The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

Government to Extend More Benefits to Same-Sex Married Couples

To mark the one-year anniversary of the historic Supreme Court ruling that struck down the Defense of Marriage Act (DOMA), the White House announced the extension of new benefits to same-sex married couples.

 

For instance, the Department of Labor has said that it would clarify rules governing the Family and Medical Leave Act (FMLA) to allow gay workers nationwide to take a leave of absence from work to care for a same-sex spouse or other family member, regardless of the state in which the employee resides. In its current implementation, the law states that a "spouse" applies only to a same-sex spouse who resides in one of the 19 states (or the District of Columbia) that recognizes same-sex marriage.

 

The recent announcement extends changes that have occurred in the past year at other federal agencies to allow same-sex couples to receive many of the same rights and benefits that heterosexual married couples have long had access to. For example, the IRS recognizes the legitimacy of same-sex marriage. Federal immigration law now applies equally to gay and straight couples. And federal government agencies now extend the same health and life insurance benefits to spouses of gay employees.

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Ten Sure Ways to Lose Money in Stocks

Who needs a pyramid scheme or crooked money manager when you can lose money in the stock market all by yourself -- quickly and easily -- by following these 10 simple strategies:

 

Go with the herd

 

If everyone else is buying it, it must be good, right? Wrong. Investors tend to do what everyone else is doing and are overly optimistic when the market goes up and overly pessimistic when the market goes down. For instance, in 2008, the largest monthly outflow of U.S. domestic equity funds occurred after the market had fallen over 25% from its peak. And in 2011, the only time net inflows were recorded was before the market slid over 10%. 1

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The Real Cost of College: Crunching the Numbers

So who can afford to pay $60,000 a year for a college education? Harvard College has disclosed that the full cost of attending the venerable institution, including tuition, room and board, and fees for the 2014-2015 academic year will be $58,607, up 3.9% from the $56,407 charged last year. Yale announced similar increases to its price tag for the coming academic year -- a 4% jump to $59,800. 1

 

Elite schools aside, the sticker-shock of attending college is still very real. Nationwide, the total average cost of a year at a private four-year college was $40,917 for the 2013-2014 academic year, while four-year public colleges came in at $18,391. 2

 

But there is more to the story than the so-called "published" costs. These eye-opening amounts are based on the full price that colleges list in their admissions documentation -- and that only the wealthiest families are asked to pay. Dig deeper into the numbers and you will find that the majority of college students pay nowhere near the published costs. Instead, most qualify to receive some form of financial aid that brings the total cost down to a more manageable bottom line. This dollar amount is referred to by The College Board and others in the field as the "net-price" tuition.

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New IRS Ruling Eases Plan-to-Plan Rollover of Assets

In an effort to ease the administrative burden placed on plan sponsors and to foster portability of retirement savings for plan participants, the IRS has issued guidance that simplifies the transfer of assets between all types of qualified retirement plans.

 

IRS Revenue Ruling 2014-09, published in April, allows the plan administrator for the receiving plan to forego the burdensome task of verifying the legitimacy of the incoming plan -- a process that typically involved multiple rounds of communication and paperwork between the two plans with the employee acting as the middleman -- and thus ease and expedite the rollover process for both the employer and the employee.

 

Now, the plan administrator for the receiving plan need only access the most recently filed Form 5500 (annual report) for the incoming plan that is stored online on the EFAST2 database maintained by the Department of Labor. The guidance is effective immediately.

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You and Your Business: Choosing the Right Form of Ownership

The form of ownership you choose for your company can have lasting legal, financial, and tax implications. Here's a review of some of the most common business structures.

 

•Sole proprietorship -- Under this arrangement, one person owns 100% of the business. Taxes are paid using a regular Form 1040, with the addition of a Schedule C to report profits and losses, and a Schedule SE for self-employment tax. While a sole proprietorship is easy to establish, since you and your business are considered the same entity, you potentially face unlimited personal liability if you are sued or become unable to pay your debts.

 

•General partnership -- A partnership is essentially two or more business owners operating under one entity. Ownership can be divided any way the partners see fit, and partners report only their portion of profits or losses on personal income tax forms. As with sole proprietorships, partners can be held personally liable for the debts of the partnership.

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Following Court Ruling, IRS Clarifies IRA Rollover Rule

A U.S. Tax Court ruling on IRA rollovers has the IRS changing its longstanding position.

 

In January of this year the U.S. Tax Court ruled that the "once a year" IRA rollover rule applies to all of an individual's IRAs, not to each separately. The court's decision conflicts with a longstanding IRS position (as outlined in IRS Publication 590) that states the rule applies separately to each IRA owned, thus allowing multiple rollovers if taken from separate accounts during a 365-day period -- as opposed to a calendar year period.

 

For its part, the IRS had not publicly indicated how it would handle the court's decision until recently, when it announced that it would uphold the court's decision and revise its rules and publications accordingly.

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Target-Date Funds Will Garner Majority of 401(k) Contributions by 2018

Target-date funds continue to gain ground in the employer-based retirement plan arena. It is estimated that by 2018, they will garner more than 63% of total defined contribution plan participant contributions and account for 35% of total 401(k) plan assets.

 

A new study by Cerulli Associates reported these findings and revealed other key trends influencing target-date funds' popularity. For instance, 84% of plan participants cited the risk management and asset allocation features of the funds as being "very important," while 42% were attracted to target-date funds' built-in diversification qualities.

 

By definition, target-date funds are mutual funds that automatically reset their asset mix of stocks, bonds, and cash equivalents to maintain a risk profile that is appropriate for a particular investor's "target date" for withdrawals, such as retirement.

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I Received an Inheritance. How Is This Money Taxed?

How your inheritance is taxed will depend on your relationship to the deceased and other factors.

 

The amount of federal estate tax typically is determined by the amount of assets within the estate and your relationship to the deceased.

 

Spouses typically may inherit an unlimited amount of assets free of federal estate taxes. Estates bequeathed to non-spouses, in contrast, may be subject to federal estate taxes and state inheritance taxes depending on the level of assets within the estate.

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Do I Need Travel Insurance?

Whether you need travel insurance is likely to depend on your level of coverage from existing homeowner's, medical, automobile, and life insurance policies. In many instances, travel insurance may duplicate coverage that you already have.

