The Diversified Blog

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

Dimensional's Flexible Trading Approach

Dimensional's Flexible Trading Approach

Here is a nice video provided by Dave Twardowski, PhD of Dimensional Fund Advisors:

 

In this client-ready video the pricing advantage that investors can get from Dimensional’s patient and flexible approach to trading is examined.  CLICK HERE to watch.

 

 

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Deferral Rates Trump Fund Performance, Rebalancing as Key to Retirement Plan Success

A study by the Putnam Institute, "Defined Contribution Plans: Missing the forest for the trees?" contends that while a number of variables, such as fund selection, asset allocation, portfolio rebalancing, and deferral rates all contribute to a defined contribution plan's effectiveness -- or lack thereof -- it is deferral rates that should be placed near the top of the hierarchy when considering ways to boost retirement saving success.1

 

As part of its analysis, the research team created a hypothetical scenario in which an individual's contribution rate increased from 3% of income to 4%, 6%, and 8%. After 29 years, the final balance jumped from $138,000, to $181,000, $272,000, and $334,000, respectively.

 

Even with a just a 1% increase -- to a 4% deferral rate -- the participant's final accumulation would have been 30% greater than it would have been using a fund selection strategy defined as the "Crystal Ball" strategy, in which the plan sponsor uses a predefined formula to predict which funds may potentially perform well for the next three-year period. Further, the 1% boost in income deferral would have had a wealth accumulation effect nearly 100% larger than a growth asset allocation strategy, and 2,000% greater than rebalancing. Of course these results are hypothetical and past performance does not guarantee future results.

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How (and Why) to Read a Fund Prospectus

When you're in search of a definitive source of information for a particular mutual fund, all you need to do is take a look at a publication known as the fund's prospectus.

 

Each fund prospectus is issued by the fund provider and contains all the details investors need when choosing an investment. For example, prospectuses answer questions such as:

 

•In what types of securities does this fund invest?

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MasterChef of Investing

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

In the popular TV program MasterChef, contestants face a series of cooking challenges. From low quality ingredients to inadequate preparation and poor implementation, so many things can, and do, go wrong. It’s a bit like investing.  To read the full article click here:

MasterChef of Investing.pdf

 

 

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Weather vs. Climate

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

Notice how TV news bulletins put finance next to the weather report? In each, talking heads point at charts and intone about intraday events that are quickly forgotten. Meanwhile, the long-term wealth building story gets overlooked.  Read the full article by clicking here:

 Weather vs. Climate.pdf

 

  

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How Much Health Insurance Do I Need?

The answer is simple: enough to ensure that if you (or a covered family member) get sick or injured, you're not footing the entire medical bill on your own.

 

If you receive health insurance through your employer, your choices are limited. Some employers will offer plans from multiple health insurance providers, but most limit their offerings to one provider. Additionally, most employers offer one or more of the following: an HMO, a PPO or a traditional plan. 

 

•An HMO (or health maintenance organization) is usually the lowest-cost alternative. As a result, enrollees are limited to doctors and treatment facilities within a limited "network." These plans usually have no deductibles. Enrollees are required to make copayments when seeing a physician.

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Investor Know Thyself

In an ideal world, emotions would play a very small role in the way people invest and manage their money. Everyone would thoroughly research their options, maintain realistic expectations, and keep counterproductive habits under control.

 

But in the real world, even well-informed investors sometimes make emotionally charged decisions that may threaten their ability to stay focused on important financial goals, such as accumulating enough money for retirement. In fact, such missteps are so common that many academics have done extensive research on "investor psychology" or "behavioral finance" to explain why some people tend to keep encountering the same obstacles in their financial lives.

 

As you might imagine, different financial attitudes can result in very different consequences. For example, the behavior known as "anchoring" is the tendency for investors to hold on to a belief based on their own limited experience, despite the availability of contradictory information.

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I'm Self-Employed. How Can I Get Health Insurance?

Self-employment is an important career choice for many people, and it is an option elected by many seniors and baby boomers. But with this choice comes the need to provide your own health insurance, which can be a formidable expense. And, thanks to the Affordable Care Act, a necessary one starting in 2014. If you are self employed and are seeking health care coverage, here are your major options.

