tag:blogger.com,1999:blog-25850319772212695172024-03-13T04:20:01.450-07:00Bert WhiteheadSensible unbiased commentary on investment and financial developments which affect professionals, entrepreneurs, and retired people.Bert Whiteheadhttp://www.blogger.com/profile/04371686647304761227noreply@blogger.comBlogger83125tag:blogger.com,1999:blog-2585031977221269517.post-20411604681428350002016-12-05T22:41:00.001-08:002016-12-05T22:41:53.927-08:00Hurray!! The Bond Market is Crashing…<br />
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<span style="font-family: "calibri";"><span style="color: black; font-size: 24pt;">Hurray!! The Bond Market is Crashing…</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 18pt;">Bert Whitehead, J.D., M.B.A. </span><sup><span style="color: black; font-family: "times new roman" , serif; font-size: 18pt;">©</span></sup><span style="color: black; font-family: "arial" , sans-serif; font-size: 18pt;"> 2016</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">The surprising election results
have been followed by recent unexpected shifts in the financial markets. Stocks
have soared, and bond prices have dropped substantially. Most of our clients
have 15-year bond ladders in place if they are retired, or if they are still
working the accumulation stages, they are building a bond ladder.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">Looking at your
brokerage statement now can be scary if you focus on how much bonds have dropped
in value. If you have never experienced a rout in the bond market like this,
don’t be unnerved. This is actually a very good development for the long-term
growth of your portfolio because usually the stock market sky-rockets when bond
values drop. And in fact, the stock market has been hitting market highs almost
every day since the election so your total portfolio is likely increasing in
value significantly if it is properly balanced between stocks and bonds.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span><br />
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">Why does this happen? It
doesn’t prove that the “right” person won or that it was caused by disfavor of
the losing political party. Surprise events sometimes trigger market reaction,
but the pressure for this kind of correction has been building over the past
few years. Indeed we might have experienced the same market phenomenon (stocks
going up and bonds dropping) if the other side won politically. What sparked
the change in the market is probably the reduction in fiscal uncertainty which
has been a drag on the global economy for several years. Financial markets
abhor uncertainty.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">The long-term favorable
impact on your investment portfolio is a result of your stocks increasing
significantly in value. A diversified stock portfolio is the growth machine for
your finances. And your bonds, which provide safety, aren’t actually losing
money.<o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">We insist on using U.S.
Stripped Treasuries in clients’ bond ladders. So the amount you have invested
to buy your bonds plus all the interest earned, is government- guaranteed as a
direct obligation of the U.S. Treasury <b style="mso-bidi-font-weight: normal;">if
you hold the bond to maturity.</b></span><b style="mso-bidi-font-weight: normal;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></b></div>
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<b style="mso-bidi-font-weight: normal;"><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p><span style="font-family: "calibri";"> </span></o:p></span></b><span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">If you became a client
15+ years or more before retiring, we have been buying some bonds for your
ladder each year. This is called ‘dollar cost averaging’ and gives you the
advantage of knowing your bond portfolio will end up earning interest equal to
the market rate average over the past 15 years. The current increase in
interest rates will be reflected in the bonds we buy for you as we are able to
lock in these higher rates. So you are not gambling on interest rates and don’t
have to fret whether rates go up or down.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">While you have the
security of knowing you will be able to maintain your current standard of
living after retiring, we use the stocks to replenish the bond ladder during
periods of economic growth, which pushes up the value of your stocks.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">You may be wondering why
your statement is showing your bonds dropping in value as interest rates rise,
i.e. why bond value moves inversely to interest rates. If you buy a $10,000 bond
when rates are 5%, you are guaranteed to receive $500 per year in interest
until the bond matures and you get your $10,000 back.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">But if you get scared
(or greedy) when rates increase to 6% and want to sell your bond a year after
you bought it you will realize a loss. This is because the investor who buys
your bond will get only $500/year in interest whereas a newly issued bond would
pay $600/year. So you have to drop the price of your bond to a “discounted
value” of about $8333, so the $500/year in interest which is locked in will provide
a yield of 6% to be competitive in the market.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">The opposite is also
true: over the past 10 years interest rates have been dropping so you may see the
value of your bond increase. It doesn’t make sense to sell it however because
you would pay taxes and transaction costs, and then you would have to invest at
a lower rate.<o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">So bond prices move up
and down all the time, but holding your bond ladder to maturity assures you
will be repaid your investment in full including interest. For long term
investors who use bonds to provide their safety net and hold to maturity, the
market fluctuations in value are just “noise.”</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">Buying and holding bond
ladders provide another important benefit-- the security they provide keeps
clients from panicking when the stock market crashes. The worst investment
decision an investor can make is to sell low when holding a long-term
investment.</span><span style="color: black; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
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<span style="color: black; font-family: "arial" , sans-serif; font-size: 12pt;">The take-away from this
discussion is: “Don’t let your political convictions dictate your investment
strategy.” Political convictions are an exogenous issue over which you have no
control, whereas with our Functional Asset Allocation model your investment
returns are endogenous and tailor- made for your situation without regard to
market shifts.<o:p></o:p></span></div>
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<div class="MsoNormal" style="background: white; line-height: normal; margin: 0in 0in 0pt;">
<span style="color: black; font-family: "arial" , sans-serif; font-size: 9pt;">Thanks to Shari Cohen
for copy editing.<o:p></o:p></span></div>
Bert Whiteheadhttp://www.blogger.com/profile/04371686647304761227noreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-63467846126597014582016-01-09T14:56:00.001-08:002016-01-09T14:56:21.130-08:00"Deja Vu" All Over Again<div style="text-align: left;">
"Deja Vu" All Over Again<br />
Bert Whitehead, M.B.A., J.D. ©2016<br />
<br />
2016 will be a year which separates the gamblers from the investors. Of course, we all want to think we are knowledgeable, prudent investors. In fact, people who are most worried about the current financial upheaval are closet gamblers. <br />
<br />
The Dow Jones Industrial Average has tumbled more than 1,000 points since the beginning of 2016, which was a much better performance than the Chinese stock market that stopped trading most of the first week of the year. This panic impacted virtually all global stock markets, and aggravated the nosedive in commodity prices. Gamblers anguish that this is just the start of the collapse of the world economy, which some economists predict will drop 80% in 2016. The world seems unsafe from ISIS's distressful terror attacks in Europe, to North Korea's claim to have set off a hydrogen bomb, compounded by the emerging conflict between Saudi Arabia and Iran, and the misery inflicted in Syria by both Russian and U.S. bombers. <br />
<br />
By comparison, the U.S. economy seems strong: unemployment has dropped (although fewer workers are in the workplace). Most economists expect our Gross Domestic Product (GDP) to grow more than the GDP of the majority of western nations. While some whine about the 'growing inequality' in this country, that is a rather parochial view because world-wide the middle class is the largest in history. We no longer are concerned about the starving millions in China and India as their prosperous middle class has grown in proportion to our decline as a profitable manufacturing nation. The global economy is so intertwined that economic issues in any of the larger world economies impact other countries.<br />
<br />
The Past Does Not Predict the Future<br />
<br />
Just as the proverbial broken clock is right twice a day, so the price of any stock or of the stock market as a whole measures only the value at a single point in time. Market volatility is the method the market uses to find the right balance in pricing stocks over a market cycle. Generally market cycles are extremely variable, lasting from 3 to 15 years. Thus, past performance is not a reliable predictor of future value. <br />
<br />
The reaction of gamblers is to try to determine which factor in the global economy is decisive. These market timers foolishly believe that they can figure out future value from past market trends, just as gamblers bet on roulette using past patterns as their guide.<br />
<br />
Sharp drops in stock prices are the time when investors who dollar cost average make the most profit in the long run, which is ideal for working people in the accumulation phase. The biggest mistake investors make is to panic during a downturn and sell out. Avoiding this outcome requires the investor to make two decisions right: when to sell and when to buy back in.<br />
<br />
Reduce Volatility for Peace of Mind<br />
<br />
The reason our compliant clients prosper is because they have U.S. Treasury bond ladders. These securities reduce the volatility of the whole portfolio, and are psychological assurance that they won't get wiped out. Of course if we have a worldwide financial collapse and we all have to learn Arabic, our wealth could be at risk. But in the end, our clients will still have more money than their neighbors.<br />
For those of you who weathered the 2008 market crash, the current situation may be deja vu. In 2008 I wrote 16 blogs which are on point in evaluating the present situation. If you were not able to read them before, or perhaps don't remember them, you can review them at <a href="http://bertwhitehead.blogspot.com/search?updated-min=2008-01-01T00:00:00-08:00&updated-max=2009-01-01T00:00:00-08:00&max-results=16">http://bertwhitehead.blogspot.com/search?updated-min=2008-01-01T00:00:00-08:00&updated-max=2009-01-01T00:00:00-08:00&max-results=16</a><br />
<br />
Thanks to Shari Cohen for copy-editing.</div>
Bert Whiteheadhttp://www.blogger.com/profile/04371686647304761227noreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-81081814622391033992014-04-30T09:42:00.003-07:002014-04-30T09:42:44.335-07:00I.R.S Scams and Identity Theft<!--[if gte mso 9]><xml>
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<br />
<div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 20.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">I.R.S. Scams and Identity Theft</span></span></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<br /></div>
<div align="center" class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Bert
Whitehead, M.B.A., J.D. ©</span></span></div>
<div align="center" class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; text-align: center;">
<br /></div>
<div class="MsoNormal" style="tab-stops: 76.5pt;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Don't
be too surprised if your tax return is rejected by the IRS because someone else
has already filed with your social security number. This scam is increasing exponentially,
and nearly every tax preparer <span style="color: black; mso-themecolor: text1;">I’ve</span>
surveyed this year has had clients who have experienced this.<span style="mso-spacerun: yes;"> </span>One of our clients last year had to come up
with $8,700 to avoid liens (which he was refunded), his credit was ruined for a
year, and it took him eight months to settle the issues.<span style="mso-spacerun: yes;"> </span>That's how he learned it is important to look
at his statements every month!</span></span></div>
<div class="MsoNormal" style="tab-stops: 76.5pt;">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-themecolor: text1;">It’s
a long, frustrating process to straighten this out if you’re getting a refund. If
you owe money to the IRS and send them a check, the matter somehow gets
resolved much more quickly.</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">This is technically identity theft even
though these thieves don't have to access any other personal information. To
file your return, all they need is your name and social security number. There
have been instances where crooks have just used a random number generator to
make up social security numbers. If they’re able to obtain other information
(PIN #, address, etc.), they may wipe out your bank account.</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">These fraudulent returns are filed
electronically early in the season, such as early February. The crooks make up
the information needed from your W-2 so that all the necessary entries are
shown on the return they file, and of course they have the refund sent to their
address or P.O. Box.</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Indications of
Tax Fraud</span></u></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><br /></span></u></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-themecolor: text1;">There
are several other ways swindlers are fleecing taxpayers. For example, some will
call and impersonate an</span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> IRS agent and
demanding that you immediately pay them using a preloaded debit card or wire
transfer.<span style="mso-spacerun: yes;"> </span>This scam has recently been
reported by an increasing number of clients. <span style="mso-spacerun: yes;"> </span>Emails are often used, usually by "phishing,"
which involves setting up bogus email accounts or websites to induce you to
send them your social security number, ostensibly so they can verify it.</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Of course there are also dishonest
preparers who skim part of their client refunds, or use the information provided
to steal cash from legitimate bank accounts. Some scams try to enlist you to help
them track a suspect by divulging your bank account numbers. Taxpayers have
even been urged to send their money to an overseas bank account to avoid
government “spying” by the National Security Agency (NSA).</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">If you receive a letter from the IRS
saying that more than one tax return has been filed in your name, or showing
income from an employer you don't know, or a refund offset, you should suspect
fraud. If you have lost a wallet or purse and suspect someone may use your
information for identity theft, fill out the IRS Identity Theft Affidavit, Form
14039. The toll-free number of the IRS Identity Protection Specialized Unit is
800-908-4490. <span style="color: black; mso-themecolor: text1;">Be sure to also file
a police report, as it will be necessary to provide a copy of the report to
various entities when you’re trying to reclaim your identity.</span></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Identity Theft
Protection Plans</span></u></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> </span></u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> </span></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-themecolor: text1;">There
are a number of plans available which cost about $100-150 per year that insure against
losses from identity theft. A rider to your homeowner or auto policy may be
even less, possibly $20-50 per year. The problem is that these services can't
keep your identity from being stolen --- only you can do that. If your identity
is stolen, all these plans cover is some out-of-pocket costs such as phone
calls and postage. These costs are usually less than the deductible, which
could be anywhere from $100 to $1,000.</span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The
most significant problem when your identity is stolen is the need to close your
accounts, open new ones, <span style="color: black; mso-themecolor: text1;">and
painstakingly advise creditors of the problem (usually including providing a
copy of the police report). No</span> insurance company can do that for you, nor
do they reimburse any money which may be stolen from you. So in the worst case
it could cost about $1,500 to clean up your identity (not including any losses which
are covered automatically by your credit card companies). This hassle is
compounded if you’re behind on your bills, as creditors will suspect that your
claim is a ruse to further delay payment.</span></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> </span>
</span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-themecolor: text1;">You
can obtain ID theft assistance for free. For example, American Express provides
24/7 identity theft</span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> assistance to
all cardholders with a toll-free number. They will assign an AMEX
representative to "help you determine if you identity has been stolen,
navigate the recovery process, and protect yourself in the future."</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The best known identity theft insurer
is LifeLock, which advertizes heavily with well-known celebrity endorsements. However,
there are many complaints about their limited services:</span></span></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: 58.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">If you need their
help, they only contact banks (not credit card companies). </span></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 58.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Once you sign on,
it is very difficult to get them to cancel you. </span></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 58.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Their service is
very impersonal. </span></span></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 58.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">They do not
monitor activity on your existing accounts, only new accounts opened in your
name.</span></span></div>
<div class="MsoNormal" style="margin-left: 3.0pt;">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><br /></span></u></span></div>
<div class="MsoNormal" style="margin-left: 3.0pt;">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Checking
Credit Bureau Reports</span></u></span></div>
<div class="MsoNormal" style="margin-left: 3.0pt;">
<span style="font-family: Arial,Helvetica,sans-serif;"><u><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><br /></span></u></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Identity theft may become evident
through unexpected and unauthorized checks of your credit report. The three main
credit bureaus (Equifax, Transunion, and Experian) offer various plans to
offset identity theft. I have used <i style="mso-bidi-font-style: normal;">Equifax
3-in-1</i> for about 5 years (<a href="http://www.equifax.com/">www.equifax.com</a>). They charge about $150
annually. With this service I’m notified whenever a credit application is made
in my name, or when there’s unusual activity on my accounts using parameters
that I determine. The most comforting aspect of their service is that I receive
an email whenever any of these credit bureaus receives a credit application in
my name. In addition, I receive an email every month they have not detected any
activity on my account. They also provide a free personal credit report annually.</span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Do-it-yourselfers can obtain a free
credit report from each of the three main credit bureaus annually, so you can
diligently check your credit for free every four months. The proper website to
obtain these reports is </span><a href="http://www.annualcreditreport.com/"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">http://www.annualcreditreport.com</span></a></span><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> </span><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"> </span></span></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">But if there was fraud involving any
of your accounts during the four-month, interval you would miss it. Your credit
report does not include your credit score.</span></span></div>
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for copy editing</span></span></div>