 

Travel insurance is likely to include coverage for trip cancellation, lost or stolen baggage or personal items, emergency medical assistance, and death while you are on vacation. Trip cancellation provides coverage if a cruise line or tour operator goes out of business or if you need to cancel because of illness or a death in the family. Costs for trip cancellation coverage typically range between 5% and 7% of the cost of the vacation.1

 

Before purchasing coverage for baggage or personal effects, determine how much coverage an airline or other travel provider offers. Airlines may limit their liability for lost baggage. Also review your health insurance to determine your liability for medical expenses, especially emergency care, out of state or out of the country, if applicable. If you already have life insurance, you may not need additional coverage for vacation.

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Employers Ramping Up Retirement Plan Features, Advisory Services

Employers are taking action to boost their retirement plan programs. Find out what actions are the most prevalent.

 

Employers are enhancing their retirement plans and increasing access to professional investment advice in an attempt to bolster employee retirement readiness.

 

A new study by Aon Hewitt, which polled more than 400 plan sponsors serving 10 million plan participants, revealed a number of initiatives being taken to strengthen employee ability to achieve greater financial security in retirement. Key actions include the following:

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Survey: Retirement Confidence Recovers for Those With Retirement Plans

EBRI's annual Retirement Confidence Survey found a marked increase in confidence among workers who participate in retirement plans.

 

The Employee Benefit Research Institute's (EBRI) annual Retirement Confidence Survey found a marked increase in retirement confidence among workers with higher household incomes who also participate in one or more retirement plans -- including defined contribution plans, defined benefit plans, and/or IRAs.

 

Specifically, more than half (55%) of survey respondents are now very or somewhat confident about having enough money to live comfortably in retirement. The number of workers who are "very confident" rose from 13% in 2013 to 18% this year, while 37% said they were "somewhat confident." The number of workers who are "not at all confident" stayed statistically unchanged from last year at 28%.

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529 Plans: Taking Distributions

Parents looking to take advantage of the many benefits of saving for college with a 529 plan will want to know the full details on which educational expenses qualify for tax-free distribution status -- and which do not.1 In Publication 970, the IRS gives detailed guidance on qualified expenses. Here are a few important points.

 

What's Covered

 

•Tuition and fees are covered in full.

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What Are Health Savings Accounts?

As health care costs continue to rise, consumers must find ways to ensure that they have the funds to pay for medical expenses not covered through their insurance. One way to save specifically for health care costs is to fund a health savings account, or HSA.

 

HSAs are tax-advantaged savings accounts set up in conjunction with high-deductible health insurance policies. Enrollees or their employers make tax-free contributions to an HSA and typically use the funds to pay for qualified medical care until they reach their policy's deductible.

 

HSAs are not for everyone, and it is important to understand how they work before considering them to help fund health care costs.

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Living with Volatility, Again

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

Volatility is back. Just as many people were starting to think markets only ever move in one direction, the pendulum has swung the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good.  Click here to read the full article:

 Living with Volatility Again.pdf

 

 

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Research in Focus: How Much Do You Need to Save for Retirement?

Here is a nice article and video provided by Massi De Santis, PhD of Dimensional Fund Advisors: 

How much should you be saving for retirement? In this client-ready video, Massi De Santis, PhD, explains that the answer should be customized for each individual, based on how their income grows prior to retirement.

Click HERE to watch the video.

More detailed information can be found by clicking on the following title to download: How Much Should I Save for Retirement?

 

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The Google Effect?

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

What can’t Google do? Free email, customized searches, maps, apps, browsers, video—the list goes on. Now researchers claim to have found a link between Google searches and future stock market movements.  Click here to read this article:  The Google Effect.pdf

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  This email address is being protected from spambots. You need JavaScript enabled to view it. .

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The Curve Ball

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

There’s a school of thought that says the best way to manage a fixed income portfolio is to base your investment decisions on where you think interest rates are headed.  But what if expectations are changing all the time?  Click here to read the full article:  The Curve Ball.pdf

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  This email address is being protected from spambots. You need JavaScript enabled to view it. .

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Why Dimensional funds for our client portfolios?

It starts with Roger Ibbotson and his book, Stocks, Bonds, Bills & Inflation almost twenty years ago while completing my MBA at the University of Colorado.  His research and work made sense to me through his historical market information and data from US small capitalization stocks. These are the stocks of companies that have a small market capitalization and have historically had much better returns than that of large company stocks like the S&P 500.  I noticed that Dimensional Funds Advisors (DFA) 9-10 (since renamed, Dimensional US Micro Cap fund), were the stocks with the returns that caught my attention.  I knew then that I would pursue the use of Dimensional funds in my practice.

My Pursuit

I first contacted Dimensional Fund Advisors about a year after starting Diversified Asset Management in 1996.  They informed me that only “approved” advisors could use their funds because they didn’t want just anyone using them.  In order to be “approved”, one had to participate in their introductory conference and write a paper.  They wanted you to understand their research and believe in their philosophy if you were going to use their funds.  Following the conference, advisors that were still interested had to demonstrate their belief in their passive asset class investing by submitting a thorough paper about it. 


At the conference, there was heavy emphasis on the mathematics with a lot of research on the financial markets and how they designed their mutual funds.  I would characterize their conference as beyond PhD research, which intrigued me, so I moved forward in becoming an approved advisor.
Who Is Dimensional Funds (DFA)?

DFA was founded in 1981 and is currently headquartered in Austin, Texas. Its governing board includes a who’s who list of respected academics and financial economists such as Nobel Laureate recipients Eugene F. Fama (founding board member), Merton Miller, Myron Scholes and Robert Merton. Dimensional Funds started out managing pension funds for some of the largest companies in the world and made a name for themselves in the pension funds after creating their small capitalization fund that was and still is used as a model in the industry. Today DFA only distributes its funds through independent investment advisors and institutions such as pension funds.

Why haven’t we heard more of Dimensional Funds? They don’t spend a lot on marketing.  No TV advertising or ads in periodicals.  They don’t even have an 800 number! To keep expenses of the fund low and the turnover of the fund low (minimizing taxes), Advisors that trade frequently are banned from Dimensional Funds. In the end, this benefits all shareholders.


With all this said, they are one of the fastest growing fund companies in the world and currently manage about 380 Billion and in the top ten in assets.

Why Passive Asset Class Investing?

Dimensional Fund’s Passive Asset Class investing is a low cost and low turnover investment strategy which delivers asset class and returns to the investors in their funds.  The funds target specific asset classes such as small and large company stocks and value stocks for both domestic and international markets.