 

If you have a spouse or partner who is or can be enrolled in an employer-sponsored plan, joining this plan is usually the simplest and least expensive way to maintain coverage. Nearly all employer-based plans offer coverage to spouses and children, and many provide coverage to domestic partners as well.

 

If you formerly were employed by an organization that employed 20 or more people and made a group health plan available to employees, you may be able to obtain medical coverage through the federal Consolidated Omnibus Budget Reconciliation Act, known as COBRA. COBRA requires employers to make available to departing employees the option of continuing membership in an employer-sponsored group medical plan at the employee's expense. You can continue your health insurance under COBRA for yourself and your dependents for 18 months, during which time you can search for the best option as a self-employed person.

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2014: Patience Pays Off

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

In 2014 the broad US stock market surprised many investors with above average returns.  Click here to read more:  

2014 Patience Pays Off.pdf

 

 

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2014 Review: Economy & Markets

Here is a nice article provided by Bryan Harris of Dimensional Fund Advisors: 

Despite a bumpy ride throughout 2014, the US economy gained pace while the US equity and fixed income markets outperformed most markets around the world.  Click here to read more in this article:

 2014 Review Economy and Markets.pdf

 

 

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Heat of the Fire

Here is a nice article written by Brad Steiman of Dimensional Fund Advisers:

Investors can prepare for future market volatility by revisiting their experience from past market declines. In Heat of the Fire Brad Steiman of Dimensional Fund Advisors discusses the value of conducting a “financial fire drill” and offers portfolio illustrations to help set client expectations. Click here to read this article:

Heat of the Fire.pdf

 

 

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Annual Report Shows College Cost Increases Slowing

The latest report on college costs published by the College Board indicted that, although college costs still increased more than general inflation in the past year, the increase in tuition and fees for the 2014-2015 academic year will be lower than the average annual increases in the past five years, the past 10 years, and the past 30 years across all sectors included in the study.1

 

Specific increases, as published in "Trends in College Pricing 2014," are as follows:1

 

•Public, in-state, four-year institutions: Average tuition and fees increased by $254 (2.9%), from $8,885 in 2013-2014 to $9,139 in 2014-2015. Room and board charges are $9,804.

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Case Study: How to Save Money Through a Financial Crisis - Defined Benefit Plan

Scenario: 

Six years before retirement, a couple, one of which was a corporate executive and the spouse, a self-employed entrepreneur, came to me because they wanted to save the maximum before they retired. When a client says they want to save the maximum that can range from up to the company match in their 401k (4% of salary) to 100k plus per year. 

 

Challenge: 

It was the mid 2008 the financial crisis was just gaining momentum, only we didn’t know it yet. 

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I'm Getting Married. How Could Marriage Potentially Affect My Finances?

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. There are, however, two important caveats. First, same-sex marriages are recognized for federal income and estate tax reporting purposes. However, each state determines its own rules for state taxes, inheritance rights, and probate, so the legal standing of same-sex couples in financial planning issues may still vary from state to state. Second, a prenuptial agreement, a legal document, can permit a couple to keep their finances separate, protect each other from debts, and take other actions that could limit the rights of either partner.

 

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans and each contributes $17,500 a year, as a couple you are contributing $35,000, far in excess of the maximum annual contribution for an individual ($17,500 for 2014). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which may make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

 

Some (but not all) pensions provide benefits to widows or widowers following a pensioner's death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

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Prepare for Retirement…Consolidate!

If you are preparing for retirement and have multiple investments spread among a number of accounts and institutions, you may want to consider making your life easier and possibly saving yourself money by consolidating your accounts. Here’s why:

 

1.  Managing multiple accounts that are similar such as Joint accounts, IRAs, and 401(k)s can become pretty confusing and very time consuming. If, in addition, you own individual or company stock, tracking cost basis can be a nightmare. Do you really want to spend so much of your time managing all these investments once you retire? 

 

2.  Having 401(k)s from current or former employers and individual retirement accounts (IRAs)  in a number of financial institutions makes it difficult to track portfolio performance, asset allocation, and diversification. You’ll at least need to rebalance your portfolio periodically.  This would be much easier if your retirement funds were all in one place.