Bert Whiteheadhttp://www.blogger.com/profile/04371686647304761227noreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-91650887294206015992014-03-06T09:19:00.000-08:002014-03-11T06:25:59.184-07:00Rich Kids, Poor Kids (Part 3)<!--[if gte mso 9]><xml>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20pt;">Rich Kids, Poor Kids </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 16pt;">(Part 3)</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 16pt;">Bert Whitehead, M.B.A., J.D. </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt;">©</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt;">2014</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">This is the third of three related blogs covering a broad topic:</span></span></div>
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<li class="MsoNormal" style="line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">Part 1: A View of our World Through our Grandchildren's Eyes in 100 Years</span></span></li>
<li class="MsoNormal" style="line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">Part 2: Intergenerational Tax and Financial Strategies to Leave a Family Legacy</span></span></li>
<li class="MsoNormal" style="line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1;"><span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt;">Part 3: The Most Important Lesson to Teach Our Children Now</span></b></span></li>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">The foremost lesson for children is to always save 10 percent of all of their income—whether from their allowance, babysitting earnings, or gifts, as well their gross earnings and investment income. Even during retirement, save 10 percent of your income.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">Often people think that “save” means to put money away for spending later, rather than investing their savings to grow their financial base, or building “investment capital.” When we refer to savings in this context, we are referring to saving money for investment, not to spending the principle.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">As children develop the habit of continually saving 10 percent of their income, their total capital will grow. This is an opportunity to teach them the basics of investing, starting with a savings account or money market. Once they have accumulated enough, move their investments to an S&P 500 Index mutual fund; these are offered at a low price by<b style="mso-bidi-font-weight: normal;"> </b>Vanguard and other no-load funds. They have very low minimums if automatic investment is selected, so savings can be transferred monthly from the savings account to the mutual fund.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">Once the child’s investment capital savings reaches a total of more than three times their annual savings, they will experience the “Miracle of Compounding.” This is the tipping point when they will realize that the amount earned from their investment capital now exceeds the amount they are saving each year. At this point, their capital mushrooms exponentially and their wealth is created through their savings and investments.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">There is a widespread misconception that rich people become wealthy by taking money away from poor people. The truth is that wealthy people are rich because they always invest part of their earnings. Poor people who spend more than they earn always stay poor. Even people who make a lot of money often still spend more than they make, so they never become wealthy. But people without much money are never broke if they always save 10 percent!</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">Tyrone Solee wrote <a href="http://www.millionaireacts.com/2801/the-difference-between-being-rich-and-being-wealthy.html"><span id="goog_1405684262"></span>an article<span id="goog_1405684263"></span></a> that beautifully explains the difference between people who are wealthy, and people who are simply rich. To summarize:</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">The main difference between being rich and being wealthy is knowledge. Wealthy people know how to make money, while rich people only have money. Being wealthy is defined as that status of an individual’s existing financial resources that supports his or her way of living for a longer duration, even if he or she does not work to generate a recurring income. Rich people, on the other hand, may get money in an instant such as inheritance or winning a lottery. However, because of lack of proper mindset and poor money management skills, all of it can be lost in a short period of time. In essence, wealthy people are financially free while rich people are not.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12pt;">The name of this game is Capitalism and the winners are those who at some point are able to live off the earnings from their money instead of by the sweat of their brow. This is true freedom and an important lesson for all of our children. Rich kids always save 10 percent of their income and poor kids always spend every last dime!</span></span><br />
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Bert Whiteheadhttp://www.blogger.com/profile/04371686647304761227noreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-36292085705497973542014-02-17T10:56:00.001-08:002014-02-17T10:56:57.578-08:00Rich Kids, Poor Kids (Part 2)<!--[if gte mso 9]><xml>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20.0pt;">Rich Kids,
Poor Kids </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 16.0pt;">(Part 2)</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 16.0pt;">Bert
Whitehead, M.B.A., J.D. </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt;">©</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt;">2014</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">This is
the second of three related blogs covering a broad topic:</span></span></div>
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<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l0 level1 lfo1;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Part 1: A
View of our World Through our Grandchildren's Eyes in 100 Years</span></span></li>
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l0 level1 lfo1;"><span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt;">Part 2: Intergenerational Tax and Financial Strategies
to Leave a Family Legacy</span></b></span></li>
<li class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-list: l0 level1 lfo1;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Part 3: The
Most Important Lesson to Teach Our Children Now</span></span></li>
</ul>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">As
discussed in the previous blog, our society is increasingly split between rich
kids with a good educational and health foundation, and poor kids with a disadvantaged
upbringing likely to hinder their futures. While we can’t restructure
dysfunctional families, we can do our best to ease the way for our own children
and grandchildren.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;"><span style="mso-tab-count: 1;"> </span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">We send
the best and brightest in our society to Washington to figure out what policies
we need to become a better country. Frequently these policies are structured as
tax incentives that reward specific financial actions. I believe that those of
us who learn about these tax policies and follow the will of Congress are
acting in the most patriotic way possible. I suggest three strategies for
consideration: Donor Advised Funds, Roth conversions and Intergenerational
Strategies.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt;">Donor Advised Funds for Tax Benefits and Philanthropic
Options</span></b></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Donor
Advised Funds (DAF) enable individuals and families to set aside funds,
tax-free, under the umbrella of a 501(c)3 nonprofit foundation<b style="mso-bidi-font-weight: normal;">. </b>Most brokerage companies (Schwab,
Fidelity, etc.) and many large non-profit and community organizations (Jewish
Federation, Southeast Michigan Community Foundation, etc.) offer these DAFs to
all individuals at a nominal cost. Each DAF manages its funds, directing
contributions to nonprofit groups chosen by the donor(s).</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">For
taxpayers in the top tax bracket, giving $1,000 in cash to a DAF results in a
$400 tax saving. However, if $1,000 in appreciated stock is donated to a Donor
Advised Fund, the donor saves $400 through the income tax deduction and up to an
additional $200 by avoiding the capital gains tax on the appreciated stock.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Our society
depends on taking care of one another and these tax incentives make
philanthropy more financially appealing. When my<span style="color: red;"> </span>family
gets together annually, each member identifies a nonprofit organization for a
$100 deduction from the Whitehead Donor Advised Fund, and we make the grants online
accordingly. When older grandchildren are away at school or jobs and unable to
join us, they email me their choices for charities. This is a good way to
develop a family commitment to help others.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt;">Roth Conversions</span></b></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Another
way to save taxes for future generations is to convert IRAs to Roth IRAs. The
money converted to the Roth IRA is taxed now, and future earnings accrue
totally tax-free.<span style="mso-spacerun: yes;"> </span>Withdrawals after
retirement age are not taxed, and there is no required minimum distribution,
which is normally required at age 70 1/2. Upon the death of the taxpayer, the
spouse pays no income tax as the beneficiary of a Roth IRA. After the death of
the second spouse the Roth IRA accounts can be passed on to their children, who
will also receive the distribution from the Roth IRA tax-free. They can then
elect to withdraw it gradually, with the minimum required distribution based on
their life expectancy at the time they inherit the Roth IRA.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">When IRA
funds are converted to a Roth IRA, the transferred funds are subject to
taxation as ordinary income. Generally conversions are made after significant
wealth has accumulated and the taxpayer is in a much higher bracket. This
disincentive to elect Roth IRA conversions can be mollified, however, with
astute tax planning.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">For
example, while high income taxpayers are not allowed to contribute directly to
Roth IRAs, they can fund non-deductible IRAs (the maximum contribution is
currently $6,500 per year). The non-deductible IRA does not provide a tax
benefit other than that the earnings accrue tax-deferred. The significant tax
advantage is that the IRA can be converted later to a Roth IRA and taxes are
assessed only on the accumulated earnings, not the original basis.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt;">Intergenerational Tax Strategies</span></b></span></div>
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<br /></div>
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">The
creation of a Donor Advised Fund and conversion of an IRA to a Roth IRA can be
combined for maximum tax benefit. By establishing a DAF, the tax deductions for
the funds contributed to it can offset taxes on the funds converted to a Roth
IRA.</span></span></div>
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<br /></div>
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Establishing
a DAF and utilizing Roth Conversions are very effective ways to pass on our
philanthropic values and conserve assets for future generations of our
families.</span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 12.0pt;">Since
these strategies can be somewhat complex, it is important to work with a tax professional
to implement them correctly.</span></span></div>
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<br /></div>
Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-2585031977221269517.post-29097155258662524952014-02-05T11:48:00.003-08:002014-02-17T10:57:42.078-08:00Rich Kids, Poor Kids (Part 1)<!--[if gte mso 9]><xml>
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<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://www.blogger.com/null" name="_GoBack"></a><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20.0pt;">Rich Kids, Poor Kids </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 16.0pt;">(Part 1)</span></b></span></div>
<div align="center" class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in; mso-add-space: auto; text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 16.0pt;">Bert
Whitehead, M.B.A., J.D. </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt;">©</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt;"> 2014</span></b></span></div>
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<br /></div>
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">This is the first of three related blogs
covering a broad topic: reviewing the impact our legacy will have on our
children and grandchildren.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpLast" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoListParagraphCxSpFirst" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: -0.25in;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> <b>
</b></span><b>Part 1: A
View of our World Through our Grandchildren's Eyes in 100 Years</b></span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: -0.25in;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Part 2: Intergenerational Tax and Financial
Strategies to Leave a Family Legacy</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: -0.25in;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span>Part 3: The Most Important Lesson to Teach Our
Children Now</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpFirst" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Most of us who are baby-boomers or older
had grandparents who had no indoor plumbing, no car, and remembered the Great
Depression and World War II as personal experiences. Our grandchildren can't
imagine we grew up without TV, computers, cell phones, or satellites. Today's
children are the first generation who didn't learn their childhood games from
their parents, and many of us don't have the technological skills to understand
their games -- or even our smart phones.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Think about the world their
grandchildren will face. We can't fathom the changes of the next 100 years ---
from significant economic upheavals to likely wars with battles that will leave
devastation beyond the nightmares we have seen.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Considering the next 100 years compared
to the past century forces us to think through what the next generations must
do to assure their survival and prosperity. Our parents and grandparents lived
in a very different era, and we should think about strategies to further
prosperity --- not only for our families but our communities.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<b><span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Facing
the Future</span></span></b></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Our children are not likely to be as affluent
as their parents. Some say it will be the first generation to be poorer than
their parents. The gap between the rich and poor is expanding at a frightening
rate.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">In addition to the wealth and earning
gap of the past 30 to 50 years, there has been a widening educational gap in
our country. High school graduation rates, ACT scores, and reasoning and
comprehension skills have plummeted until our country ranks 25<sup>th</sup>
among 50 first-world countries, down from #1 during the 1950s. Poor schools get
worse and the best schools get more expensive and elite. Additionally, 35
percent of our higher education resources are now devoted to students from
China, Japan, South America and the Arab countries, as compared to 5 percent 50
years ago; this is a seven-fold increase.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Even though educational progress seems grim
by the standards of our childhood, few of us can match the technological
prowess of our grandchildren. It seems that the evolutionary process started
hardwiring kids’ brains differently after about 1965. Maybe "being smart"
in the 2200s will mean something entirely different in an overwhelmingly
technological world, one in which setting up your TV remotes will be considered
a simple task.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Indeed, ACT and SAT scores as we know
them may become irrelevant in the next few generations. A hundred years ago, a
classical education based on theology, philosophy, and languages was considered
the cultural foundation for the future. Accelerating changes in critical
thinking, scientific knowledge and specialized fields of inquiry require a much
more advanced base.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;"><b>Extended
Life Expectancy </b></span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Life expectancy was 46 years in 1900 and
had increased to 78 years by 2000. As a result, Social Security as we know it
will end within a few decades, because there will be too few workers to support
the large number of baby boomer retirees. Many actuaries predict that more than
50 percent of the American children born during this century will be
centenarians. However, economic and demographic trends tend to be
self-correcting. Certainly life expectancy won’t continue to increase unless we
address the primary health threats that we face: obesity, sedentary lifestyles
and increasing stress.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">To summarize, there is a widening gap
between the haves and the have-nots, between the educated and the uneducated,
and between the healthy and the unhealthy. Many factors contribute to these anomalies;
generally the poorest among us not only have the fewest financial resources,
but also the least education and the shortest life expectancy. Solving the
income inequality issue, the glaring education gap and the health disparities within
our society cannot be done independently.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;"><b><span class="msoDel"><del cite="mailto:Shari%20Cohen" datetime="2014-01-30T10:14"><br /></del></span></b></span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<b><span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">Parenting
Skills Are Key</span></span></b></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">The overriding common denominator
between the haves and the have-nots in our society is the quality of their
parenting. 40 percent of American children are raised in single-parent homes
and others grow up with dysfunctional adults. Even among two-parent households,
financial conditions usually necessitate that both parents work so that neither
spouse is available to be the primary nurturer and teacher of children.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;">These children are less likely to have
balanced, nutritional meals and may not be taught healthy habits. Children raised
in dysfunctional homes are likely to live in an underprivileged environment. Their
children will likely also be economically disadvantaged, as poverty is
normalized in their world. When basic needs aren't met, the value of education
is not paramount.</span></span></div>
<span style="font-size: small;">
</span><br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Arial,Helvetica,sans-serif;"><br /></span></span></div>
<span style="font-size: small;">
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="line-height: 115%;">Of course we alone can’t change the course of
mankind. Our primary goal is to do what is best for our own families. We are in
a position to influence and reinforce the well-being of our progeny by laying a
sound financial foundation. There are perfectly legal tax strategies which our
government has designed that enable families to improve their lives and those
of their children. I’ll cover these in my next blog.</span></span></span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-11500831090145495502013-12-02T14:38:00.001-08:002013-12-02T14:38:24.146-08:00A Skeptic's View of Long-Term Care Insurance<!--[if gte mso 9]><xml>
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<br />
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 8.0pt;"><br /></span></span></div>
<h2 align="center" class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 18.0pt;">A Skeptic's View of Long-Term Care Insurance</span></b></span></h2>
<h3 align="center" class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;">Bert Whitehead, M.B.A., J.D. <span style="mso-bidi-font-family: "Times New Roman";">©</span> 2013</span></h3>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">Recently
an elderly client asked me whether she should purchase Long-Term Care (LTC)
insurance. Her neighbor who sold this insurance often mentioned the importance
of this coverage, particularly since my client's spouse had died and she didn't
want to "ruin her daughter's old age" by having her daughter become
her caretaker.<br /></span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">LTC
insurance policies are designed to cover the costs of custodial care for an
elderly or disabled person who becomes so frail that they need help with at
least "two activities of daily living," such as bathing or eating.