 Three significant advantages of passive asset class investing are:

•    A passive investment strategy means a low turnover investment strategy.  This means less trading in the mutual fund portfolios with better return and lower taxes.
•    Dimensional funds also targets different dimensions of risk such as creating mutual fund portfolios, which target value stocks.  Value stocks typically have historically had higher returns than growth stocks.
•    As an Advisor, you know that the asset class funds are comprised of the asset class that is specified in the name.  You know that the fund will not drift from its mandate when another asset class gets hot.  For example, other fund companies might have a fund which starts out as a US small company fund and before you know it, the find company has loaded up on emerging markets because they are performing well (hot).  As an advisor, it helps me keep strict portfolios and makes the rebalancing job much more efficient since I don’t have to worry if a fund manager has drifted significantly from its mandate.


The use of Dimensional Funds in our client’s portfolios just makes sense.  They mirror our drive to maintain a wealth management plan designed to keep you on your path toward financial success.

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Putting Financial Science to Work

Here is a nice article written by Dimensional Fund Advisors:

 

The downloadable brochure below explains why we use Dimensional Funds. Putting Financial Science to Work, explains Dimensional’s way of investing, highlighting their view of markets and describing how they combine research, portfolio structure, and implementation to target dimensions of higher expected returns.  Click on the link to download:  Putting Financial Science to Work.pdf

 

 

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CAPE Fear: Valuation Ratios and Market Timing

Here is a nice article provided by Weston Wellington of Dimensional Fund Advisors:

As broad market indices such as the S&P 500 have set new record highs in recent weeks, many investors have become apprehensive. They fear another major decline is likely to occur and are eager to find strategies that promise to avoid the pain of an extended downturn while preserving the opportunity to profit in up markets.  Click here to read the full article:  CAPE Fear Valuation Ratios and Market Timing.pdf

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  This email address is being protected from spambots. You need JavaScript enabled to view it. .

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Over the Hedge

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

 

A recent press article said that with major risk assets looking "fully valued," it was time to seek out alternative investments such as hedge funds. But those thinking of making that shift might want to look before they leap. 

 

According to consulting firm McKinsey and Co, hedge funds and other "alternative" investments will command up to 40% of the asset management industry’s global revenues by 2020 as investors seek them for "safety and consistent returns."1 

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Dimensional Funds Mutual Fund Landscape 2014

Here is a nice article written by Dimensional Fund Advisors:

 

Dimensional's Research group recently updated the Mutual Fund Landscape analysis to reflect US mutual fund industry performance through 2013. The analysis is based on data from the CRSP Survivor-Bias-Free US Mutual Fund Database. 

 

"The Mutual Fund Landscape 2014" features graphics and narrative that describe a fund manager’s challenge to survive and outperform over time. The data reveals that few mutual funds have delivered benchmark-beating returns and quantifies an investor’s challenge to identify outperforming managers in advance. The content also shows the impact of fees and turnover on fund returns. Click on the title to download: Dimensional-Funds-Mutual-Fund-Landscape-2014.pdf

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Bringing Academic Ideas to Life

In the attached article, David Booth congratulates Eugene Fama for being named a 2013 Nobel laureate and reflects on Dimensional’s history of bringing financial science to life for investors. Click on the title to download:  Bringing-Academic-Ideas-To-Life.pdf

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  This email address is being protected from spambots. You need JavaScript enabled to view it. .

 

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Connecting the Dots

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

 

Human beings love stories. But this innate tendency can lead us to imagine connections between events where none really exist. For financial journalists, this is a virtual job requirement. For investors, it can be a disaster. 

 

“The Australian dollar rose today after Westpac Bank dropped its forecast of further central bank interest rate cuts this year,” read a recent lead story on Bloomberg. 

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Seven Ways to Fool Yourself

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:


The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag.

We delude ourselves for a number of reasons, but one of the principal causes is a need to protect our own egos. So we look for external evidence that supports the myths we hold about ourselves, and we dismiss those facts that are incompatible.

Psychologists call this “confirmation bias”—a tendency to select facts that suit our own internal beliefs. A related ingrained tendency, known as “hindsight bias,” involves seeing everything as obvious and predictable after the fact.

These biases, or ways of protecting our egos from reality, are evident among many investors every day and are often encouraged by the media.
Here are seven common manifestations of how investors fool themselves:

    1.    “Everyone could see that market crash coming.” Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You     don’t need forecasts.


    2.    “I only invest in ‘blue-chip’ companies.” People often gravitate to the familiar and to shares they see as solid. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.


    3.    “I’m waiting for more certainty.” The emotions triggered by volatility are understandable, but acting on those emotions can be counterproductive. Uncertainty goes with investing. Historically, long-term discipline has been rewarded.


    4.    “I know about this industry, so I’m going to buy the stock.” People often assume that success in investment requires a specialist’s knowledge of a sector. But that information is usually already in the price.   Trust the market instead.

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Not Rocket Science

Here is a nice article provided by Jim Parker of Dimensional Fund Advisers:

When the media raises the subject of beating the market through astute stock picking, the name Warren Buffett is usually cited. But what does this legendary investor actually say about the smart way to invest?

Buffett is considered to have such a track record of picking stock winners and avoiding losers that his annual letter to shareholders in his Berkshire Hathaway conglomerate is treated as a major event by the financial media.1

What does he think about the Federal Reserve taper? What could be the implications for emerging markets of a Russian military advance into Ukraine? What does an economic slowdown in China mean for developed markets?

Buffett has a neat way of parrying these questions from journalists and analysts. Instead of offering instant opinions about the crisis of the day, he recounts in his most recent annual letter a folksy story about a farm he has owned for nearly 30 years.2

Has he laid awake at night worrying about fluctuations in the farm’s market price? No, says Buffett, he has focused on its long-term value. And he counsels investors to take the same sanguine, relaxed approach to liquid investments such as shares as they do to the value of their family home.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” Buffett said. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

While many individuals seek to ape Buffett in analyzing individual companies in minute detail in the hope of finding a bargain, he advocates that the right approach for most people is to let the market do all the work and worrying for them.

“The goal of the non-professional should not be to pick winners,” Buffett wrote in his annual letter. “The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

As to all the predictions out there about interest rates, emerging markets, or geopolitics, there will always be a range of opinions, he says. But we are under no obligation to listen to the media commentators, however distracting they may be.

