You have $100,000, you give it to an insurance company. You get a certain amount of income for life. In the simplest kind of annuity, this happens immediately. You give your money to the insurance company, and they immediately start giving you a “paycheck” every month. It is essentially buying a pension.

Is this the best use of your money in retirement? Well, it depends. There is certainly comfort in knowing that you have a certain amount of income that will continue as long as you live. You are passing off the risk that you will outlive your assets to the insurance company. If running out of money is a worry – for instance, if your financial plan suggests a substantial risk that you may run out of money later in life – then a single premium immediate annuity may be a useful financial planning tool.

I also look at it this way. When a client comes to me with both a 401k and a pension benefit, they often have the option of taking the pension benefit as a lump sum. We will very often end up recommend that the client choose the monthly payment option (annuity) after analyzing the offer. This is driven by several considerations. 1) By increasing income, there will be a lower demand on savings in retirement, which makes it easier to weather ups and downs of the markets. 2) Annuity payouts from corporate pensions are usually more attractive than offers from commercial annuities offered by insurance companies and 3) the effective rate of return on the fixed income like annuity is often better than alternative fixed income investments like CD’s or treasury bonds.

Annuities give those of us without employer pensions the ability to buy one.  But very few of our clients when presented with the option are willing to part with any of their savings to purchase an income stream – even though the decision is almost the same. Perhaps there is some fear that if they die early, the insurance company somehow benefits at their expense. This can be overcome with a “ten year certain” option in which payments will be made for at least 10 years even if you die the next day.

Rates of Return on Annuities. An annuity by its nature is a very conservative instrument. There is usually some level of guarantee – by the Pension Benefit Guarantee Corp. for private employer pensions or by insurance companies (backed up by state insurance guarantee funds) for commercial annuities issued by insurers.  Whenever risk of loss is minimal, we can expect returns to be modest as well. Pensions and immediate annuities rarely quote a “rate of return” because they are technically not “investments” but are contracts.  Thus annuity quotes simply tell you how much money you will get. Us finance people can compute an imputed rate of return by discounting the payment stream over an expected lifespan – and we find that most private pension offers are using a rate of about 3.0% – 4.5% in computing their payouts. Not too bad in today’s low rate environment.

Commercial annuities you purchase on your own however, are often less generous. I compute returns of only about 2% on many commercial annuity quotes.

NAPFA and Income Solutions provide institutional pricing for fixed immediate annuities available only through fee only advisors. Income Solutions by Heuler Associates is a program which provides institutions (pension plans, employers, etc.) access to annuities for their members. Payment rates seem comparable, in my estimation, to what private employer pensions are providing, and better than most insurance brokers provide on commercial annuities. As a client of a fee only advisor (that would be me) – and by taking commissions out of the loop, we can obtain annuities from major insurance companies at very competitive pricing. Here is an example of monthly income estimates I recently found online for a 69 year old male investing $100,000 in an immediate annuity:

Picture1

I can’t vouch for any of these sites or companies, and these are not really quotes but merely income estimates provided off the respective firm’s websites, but still it gives a good idea of what is possible (and perhaps a good reason not to automatically jump at whatever AARP offers!)

Income would be lower if the individual were married and wanted income to continue for both his own life and his wife’s, or if the quote were to include an annual COLA.

So if recent market volatility has you reconsidering the risk associated with stock and bond investments, and if stable income for life sounds appealing, give us a call. We can help you see how (or if) an immediate annuity can fit into your overall retirement plan and weigh the pros and cons. Remember, we do not sell annuities – so we do not have a horse in this game. We are compensated by fees (retainer, hourly, etc.) – not by a payment from the insurance provider. Our goal is to see that none of our financial planning clients ever runs out of money – and if this is a tool that can help achieve that goal, we will use it!

Note: annuities are often sold as “guaranteed income” – but it is important to realize that the guarantee is the guarantee provided by the insurance company itself, not by the federal government. It is therefore important to check creditworthiness of an insurer before purchasing any annuity or life insurance product.

Greece Defaults on Debt: Should we Worry?