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Is Your Portfolio "In Style" or Making a Bad Fashion Statement?

It is fairly common knowledge that a retirement portfolio's carefully constructed asset allocation can become unbalanced in two cases: When you alter your investment strategy and when market performance causes the value of some funds in your portfolio to rise or fall more dramatically than others. But did you know there is also a third scenario? Your portfolio can become unbalanced due to unexpected changes in the funds' holdings.

 

The phenomenon known as "style drift" generally occurs when a fund's manager or management team strays beyond the parameters of the fund's stated objective in pursuit of better returns. For example, this may occur when a growth fund begins investing significantly in value stocks or when a large-company fund begins investing in the stocks of small and mid-sized companies. As a result, the fund's name may not accurately reflect its strategy.

 

If style drift occurs within the funds held in your portfolio, it could alter your overall risk and return potential, which may influence your ability to effectively pursue your financial goals.

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As Inflation Fears Fade, Deflation Moves Front and Center

As the Federal Reserve winds down its massive bond-buying program, the widely predicted after effects -- rising interest rates and inflation -- have thus far failed to materialize. The yield on the bond market's bellwether 10-year Treasury note, which started 2014 at 3.03%, had fallen to 2.33% as of October 29.1 Similarly, inflation, as measured by the U.S. Bureau of Labor Statistics key benchmark, the Consumer Price Index, has risen just 1.7% in the past year and has averaged 1.6% since the Fed first initiated its bond-buying program four years ago.2

 

Currently, concerns over inflation have been replaced by an opposite economic condition: deflation, defined as two quarters of falling prices within a 12-month period.3

 

The paradox of deflation is that it can create good as well as bad conditions. When prices on essential goods and services drop, consumers are left with more disposable income to spend on nonessential items. Case in point: Plunging oil prices have spelled relief at the pumps, as the average national price for gas has now dropped below $3.00 a gallon for the first time since 2010.4

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Early 401(k) Withdrawals Hamper Long-Term Retirement Savings

As the IRS released the 401(k) contribution limits for 2015, attention turned, as it has in prior years, to the large number of plan participants who come nowhere close to contributing these amounts. In contrast, many individuals use their 401(k) accounts as a means to pay off loans and other current expenses.

 

The amounts withdrawn are not negligible. According to a recent study by Vanguard, the average withdrawal represents one-third of the participant's account balance. Additionally, most withdrawals are not for hardship -- non-hardship withdrawals outnumber hardship withdrawals 2-to-1, and the rate of new non-hardship withdrawals doubled between 2004 and 2013.1

 

So, why are so many withdrawals occurring? One reason is to pay off debt, including student loans. Another may be to help make ends meet when people are between jobs. Fidelity reported earlier this year that 35% of participants took all or part of their 401(k) savings when leaving a job.2

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Trading Places: Baby Boomers More Aggressive Than Millennials in Retirement Goals

Popular investing wisdom states that the younger you are, the more time you have to ride out market cycles and therefore the more aggressive and growth-oriented you can be in your investment choices. But that is not how individuals surveyed recently are thinking or behaving with regard to their retirement investments.

 

In fact, the new study sponsored by MFS Investment Management suggests that Baby Boomers take a more aggressive approach to retirement investing than the much younger Millennials -- those who are 18 to 33 years old. Further, each group's selected asset allocation is inconsistent with what financial professionals would consider to be their target asset allocation, given their age and investment time horizon.

 

For example, Baby Boomers, on average, reported holding retirement portfolio asset allocations of 40% equities, 14% bonds, and 21% cash, while Millennials allocated less than 30% of their retirement assets to equities, and had larger allocations to bonds and cash than their much older counterparts -- 17% and 23% respectively.

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What Is the Difference Between Disability Insurance and Long-Term Care Insurance?

Disability insurance addresses lost wages that stem from an inability to work. Long-term care insurance, in contrast, addresses expenses associated with medical care provided to you in your home, a nursing home, a rehabilitation center, or an assisted living facility.