“Owners of stocks . . . too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,” Buffett says. “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments.”

The Buffett prescription isn’t rocket science, as one might expect from an unassuming, plainspoken octogenarian from Nebraska. He rightly points out that an advanced intellect and success in long-term investment don’t necessarily go together.

“You don't need to be a rocket scientist,” he has said. “Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”3


1. “Buffet Warns of Liquidity Curse,” Bloomberg, Feb 25, 2014.
2. Berkshire Hathaway Inc. shareholder letter, 2013, www.berkshirehathaway.com/letters/2013ltr.pdf.
3. “The wit and wisdom of Warren Buffett,” Fortune, November 19, 2012, management.fortune.cnn.com/2012/11/19/warren-buffett-wit-wisdom/. 



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  This email address is being protected from spambots. You need JavaScript enabled to view it. .

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

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The Devil Wears Nada

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

The global fashion industry is fickle by nature, pushing and then pulling trends to keep hapless consumers forever turning over their wardrobes. Much of the financial services industry works the same way.

Fashion designers, manufacturers, and media operate by telling consumers what’s in vogue this year, thus artificially creating demand where none previously existed. What turns up in the boutiques is hyped as hip by the glossy magazines to make you feel like you “have” to buy it.

Likewise, much of the media and financial services industries depend on fleeting trends and built-in obsolescence to keep investors buying new “stuff.” Driving this industry aren’t so much the real needs of individuals but manufactured wants with short shelf lives.

Just as in fashion, many consumers jump onto an investment trend after it's already peaked and the market has moved onto something else. So their portfolios can end up full of mismatched, costly, impractical creations such as hybrids, capital protected products, and hedge funds.

These products tend to be created because they can sell. So in early 2005, Reuters wrote about how banks were manufacturing exotic credit derivatives (instruments designed to separate and transfer credit risk) for investors looking for ways to boost yield at a time of narrowing premiums over risk-free assets.1 (A credit default swap is a credit derivative. It’s an over-the-counter financial instrument whose value is determined by the default risk of an underlying asset).

Four years later, in the midst of the crisis caused partly by those same derivatives, the shiny new things were “guaranteed” or “capital protected” products as financial institutions rolled out a new line of merchandise they thought they could sell to a ready market.2

Some investors made the mistake of swinging from one trend to the other, ending up with overly concentrated portfolios—like a fashion buyer with a wardrobe full of puffy blue shirts.

While some of these investments may well have found a viable market, it’s worth asking whether the specific and long-term needs of individuals are best served by the design and mass marketing of products built around short-term trends.

Luckily, there is an alternative. Rather than investing according to what’s trendy at the moment, some people might prefer an approach based on long-term research and built upon principles that have been tried and tested in many market environments.

Instead of second guessing where the market might go next, this alternative approach involves working with the market, taking only those risks worth taking, holding a number of asset classes, keeping costs low, and managing one’s own emotions.

Instead of chasing returns like an anxious fashion victim, this approach involves investors trusting the market to offer the compensation owed to them for taking “systematic” risk—those risks in the market that can’t be diversified away.

Instead of juggling investment styles according to the fashion of the moment, this approach is based on dimensions of return in the market that have been shown by rigorous research as sensible, persistent, and pervasive.

Instead of blowing the wardrobe budget on the portfolio equivalent of leg warmers, this approach spreads risk across and within many different asset classes, sectors, and countries through a technique called diversification.

And instead of paying top dollar for the popular brands at the expensive department stores, this approach focuses on securing good long-term investments at low prices relative to fundamental measures. Buying high just means your expected return is low.

Most of all, instead of focusing on off-the-rack investments created by the industry based on what it thinks it can sell this week, this approach can help deliver long-term results based on each individual’s own needs, goals, and life circumstances.

To paraphrase the legendary designer Coco Chanel, investment fashion changes, but style never goes out of fashion.

1. “Demand for Exotic Derivatives Seen Growing—Bankers,” Reuters, Jan. 18, 2005.

2. “Investing: Storm Shelters,” Money magazine, Oct. 1, 2009.


 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  This email address is being protected from spambots. You need JavaScript enabled to view it. .

 

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Future Testing

Here is a nice article provided by Jim Parker  of Dimensional Fund Advisors:

 

Much financial news purports to be about the future but is really just an account of the past. As a result, many investors project what has already happened onto an imagined future. There’s another way of framing this problem.

 

It’s understandable that investors, with the help of a necessarily short-term-focused media, will tend to focus most of their attention on what has happened in financial markets in the past month, week, day, or even hour.

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The Golden Ticket Trap

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors.

 

In a popular children’s story, the young hero pins all his hopes on finding one of a handful of “golden tickets” hidden among millions of candy bars. It seems many people approach investing the same way.

 

The notion that the path to long-term wealth lies in locating secret and previously undiscovered treasures in the global marketplace of securities is one regularly featured in media and market commentary.

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The Certainty Principle

This guest post is written by Jim Parker. Jim Parker works for our partner Dimensional Fund Advisors (DFA) in Australia. He discusses financial topics that are as relevant to investors here in the US as they are to investors in Australia. He discusses the “The Certainty Principle” and how waiting on total certainty will lead to missed opportunities. Here is his article:

 

 

A frequent complaint from would-be investors is that “uncertainty” is what keeps them out of the financial markets. “I’ll stay in cash until the direction becomes clearer,” they will say. So when has there ever been total clarity?

 

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Spring Cleaning -- Put Your Financial House in Order

As you file away your forms and schedules at the end of the tax season, it's a good time to take a closer look at the big picture of your financial structure and tidy up where needed. Here's a checklist of key considerations to help you get started.

 

Lay a Balanced Investment Groundwork

 

Does your current asset allocation -- the mix of securities in your investment portfolio -- still match your risk tolerance and time horizon? Stock market performance over the past few years may have altered the value of your stock holdings above or below the level you had originally intended. If so, consider rebalancing, either by selling some of your stock or bond investments or by purchasing more stock, bond or cash investments.

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Still Time to contribute to an IRA or Roth IRA for 2013…If You Qualify

Can You Make an IRA Contribution?

 

As long as you have income, you can contribute to an IRA; even if you are participating in an employer retirement plan. The only question is whether or not your IRA contribution is deductible from your taxes.