These policies appeal to people who have no one to care for them, or who do not
want to burden a spouse or children if they cannot care for themselves.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">These policies
are aggressively sold because insurance sales people generally make higher
commissions on LTC insurance than any other policy. Moreover the annual premiums
have increased so much over the past ten years that people who bought policies
then cannot afford the policies now, or have to agree to reduced coverage. Premiums
can increase continually without a ceiling.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">Insurance
companies have vastly underestimated the costs of long-term care benefits; even
the government dropped long-term care in the Affordable Care Act because it was
determined to be too expensive. Faced with rising life expectancies and
increasing costs for medical care, more than 100 insurance companies have stopped
offering LTC insurance during the past ten years. It’s difficult to determine
the strength of insurance companies that continue to offer these policies.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">In my
experience, LTC insurance is over-priced and often sold to people who don't
need it. The worst part is that when people have to use it they’re more likely
to feel frustrated, disappointed and dissatisfied than to enjoy the comfort and
peace of mind they expect.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">Claims
for benefits are routinely challenged by insurance companies<span style="color: red;">,</span> and policy holders are often determined to be ineligible
for benefits based on the fine print in their policies. People who make the
claims are saddled with an overwhelming continuing administrative task as
companies require more and more documentation to support claims.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Who Needs It?</b></span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><br /></span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">It is
better to self-insure yourself whenever you can. Insurance companies are like
casinos: they know what the odds are, and simply adjust their payouts to assure
profits. LTC, however, is a relatively new offering. When I grew up, my
grandmother went to the county hospital when she became senile -- nobody
considered LTC insurance. So our generation is the first to face this issue and
insurance companies don't have enough experiential data to price it. Since life
expectancy has risen so fast, and medical technology and expense have
mushroomed, companies selling LTC have had to continually scramble to raise
prices, reduce coverage and<span style="color: red;">,</span> of course<span style="color: red;">,</span> contest claims.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">One of
the reasons LTC is relatively costly is that sales people are paid higher
commissions to sell it than any other non-investment insurance policy. Policies
are sold aggressively and are very difficult to compare. The primary components
of a long-term care policy are the daily benefit rate, the length of coverage,
and the level of inflation coverage. Sales people are paid higher commissions based
on the various options they suggest and sell. </span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">If you
select $250/day coverage when you are 55, the cost would be $2,065 per year and
would cover benefits for 3 years. Even ignoring the reality that premium costs
will rise faster than the inflation rate, from the start this policy would create
a "pool" of only $273,750.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">Let's
face it: if you end up in a nursing home, you're not going anywhere else. Right
now if you live within your means and save 10% a year (even after retirement),
you may well have enough to self-insure. Certainly those with $1 million in
financial assets (or $2 million for a couple) should be able to self-insure.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">Fifty percent
of Americans who have less than $250,000 in financial assets probably can't
afford the luxury of LTC. You will have to make do with Social Security
benefits, Medicare and Medicaid if you qualify. So let's consider those with
more than a $250,000 but less than $1 million in total assets who are over age
60.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">What are your chances of needing LTC?</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><br /></span></div>
<br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span>Insurance sales people stress that two-thirds of
people age 65 will need LTC in their lifetime.</span></li>
</ul>
<br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span>A nursing home can cost more than $70,000 per
year.</span></li>
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<br />
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<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">But
what they don't tell you is:</span></div>
<br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span>More than 70% of seniors will have less than
$25,000 in private out-of-pocket expenses for nursing home care during their
lifetime.</span></li>
</ul>
<br />
<ul>
<li><span style="font-family: Arial,Helvetica,sans-serif;"><span style="mso-list: Ignore;">·<span style="-moz-font-feature-settings: normal; -moz-font-language-override: normal; font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span>Only 5% of seniors will need to pay $50,000 or
more per year for long-term care<a href="http://www.blogger.com/null" name="_GoBack"></a> for more than 5 years.</span></li>
</ul>
<br />
<div class="MsoListParagraph" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">If you are considering LTC:</b></span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;"><br /></span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">There
is impartial information available online, e.g. <a href="http://www.cbsnews.com/8301-505146_162-39941305/long-term-care-what-are-the-real-risks/?tag=mwuser" target="_blank">Long-Term Care: What Are the Real Risks?</a><span style="mso-spacerun: yes;"> </span>If you currently have an LTC policy, have it
reviewed by a fee-only financial advisor before you cancel it.</span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;">
<span style="font-family: Arial,Helvetica,sans-serif;">Keep
in mind that policies generally cover only three years of nursing home care and
older policies that covered up to six years are seldom available any more. There
are also options to convert current life insurance policies so that they can
serve double duty and provide LTC insurance if that is needed. If you decide
you need LTC, check your life insurance policies to see if they are convertible.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 8.0pt;">Thanks to Shari Cohen and Laura Webber for editing</span></span></div>
Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-2585031977221269517.post-46502077991024328902013-08-23T08:28:00.000-07:002013-08-23T08:28:24.593-07:00How Important Is It that the U.S. Repay Its Debt? (Part II)<!--[if gte mso 9]><xml>
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<h2 align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20.0pt; line-height: 115%;"> How Important Is It that the U.S. Repay Its Debt? (Part II)</span></b></span></h2>
<div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20.0pt; line-height: 115%;"></span></b></span></div>
<h3 align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 14.0pt; line-height: 115%;">Bert Whitehead, M.B.A.,
J.D.</span></b></span></h3>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">Keynesian theory espouses the belief that the government can
and should shape the economy through both fiscal policy (increasing government
spending to spark economic activity) and aggressive monetary policies
(expanding the money supply to pay off existing debt and fund higher spending).
Thus, governments should expect to have a deficit during a recession in order
to prime the pump so that the economy can get traction and create jobs.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;">Keynesians point to FDR's policy during the Great Depression
of abandoning gold as the basis for U.S. currency and his unprecedented federal
spending as the key to recovery at that time. Classical economists, however,
insist that FDR's spending and unfettered increase in the money supply made the
Depression worse, and that it was World War II that finally ended the Depression.
They also note that Carter's application of Keynesian prescriptions in the 1970s
led to unparalleled inflation and unemployment.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Can Growth Counteract
Easy Money Policies?</b></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">It would seem that some level of government debt has been
helpful for economic growth, but there’s a point where inflation compounds and
gets out of control. The result is the collapse of the nation's economy as we
witnessed in 1989 when Russia was terminally crippled by over-printing rubles
to pay for its military.</span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial,Helvetica,sans-serif;">The issue isn't whether the U.S. should pay off its debt,
but whether it can grow the economy (i.e. grow our Gross Domestic Product, or
GDP) enough to keep up with the additional money we’re printing. If “easy
money” policies outstrip national production of goods and services, the inflation
of our dollar will accelerate at a compounded rate to a point where other
countries, and even our own citizens, will view it as worthless. Incidentally,
this happened in the U.S. with Continental dollars during the Revolutionary
War.</span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Money without Backing
Loses Its Value</b></span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">“Fiat” money is currency which is not backed by any specific
assets, other than trust in the entity creating the money. It generally refers
to paper money not backed by gold. However one of the first instances of fiat
money was coinage in ancient Rome. In about 300 BC, Rome changed from a
monarchy to a republic and the leaders started issuing a silver coin, the
denarius. These coins facilitated world trade and became the world's reserve
currency which greatly enhanced Rome's prosperity.</span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">After about 300 years, Julius Caesar turned Rome into an
empire, and as emperor he started debasing the coins by replacing an increasing
percentage of the silver in a denarius with iron. People caught on quickly and
started hoarding and melting down the older coins which had more silver
content. This is an early example of Gresham's Law: "Bad money drives out
good money."</span></div>
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<br /></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">Over time, successive Roman emperors continued to debase the
denarius, so when the Roman Empire collapsed, less than 1% of the denarius was
silver. This was called “fiat money” (“fiat” is Latin for “it is declared” or
"let it be done"). The government declaration that the denarius was
truly money was spurious, because it ceased having any value in world trade and
even Roman citizens refused it. This is a classic example of what happens when
a government produces too much money with declining credible backing.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">The Chinese first used paper money 1,000 years ago and it
was soon debased into fiat money. Successive dynasties attempted to support the
paper, and Marco Polo described the use of paper money during the Yuan Dynasty.
The government made several attempts to support the paper, but since notes were
never retired inflation became evident. Since then fiat paper money has been
tried by dozens of different governments, but none of the currencies has
survived more than 100 years.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: red;"></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Excess Debt Can Lead
to Unchecked Inflation</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">While some level of government debt has been helpful for
economic growth, there’s a point when the inflation created unravels an
economy. The U.S government’s current proclivity to spend without adequate
consideration of economic implications (both positive and negative) puts the
U.S. dollar at risk of becoming a worthless currency.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span class="msoIns"><ins cite="mailto:Shari%20Cohen" datetime="2013-08-12T20:05"></ins></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">Although the world has never known a world reserve currency
as strong and dominant as today’s U.S. dollar, we don't really know how much
debt is too much, i.e. when other countries will be unwilling to accept dollars
because our national production dwindles relative to new money printed. The
bottom line is that when there’s nothing others can buy with U.S. dollars, it’s
worthless.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Inflation Can Unravel
and Economy</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">FDR took the US dollar off the gold standard in 1933, and in
1972 Nixon officially made the US dollar fiat money. During the following
decade, the US economy tanked, while more dollars were printed due to the OPEC
crisis. The value of the dollar fell 50% between 1970 and 1980, until spending
and taxes were cut and production and employment increased. Inflation exceeded
14% and unemployment was over 10% at the end of Carter's term. It’s folly to
think that by using fiat money we can continually spend with impunity on wars,
welfare, infrastructure, education, etc. unless our productivity increases
commensurately.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: red;"><span class="msoIns"><ins cite="mailto:Bert%20Whitehead" datetime="2013-08-01T15:59"></ins></span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">The crisis limit is widely estimated to be when national
debt exceeds GDP. Most countries in this position experience serious currency inflation.
The U.S. debt now is approaching 100% of its GDP. Japan (whose debt is 200% of
its GDP) is an anomaly due to the factors detailed in my earlier blog, <a href="http://bertwhitehead.blogspot.com/2013/02/the-race-to-zero.html" target="_blank">The Race to Zero</a>.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">It’s often difficult to evaluate economists' projections--
economic theory is more conjecture than science. We’ve never been able to truly
test global economic reactions in a controlled experiment where we can limit
the impact of the innumerable potential variables.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">I do think that people who have a basic understanding of the
principles involved can be more aware of economic shifts which may affect them
without going to extremes and putting everything in gold, or mindlessly
accumulating debt with the hope of winning. In short, if a $3 loaf of bread in
today's prices costs $30 in 2060, it's not likely to be a big problem. But if
we print so much money that today's $3 loaf of bread costs $30 in 2020, we will
face an economic catastrophe.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">Worry is not prevention and hope is not a strategy<a href="http://www.blogger.com/null" name="_GoBack"></a>.<span style="color: red;"></span></span></div>
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<span style="font-size: xx-small;"><span style="font-family: Arial,Helvetica,sans-serif;">I appreciate copyediting by Shari Cohen and Laura Webber.</span></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-61520694781173568342013-08-06T09:22:00.000-07:002013-08-06T09:23:08.705-07:00How Important Is It that the U.S. Repay Its Debt? (Part I)<b style="mso-bidi-font-weight: normal;"><span style="font-size: 20pt; line-height: 115%;"><span style="font-family: Calibri;"> </span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20pt; line-height: 115%;"><span style="font-family: Calibri;"> </span></span></b><br />
<h2 style="text-align: center;">
<b style="mso-bidi-font-weight: normal;"><span style="font-size: 20pt; line-height: 115%;"><span style="font-family: Calibri;">How Important Is It that the U.S. Repay Its Debt? (Part I)<o:p></o:p></span></span></b></h2>
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<h3>
<b style="mso-bidi-font-weight: normal;"><span style="font-size: 14pt; line-height: 115%;"><span style="font-family: Calibri;">Bert Whitehead, M.B.A., J.D.<o:p></o:p></span></span></b></h3>
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<br />
<span style="mso-bidi-font-family: Arial;"><span style="font-family: Calibri;">Often questions posed by my clients are the best topics for this blog! A client recently responded to my blog of July 8 ("<a href="http://bertwhitehead.blogspot.com/2013/07/normal-0-false-false-false-en-us-x-none_8.html" target="_blank">Dollar Collapse</a>?" which was also on a subject raised by a client).<o:p></o:p></span></span></div>
<blockquote class="tr_bq">
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<i style="mso-bidi-font-style: normal;"><span style="font-size: 9pt; line-height: 115%;"><span style="font-family: Calibri;">Hi Bert,</span></span></i> </div>
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<i style="mso-bidi-font-style: normal;"><span style="font-size: 9pt; line-height: 115%;"><span style="font-family: Calibri;">I read this with some interest--especially your client's concerns. Sometime please say something about the debt. I just don't believe this has been shown to be a profound economic question. But I can't see why any serious person would worry about whether we can repay the national debt. Do Fortune 500 corporations worry about "repaying" their debt?<br /><br />As for hyper-inflation worries: Where does this come from? Whatever expansion of the money supply that we have had since 2008 has certainly not led to serious inflation, let alone hyperinflation.<o:p></o:p></span></span></i></div>
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<span style="font-family: Calibri;">There are two intertwined issues raised here: 1) The impact of government debt on our economy; and 2) The dangers of “fiat” money. The response requires two blogs, of which this is Part I.</span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">Excess Debt Can Lead to Bankruptcy<o:p></o:p></span></b></div>
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<span style="font-family: Calibri;">Notable economists during the past 100 years have declared that the amount of our government’s debt doesn't matter. It is true that most successful corporations, individuals and nations never pay off their debt and never face any consequences.</span></div>
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<span style="font-family: Calibri;">As an entity or an individual amasses debt beyond their repayment ability, their credit rating drops. A company may drop from an AA rating to an A rating, or an individual’s credit score may drop from 750 to 710. These ratings are based not only on the borrower’s history of repayment, but also their assets relative to debt, and more importantly, their debt as a percentage of their income. These same three factors are used to rate the creditworthiness of the U.S. Naturally, there was concern when the U.S. credit rating dropped from AAA to AA.</span></div>
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<span style="font-family: Calibri;">In the private sector, the debt of corporations and individuals can have a huge impact on their survival. Since 2008 we’ve witnessed over 100 of the largest US corporations go bankrupt, including American Airlines, Borders, Circuit City, Mervyns, and scores in other industries.</span></div>
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<span style="font-family: Calibri;">We’re all aware of the personal impact when an individual loses a job or gets behind on their payments: it becomes more difficult and more expensive to borrow money. Corporations, likewise, have to pay a higher interest rate if they continually operate with losses and if their debts exceed their revenue. Eventually, if a corporation or individual is unable to repay their debts, they may be forced into bankruptcy and the court will liquidate their assets for distribution to their creditors. The same is true for municipalities: when no one will lend them any more money, they are often forced into bankruptcy (e.g. Detroit, MI and Stockton, CA). Then their assets are sold off and the proceeds paid over to the creditors, including pensioners, who typically receive 5 or 10 cents on the dollar.</span></div>
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<span style="font-family: Calibri;">On the international level even sovereign entities are not immune to the consequences of spending more than they collect in taxes. The downgrading of credit in Greece, Spain, Argentina, and other struggling nations has hampered their ability to grow their economy and participate in global trade. Unrestrained government spending has caused widespread unemployment, uncontrollable inflation, shortages of consumer essentials, often riots, and the deprivation of their people. This results from unmanageable debt by their leaders.</span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">Expanding the Money Supply Can Cause Economic Collapse<o:p></o:p></span></b></div>