 

Disability insurance policies may address either short-term or long-term needs for income. Short-term disability policies provide coverage on a temporary basis, usually up to several months, while you recover from an accident or illness. Long-term disability insurance provides benefits when a disability is of a more permanent nature. Most long-term disability policies will cover you throughout your working years, usually until you reach age 65. Policies vary considerably in terms of the cost of premiums, the percentage of your prior salary paid out as a benefit and the definition of what constitutes a disability.

 

Long-term care insurance is designed to help cover costs of health care services provided to you in your home, a nursing home, a rehabilitation center, or an assisted living facility. Many long-term care insurance policies provide benefits when you require assistance with activities of daily living such as bathing, dressing, and feeding yourself. Loss of wages typically is not an issue with this type of coverage.

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How Much Is That “Free” Financial Advice Really Costing You?

Today’s investor is faced with so much fear caused by political uncertainty, media hype and the quagmire of the financial world.  This tends to lead many potential investors to inaction and/or attempting to manage their finances themselves with the intent of saving money and protecting their assets from the Bernie Madoff’s of the world.  

 

If you were to ask, “how much is your financial advice costing you?” the answer would most likely be, “Nothing!”. When in fact, many do-it-yourselfers or those that do nothing, are paying in missed or misdirected opportunities.  This is not to say that there aren’t a few people capable of making informed decisions and successfully navigating the complexities of the financial and legal industries, however, most just do not have the time, resources or knowledge to manage their money or estate for “free”.

 

Let’s look at 5 major concerns that investors have and how doing it yourself can cost you money:

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Student Loan Debt: A Lingering Burden for Aging Americans

When the growing problem of student loan debt is discussed in media reports, most of us assume the borrowers in question are young people in their 20s and 30s. But new government research has revealed that the number of Americans aged 60 and older who are still saddled with unpaid student loans has risen precipitously in recent years.

 

According to the Federal Reserve Bank of New York, approximately two million older Americans currently have outstanding student loan debt, up from 700,000 in 2005.1 That number includes both longstanding loans, which were used to finance their own educations, as well as recent loans taken out to fund a family member's college degree. In dollar figures, older individuals collectively are on the hook for $43 billion in debt -- up from $8 billion in 2005. 1

 

For those in this population who are already retired and living on a fixed income, the burden of paying off old loans -- some of which carry interest rates as high as 8% or 9% -- can potentially put them at financial risk. Per legislation passed by Congress, federally funded student loans taken out on or after July 1, 2013, carry a fixed, reduced interest rate of 3.86% (5.42% for graduate student loans). 2 A proposal currently being considered by Congress would allow individuals holding pre-July 2013 loans to refinance their debt at today's lower rates, which proponents of the bill estimate would provide relief for some 25 million Americans. 1

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The Challenge of Supporting Your Grown Children

Say so-long to the days of "empty nesters," when parents would make life changes once their children had moved out and moved on. It is more likely that parents today are dealing with a "full nest."

 

A study in 2010 by researchers at Columbia University using the U.S. Current Population Survey found that 52.8% of 18- to 24-year-olds were living at home, up from 47.3% in 1970. The study also showed that one-in-seven young adults is emerging from their teenage years with no pathway to financial and economic independence. 1

 

For parents it can be trying. While it's important to respect the independence of full-grown children, it's not that easy when they are exercising that independence under your roof. What's more, it can also be a drain financially. Food, heating, gas, electricity, and many other daily expenses can be a lot higher when they include another mouth or two.

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Worried About Inflation? Consider TIPS

Treasury Inflation-Protected Securities (TIPS) are bonds issued by the U.S. Treasury whose principal is adjusted by changes in the Consumer Price Index (CPI). With inflation (a rise in the CPI), the principal increases. With a deflation (a drop in the CPI), the principal decreases.

 

TIPS are considered a low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, while their interest rate remains fixed. Interest on TIPS is paid semiannually and is subject to federal taxes, but is exempt from state and local income taxes.

 

The relationship between TIPS and the CPI affects both the sum you are paid when your TIPS matures and the amount of interest that a TIPS pays you every six months. While TIPS pay interest at a fixed rate, because the rate is applied to the adjusted principal, interest payments can vary in amount from one period to the next. If inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.

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What are the retirement plan limits for 2014 & 2015?