Even if your contribution is not deductible, the money in the IRA will still grow tax free until you take it out (after age 59½) at which point you only pay tax on the gains. If your spouse is not working, you can contribute to an IRA on their behalf as well, provided you have earned income.

Check with your accountant on the deductibility of an IRA contribution for your situation.

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2013 Review: Economy & Markets

This guest post is written by Bryan Harris. Bryan Harris works for our partner Dimensional Fund Advisors (DFA).

The financial markets encountered strong headwinds but little turbulence on the way to a record-setting year. 2013 has been described as a “year about nothing.” In reality, a lot happened—but nothing could challenge the market’s profitable run. Investors shrugged off news of a sluggish US recovery, recessions in China and Japan, threats of a US government shutdown, lingering euro zone debt problems, climbing interest rates, worsening turmoil in the Middle East, and stock market glitches.

The US and most developed market indexes experienced double-digit gains for the year. Overall, US stocks were up for the fifth year in a row while daily volatility fell to its lowest level in seven years. The Dow Jones Industrial Average posted a gain of 26.50%, its largest advance in 18 years. The S&P 500 Index had its best year since 1997, returning 32.39%. In the non-US developed markets, the MSCI-EAFE Index returned 22.78%, and all developed country markets in the MSCI indexes had positive returns. Emerging markets were the exception to the worldwide equity advance, as returns in many emerging countries turned negative, with the MSCI Emerging Markets Index returning -2.60% for the year.

During 2013, the yield on the 10-year Treasury note climbed from 1.76% to 3.01%―its largest increase since 2009. Rising interest rates left US fixed income indexes with either flat or negative returns, with longer-term and higher-quality bonds declining the most. TIPS performance was notably poor. Returns in the international bond markets were mixed and emerging market bond index returns were negative.

US Stock Market Performance

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Many Happy Returns

This guest post is written by Jim Parker. Jim Parker works for our partner Dimensional Fund Advisors (DFA) in Australia. He discusses financial topics that are as relevant to investors here in the US as they are to investors in Australia. He discusses the “predictions” made a year ago and how – if followed – would have harmed investors all over the world.

 

It’s that time of the year when the talking heads of television and the prognosticators of print issue their sage outlooks for the coming 12 months. While this crystal ball gazing is always entertaining, it becomes even more so a year later.

 

In journalism, this is known as the “silly season.” Lots of people are on vacations, and the flow of news slows to a crawl. So the wide open spaces are filled with forecasts about the economy, markets, and anything else you can think of.

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Protect Your Wealth & Your Family!

Too often, life gets in the way of our best intentions – especially for busy corporate executives or small business owners. Time constraints of work and family and the distractions of the great outdoors of Colorado can let some important tasks fall through the cracks. Small business owners often find themselves overwhelmed with day to day operations of their business, performing tasks such as marketing, client meetings, product development, managing employees, paperwork, benefit decisions, and much more. Corporate executives are busy managing their teams, meeting revenue targets, cultivating new business acquisitions and sometimes-endless travel, among other things. With all these tasks at hand, protecting earning power and making sure their estate plan is in order are two of the most important wealth management topics that should be addressed, but are often overlooked.

 

The thought of estate planning is a daunting task to most people – but particularly for those whose days’ are consumed with so many other important tasks and decisions. There are many steps that become overwhelming during the process of estate planning and creating your will. First, you have to find a qualified attorney. And the hard work doesn’t end there – next you have to fill out a long multi-page questionnaire. This is often where the momentum ends because the last thing a busy corporate executive or small business owner wants to do is fill out more forms. If you utilize the services of a wealth manager who is already familiar with your assets and total picture, they can be of great assistance when completing the initial questionnaire for the attorney. After answering questions about your financial and personal situation, you then have to make some tough decisions – you have to determine an executor for your estate, a guardian for your children, trusts for your children and where and how assets should ultimately be divided up. You also have to make decisions about your healthcare wishes. All of these decisions and appointments are not so straightforward.

 

Once you finally have your will and estate plan created, you then have the long process and checklist of things to do such as changing your beneficiaries, changing account titles, changing asset titles and possibly funding trusts. This list should be shared with your wealth manager so they can assist with as many things as possible. As a wealth manager, we have found that changing your beneficiaries is the commonly overlooked.

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How much should I save and already accumulated for retirement?

More and more Americans are faced with the challenge and burden to save for their own retirement as pensions continue to fall by the wayside. The trouble is determining how much money you need to amass before you can retire. Answering the question of ‘how much should I save before I retire’ and ‘how much should I have already accumulated to be on track to retire’ prove quite difficult, mainly because there is no one-size-fits-all solution for calculating a person’s needs in retirement. To get the best answer to either of these questions, it takes a tailored and customized calculation and solution that incorporates all facets of a household.

 

Saving for retirement is not always a priority for most Americans – especially when you are young. When you are a young worker, there are a lot of fixed costs associated with everyday living, such as mortgage payments, car payments, student loan payments, insurance, food and other regular bills. As we age, part of these payments/bills will remain fixed or constant, while others are variable and change throughout the course of life.

Marlena Lee and Massi De Santis, both of Dimensional Fund Advisors, recently published their research titled “How Much Should I Save For Retirement” 1 and it attempts to solve both of these ubiquitous questions. They summarized their findings in their paper, and we will summarize it below.

 

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What should you do from a financial standpoint before becoming self-employed?

Are you tossing the idea around of starting a new business in the New Year? While you are still employed full-time, there are many financial issues you should address prior to becoming self-employed and stating a new venture.