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<span style="font-family: Calibri;">The typical response of sovereign governments to tackle unwieldy debt is to print more money to pay off existing debt and fund their continued over-spending. This can work for a while if the country’s growth in productivity (as measured by GDP or Gross Domestic Product) exceeds the expansion of its money supply. Classical economic theory claims that a country's increasing debt ratio relative to GDP will devalue its currency gradually until at some point the currency collapses. We have seen situations when printing too much money brought on economic collapse during the past century in spectacular ways: Zimbabwe in the last decade, Russia in the 1980s, Mexico in the 1970s and the Weimar Republic in the 1920s.</span></div>
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<span style="font-family: Calibri;">A sure sign of a collapsing currency is when a black market develops and ultimately controls the exchange rate. For example, at the time of the fall of the Berlin Wall in the late 1980s, Russian rubles had an official exchange value of 5 rubles to the dollar, but on the street the going rate was 100 to the dollar.</span></div>
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<span style="font-family: Calibri;">When a country loses control of its money supply and keeps printing money to cover its debts and spending, the price of imports skyrockets (since other countries don't want their currency). The country becomes isolated from the world economy.</span></div>
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<span style="font-family: Calibri;">Keynesian economists argue, however, that the U.S. is not subject to these consequences because the dollar is the world reserve currency. Accordingly, it doesn’t matter how much of a deficit we have because other economies measure the value of their currency in U.S. dollars.</span></div>
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<span style="font-family: Calibri;">While the U.S. dollar was established as the world reserve currency in 1944, other world reserve currencies going back thousands of years (like the Greek drachma, Roman denari, Dutch guilder, and the British pound) have come and gone. Historically there has never been a nation able to control government spending when it has the ability to print money and eventually their currency is inflated to worthlessness.</span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">Inflation Is the Real Issue<o:p></o:p></span></b></div>
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<span style="font-family: Calibri;">Inflation results when there are too many dollars chasing too few goods, so prices increase. Inflation is stealthy so we don't feel the effects from year to year, but over time inflation does decrease the value of our currency. The dollar's purchasing power has decreased over the past 50 years so that now the dollar is worth 60% less. That is why bread, for example, cost 30 cents in 1960 and now costs $3. If you lent a friend $100 in 1950 and were repaid today, the $100 you receive will only buy goods and services which cost $10 in 1950. (See my February 25 blog “<a href="http://bertwhitehead.blogspot.com/2013/02/the-race-to-zero.html" target="_blank">The Race to Zero</a>” about whether or not inflation is inevitable.)</span></div>
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<span style="font-family: Calibri;">So the real issue is not the need to pay back the national debt, but rather that the value of the dollar continues to plummet as the government prints currency at a rate exceeding the GDP. So even if we don't pay off our debt as a nation, our children and their children will be paying the price through unhindered, compounding inflation.</span></div>
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<span style="font-family: Calibri;">Classical economists argue that increasing national debt will eventually imperil a nation's economy. They insist the correct remedy to cure a recession is to cut government spending and taxes to give room for the economy to recover. Even though austerity may be the short-term result, it is necessary to break out of the downward spiral of devaluation. This strategy is opposed by those who believe that government spending and regulation would help increase current and future productivity, in addition to mitigating social </span><a href="http://www.blogger.com/null" name="_GoBack"></a><span style="font-family: Calibri;">issues.</span><br />
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<span style="font-size: xx-small;"><i style="mso-bidi-font-style: normal;"><span style="line-height: 115%;"><span style="font-family: Calibri;">I appreciate copy-editing by Shari Cohen and Laura Webber</span></span></i></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-70445233551599850442013-07-08T14:10:00.004-07:002013-07-08T14:11:08.896-07:00Dollar Collapse?<!--[if gte mso 9]><xml>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 9.0pt; line-height: 115%;">Dollar
Collapse</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 28.0pt; line-height: 115%;">Dollar Collapsing?</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 20.0pt; line-height: 115%;">Bert Whitehead, M.B.A.,
J.D. </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 14pt; line-height: 115%;">© </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 14.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">2013</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 14pt; line-height: 115%;"></span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%;">The market turmoil over the past
month has again raised the specter of global economic disaster. Several clients
have expressed concern about the volatility in the stock market, and the recent
increase in interest rates and corresponding drop in bond values. This is a
typical email I have received which succinctly addresses this concern, followed
by my reply:</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span></span>Bert:</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="mso-tab-count: 1;"></span>Given
the fact that I am no longer eloquent on any topic (let me think that I once
was) I</b><b style="mso-bidi-font-weight: normal;"><span style="mso-tab-count: 1;"> </span>thought
it better to handle this topic by email.</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="mso-tab-count: 1;"></span>The
crux of the thing is the size of the national debt; the fact that I can't find
anyone that </b><b style="mso-bidi-font-weight: normal;"><span style="mso-tab-count: 1;"></span>thinks
it can be repaid; the pending loss of the reserve currency status (already
Russia and</b><b style="mso-bidi-font-weight: normal;"><span style="mso-tab-count: 1;"> </span>China
settle trade between their countries in the Yuan).</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="mso-tab-count: 1;"></span>Not
all doomsayers are gold dealers.</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Are
we expecting a period of hyper-inflation or the extinction of the dollar?</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Can
you point me to other sources that you are looking at?</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;">Thanks,
(from a long time client)</b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">Dear
Client:</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">I’ve
given this a lot of thought, and while it’s true that historically ‘fiat’ money</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-font-size: 10.0pt;"> (i.e., currency that a
government has declared to be legal tender, despite the fact that it has no
intrinsic value and isn’t backed by reserves such as gold</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">) has never survived beyond a century. National
leaders inevitably try to use the power to print money as a vehicle to change
society to their liking, rather than controlling the money supply to reflect
increased productivity. Eventually there’s too much money chasing too few
goods, and hyperinflation renders the money worthless. The big question is, “How
much longer can this last?” We don't know the 'tipping point' when too
much government debt degrades the dollar.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">When I
evaluate the alternatives, I don’t find a real solution. The
gold/silver/platinum markets are now dominated by speculators. There isn’t a
credible institution that could guarantee a stable enough price of any metal
that would be required if used to provide liquidity in a global market.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">I don’t
see any other currency deep enough to support global trade, including
Japan. The Euro and Yuan would like to be the world reserve currency, but
Europe is in worse shape than we are, and a totalitarian government like China
would never be acceptable as the world’s banker – plus I think they will spin,
crash and burn before we will.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">The idea
of a ‘basket of currencies’ is appealing to some, but I can’t see how stacking
up inept economies and their leaders is going to magically become the global
financial solution. The idea of Russia teaming up with China to bring
about a strong worldwide economy is ludicrous – perhaps they’re sincere about
making this a better world, but they’ve bungled it during the last hundred
years.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">This is
not a given, but I don’t trust any other alternative I’ve studied. Financial
markets seek balance by testing the extremes, particularly when there are
sudden shifts in the economy. This is the norm, not the exception.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">Stock
prices in particular have always shown a remarkable resilience over the long term.
The gravest error an investor can make is trying to time market shifts. There’s
never been a system to 'beat the market' that works as well as buying and
holding a well-diversified portfolio.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">Prices
of bonds can fluctuate unpredictably, rising suddenly when interest rates fall
and then crashing when interest rates rise. The wisdom of owning Treasury Bonds
is that you can be certain of getting your money back at maturity. Regularly
laddering bonds over time enables an investor to protect a portfolio from loss
and enables a steady long-term cash flow.</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12.0pt; line-height: 115%; mso-bidi-font-family: Calibri;">I’m still
betting my money on the U.S., based on Darwin’s theory. It’s not about
survival of the fittest (although arguably we may be the most fit), but rather
survival of the most adaptable. And I think, as bad as things may be here,
our political structure and relative freedom still allows us to be the most
entrepreneurial and therefore the most adaptable nation in the world.</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 12pt; line-height: 115%;"> </span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: xx-small;"><i>I
appreciate the editorial review contributed by Chip Simon, CFP®, an ACA
colleague of mine in Poughkeepsie, NY, and copyediting by Laura Webbe<a href="http://www.blogger.com/null" name="_MailEndCompose"></a>r.</i></span></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-13883296770586815002013-05-24T07:38:00.001-07:002013-05-24T07:40:46.897-07:00Money Mindfulness<div style="text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-large;">Money Mindfulness</span></div>
<div style="text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><div style="text-align: center;">
<br /></div>
</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Bert <span style="font-family: Arial, Helvetica, sans-serif;">Whitehead, M.B.A., J.D. © 2013</span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div style="text-align: center;">
<u><span style="font-family: Arial, Helvetica, sans-serif;">Money and Behavioral Issues</span></u></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Money matters are complex. Investment options, taxes, interest rates, and financial transactions in general can be overwhelming for people who are not in the financial industry. Fewer than half the people in this country understand the math necessary to handle their own finances, even at a minimal level (including reconciliation of a checkbook). Compound the bewildering technical aspects of money with fear: nearly everyone reading this has been 'ripped off' monetarily at some point in their lives. Eventually, most of us understand that we should be very careful about trusting anyone else, even family members, with our money.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Even with these issues, the most difficult money problems are without a doubt the behavioral aspects. On the one hand, some people are compulsive shoppers who spend every dime they can and then run up their credit cards when the checking account is empty. This can be so extreme that it can constitute an powerful and devastating addiction. Often these people are not even aware of these issues because of denial, which is a common phenomenon among addicts.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">On the other hand, there are others who hoard money, sometimes compulsively. This obsession drives every decision. They may spend many hours counting their money, talking to others about money, and lecturing family members about spending too much money. They never have enough savings to make them feel secure, and they don't generally even know how much they would need to feel financially adequate.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Recent studies have demonstrated that using a trusted and knowledgeable financial advisor who doesn't charge commissions enables people to make better decisions and improves their financial situation substantially over time. That's why I myself rely on other financial advisors in my own financial affairs: as a professional, I know it is impossible to be objective about my own money. It is a huge weight off my shoulders to turn it over and rely on the wisdom of others. Doctors don't take out their own appendices, lawyers shouldn't represent themselves, and believe me financial advisors and do-it-yourselfers are their own worst problem.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div style="text-align: center;">
<u><span style="font-family: Arial, Helvetica, sans-serif;">Money Mindfulness</span></u></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Money mindfulness entails living within your means. You are living within your means if you are able to save 10% of all your income and pay off your credit cards each month (not with a home equity loan!). When people live beyond their means, their debt becomes the monkey on their backs. Basically, they are trying to be someone they are not. It is very emotionally exhausting to continually fight this disconnect. If you have debt, you must put away the credit cards until you bring your spending down and get them paid off.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Bond ladders with US Treasuries --- which assure investors that they have sufficient cash flow for fifteen years on retirement, without having to worry about any other investments --- provide the security needed for Money Mindfulness. Clients without bond ladders made it through the recession of 2008 financially, but I witnessed their anxiety as their investments stocks, junk bonds and real estate plummeted. Clients with bond ladders faced those traumatic times with aplomb, and gratitude.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Money Mindfulness is a concept that stresses awareness without obsession, circumspection without distrust, and a cultured disposition to use money effectively to enhance one's own life and the lives of those around them. There are several aspects I have noticed in people who have matured to this level. These include emotional, intellectual, and spiritual assets which provide a base to earn, use, and enjoy money comfortably.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
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<u><span style="font-family: Arial, Helvetica, sans-serif;">Emotional, Intellectual, and Spiritual Aspects</span></u></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Emotional mindfulness is nurtured by our relationships with others, obviously starting with our parents. Childhood deprivation often develops a 'getting and spending' vortex impelling some to never feel like they quite have enough. In some cases this may manifest as hoarding or kleptomania in later life, but seldom results in such extremes. More generally it shows up in dithering over decisions involving money. For example, at a restaurant some people evaluate their choices by first reviewing menu prices to find the least expensive, or at least not the most expensive choice. Frankly, if you have to make your culinary choices based on the menu prices, you should go to a different restaurant.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Intellectual mindfulness must be learned. These lessons are difficult, especially for those who are not naturally mathematically inclined. It can be difficult to intuitively understand when an interest rate is too high or too low. This drives many people into financial destruction because they don't understand how much interest they are actually paying when they buy on credit. Likewise, as Warren Buffet noted: "Investors lose more money chasing high rates of return than they do at the point of a gun.” </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The single most important concept to understand is the power of compounding, both when investing and when borrowing. Even tiny differences in investment returns mushroom over time. $100 saved every week in an index fund will net $32,000 more return over 20 years compared to paying 1.25% for a managed fund. Conversely, borrowing $300 for a week until payday for $10 interest amounts to an annual interest rate of over 40%. Learning this fundamental truth is essential to Money Mindfulness.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Finally, I believe there is a spiritual element in mindfulness. This is a basic understanding of myself in relation to the rest of the world. The winner in life is not the one with the most toys at death. The winners in life are those who can detach themselves from the facets of life that are reflections of fear, and who know how much is enough. Money Mindfulness is an ancient Buddhist concept which teaches that the path to happiness is more a result of wanting what we have than getting what we want. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif; font-size: xx-small;">Thanks to Laura Webber for editing this for me.</span>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-2585031977221269517.post-11498170567945520552013-04-10T11:08:00.002-07:002013-04-15T08:38:14.906-07:00Sundown in America?<div align="center" class="MsoListParagraph" style="margin: 0in 0in 10pt 0.5in; text-align: center;">