Greece Defaults on its IMF Loans

Is anyone actually surprised? Two years ago I noted in this blog that the Greece problem was not solved, merely swept under the rug. The market is reacting with great anxiety – but why? Does Greece matter? The argument being made is that if Greece leaves the Euro, so will Portugal, Spain, and Italy. Really? As my great aunt Helen used to ask “just because your friends jump off the Brooklyn Bridge, do you want to do it too?” Are other countries really looking to the Greek chaos thinking they should choose that path too?
Greece is an insignificant part of the global economy. What happens to Greece will not impact the profits of the S&P 500 companies in any meaningful way. News and hype however, does tend to get investors unsettled, and the traders love an excuse to trade. Sell today, then buy tomorrow – that is how the traders make money. The rest of us can afford to ignore Greece and this temporary volatility associated with the headlines. We aren’t looking to get in and out of the market on every headline, because time has shown us again and again that doing so does not add value. The surest way to accumulating wealth over long periods of time is to consistently follow your strategy through bull markets and bear, through periods of turmoil and periods of tranquility. Greece is just one more (hopefully temporary) period of turbulence that we will look back on in a month or two and think “we were worried about WHAT?”
China may be more significant than Greece. A couple weeks ago, I wrote comparing the Chinese stock market to the US market in 1999 – the famous “internet bubble”. Since June 12, Chinese mainland shares (as measured the Shanghai Stock Index) are down 21.5%, making it officially a bear market. So why is this significant? Well, because what happens in China is much more likely to have an impact on the rest of the world than Greece. The Chinese government also seems increasingly desperate to figure out how to maintain its growth target of 7%, with policy actions seeming at times haphazard.
International and US stock markets are digesting both of these situations by selling off strongly today. Maybe the market is wanting a good excuse to fall. There hasn’t been a correction (fall of 10% or more) since mid 2011 – almost 4 years! That is rare – and maybe even unhealthy. It is good for investors to be reminded from time to time that markets are risky.
What to Do? An investors ultimate success is determined very much by how he/she reacts to periods of turmoil. It is quite natural for an investor to think as you read these headlines “What should I DO” about this. It seems so unnatural to hear the TV news people go on about world events and think you should be doing something – but the best thing to do – assuming you are ALREADY well diversified and not taking more risk than you ought to – is usually nothing at all. Selling stocks in reaction to bad news seems natural. The problem is that once you are out, it can be very difficult to get back in to the market. There is no neon sign blazing “Market Bottom Ahead”. In fact, quite the opposite. It is often those times the media is screaming “Sell While you Still Can!” that hindsight suggests were actually the best times to buy. Many (most?) investors who sold out of the markets in 2008 (locking in huge losses) were still sitting in cash years later. If they had just gone along for the ride, they would have ended up far better off. The same could have been said about previous bear markets as well.
My observation, working with many investors and seeing the results of many approaches to investing, is that staying invested through good news and bad is indeed the best approach for the long term. If you really feel the need to DO something – a nice martini might do the trick.

Stop Worrying About Gift Tax: Almost No One Has to Pay It

I recently wrote an article for Nerdwallet.com regarding the truth about the the gift tax. Many clients have expressed worries regarding annual gift tax limits – to which my usual response is “who cares?” The article explains why most people can give away whatever they want without having to pay any tax.

http://www.nerdwallet.com/blog/finance/advisorvoices/stop-worrying-gift-tax-pay/


Internet Bubble 2.0 – Chinese Stock Market Mania

Chinese Investor Behavior Reminiscent of 90’s Internet Stock Bubble

Remember the late 90’s? Everyone was opening online trading accounts, sharing stock tips, everyone believed that the stock market would make them rich beyond our wildest dreams? Attribute some of this just to the fact that for the first time, American’s had direct access to stock trading accounts. The novelty itself (fueled by another innovation – financial television “news”) was partly responsible for the resulting bubble in trendy tech stocks.
During the same time, value stocks (boring old industrial, telecom, banking stocks that just make money) were being largely ignored by investors.

We know how it worked out. The harsh realities of business eventually overwhelmed the hopes and dreams of casual investors. Dot com companies eventually spent all their capital (many never made ANY profit at all – simply spent investor money until it dried up) and went broke. Others survived, but stock prices collapsed back to reflect normalized profit expectations. Many investors took a serious bath.

Well watching the Chinese stock market today is eerily reminiscent of those days. Ordinary Chinese only recently have been granted access to local stock markets, and the ability to open individual investment accounts. The result is stock investment mania – and guess which companies are the most popular targets. Yup! Tech and internet stocks. Valuations have exploded through the roof as ordinary Chinese discover the wonders of day trading.

As long as more investors come in and buy – the market may keep going up and up. But they say that those who do not learn from history are doomed to repeat it. Chinese citizens should read up on American financial history before they bet their life savings on a Chinese reincarnation of Pets.com.