 

Here are some of our top suggestions of things to do before you become and entrepreneur:

 

  1. Set up a budget so you know exactly how much you are going to need during the first year of business.
  2. Make a business plan to estimate your business related expenses and estimate your revenues. A business plan is critical because it identifies goals to shoot for and hopefully exceed.
  3. Hire an expert wealth advisor, to help you determine how much you should save, where to save your money and in which investments you should invest. One of the main reasons businesses fail is due to the fact that they are under funded and do not have enough in cash reserves and investments. If you have money in a taxable account or a money market you can easily access the money. If your money is tied up in your 401k or IRA there is usually a penalty to access it prior to age 59.5, except if you take a loan from your 401k, but that is not recommended. It will be satisfying to know someone is taking care of your finances.
  4. Review your insurance to make sure your life and heath insurance is the best for your situation.Get disability insurance before you leave your job. Understand that it might take some time to get group insurance under your new business. You will be able to get insurance, just not group rate insurance for your business.
  5. Talk to an attorney and an accountant to find out the best structure for your business. It is important to speak with an accountant or attorney so you can set up your business with a structure that is most advantageous for the type of business you will be getting into.
  6. Think about refinancing your house to lower your monthly payments, if the interest rates make sense. Another option maybe to reduce your payments by going from a 15 year mortgage (if you have one) to a 30 year mortgage. Banks and mortgage companies will typically loan you more money if you have a steady income than if you don’t. Once your money is in your house, it is usually hard to access it if you have little or no income.
  7. Get a home equity line of credit set up while you are employed full time. You don’t have to access right away, but you can use it if you run into trouble down the road.
  8. Remember it is all marketing, marketing and more marketing! You can be the best at what you do but if no one knows who you are then it will be hard to survive. Understand the difference between pull marketing and push marketing.
  9. Read books about running a business such as Michael Gerber’s E-Myth. It is important to think about the long term vision of your business right from the start.

 

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Plan Ahead for the Holiday Budget Crunch

Every year, millions of Americans celebrate the holidays with traditions like throwing parties and buying gifts for family and friends. Unfortunately, many also participate in another tradition that lands them in debt – spending more than they can afford.

 

This year, break the buy-now, worry-later habit by creating — and sticking to — a special holiday spending plan. It won’t take long, and you’ll still be able to spread cheer without completely draining your wallet.

 

Set Limits and Goals
Gauge how much time you have between now and the holidays and determine a realistic spending limit. Divide that amount by the number of weeks you have available and try to save that amount each week.

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Index funds might have low expense ratios but …

In 2012, index funds accounted for 24% of assets under management, growing four times faster than all other funds, according to Morningstar. A major draw to index funds is their low expense ratios. Index funds typically have low expense ratios because they track and invest in a particular index. This framework however results in the major flaw of index funds.

 

Index funds attempt to minimize tracking error by holding whatever stocks comprise the index they track at that moment. The companies that construct the index determine when the companies in an index change, in addition to setting the parameters of inclusion for the index. This provides a model which determines the timeliness which stocks are included in that index and which stocks get removed from that index. If you run an index fund and you want to minimize tracking error, you have to buy and sell along with everyone else in the open market when the index constituents change. For example, if you are running an index fund, when stock XYZ is added to the index and stock ABC is dropped from the index, you buy stock XYZ and sell stock ABC. If other index fund companies are doing the exact same thing, what do you think this does to the prices of these two stocks? Stock XYZ’s price is bid up and Stock ABC’s price is bid down.

 

Some fund companies like Dimensional Funds, do not tie their funds to any indexes to avoid buying and selling when there is higher than usual volume for funds being added/removed from an index. Dimensional Funds has found that they can exploit this conception known as ‘mis-pricing’ by waiting to buy XYZ and waiting to sell ABC for a few days, weeks or months – waiting to buy/sell those particular stocks until after everyone else is done trading in the stocks that were added and dropped from the index. Dimensional Funds can sometimes outperform an index by not buying and selling when everyone is adjusting their holdings to reflect the changes to an index fund.

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Get Ready for Your Year-End Review

The last few months of a year often prompt people to think about goals they want to pursue in the year ahead. If your goals include investment issues, an annual review with your financial advisor is an excellent opportunity to focus on what you need to do to pursue them. Every person’s goals are unique, but you may want to think about the following areas when preparing for your review.

 

Building Retirement Assets

 

Your advisor can help you calculate how much you need to save for your later years. If you are coming up short, funding an IRA may help you close the gap.1 For the 2013 tax year, you may contribute a maximum of $5,500 to a traditional IRA or to a Roth IRA — plus a $1,000 catch-up contribution if you are age 50 or older. If you haven’t yet made your 2013 contribution, you may do so up until April 15, 2014.

 

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Top Issues Facing Corporate Executives Before They Retire

As a well-paid corporate executive, you might think that shifting into retirement will be a breeze.

But even with enough money to retire, there are concerns facing corporate executives, which can turn that calm breeze into choppy gusts.  For a smoother ride, be prepared to do some planning many years before you retire.

A good place to start your planning before retirement is to calculate how much money you need.  To answer this, look at what your take home pay is and subtract out any current savings. Current savings can consist of contributions to an IRA (Roth IRA), contributions to a taxable investment or savings account or extra principal payments. From this, subtract estimated amounts for additional retirement income such as Social Security, pensions, or rental incomes. This will provide a good idea of what you need on an after tax basis to live on during retirement. Typically, this works out to be 60%-80% of your pre-retirement income. But having enough money to retire is not all there is to it.

One of the biggest issues facing a corporate executive is figuring out what to do with your large position in the company stock or company stock options. Just like any other stock, owning a large position in a single stock is risky business.  It leaves you with an unbalanced portfolio, that’s subject to wild swings.

Look at the standard deviation of your portfolio with and without the large position in the company stock. There are techniques to hedge your large position by using stock options and equity collars. These methods can become complicated and usually require the assistance of an investment professional and accountant.

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Harnessing Risk in Any Market

If you're an outdoor enthusiast, at some point or another you've probably contemplated what you might do should you encounter a bear or other wild animal. Wildlife experts typically recommend these tips: Stay calm and don't run. Investors might also do well to heed that advice when traversing the stock market.

Plan ahead -- Rather than fret about which way the market is headed this week or even this month, do what 87% of millionaires do to reduce worries -- be proactive and develop a plan.1 A sound financial plan can keep you focused on your long-term financial objectives and keep you from getting caught up in the doldrums of a short-term market downturn or the hype of the latest hot sector.

Hold on -- A buy-and-hold investing strategy can also help keep you from being distracted by short-term market performance. It can also potentially help reduce the risk of loss over time.

Maintain realistic expectations -- Consider that since 1926, the average total annual return of the S&P 500 has been 9.9%.2 Maintaining realistic return expectations can make it easier to cope with short-term market downturns.

Make diversification your ally -- Different types of investments lead the market at different times. By holding a well-diversified portfolio of stocks and bonds, for example, you may increase the possibility that those securities that increase in value could offset those that decrease.

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Hedging your company stock is easier said than done

Life gets in the way of your best intentions. As a busy executive, work and family usually are your highest priorities, while portfolio management gets left to a few moments on weekends and evenings.