<span style="font-family: 'Arial','sans-serif'; font-size: 24pt; line-height: 115%;">Sundown in America?<o:p></o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 18pt; line-height: 115%;">Bert Whitehead, M.B.A., J.D.<o:p></o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">David Stockman, President Ronald Reagan's Budget Director, authored an opinion piece published in the Sunday New York Times on March 30, 2013. His provocative conclusion is that eight decades of bipartisan Keynesian spending and Federal Reserve money-printing have left us exhausted and bankrupt. The article can be referenced <a href="http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html">here</a>.</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">His article certainly outlines a doomsday scenario, buttressed with historical trends and US policy gone awry. I would refer my readers to a blog I wrote a month ago – which is now distributed by a number of online financial websites – titled “The Race to Zero Interest Rates.” This lays out a similar financial unraveling, but emphasizes the global scale of the issue. Today, more so than the past, our issues are intertwined with international reactions. The article can be found <a href="http://www.adviceiq.com/articles/bert-whitehead-and-charles-simon-race-zero-interest-rates">here</a></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">.</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">Most observers agree with David Stockman about the likely outcome of debilitating inflation, but no one knows when this outcome is likely to happen. My article explains some key global factors that may continue to dampen inflation for awhile – perhaps even for 10 to 20 years.</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">There are an infinite number of factors that impact the global economy, which now shapes the US economy to a large extent. Also, economies don’t evolve in a straight line, but are molded by many factors interacting simultaneously.</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">Most imbalances are self-correcting, like supply rising to meet increasing demand. Innovations often solve problems that seem intractable, and create opportunities that could never be foreseen. With all due respect to Mr. Stockman, I don’t think anyone can create a dynamic algorithm to take into account all of these possibilities and their unlimited contingent possible combinations. No matter how concrete a belief may be, there is always a contradiction that can prove it wrong.</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">While it is often observed that history repeats itself, the actual course of history is sheer guesswork. Stockman’s advice is to “get out of the markets and hide out in cash.” In my opinion, this is a dangerous knee-jerk reaction to our economic situation. It reminds me of all the past prophets of doom who advocate a single asset class as the safe haven of the future, with usually gold and real estate taking center stage. They are, of course, usually offset by a similar chorus of single-minded get-rich gurus pumping investments into stocks in BRIC emerging countries, or various commodities, or even junk bonds. We must remind ourselves: for every buyer, there is a seller – and one of them is wrong!</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">I always prefer to view these problems from an endogenous perspective: how does this affect your family and what should you do about it? I still favor balance for our clients. You must continue to diversify yourself and take into considerations the only 3 possible economic scenarios: continued deflation, rising prosperity, and the specter of inflation.</span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"></span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">Keep in mind that most financial approaches involve complex instruments which are actually designed for large pension funds, foundations, insurance companies, etc. The three tried and true strategies for ‘real people’ are well-known and very simple:</span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"><o:p> </o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"><o:p>Always live within your means</o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"><o:p>Save 10% of every dollar you earn</o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;"><o:p>Keep your portfolio diversified</o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">We still recommend Treasuries as the <u>only</u> solid buffer against deflation. When deflation kicks in, the current value of bonds drops, but at maturity you will get your money back. The most efficient protection against inflation is a fixed rate long-term mortgage for at least 50% of the value of your house because you will fix a portion of your housing costs and pay back the obligation with cheaper dollars. And dollar-cost-averaging into the stock market, using primarily large cap index funds , assures that you will benefit from long or short spurts of prosperity.<br /><br />Some financial </span><span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">commentaries appeal to greed, others to fear. The prudent path is to avoid extremes and disregard exhortations to take undiversified positions within your portfolio. Diversification is your true ally and the only reasonable answer to the question “What if everyone is wrong?”<o:p></o:p></span></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: 'Arial','sans-serif';"><span style="font-size: x-small;">I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague of mine in Poughkeepsie, NY, and copyediting by Laura Webber.<o:p></o:p></span></span></i></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-81664199696656472042013-03-29T07:23:00.001-07:002013-03-29T07:23:28.293-07:00Why Invest in the Stock Market Anymore?<h2 style="text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;">Why Invest in the Stock Market Anymore?</span></h2>
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<span style="font-family: Arial, Helvetica, sans-serif;">Bert Whitehead, M.B.A., J.D. ©2013</span></h3>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-family: Arial, Helvetica, sans-serif;">You’ve heard the investment commentators berate investments</span> in the U.S. stock market lately. They note that the Dow Jones Industrial average, which measures values in the stock market, has been trading over 14,000 for the past month -- but isn’t that where it peaked in September of 2007?</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Their conclusion is that it’s folly to invest your money in the stock market since it’s had a zero return over the past five years. Other indexes measuring the U.S. stock markets, such as the S&P 500, have confirmed this 'lagging' performance.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">This conclusion demonstrates the hazard of relying on 'static' analyses, which are based on exogenous factors such as comparing the beginning and end of a chart. I suggest that a dynamic analysis, based on endogenous factors, more accurately assesses the impact from an individual investor's perspective. This endogenous viewpoint takes human behavior into account.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Over the past five years, we have advised our clients to continue buying stocks (or mutual funds) every month. This strategy is called "dollar cost averaging" (DCA). By using this strategy consistently, instead of trying to time the market, an investor automatically takes advantage of down markets since investing the same amount every month enables them to purchase more shares.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">When the market eventually turns around, the investor's portfolio carries stocks with a lower cost overall. The chart below compares the amount which would be saved by an investor stashing his investment in cash (under the mattress or in a money market paying virtually zero yield) to the value of the portfolio invested in diversified stocks such as mutual funds. It assumes the investor regularly invests $1,000 per month over the 64 month period (approximately 5 years) beginning in October, 2007 and ending in February, 2013, with dividends reinvested.*</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Rather than ending up with $64,000, the investor using DCA ends up with $88,500, or 35% more than a static analysis would suggest. This works out to a return of approximately 7% per year, rather than a zero return. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">* <em>Data is based on closing prices of DIA, which is like a mutual fund that has all 30 of its stocks in the Dow Industrial Average</em>.</span></div>
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<span style="font-family: Arial;">I want to thank Al Hoefer, my technical consultant, and Laura Webber, my executive assistant, for their assistance in preparing these charts and proofreading this document.</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-24363111772508099252013-02-25T07:15:00.001-08:002013-02-25T07:15:33.663-08:00The Race to Zero<h2 style="text-align: center;">
The Race to Zero</h2>
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Bert Whitehead, M.B.A., J.D. ©2013</h2>
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The government is printing too much money!<br />
<br />We have all heard the clamor raised by concerns that U.S. monetary policy (called "Quantitative Easing") will trigger inflation by causing 'too many dollars to chase too few goods and services.' The U.S. Treasury is issuing U.S. Government bonds at a faster rate than our economic growth. These surplus bonds are purchased by the Federal Reserve Bank, creating money that can be lent to businesses, etc. and so presumably help the economy expand.<br />
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There have been a couple problems with this strategy. First, the banks (and corporations) already have too much cash so they are not borrowing it from the Fed as expected. Next, we are still cleaning up the last mess when mortgages were made to virtually anyone. Since the excess money being issued is not being lent out or circulating, it keeps interest rates low. It also depresses the value of the dollar in the international market, since dollars are so plentiful. The good news is that this helps make our exports cheaper for other countries and keeps Americans working.<br />
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Ironically, other countries have caught on to this strategy, although not always as aggressively as the U.S. The European Union has been inflating its money supply as a tactic to avoid collapse of the weaker members (Spain, Italy, Portugal, etc.) and to make their exports cheaper. China has had a bout of inflation triggered by a growing labor movement and skyrocketing urban real estate prices. It has been printing more Yuan to reduce its value and make its exports cheaper. And even though Japan is still largely in a deflationary spiral, they have decided that printing more Yen will make their exports more competitive. Even Switzerland, the bastion of conservative economics with the strongest currency in the world, has started printing more Swiss Francs because no one in other countries can afford to buy Swiss watches.<br />
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This bloated international money supply is the result of the battle for increasing exports. Lowering interest rates through global expansion of the money supply is ultimately expanding the next inflation bubble. These low rates may give some countries an export advantage, perhaps for another decade or even longer. How can this bubble persist without creating inflation now? There are three factors which can temper inflationary pressures for awhile:<br />
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1. Increasing global trade brings down production costs. Just as water seeks the lowest level, free trade enables producers to move to lower cost environments. It also pushes prices down globally which moderates inflation.<br />
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2. Technology has brought unparalleled increases in worker productivity worldwide which keeps prices down. Computers, robots, and other smart technologies lower the costs of production dramatically.<br />
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3. Consumer savings has increased significantly worldwide as a result of the economic volatility of the past decade. When people feel vulnerable they react by spending less and saving more. This is particularly evident in Japan where people save 6-9% of their income, spurred by their aging demographics and concern that the government's safety net may not be effective when they retire. This savings takes money out of the consumer economy and reduces the amount of money that chases the available goods and services.<br />
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Most economists recognize that eventually inflation will catch up with us. But no one knows when or how. Will a smaller, poorer nation default on its debt, or will large investors be scared away from bond auctions as markets lose faith in governments' ability to repay debt? Whether it will be triggered by a 'black swan' event like a war or a natural disaster or simply the gradual erosion of investor confidence, it will likely ignite a global domino effect of hyper-inflation that could engulf most developed countries.<br />
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We know it will happen, but we can’t know when. It is critical to prepare by adhering to the one take-away lesson from the history of inflation: you must emphasize safety in bond investments.<br />
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This is not easy to accept when you consider that it is likely that interest rates will remain low or continue to drop for another decade, just as they have been dropping in Japan for over 20 years. While a 2% return now on 10-year U.S. Treasury bonds seems skimpy now, it could well be 1% in a few years (which is the current yield on Japan's 10-year sovereign debt). People are saying that interest rates can't possibly go any lower, but they have insisted on that since 1994 when 10-year Treasury rates were at 7%!<br />
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It is tempting to be dissatisfied with today’s apparent race to zero interest rates. It impels many of us to want to grasp for higher returns. But higher returns always entail higher risks and it is folly to try to offset lower yields by taking more risks. High yield bonds offer dramatically higher returns than a safe haven, like treasuries, but the risk cuts both ways: when interest rates begin to rise, the value of high yield bonds drops. This is also true of Treasuries, but at least you can be assured of getting your money back at maturity, unlike junk bonds. In addition, when the music stops, holders of junk bonds face significant risk of default. In Functional Asset Allocation theory, which is the centerpiece of our financial planning theory, the function of bonds and cash in your portfolio is to assure consistent cash flow, so it is critical that this part of the portfolio be absolutely safe.<br />
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Before you stretch for a higher yield, keep in mind there is a strong likelihood that we very possibly will see continuing low interest rates for a long time. Meanwhile the "Race to Zero" is the harbinger of the next bubble to burst.<br />
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(Cf. My blog dated Sept. 4, 2012: Finding "Real Returns" in the Bond Market.)<br />
<em>Special thanks to those who collaborated on this post: Chip Simon, an ACA colleague from Poughkeepsie, N.Y., and Shari Cohen who was the copy editor.</em><br />
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-65768420254054043822013-02-10T15:33:00.000-08:002013-02-10T15:33:03.960-08:00What's a "Safe Portfolio Withdrawal Rate?"<br />
By: Bert Whitehead, M.B.A., J.D<br />
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How much can you withdraw annually from your investment portfolio to be sure you don't outlive your money? If you regularly read investment articles, you know that this issue is often debated. Scenarios are analyzed, and various inflation rates, historical investment rates of return, and life expectancy projections are compared. <br />
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While these are key and critical <u>exogenous</u> issues if you are managing billions of dollars in pension investments, if you are a real person it is the <u>endogenous</u> factors that are important when you decide how much money to take from your retirement portfolio. Endogenous factors include living within your means, how much you pay in taxes, and taking appropriate risk for your situation.<br />
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<strong><u>Inflation: The Bogey Man.</u></strong> There is no question that the cost of living has risen over the years, and the compounded effect of inflation over time is startling. For real people, however, it is more complex than just measuring the price level across the whole economy. Younger and middle-aged Americans will likely see prices rise substantially over their lifetimes, but while working their wages can also increase, and generally faster than the rate of inflation. And if you consistently save 10% of your earnings, the amount you save increases each year and easily outpaces the inflation rate.<br />
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For older retired people, especially those on a 'fixed income,' you would think that inflation would be disastrous. Certainly inflation is a continual struggle for those living at a subsistence level. For the more affluent, however, expenses tend to start dropping when they are in their 70's, and continue dropping more rapidly as they age despite increases in inflation. Older people are less mobile, have 'been there, done that, and have the T-Shirt.' They travel less, are generally less active, and less fashion conscious. <br />
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So while the rate of inflation is a big concern for money managers who run gigantic pension plans, in reality it has virtually no impact on personal financial planning.<br />
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<strong><u>‘I just want to 'Die Broke!'</u></strong> New clients sometimes say they want to withdraw their retirement portfolio money and spend it all on themselves during their lifetimes. No problem, I say: just let me know your date of death! <br />
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The simplest and most effective strategy to make sure you never run out of money is to continually save 10% of your total income. While working, most people do this by contributing to their 401Ks. Even in retirement it is prudent to continue to save 10% of your total income (that is, to live at 90% of your means) which includes pension income, social security, and estimated long-term investment returns. Then you don't have to worry about your life expectancy: if you always save 10% of your income you are by definition always living within your means and you will never run out of money.<br />
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True, you could end up spending all of your savings for a catastrophic medical expenses. But in that unlikely event, you will be much better off having saved 10% of your income after retirement than you would be trying to spend down to your life expectancy as a primary investment guide.<br />
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Of course there is a selection bias in determining which people hire financial advisors. These people generally have been living within their means and saving the surplus their whole lives. For them, the prospect of saving 10% is more comforting than challenging.<br />
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<strong><u>If you are going to worry about returns, make it your tax return!</u></strong> Generally the 'safe withdraw rate' calculated by expert financial analysts today ranges from 3.5% to 4.5% of your investment portfolio annually (depending on inflation and longevity assumptions). For real people, however, the source of the funds is much more critical as this determines how much you will pay in taxes. <br />
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After-tax cash savings are obviously preferable to withdrawals from a qualified retirement account and impacts your withdrawal rate significantly. Individuals in their early 60's would likely* have to withdraw $15,000 from an IRA to end up with $10,000 in after-tax dollars to spend. Withdrawals from a Roth IRA aren't taxable, but are generally less advantageous than using after-tax savings because investments inside a Roth compound tax free. Taking capital gains results in 50% less tax than a stream of income from an ordinary annuity with the same basis. Selling high-risk assets with uncertain marketability in an over-leveraged portfolio may be more advisable than blindly taking a 4% withdrawal from ready cash.<br />
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These issues are dependent on 'asset location,' which determines how investments are structured to be tax efficient. Clearly this is an endogenous consideration when determining withdrawal rates. The composition of assets is different for everyone.<br />
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<strong><u>“Are you leavin’ on a jet plane…?”</u></strong> Finally, hiring a great money manager who develops charts, graphs, and long lists of numbers to demonstrate their investment prowess doesn't recognize the really significant issues you face.<br />
<br />
Look at the risk in your portfolio this way. If you are flying from New York to Los Angeles, you could hire a fighter pilot who can demonstrate how fast the jet flies, how quickly he or she can maneuver, their skills are in steeply ascending and descending, and that their record flight is 4.25 hours. However, you also have the option to travel with a trained airline pilot who avoids bad weather systems, knows how to handle the jet streams, and is more concerned about the comfort and safety of your flight. Be aware that the airline pilot will estimate your time of arrival as 5.15 hours, but pads the schedule because the trip usually only takes 4.45 hours. If you can “fly comfortably” by withdrawing dollars from a lower risk portfolio during retirement, doesn’t it make sense to do? Doesn’t a safe withdrawal rate depend in part on having a safe level of risk in your portfolio that is appropriate for you and you alone?<br />
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Real people need to evaluate the factors that they can control when considering the optimal safe withdrawal rate. Forget the academic studies and historical reconstructions and pay attention to the factors that really affect your future by living within your means, staying attuned to taxes, and investing with appropriate risk.<br />
<br />
*Assumes IRA withdrawals are subject to 28% federal plus 5% state taxes.<br />
<strong>-----------------------------------------------------------------------------------------------</strong><br />
Special thanks to those who collaborated on this post: Chip Simon, an ACA colleague from Poughkeepsie, N.Y., and Shari Cohen who was the copy editor.<br />
<br />
<br />
<br />Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-2585031977221269517.post-59842466584466320692013-01-08T16:27:00.001-08:002013-01-13T17:12:29.106-08:00Congress Passes "Fiscal Cliff" Legislation - An Update from Bert and PamGreetings Cambridge Connection Clients,<br />
<br />
As your financial advisors, we have been following the legislative developments in Washington. At the last moment, on January 1, 2013, Congress managed to avert the so-called Fiscal Cliff by passing the bill known as “The American Taxpayer Relief Act”. Perhaps the most notable aspect of the legislation is that nearly all of the tax-related provisions are permanent. This affords us a more reliable framework for your personal financial planning. We will be addressing the impact of these new provisions on your individual tax situation in our tax preparation and tax planning meetings this year. A brief overview of the new tax act is provided below:<br />