Owning company stock and/or options throws an extra challenge into the mix. Overconfidence can lead to an underestimation of the real risk of these investments. Since you work for the company you feel that you will be able to tell in advance when to get out of the stock (even though you are not supposed to).

But trying to find the best strategies to hedge or dispose of your company stock and options can be a daunting task. Hedging your company stock requires skill and persistence and knowledge of sophisticated techniques.

The most common strategy is to create a collar on the stock, establishing a ceiling and floor to which the stock can't go above or below. To do this, you purchase a put option on the stock and sell a call option. For this example, we’ll assume you own 10,000 shares of stock XYZ and the price is $50 per share and your cost basis is $25 per share. First, figure the option expiration date you should use to hedge your stock. Typically, option expirations run in three-month cycles, so options would expire in three, six or nine months, or one-year time frames with some options expiring in as long as two years. If it’s a six-month expiration, you would purchase a put option that expires in six months and sell a call option that expires in six months. Say you purchase 100 June 40 puts for $4 (one put hedges 100 shares, so 100 puts hedge 10,000 shares) and you simultaneously sell 100 June 60 calls for $4. You have effectively hedged your stock for no cost or in other words have created a zero cost collar.

We also forgot to mention that all this has to happen simultaneously otherwise you are exposed to individual company risk. A typical individual company stock is two- to three-times more risky that a diversified portfolio of mutual funds. Now that you are hedged you have to understand the mechanics of the hedging. On expiration day which is the third Friday in June, your stock will be sold if it is above $60 or below $40 per share.

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401(k) Plan Roundup

401(k) plans have received a lot of press and attention of late. Recent implementation of Department of Labor regulations has resulted in some changes for 401(k) plan participants and plan sponsors.

Here are some recent articles that offer some critiques and issues facing 401(k) plans today.

"Bad behavior persists in 401(k) accounts"
In an April 2013 article, author Linda Stern highlights how many 401(k) participants have missed much of the market rebound since 2009 due to their own ‘emotionally driven’ behavior. The article mentions one positive trend in 401(k) plans since 2009 – the elimination of large stakes in company stock within 401(k) plans. A 401(k) plan can be your largest financial asset and it is crucial that you are receiving the information and advice you need when it comes to your 401(k).
Full article: http://reut.rs/18tNaOG

“Ban ‘active’ fund from 401(k)s, IRAs”
In March 2013, Alicia Munnel of the Center for Retirement Research at Boston College wrote a short article highlighting her position for why ‘Investments in tax-favored accounts should be limited to index funds’. She found that there is not a correlation between the high fees of actively managed funds and higher investment returns. Her position goes so far as to suggest ‘banning actively managed funds from tax favored plans’.
Full article: http://on.mktw.net/12Vcojg

“Cover: Delegation of Duty”
This article delves into the selection and monitoring of a 3(21) or 3(38) fiduciary assigned to a company 401(k) plan. Plan sponsors need to do their homework when outsourcing this important role and have a prudent process in place to select and monitor the plan fiduciary. Recent laws have changed where the responsibility falls and it’s not as easy as signing away the role.
Full article: http://bit.ly/11j9nPe

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Does Your Portfolio Reflect Your Risk Tolerance?

When it comes to investing, many people associate risk with losing money. But investing entails different types of risk. Understanding each type of risk and the potential return associated with your retirement portfolio can help you determine whether your investments are appropriate for your situation.

Examining Risk and Return
Stocks historically have exhibited the highest level of market risk -- the potential that an investment may lose money in the short term. Over the long term, however, stocks have outperformed both bonds and cash investments.1 This risk/return tradeoff may influence how you allocate your investments. For instance, consider weighting assets that you intend to keep invested for 10 years or more toward stock funds.

Bond funds carry their own risks -- credit risk, the possibility that a bond issuer could default on interest and principal payments; and interest rate risk, the chance that rising interest rates could cause a bond's price to fall. Ascending interest rates historically have influenced the prices of bonds more directly than stocks.1 When short-term rates are on the rise, investors may sell older bonds that pay a lower rate of interest -- causing their prices to fall -- in favor of newly issued bonds that pay higher interest rates. On the plus side, bonds historically have exhibited less short-term volatility than stocks.

It's also important to look at cash investments, such as money market funds, from the vantage point of risk and return.1 Although money market funds typically experience a low level of volatility, they may be subject to inflation risk -- the possibility that their returns may not keep pace with the rate of inflation. For this reason, you may want to invest in money market funds in short-term situations when you expect to access your money within 12 months or less.

Putting Risk in Perspective
Because all investments entail risk, you may want to review your mix of stock funds, bond funds, and money market funds with an eye toward creating the risk/return tradeoff that is appropriate for your situation. Owning different types of assets may increase your chances of experiencing the benefits associated with each while mitigating the corresponding risk. Your retirement portfolio won't be risk free, but you'll have the confidence of knowing you've done what you can to manage a potential downside.

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I am retiring and I can’t lose money now

The retirement process is very overwhelming for most individuals and couples. Typically you are transitioning from a steady paycheck to depending on accumulated wealth to provide a “retirement paycheck”. Understanding the complete retirement process is crucial to making a smooth transition from the corporate/self-employed world to a long-lasting, sustainable retirement. The retirement process consists of many steps, each of which is important. A summary of three key steps are as follows:

1. Asset Consolidation: Consolidate your accounts as much as possible, simplify the big picture.
2. Quarterly Account Rebalancing: Maintain portfolio diversification and address cash needs for the retirement paycheck
3. Create Retirement Paycheck: Transfer cash generated from quarterly rebalancing to bank account - your retirement paycheck

One of the big myths about retirement is that you simply put your portfolio in safe investments and “live off the interest”. Typically, pre-retirees are referring to bonds when they make this statement. There are two problems with having just bonds. The first is that there is no potential for growth in your portfolio. Each year your living expenses need to increase with inflation, and bonds will not provide any growth to compensate for this. Secondly, there is interest rate risk. If interest rates rise, your portfolio of bonds could decrease in value. The decrease would be a function of the average maturity of the bonds (longer maturity=larger decrease when interest rates rise) and the magnitude of the rise in interest rates.