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<strong>American Taxpayer Relief Act of 2012</strong></div>
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The American Taxpayer Relief Act of 2012 (or "ATRA") extends and makes permanent the majority of tax cuts that were scheduled to expire at the end of 2012, in addition to retroactively reinstating some rules that had expired in 2011. Here is a brief summary of the changes:<br />
<br />
<strong>2% Payroll Tax Cut NOT Extended</strong> - The 2% payroll tax cut that has been in place for the past two years has lapsed. Social Security payroll tax had been 4.2% the past two years, but will rise to its prior 6.2% level going forward. The Social Security tax applies to the first $113,700 in wages or self-employment earnings in 2013.<br />
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<strong>New Tax Bracket</strong> - The top tax bracket rises to 39.6%, and applies to income in excess of $400,000 for individuals and $450,000 for married couples. These thresholds are indexed for inflation (in a similar manner to all the other tax bracket thresholds). Bear in mind that tax brackets are based upon taxable income after all deductions, not Adjusted Gross Income.<br />
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The remaining tax brackets are extended at their current levels. This means the 35% tax bracket is still in effect, although it's now one of the smallest tax brackets, applying for only $388,350 to $400,000 (for individuals; or $388,350 to $450,000 for married couples).<br />
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The changes to the tax brackets are permanent but, of course Congress could still change the rules in the future!<br />
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<strong>Phaseout of Itemized Deductions and Personal Exemptions</strong> - Phaseout of itemized deductions and personal exemptions returns for 2013. This change was already scheduled to happen with a lapse of the Bush tax cuts, but ATRA applies new thresholds to the rules.<br />
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The phaseout for itemized deductions (also known as the Pease limitation) reduces total itemized deductions by 3% of excess income over a threshold. The threshold amounts are now an Adjusted Gross Income of $300,000 for married couples and $250,000 for individuals. These amounts are indexed for inflation.<br />
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The personal exemptions phaseout (also known as the PEP), reduces personal exemptions by 2% of the total exemptions for each $2,500 of excess income over a threshold. The threshold for this phaseout will be the same as the threshold for the Pease limitation (AGI of $300,000 for married couples, and $250,000 for individuals, indexed for inflation).<br />
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<strong>Capital Gains and Dividends</strong> - ATRA makes permanent the 0% and 15% long-term capital gains tax rates, but increases the tax rate to 20% for any long-term capital gains that fall in the new 39.6% top tax bracket.<br />
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Qualified dividend treatment is also made permanent. Notably, because qualified dividends are tied to the long-term capital gains rate, any qualified dividends that fall in the new 39.6% top tax bracket will also now rise to 20%.<br />
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Individuals who are subject to the new 20% top long-term capital gains and qualified dividends tax rate will actually find their capital gains and dividends taxes at 23.8%, due to the onset of the new 3.8% Medicare tax on net investment income that would also apply at this income levels. <br />
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<strong>AMT Relief</strong> - The ongoing series of AMT exemption patches over the past decade are made permanent, and fixed retroactively for 2012. The new AMT exemption amount will be $78,750 for married couples and $50,600 for singles in 2012 and indexed for inflation in the future. In a separate but related provision, the rules that allow nonrefundable tax credits to be used for both regular and AMT purposes (subject to some restrictions) is also retroactively patched for 2012 and made permanent going forward.<br />
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<strong>Estate Taxes</strong> - ATRA makes the current estate tax laws permanent, including the $5,120,000 (in 2012) gift and estate tax exemption (which will rise further to approximately $5.25M with an inflation adjustment for 2013). However, the top estate tax (and gift, and GST) rate is increased from the prior 35% to a new maximum rate of 40%. <br />
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The estate portability rules for a deceased spouse's unused estate tax exemption amount are made permanent.<br />
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<strong>Miscellaneous Extension Provisions</strong>: <br />
<br />
<em>Made permanent:</em><br />
1) Coverdell Education Savings Accounts (so-called "Education IRAs"), including both the higher contribution limits ($2,000/year), and the ability to use qualified distributions for eligible K-12 expenses, has been extended and made permanent under the new law.<br />
<br />
<em>5 year extension:</em><br />
1) The American Opportunity Tax Credit (the $2,500 tax credit for college) is extended 5 years - it was scheduled to lapse at the end of 2012, and will now run until 2017.<br />
2) The Child Tax Credit and the Earned Income Tax Credit were also extended over the same 5-year time period – until 2017.<br />
<br />
<em>Retroactively patched for 2012 and extended one year through 2013:</em><br />
1) Deduction for up to $250 expenses for elementary and secondary school teachers<br />
2) Exclusion from income of discharged mortgage debt (necessary to prevent a short sale from triggering income tax consequences for the amount of debt that was discharged)<br />
3) Deduction of mortgage insurance premiums as qualified residence interest<br />
4) Deduction for state and local sales taxes paid (in lieu of state and local income taxes paid, useful in states that have little or no income taxes)<br />
5) Above-the-line deduction for up to $4,000 of higher-education-related expenses<br />
6) Exclusion from income for Qualified Charitable Distributions from an IRA to a charity. Notably, a special rule allows qualified charitable distributions made by February 1, 2013 to be counted retroactively for the 2012 tax year, for those who want to take advantage of the rule for 2012 and 2013.<br />
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<strong>New Roth Conversion Flexibility</strong> - ATRA will now allow individuals to convert their existing 401(k) plan to a Roth 401(k) plan, if the employer offers designated Roth accounts under the plan, regardless of whether the individual is allowed to take a distribution out of the plan. The transaction will be taxed in a similar manner to any other Roth conversion. Previously you could only convert a 401(k) plan if you are eligible to take a distribution from the plan, which meant you had to be 59 1/2, dead, disabled, or separated from service, unless the plan allows in-service withdrawals.<br />
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<br />
“We are pleased to present this summary which is attributed to Brian Shea, CFP, E.A. who provided this to members of the Alliance of Cambridge Advisors to share with our clients.”<br />
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<br />
Regards, <br />
Bert Whitehead and Pamela LandyUnknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-17959044469572970592012-12-21T17:27:00.003-08:002012-12-22T07:39:09.361-08:00A Christmas Carol<div style="text-align: center;">
The Lord Mayor Would Have Spoiled </div>
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"A Christmas Carol"</div>
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Contributed by John David Marotta</div>
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</div>
<em><strong> This insightful blog was composed by my colleague David John Marotta. He identifies the characters in Dickens’s <u>The Christmas Carol</u> according to their Money Personality matrix which I developed and is explained in my book ‘<u>Why Smart People Do Stupid Things With Money</u>” (pp.22-40). He uses this personality assessment to demonstrate classic behaviors around the Christmas theme, and pinpoint the impact the Christmas Spirit has on each one of us irrespective of our religious differences. His analysis of how our personality shapes our perceptions about money is a real masterpiece. Have a happy holiday! Bert Whitehead, M.B.A, J.D.</strong></em><br />
<strong><em></em></strong><br />
<br />
<em></em><br />
In his book "Why Smart People Do Stupid Things with Money," Bert Whitehead describes eight different financial personalities. For the past seven years I've taken a character from Dickens's A "Christmas Carol" and used them to illustrate one of these personalities.<br />
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Driven by fear and hoarding all he earns, Marley is a miser. Scrooge saves just as much, but he's greedier and reinvests his money to grow the business. Bob Crachit, on the opposite end of the spectrum, spends too much. He should be able to live on his income, but in modern terms would be called a shopaholic. These three personalities represent the extremes.<br />
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The characters in the middle of the continuum include Fezziwig, Scrooge's former boss. He is a nester, who tends toward savings and does better at balancing the extremes of greed and fear. He keeps his spending close to home, but includes his employees as part of his family. The two portly gentlemen tend toward greed, but they also solicit donations for the poor at Christmastime. They are entrepreneurial philanthropists.<br />
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Scrooge's nephew Fred represents a traveler who also balances greed and fear but tends toward spending. Indifferent about amassing wealth, he cares more for experiencing life to the fullest. Scrooge's former fiancée Belle is the bon vivant. She is driven largely by the desire to spend money on herself. She judges success by how it improves her own life.<br />
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These seven characters from "A Christmas Carol" represent all but one of the eight financial personalities. The final one is the gambler, motivated by greed and a desire to be associated with great power and wealth.<br />
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The character most closely aligned with the gambler personality in the story is the Lord Mayor. As Dickens described him, "The Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his fifty cooks and butlers to keep Christmas as a Lord Mayor's household should."<br />
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Politicians align well with the gambler personality. They tend toward greed and spending. They are incorrigible optimists. They mistakenly believe there are easy answers to financial problems.<br />
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Whitehead describes gamblers this way: "Gamblers are frequently embarrassed about the way they handle money. They get so good at lying to themselves and others that they actually believe it. They brag when they win, but seem to ignore and deny their losses. This makes it very hard for them to address their financial issues in a reasonable, logical way. Their warped view of financial logic often results in them viewing the casino or horse races as types of investments."<br />
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If that doesn't describe today's politicians, I'm not sure what does.<br />
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And when their schemes fail, politicians are susceptible to depression or embezzlement. In fact, studies suggest that both a gambling addiction and success in politics correlate with psychopathic behavior. Politicians tend toward lack of guilt, fearlessness and interpersonal dominance. And it is from this small minority of human beings with literally no conscience that we tend to choose our political leaders. This at least explains even if it does not condone their shameless deceit and manipulation of public opinion to extend their own political power and influence.<br />
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In their desire to be rich and powerful, politicians tend toward alcohol and drug abuse and sexual addictions, often despite a sham moral posturing for the voters. They also are generous to a fault with the public's money, all the while avoiding any significant private sacrifice from their own resources. This pomp with little circumstance was epitomized by the Lord Mayor's Show, an annual event that Dickens mocked in "The Public Life of Mr. Tulrumble."<br />
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Dickens wisely did not include a gambler personality in his Christmas story. Had he done so, the tale would have had an external villain. In Dickens's writings the gambler politician positions himself as a great benefactor to the city and yet turns out to be the "greatest forger and the greatest thief that ever cheated the gallows." The gambler would have assumed the role of antagonist and detracted from the heart of the story: Scrooge's inner struggle and his awakening conscience. Including the Lord Mayor's character would have made it a completely different story.<br />
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Dickens started his writing career as a parliamentary reporter. He found politicians pompous rhetoricians who made promises they never kept. His experience is captured in David Copperfield's description: "I record predictions that never come to pass, professions that are never fulfilled, [and] explanations that are only meant to mystify."<br />
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Since Dickens's day, politicians have perfected the sound bite, which in essence is the antithesis of nuanced reasoning. It also makes it increasingly difficult to express the complex unintended consequences of economic systems.<br />
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Families can't afford gamblers running their personal financial affairs just as our country can't afford politicians assuming our corporate financial affairs. Ultimately Scrooge did what neither the Lord Mayor nor anyone else in the story could. Ebenezer developed the empathy to truly care about others. And then he gave of himself and his own resources to make a difference in their lives. And that is the true spirit of Christmas.<br />
<br />
<br />
Attribution to David John Marotta<br />
Posted 12/20/12 Online IndUS Business Journal<br />
<br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-33406385602627226982012-11-28T20:19:00.000-08:002012-11-29T17:50:33.460-08:00Five Ways to Get Poor<div style="text-align: left;">
Bert Whitehead, M.B.A., J.D ©</div>
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<u><strong>1) Stay in a Dysfunctional Relationship.</strong></u> </div>
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I have often described divorce as "mutual impoverishment." While many different relationships can have detrimental financial consequences, divorce in particular leaves both parties handicapped -- often for their lifetimes. Our divorce laws are designed to protect the most vulnerable spouse, but seldom can the contribution of a high-earning mate be equalized. So the dependent spouse who typically embraces the primary parent role at the expense of career development often faces a continuing downward spiral in living standard while the higher earner must start a new financial future from scratch. And while two people living together costs less than living in separate households, the reality is that the costs of living apart after a divorce can be financially devastating if both parties attempt to maintain the marital standard of living.</div>
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The lesson here is to be choosy about your mate at the outset! "Till death do us part" states a commitment that embraces the mutual support and teamwork that optimizes the marital relationship. But that is still no guarantee of financial prosperity.</div>
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<br />
Of course other dysfunctional and financially draining relationships can be non-marital. By definition a dysfunctional relationship is one where maintaining a commitment is detrimental to both parties. This can also include parents and children, abused spouses, and those who continue long-term relationship with an afflicted partner who will not take the steps necessary to achieve recovery. Often the most committed spouse unwittingly aggravates the dysfunctional relationship through co-dependent support.<br />
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<strong><u>2) Develop Some Bad Habits.</u></strong> </div>
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No one is perfect; some are more imperfect than others. The Seven Deadly Sins (Pride, Anger, Sloth, Greed, Lust, Gluttony, and Envy) are considered by many to be the roots of various addictions (hubris, chronic rage, procrastination, gambling, sexual obsession, compulsive spending, over-indulgence in food and drink, covetousness, etc.). These bad habits are 'deadly' because they are often considered the origins of many other 'sins' or dysfunctional behaviors that are difficult to change.</div>
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<br />
My experience is that addiction of one type or other is often at the root of financial distress. Addictions involve misuse of both personal and material assets, so they are often the harbingers of poverty. Recovery from financial downfalls due to active addiction is seldom successful unless the addiction is directly addressed and dealt with effectively.</div>
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<br />
<strong><u>3) Let Your Skills Atrophy.</u></strong> </div>
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As our global economy grows increasingly complex and competitive, skills we develop in our youth become obsolete much sooner than in earlier cultures and societies. For example, in the past a journeyman carpenter could be assured of a job for life with very simple tools. This job today requires considerable computer knowledge and more advanced mathematical capability. The knowledge of a financial planner and other complex professions is estimated to have a half-life of eighteen months. Half of our knowledge relating to our profession becomes obsolete in just a year and a half.</div>
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<br />
It is not only more difficult to get a good job without advanced education, the education that qualified you for a job five years ago is likely to be insufficient in today's labor market. Paradoxically, the more advanced an education required to get a job, the faster those skills and knowledge become obsolete. Thus, most advanced professions require more continuing education to maintain licensing.</div>
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<strong><u>4) Put Up a Good Front.</u></strong> </div>
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This is essentially the motive for maintaining consumer debt, such as balances on credit cards. Typically, someone who lives beyond their means is trying to be someone they're not. Maintaining this illusion to impress others takes a huge psychological toll, which aggravates the guilt and fear. Dampening those feelings requires more spending on props to maintain the false facade. The person is sucked into a vortex of poverty.</div>
<div style="text-align: left;">
<br />
There is a distinction between 'good debt' and 'bad debt.' 'Good debt' may include a home mortgage, an education loan, or a car loan for someone starting out. These can be considered 'good' because they enable a person to get leverage, e.g., get a better job, so they can earn more. This is relative to their ability to earn, so a $250,000 mortgage, or a $100,000 education loan, or a $50,000 car loan is not appropriate as a 'good debt' for a new college graduate who earns $35,000 per year.</div>
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</div>
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<strong><u>5) Don't Celebrate Thanksgiving.</u></strong> </div>
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Getting poor, or rich, is more of an attitude than a measurement. Relatively speaking, the poorest 10% in our society are richer than the richest 10% of humans in the world. "Prosperity depends more on wanting what you have than having what you want." --(Geoffrey Alpert)</div>
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I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-57051761928992476502012-11-01T16:13:00.003-07:002012-11-01T16:13:27.578-07:00Are Financial Planning Fees Worth It?Bert Whitehead, M.B.A., J.D. ©2012<br />
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Pssst. Wanna increase your investment portfolio’s returns by 1.82%?<br />
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Then get yourself a good financial planner. <br />
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Or so says Morningstar, a consumer-driven investment research firm, in a recent study that measured the value of financial planning to individual investors. Morningstar is considered credible because it isn’t paid by the funds and annuities that it rates. Of course, the end users of Morningstar data are generally investment advisors who earn large asset management fees and they greeted the study with enthusiasm. But the report describes certain factors apart from investment portfolio decisions that add incremental value to financial management -- a major point that lends credibility to the study.<br />
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<u>Morningstar Describes the Benefits of Financial Planning</u><br />
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Measured together, these outside factors are called “Gamma” by Morningstar and include: asset allocation, “product allocation” (which seems redundant), tax efficiency, and then withdrawal strategy and “liability-driven investing” (which seems to be akin to withdrawal strategy). So it seems there are really three main factors: asset allocation, tax efficiency (in the portfolio), and withdrawal strategy.<br />
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Investment advisors primarily tout their “strategy” for buying and selling individual securities or shifting allocations based on their market timing approach. While they insist that this adds more value to a portfolio than they charge, using this approach alone has been debunked by numerous studies. Simplistic or complex hedged “buy high, sell-low” approaches have lower returns in the long run as taxes, trading costs, idle cash, and emotions undermine performance. <br />
<br />
However, many investment advisors feel that the 1.82% Gamma advantage would more than cover the 1.0% fee that they charge. After all, they often consider themselves to be “Financial Planners” who advise clients on their "total" financial situation. Therefore, their services deliver value beyond portfolio management.<br />
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<u>“Financial Planners” Usually Limit Their Advice to Investments</u><br />
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It’s my experience that most advisors who hold themselves out as “Financial Planners” are in truth “Investment Advisors.” While they pitch the “total” approach, they focus their marketing and advisory efforts almost exclusively on investments. They charge for “assets under management” (AUM), usually a percentage based on the amount of assets a client gives them to manage. <br />
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I find that many AUM clients don't reveal all their accounts (especially retirement accounts) to their advisor to avoid being charged a higher fee. So advisors who claim to manage total assets under this scenario are stretching it a bit. In addition, tax efficiency is a sham if the client’s tax return is never reviewed. And, typically, advisors don't know the important withdrawal details of retirement accounts, even when told about these accounts. As to the withdrawal strategy, it’s problematic when neither client nor advisor knows how much the client spends each month or their other sources of income!<br />
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Based on these realities, Gamma is tough to find for most financial planning or investment management clients. And the Morningstar researchers agree. They doubt that most financial plans ever go beyond investment selection to include the Gamma advantage.<br />
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<u>Advisors May Understand and Advise Only about Investments</u><br />
<u></u><br />
That means that most clients pay too much for AUM advice. A $2,000,000 portfolio brings in a $20,000 fee for the investment advisor who charges 1% of assets under management. And since the business is scalable, it’s pure profit. For that fee the client usually gets asset allocation and rebalancing. But where is the guidance about how much to save, when and how to refinance a mortgage, when to initiate a Roth conversion, insurance needs, and estate planning? Since most investment advisors are not trained or professionally certified to provide comprehensive financial advice, the client is told to obtain mortgage advice or Roth strategies from their tax advisor. The tax advisor however knows nothing about the client's investments or long-term goals so the client gets no advice on the issues that matter the most.<br />
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<u>Flat Retainers Are More Cost Effective than AUM Fees</u><br />
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Dalbar, Inc., a leading financial services market research firm, consistently finds that clients want comprehensive financial advice. But how can they find it for a reasonable cost when so much of the industry is geared to “gather assets” for AUM? <br />
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It’s my contention that a flat annual retainer fee is the least expensive and best method to obtain unbiased, comprehensive financial advice. In fact, it focuses the relationship on the very same outside success factors cited by Morningstar. There are minimal conflicts of interest and the advisor is motivated to work with the client on a regular basis, handling financial issues as they arise. <br />
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Think of it this way…would you rather work with an advisor who is structured to put his arms around your money, or one who is structured to put his arms around your problems? Chances are, it’s the latter. <br />
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Many people think that annual retainers are too expensive since they are quoted as an annual dollar amount. In fact, a flat annual retainer fee is nearly always less than an AUM fee….and you know what you are paying for. Clients are generally unaware of AUM fee amounts since they are withdrawn directly from their account and buried in the investment reports. <br />
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The right professional advice is worth the price. But the only thing worse than paying an investment advisor 1% of your portfolio annually for investment advice, is paying that fee and expecting to get professional comprehensive advice that is not forthcoming. <br />
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Special thanks to those who collaborated on this post: Chip Simon, an ACA colleague from Poughkeepsie, N.Y., and Shari Cohen who was the copy editor. Unknownnoreply@blogger.com23tag:blogger.com,1999:blog-2585031977221269517.post-30155186681920237332012-10-15T20:34:00.003-07:002012-11-01T16:14:44.316-07:00Bi-Weekly Mortgage Payments<br />
Smart Strategy or a Scam?<br />
<br />
Bert Whitehead, M.B.A., J.D. © 2012<br />
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Most homeowners have been solicited by their mortgage company or another financial institution with an offer to convert to biweekly mortgage payments instead of monthly payments. The advantage touted for this strategy is saving a heap of interest over the years and reducing the time required to pay off your mortgage by several years. Clients often ask us whether this is a good idea or not. No, it is not smart; it is a scam.<br />
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If that is all you need to know, you're done: go on and read something else. If you want to understand why it's not smart, read on!<br />
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The math does work: paying half your monthly mortgage every two weeks does pay off your mortgage much faster and does save a substantial amount of interest. It may also be viewed as very convenient since most people are paid biweekly. <br />
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<u>Investment Earnings Exceed Benefit of Interest Savings</u><br />
<u></u><br />
It is not financially advantageous because it doesn't take into account the foregone investment earnings, which is more than the mortgage interest saved. The reason biweekly mortgage payments reduce interest and the length of the mortgage is that you end up paying an additional month's mortgage payments each year (26 payments divided by 2 = 13 Months). The correct comparison is not between biweekly mortgage payments and monthly mortgage payments. The correct comparison is between the interest expense you could save with biweekly payments and the amount of interest earned if you invest the additional amount you otherwise would be paying on your mortgage.<br />
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<u>A Sample Mortgage Situation (or A Case Study)</u><br />
<u></u><br />
Consider a 30-year, 4% fixed -rate mortgage taken out 5 years ago by a taxpayer in a 33% federal tax bracket. The taxpayer is offered a deal to switch to biweekly payments which would require a $500 “set up” fee plus half of a month's mortgage payment to start. The interest rate (4.0%) remains the same, but instead of a monthly payment of $763.86, the home owner would pay $381.93 biweekly. This would enable the homeowner to pay off the mortgage in 21 more years (instead of 25) and save the homeowner $42,572 in interest expense. This is the ”pitch.”<br />
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To correctly analyze this problem, there are five factors to consider:<br />
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1. Normally (but not always) the mortgage company charges a fee of about $500 to set this up for you. This is ridiculous because most mortgages permit prepayments with no additional fee or penalty. If you were to invest this $500 fee at 6.00% for the 21-year mortgage period, it would grow to about $815.<br />
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2. The terms of the biweekly arrangement actually require that the payments be made at the beginning of the period, whereas typical mortgages charge the €payments at month-end. If the homeowner invested only one month’s payment at 6% for 21 years, it would earn about $480 in interest. <br />
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3. Paying half of the monthly payment every two weeks is comparable to paying 13 monthly house payments a year. If the extra $764 was invested each year instead of being used to pay off the mortgage, it would grow to $30,548.<br />
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4. Since home mortgage interest is deductible, choosing to reduce interest by $42,572 over the next 21 years would increase federal income taxes by $12,024, plus the taxes saved would earn $ 7,575 over the 21 years.<br />
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5. In total, the $ 51,442 in additional investment earnings generated by investing the money instead of paying down the mortgage is sufficient to pay off the balance of the original 30- year mortgage in full in 21 years and still have $18,262 in cash remaining.<br />
<br />
<u>Additional Reasons Why Biweekly Mortgages Are Not Advantageous</u><br />
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In addition, if you were able to invest the surplus mortgage payments in an IRA or other pension each year, you would be able to defer an additional $17,981 in income taxes.<br />
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Consider also that mortgage providers generally charge a lower rate for shorter mortgages. So if you wanted to pay off your home in 25 years instead of 30, it would be wiser to arrange that at the outset when applying for a mortgage and take advantage of the lower rate.<br />
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In any event I advise clients to keep a longer mortgage on their home because it is your best hedge against inflation. If inflation increases in the next 5 or 10 years back to 5% or 10% as it did during the 70s and 80s, mortgage rates will soar to 9 to14%. You would be pleased to owe the bank a couple hundred thousand dollars at a 4% fixed rate as your money market account is paying 6% or more!<br />
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Special thanks to those who collaborated on this blog: Chip Simon, an ACA colleague from Poughkeepsie, N.Y., Al Hoefer, my technical consultant; and Shari Cohen who was the copy editor.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-23786312912774278822012-09-04T16:22:00.002-07:002012-09-04T16:22:15.114-07:00Finding "Real Returns" in the Bond MarketBert Whitehead, M.B.A., J.D<br />
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Widespread consternation is erupting in the investment arena, particularly in Fixed Income Departments which handles bonds. Everyone wants to find the perfect investment with 'decent' yields like 5% to 8% which are our birthright. To accomplish this, many investment advisors devise complex allocation strategies, e.g. derivatives, collateralized mortgage obligations, annuities and whole life insurance, to justify the amount they charge investors.<br />
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I still have trouble believing that these ‘Professional Fixed Income Strategists’ can add any value for their retail clients. Surely if they had the foresight and analytic ability they claim, they would have been able to detect Collateralized Mortgage Collapse or Libor Rate scam. Their losses on these investments will exceed $100,000,000,000 (yes, 100 Billion)… and the scam had been ongoing since 2008!<br />
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The players include Schwab, BofA, JP Morgan, Citi Bank – plus virtually all the biggest bond dealers abroad. Their strategies in this area have been a continuous train wreck! Why would we conclude that they can make these kinds of fixed income strategies work for small investors in the retail market? <br />
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Rates Reflect Default Risk<br />
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The truth is this: if Treasuries are paying 2, and high-yield bonds are paying 6%, the 4% difference is entirely attributable to the higher risk (i.e. default rate) plus the outrageous fees bond dealers charge. That means that for every $1million invested in junk bonds, some retail customer(s) will lose $40,000 – net of everyone else’s gains. There is no free lunch.<br />
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In Las Vegas, the casinos set the ‘vig’ or the odds by adjusting the rules. In the financial world, the Gnomes of Zurich set the vig, based on their knowledge of the default rate of the debt. This is why subprime borrowers pay higher rates (currently 6.5%) than you and I do (3.5%). In aggregate, the higher amounts of interest the banks collect from subprime loans are offset by the higher losses and administrative costs except for a very small premium. If the ‘vig’ is set too low (as it was during the real estate/mortgage meltdown), the banks and investors in these bonds see their values plummet once the defaults start.<br />
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When these bonds are wrapped up in bond funds, closed funds, or sold to individuals through large institutions, the additional costs wipe out the small premium. These costs include underwriting costs, reporting costs, distribution costs, transaction costs, and other ‘monthly expenses’ that are added in. Then the institutions have to sell the bonds for substantially more than they bought them for, and the yield realized by the small investor is correspondingly less.<br />
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Essentially, especially at today’s rates, retail investors focus on the 6% yield, and have no idea that the correct odds, or risk premium, should mathematically be 8% on the world market. Investors take much greater risks than they think they are, and are paid less for the risk. Since the default rate is relatively small, an investor may never see the loss attributable to the higher risk of any one investment. But there are real losses when investors must take pennies on the dollar after a bond when there is a default (such as GM, Lehman Bros., etc.). In a bond fund, this loss is further obfuscated by the expenses of the bond fund, and its market value.<br />
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Interestingly, when bonds are sliding toward default their value drops and they can be bought at a sizeable discount. Since the coupon (i.e. the periodic income payment from the bond) is fixed, the bond's yield rises. So a $10,000 bond with a 6% coupon pays the investor $600/year. If the bond issuer (e.g. Greece) starts to look riskier, the bond value could drop on the open market. So if the price drops to $6,000 the yield increases to 10%! To amateur investors, this makes the bond look like an even better deal simply because it has a very high yield. <br />
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Yields Increase as Bonds Become Riskier<br />
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In truth, the bond becomes more risky as the price drops and yield rises, and is considered less risky as the price of the bond increases and the yield drops. <br />
This is a fundamental truth about investing in bonds: there is no excess long-term profit in a bond investment. A higher rate of return is always accompanied by more risk. Unlike stocks, diversification in a bond portfolio does not provide protection -- only higher costs. <br />
Bond dealers (who are paid more than stock brokers) have more latitude in pricing bonds because all bonds (except Treasuries) are very thinly traded. This is because bonds have many different variables: convertible, preferred, subordinated, call features, etc. Therefore, very few bonds are traded each day so bond dealers usually hold inventories themselves. <br />
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So when you sell the bond, it doesn't sell for the amount shown on your statement--that is the 'asked' price if you were buying. The 'bid' price is generally not provided because the bond dealer will buy ONLY at a significant discount. The difference between the bid price and the asked price is called the 'spread.' These spreads are common in the sales of assets in inefficient markets, like diamonds. If you buy a diamond today and go back to sell it back tomorrow, you would likely get back only about 60 cents on the dollar since the spread is about 40%.<br />
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Since the dealer is taking the risk of holding the diamond, he can set his own prices. Stock brokers are called 'brokers' because legally they don't take title to the stocks: they are only facilitating the transaction. Most stock markets are huge so the broker never actually owns the stock and must buy and sell at market values.<br />
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It is folly to think that the ABC bond you bought today at 8% yield is 'better' than the XYZ bond your friend bought with a 7% percent yield. At the end of the day, those who bought the XYZ bond will, in aggregate, have the same amount of money as the ABC bond buyers. The defaults and additional costs of ABC buyers will offset the extra 1% in yield.<br />
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These numbers are not just 'made up' any more than the casino odds (or vig) are haphazard. If you buy bonds with the belief that you can beat the market you are thinking like a casino gambler. You can no more outsmart the house with your system, than you can get an edge in a casino. You are facing an overwhelming disadvantage since the other side has much more information, analytic capacity and cash.<br />
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Bonds Are Useful for Cash Flow<br />
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That’s why I insist that ‘safety trumps yield.’ The function of bonds in a portfolio is to provide cash flow which is certain. Since bond yields only vary between about 2% and 20%, the only way to make money in the bond market is to be a market timer. Like trying to beat the casino, the bond dealers who are betting against you know more than you do, have more cash and, are more informed, so you are the chump.<br />
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The stock market, by contrast, can be a great investment because the risk of diversification only impacts the volatility. For 'real people' the wise choice is to dollar-cost-average by saving a certain amount every month over a lifetime into a low-cost diversified index fund. Cash and bonds are held to provide long term cash flow so stock investments don't have to be liquidated.<br />
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The more complex an investment is, the less suitable it is for individuals. Complicated investment products are really designed for banks, insurance companies, and other financial institutions which can vet them properly. This is especially true for bonds. Our financial institutions offer stripped down versions of complex strategies, add on a huge profit, and sell them to people who don't really know what they are buying.<br />
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People have lost more money by chasing yield than at the point of a gun!" -- Warren Buffett.<br />
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I appreciate the discussion with our client Ward Johnson which inspired this blog. I also appreciate the professional copy editing provided by Shari Cohen.<br />