Another common myth is, to be safe; you would just buy CD’s in your portfolio. This can work but you actually will need to accumulate 33% more before your retire if you want to use this investment strategy because the safe withdrawal rate for a portfolio of CD’s is 3%. Typically, a diversified portfolio of stock & bond mutual funds (ranging from 40% stock funds and 60% bonds to 80% stock funds & 20% bond funds) will provide a safe withdrawal rate of 4% annually. This amount can be increased each year for inflation. For example, if you have accumulated $2M, you can safely withdraw 4% or $80,000 per year with a diversified investment portfolio. If you only have CD’s and money markets, then you need $2,666,666 to withdraw the same $80,000 annually.

In summary, you do need to take some risk but not a lot. The reason you need to take risk is that you need to have some growth in your portfolio to keep up with the increased living expenses each year. As you move to the extremes on each end, meaning really conservative or really aggressive, you increase the probability of running out of money. As you get more aggressive, a couple of bad years in the beginning can derail your retirement. If you chose an extremely conservative portfolio, then you run the risk of not having your portfolio keep up with inflation.

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Tax Day for 2012 is over – but the work starts now for 2013!

With the April 15th deadline behind us, many of us want to forget about Tax Day until next April. This would be a disservice to you. Take the time now to do some planning for the 2013 tax year to capture any potential benefits – or miss out on potential harms to your tax situation.

Of course, if you took advantage of an extension for your 2012 returns, the sooner you file your return, the better so you can start planning for your 2013 tax year.

Here are some things you should be thinking about now – before next April:

1)      Make Your Estimated Tax Payments.
If you are self-employed, have a job that does not withhold tax from your paycheck, or have income from other sources (such as certain investments) then you likely have a need to make estimated tax payments. If you anticipate a shortfall in your tax withholding for the year, you need to be making estimated tax payments. One quick check to avoid the underpayment penalty is to ensure by the end of 2013, the smaller of: 90% of the tax you owe for the current year or 100% of the tax shown on the return for last year (2012) is being withheld. If you don’t anticipate this amount to be withheld, then you probably need to make estimated tax payments.  Check with your accountant to see if they recommended making estimated payments for the 2013 tax year. Estimated tax payments are due quarterly: April 15, June 15, September 15, and January 15.

2)     Fund Your IRA or Roth IRA Account.
Consider making current year (2013) contributions to your retirement accounts now instead of waiting until the filing deadline to contribute. The contribution limits for 2013 are $5,500 to an IRA or Roth IRA and $6,500 if you are over 50. There are certain income limits for contributions that you need to be aware of. Consult with your accountant or other financial professional to see what if an IRA or Roth IRA contribution is appropriate for your 2013 tax situation.

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Gifting: A Win-Win Proposition

You can make annual gifts of up to $14,000 ($28,000 per married couple) to as many people as you wish without incurring federal gift taxes. For tax year 2013, the annual exclusion for gifts was increased to $14,000, up from $13,000 for 2012.

A wealth-transfer technique you can use to reduce your taxable estate and keep more of your assets for your heirs is with gifting. You can make annual gifts of up to $14,000 ($28,000 per married couple) to as many people as you wish without incurring federal gift taxes.

An example: A married couple with three children could reduce their estate by $84,000 each year if $28,000 were given to each of their children.

Gifting can be used in a number of unique ways. You can use annual gifts to help build a college fund for a child, grandchild, relative, or even a friend -- by contributing to a 529 plan account, a Coverdell Education Savings Account, or a UGMA/UGTA account. In fact, 529 plans have special rules that allow you to make five years' worth of contributions in one year without incurring any gift taxes -- that's $70,000 for individuals and $140,000 for married couples!

Gifts can also be used to build wealth for future generations as well as help a child, relative, or friend fund a down payment on a home, buy a car, or start a business. Your financial advisor can help you determine how annual gifts might fit into your overall financial plan.

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Still Time to contribute to an IRA or Roth IRA for 2012…If You Qualify

Can You Make an IRA Contribution?

As long as you have income, you can contribute to an IRA; even if you are participating in an employer retirement plan. The only question is whether or not your IRA contribution is deductible from your taxes.

Even if your contribution is not deductible, the money in the IRA will still grow tax free until you take it out (after age 59½) at which point you only pay tax on the gains. If your spouse is not working, you can contribute to an IRA on their behalf as well, provided you have earned income.

Check with your accountant on the deductibility of an IRA contribution for your situation.

Can You Make a Roth IRA Contribution?

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How to navigate and manage all of the new taxes

The recent passage of the “Taxpayer Relief Act of 2012” coupled with the HealthCare Acts of 2010 poses some significant changes in 2013 and additional taxes for some taxpayers. Here is a quick summary of some of the biggest tax changes that may affect you and some tips on reducing your tax bill and providing your own relief.

The first major change, which comes from the Taxpayer Relief Act, was an increase to the employee’s portion of the FICA tax from 4.2% to 6.2%. The FICA tax for employees was reduced temporarily to 4.2% during 2011 & 2012. This tax has returned to the pre-2011 levels of 6.2% as it was never meant to be permanently lowered.

A new tax for some starting in 2013, which stems from the healthcare reform, is the 3.8% Medicare surtax. This tax is imposed on the lesser of total net investment income or the excess amount of modified adjusted gross income (MAGI) over $250,000 filing jointly or $200,000 filing individually. Net investment income includes, but is not limited to, taxable interest, dividends, net capital gains, nonqualified annuities, royalties and rents. The 3.8% surtax applies to the lesser of net investment income or MAGI over the threshold limits.  For example, in a given year if you have wages $25,000 above the wage threshold and in the same year have $15,000 in net investment income (dividends, interest, and capital gains), you would pay the 3.8% surtax on the $15,000 since it is the lesser of the two.

Also stemming from the healthcare reform is an additional Medicare tax of 0.9% for all wages above the threshold of $200,000 for single filers and $250,000 for joint filers. All wages under and up to the thresholds will be taxed at the standard Medicare tax of 1.45%. All wages in excess of the thresholds will be taxed at 2.35% (1.45% + 0.9%).

Another possible tax change exists if your taxable income is over $400,000 (single) or $450,000 (joint). Income above these limits will now be taxed at 39.6% instead of 35%. This change came as a result of the “Taxpayer Relief Act”. Additionally, your tax rate on capital gains and dividends will increase from 15% to 20% if your income exceeds this threshold. For example, if you had $20,000 dividends and capital gains you would pay an additional $1,000 in taxes, not including the additional 3.9% Medicare surtax that your investment income potentially faces.

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