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-28445714552901502532012-08-06T18:35:00.002-07:002012-08-06T18:35:08.461-07:00Our 'Lost Generation'Bert Whitehead, M.B.A., J.D. and Chip Simon, CFP © 2012<br />
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Much political patter is spent discussing how to bring back our middle class. Globally, the middle class is doing quite well, thank you. In fact, it has burgeoned exponentially in China, India, and other emerging economies. Fifty years ago we were admonished that, “rather than giving a man a fish it is better to teach him to fish.” Now much of the globe is fishing in our pond. <br />
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Sometimes I worry that the U.S. middle class may be facing a ‘lost generation’. The term "Lost Generation" was originally used to define a sense of moral loss or aimlessness apparent in literary figures during the 1920s, a result of their experience in the First World War. <br />
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But rather than being demoralized by the shock of a major conflict, consider that nearly half of our youth today between 17 and 24 can’t even qualify to enlist in the Army. Either they have no high school degree, can’t pass the reading or math tests, are felons, or are obese. If they have trouble keeping up to these basic requirements of citizenship or health, how can they keep up to other changes and demands in the world? How do we expect them to be in the middle class 20-30 years from now? <br />
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Why might much of our youth be lost? After all, we spend more per student for education than any country in the world. Yet our students rank in the lower 50th percentile in math and science compared with 34 other developed countries. SAT scores have declined over the past 40 years. Colleges and employers are increasingly burdened with remedial courses. In a nutshell, our youth are not as smart as they were in the past, and much of the rest of the world’s youth are smarter, and hungrier, than ours. They’re ready to catch most of the fish…<br />
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We can’t pin our current problems on the government, or parenting, or schools, or the breakdown of the social contract. All of these play a part. But over time there is a remarkable capacity for many social and economic problems to ‘self-correct.’ As we adapt we eliminate solutions that don’t work anymore and embrace new approaches. <br />
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The New York Times recently ran an interesting summary of current sociological research about family structure and its effect on inequality. (http://www.nytimes.com/2012/07/15/us/two-classes-in-america-divided-by-i-do.html?_r=1/). Many of the hurdles that are created for our youth can start early. Over 40% of children are currently born out of wedlock, up from less than 10% in the '60's. This has an alarming correlation to poverty, high school dropout rates, shorter life spans -- and the decay of our middle class.<br />
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My generation in the 60's and 70's often pushed social boundaries, which expanded civil rights, generated the sexual revolution, empowered women, and changed our society in other important ways. We also tore down a lot of fences without understanding why the fences were there in the first place. Many of the fences were there to enable future generations to build sound financial foundations. <br />
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The most successful financial pattern for the development of young adults has a defined sequence of events: <br />
• First, finish your education;<br />
• Then establish a career;<br />
• Then get married;<br />
• Then buy a house;<br />
• Then have children. <br />
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When the order of these life decisions is changed, there are often severe financial consequences for the individuals involved and for society. Decisions to have babies before a parent is able to support a family leads to a lifetime of poverty. Since couples living together without a marriage commitment are twice as likely to break up, their children are more limited growing up in poor single parent homes. <br />
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It is very difficult, particularly in our technologically advanced society, for young people with inadequate education and experience to find a path to prosper in the workplace. Early financial setbacks generally limit their potential and their children's potential. <br />
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Of course there are many successful families that don't share this developmental pattern. But the data is clear. These stepping-stones are important and many of our social ills stem from missteps and ill-advised decisions made by our youth. Providing our youth with sound financial direction, and cementing expectations of sound financial decision making, are critical. <br />
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I believe that, ultimately, the changes that will avert our current social trajectory will develop from these ‘endogenous’ factors that we can control in our lives. We can’t predicate our lives on ‘exogenous’ changes or expect the government or other forces beyond our control to determine our fate.<br />
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Reverend Ike, the popular black prosperity preacher in the 60's and 70's often exhorted "The best thing you can do for poor people is not be one of them!" More recently Hillary Clinton's observation that "It takes a village to raise a child" reinforces the reality that bringing up the next generation must be an endogenous process, not an exogenous government activity. If we are to reenergize our middle class, I believe that a key driver will be providing personal attention to show our youth positive ways to make sound financial decisions.<br />
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Sitting around and playing 'ain't it awful!' with like-minded friends only induces frustration, hopelessness and depression. It’s also nothing new. We all want our children to have a better life than we have enjoyed. It is our responsibility to give them a sound financial track to follow in making adult decisions. <br />
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Rebuilding our middle class is not the provenance of politicians, but of parents. It is up to us to help our lost generation to find its footing.<br />Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-2585031977221269517.post-68910325856643226112012-07-12T09:07:00.000-07:002012-07-12T09:07:23.026-07:00Our 'New' Investment RealityBert Whitehead, M.B.A., J.D. and Charles “Chip” Simon, CFP® © 2012<br />
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Can we realistically expect returns on our investments to be on a par with those enjoyed by past generations? Long-term historical stock market returns over a 20-year period in the U.S. have remained relatively stable at about 7-9% appreciation + 2% dividends over the past 80 years. When combined with intermediate bonds, a portfolio with 50% stocks and 50% bonds would reliably average a 7-8% return over a 20-year period. <br />
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However, the recent historic decline in interest rates has hurt total returns. Unless we see a marked increase in the stock market in the next 3-4 years, which would be a ‘reversion to the mean’, the 20-year historical average used for projections will have to be revised. <br />
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In this environment, near-term inflation is not likely to be much of a concern. The challenge will be to adapt to possible lower total portfolio returns. <br />
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There would be several sobering results from this economic revision. One is that clients will either need to work longer to accumulate a larger investment retirement portfolio, or they will have to plan to downsize. This is particularly true for the ‘echo-boom’ generations born in the late 1960's and later. They are not likely to have reliable social security benefits, and guaranteed pension benefits are becoming a relic of the past.<br />
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It’s also likely that children will not inherit as much wealth from their parents, as parents will use up those assets in their old age. Our youth will be paying a high price for increasing life expectancy.<br />
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To round out this scenario, we have to remember that governments are inclined to rescue every segment of society by increasing the money supply. Printing more money is a long-term inflationary strategy that is likely to compound the financial stress on at least the next two generations.<br />
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There is no easy way out of this if the economic duress continues and is exacerbated by public resistance to austerity. As a result, it becomes imperative that we teach our children these important basics to survive in the new reality:<br />
1) Each family must produce more than they consume.<br />
2) Our futures depend on saving at least 10% of our earnings through our lifetime to support us in old age.<br />
3) Future citizens will have to recognize that life expectancy will determine their retirement age.<br />
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Now you might be nodding your head and saying 'ain't it awful!' with like-minded friends. But if you present these three points to your grandparents they are likely to look at you and say “DUH!” Wasn’t it commonplace for families to lead productive lives? Wasn’t it known that living below your means rather than beyond your means was bound to put you on a better financial firmament? And weren’t pensions originally keyed to life expectancies? (Yes, even in the late 1800s in Bismarck’s Germany)<br />
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The point is that the important changes have to be ‘endogenous’ and start with the factors we control in our lives. We can’t really wait for our lives to be dictated by ‘exogenous’ changes, whether they be Republican, Democrat, policy-based, Supreme Court sanctioned or anything else beyond our immediate control. <br />
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What can you do now? We don't advise immediate and precipitous portfolio revamping. Retired clients who have experienced the benefits of completed bond ladders already know that they are well protected financially for the next 15-20 years. <br />
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For clients who are still accumulating assets and building their bond ladders, a reduction in the total portfolio return will likely have an impact on retirement planning. During regular investment review appointments, we have generally calculated 'market rate of return' at 7 -8%. We are now also looking at the impact if rates of return fall to 5-6% (assuming a portfolio of 50% interest earning and 50% stocks). Finally, we urge clients to remember that it is a mistake to take more portfolio risk to offset the decline in market rates of return. <br />
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I am not predicting the future will unfold as outlined above. There are likely many countervailing developments, many of which will be positive. <br />
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But I do think that there is a new reality that has been set in motion that is not going to be reversed in the next generation or two. Most of it is based on modern longevity and will require a change in financial expectations. <br />
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But remember your grandparents and ignore the basics at your peril. While there are some long-term possibilities that we should consider in our decision making today (like less Social Security for the young), we can only fruitfully focus on the three issues above that are in our control. I am comfortable thinking that the actions needed to adapt to the ‘new’ investment reality will have a very familiar sound. <br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-2585031977221269517.post-40954037129280905122012-06-15T08:43:00.002-07:002012-06-15T08:54:11.677-07:00Tax Planning 2012: Last Chance!By Bert Whitehead M.B.A, J.D. © 2012<br />
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Taxes are the biggest debate this election year. Will there be a change passed for next year? Looks doubtful, eh? And if there's no change, we go back to the tax rates of 2002. That means the top rate goes to 39.5% from today's 35%, and other changes reappear which will increase income taxes across the board. Even if a tax bill passes, it will likely include a tax increase.<br />
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For those who want to position themselves financially for a higher-tax world in the future, there are two items to consider:<br />
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1) The tax deduction for charitable contributions is likely to be reduced or restricted after 2012. This could affect the advantages of using a Donor Advised Fund (DAF) for philanthropy. The Wall Street Journal article, “Invasion of the Charity Snatchers!” covered this on Sat. June 6 and referenced me therein (http://online.wsj.com/article/SB10001424052702303296604577450451929765874.html).<br />
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2) 2012 will be the best year to convert IRA's to Roth IRA's for many taxpayers who are likely to be in a lower tax bracket now than future years.<br />
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The tax planning strategy consists of contributing highly appreciated stock to a DAF before December 31st of 2012. Under current rules, this will avoid the tax on all the appreciation and provide the taxpayer with a charitable deduction for the full market value of the stock. For example, suppose that a taxpayer purchased stock years ago for a low price of $2 per share and it is worth $42 per share today. There is an unrealized capital gain of $40/share. If you hold 1,000 shares, the capital gains tax on the $40, 000 based on current legislation (15% federal) will be $6,000. This tax is avoided by making the donation. <br />
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In addition to this savings, the taxpayer will also receive a charitable deduction for the full $42,000 market value of the stock. This will save a taxpayer in the top bracket (35%) $14,700 in 2012 income tax. <br />
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The taxpayer can simply save these tax dollars, or they can be applied against the cost of a Roth IRA conversion. If the taxpayer chooses to convert $42,000 of an IRA to a Roth IRA they can do so for no additional tax cost because the additional taxable income of $42,000 for the Roth conversion will be offset by the $42,000 charitable contribution deduction. <br />
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To review the full discussion on the current rules on converting IRA's to Roth IRA's, please see Bert's Blog on Roths from 3/2/10(http://bertwhitehead.blogspot.com/search?q=Roth). <br />
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Our analysis shows that the taxes saved by having your retirement money grow tax-free in a Roth would fully offset the taxes paid now to convert the funds in seven years. So by paying taxes on the IRA money now, you could increase your after-tax retirement income by 13% to 28% for the rest of you and your spouse's lifetimes!<br />
There are still six months left to implement this strategy, and it is somewhat complex. If you are interested, call your Cambridge advisor to discuss it. All members of the Alliance of Cambridge Advisors (ACA) know how this can be set up and can assist you in the implementation.<br />
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I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.<br />
<br />Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-2585031977221269517.post-36234281098505503822012-04-26T09:26:00.001-07:002012-04-26T09:31:14.723-07:00Faith and Fiat MoneyBy Bert Whitehead M.B.A, J.D. © 2012<br />
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"Fiat Money" is commonly defined as money that has no intrinsic value and cannot be redeemed for specie or any commodity, but is made legal tender through government decree.<br />
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I have heard "Faith" defined as the belief in the experience of others.<br />
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This sums up our long-term economic dilemma. Since Nixon ended the convertibility of dollars to gold to combat inflation, the U.S. has given up any pretense of backing the dollar with gold or any commodity. So the currency we carry in our wallets and purses is essentially only slips of paper with pictures of dead white guys. <br />
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U.S. dollars are nonetheless respected and used globally as the world reserve currency. This only persists because everyone believes the dollar has value and can be used by people to buy things. Thus, we have faith that we can spend dollars to buy what we want. So far, so good. <br />
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But what happens if people around the world stop believing this? How could this scenario unfold? What can you do to protect yourself? This is the scare tactic that gold advertisements trumpet to entice people to protect themselves by buying gold as an investment.<br />
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There are over a hundred instances throughout the centuries during which governments issued paper money and backed it by a commodity, usually gold. "Fiat" paper money has never, however, lasted more than a few generations. Gradually these rulers or their successors could not resist printing more money to increase their spending to finance wars, or cover desirable social objectives. By decree they declared an increase to the legal currency even though they did not add enough gold to their reserves. This became known as Fiat Money. <br />
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Once merchants realized that they couldn't convert their money and receive the amount of gold they expected, they raised their prices. Inflation results when too much money chases fewer goods and services. In the 1970's this global issue was addressed by allowing currency values of each country to 'float' against other countries. <br />
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Government overspending is a hotly debated topic. Some economists (Keynesians) insist that there are times when it is appropriate for governments to run a deficit. They argue that, unless the government 'primes the pump' by increasing national debt, the country's economy could spiral into depression. The other side provides evidence that a government can't be trusted to ever pay off its debt. Running annual deficits will gradually debase the money and the economy will inevitably be ravaged by inflation. <br />
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Both sides of the debate can point to situations as proof that their theory is correct. Take the Great Depression, for instance. Did FDR's social economic stimulus bring our economy back to life in the 1930's, or was it really our entry into World War II that rescued the economy? Was the inflation in the 70's a result of the oil cartel raising prices, or did it arise from Nixon printing more money? <br />
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In reality, economics is not, strictly speaking, a 'science.' We can never apply the scientific method to economics since we can’t suspend a complicated global economy in time and study the effect of controlling selected variables.<br />
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Modern economists insist that the soundness of a country's 'hard' currency is not determined by how it is “backed”, but rather by whether it is easily converted into other assets. Historically, gold facilitated this convertibility, but that has been replaced by a nation's productive capacity, or gross domestic product (GDP). This seems reasonable, though it can be argued that this is a purely academic paradigm. Alas, austerity is the only known antidote to runaway inflation: we never know when our money ceases to be convertible (or 'spendable') until we can't spend it any more!<br />
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Today, for example, people would surely be hesitant to accept Greek drachmas at whatever rates their government decrees. As Argentina nationalizes private property to support their government spending programs, they should expect that the rest of the world will increasingly distrust the value of their peso. All countries that ignore economic realities are eventually exposed as their 'soft' currency starts trading on an internal 'black market.' The 'black market' sets the true value of their currency, irrespective of what the government decrees. <br />
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The take-away of this blog is simple: Currencies today do fluctuate in value. Trying to guess which one will go up next is not investing: it is gambling. Gold can be comforting if you can't sleep, but don't bet your retirement on it.<br />
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I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NYUnknownnoreply@blogger.com0