Here is a nice article written by Dimensional Fund Advisors:

 

The Federal tax laws can be saver friendly and allow most people a way to save money in a tax-deferred or tax-free environment. Here is a table of the contribution limits for some U.S. retirement vehicles:

 

Year

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Medicare and Social Security: A Good News, Bad News Story

The good news for Medicare is that the program's outlook has improved considerably in the past year. According to the trustees, Medicare's Hospital Insurance Trust Fund is in good shape until 2030 -- that's four years longer than the trustees projected last year -- and 13 years longer than they anticipated the year before the passage of the Affordable Care Act (ACA). 1

 

Officials pointed to the ACA's legislated cutbacks in payments to health care providers as one of the key drivers of the slowdown in Medicare spending. Additionally, they indicated that the post-recession drop in wage and price growth had also contributed to the Medicare spending decline.

 

In the short term, the good news for Medicare recipients is that the premiums charged for Medicare Part B -- the portion of Medicare that pays for doctor visits and outpatient care -- will likely remain at its current monthly rate of $104.90 for a third year in a row. 2

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Roth 401(k)s Gaining Ground, Enhancing Retirement Readiness

The use of Roth 401(k)s by retirement plan sponsors has been on the uptick for the past several years. According to research conducted by PLANSPONSOR.com, 52.4% of employers now offer a Roth-type defined contribution account, compared with only 11% in 2007. Among the largest plans (those with more than $1 billion in plan assets), 61% now offer the Roth option.

 

Because taxes are paid on Roth accounts now instead of when withdrawn -- typically in retirement -- industry analysts observe that funding retirement with a Roth 401(k) can help to reduce concern over taxation -- specifically whether employees will be in a higher tax bracket when they retire and throughout their retirement years. This in turn helps to facilitate sound retirement income planning.

 

Financial planners also point out the advantages Roth assets bring to the table with regard to planning for health care costs in retirement. Because the taxes paid on Roth contributions do not get added to the modified adjusted gross income (MAGI) calculation, proceeds from Roth accounts do not affect an individual's tax bracket, which is used to determine the cost of Medicare Parts B and D premiums in retirement.

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Young Adults and the New Health Care Landscape

A survey conducted by the nation's first private online health exchange, eHealth, Inc., explored the attitudes of young adults aged 18 to 25 regarding the new health care landscape and the influence that the Affordable Care Act is having on health care costs.

 

Among the 220 survey respondents, all of which had purchased their health care plan through eHealth, 62% said their monthly premiums were more expensive than they could afford, and nearly three-quarters (73%) said that their annual deductibles were too expensive as well.

 

According to eHealth's records, young adults who purchased health coverage through the private exchange were paying average monthly premiums of $146 and had an annual deductible of $4,955. When asked what they thought would be an affordable rate for them to pay, nearly two-thirds said a monthly premium of $100 or less and an annual deductible of less than $1,000.

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Sequence of Returns -- A Critical Factor in Shaping Your Retirement Outlook

This article illustrates how the variation of year-to-year investment returns works together with an investor's withdrawal rate and inflation to potentially affect the longevity of a retirement portfolio.

One of the key determinants of retirement income planning is the expected rate of return on your investments. Conventional analysis typically relies on long-term performance averages to gauge a retiree's spending limits. Increasingly, however, planning experts say that for those who are withdrawing from a portfolio, it is not just the average rate of investment return that is important.

 

In fact, the sequence of those returns may be just as, if not more, critical to your portfolio's long-term success. In other words, over time, "average" returns will include both bull markets and bear markets. Yet once withdrawals begin, it is far better to have poor years occur later in retirement than earlier.

 

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Role Reversal: When Children Should Talk to Parents About Money

As Baby Boomers grow older -- and presumably wiser about economic matters -- more are finding themselves in a position of caretaker for elderly parents. Raising the topic of money with parents can be difficult. But with the right choice of words, timing, and tone, you can open the door to a meaningful conversation.

 

Select a Representative. An initial conversation about finances should be done one-on-one. Involving too many people can be overwhelming and appear threatening. If you have siblings, select one -- perhaps the oldest, most financially knowledgeable, or one with whom your parent(s) may feel most comfortable -- to lead the way. Remember, this is about your parent's money, not about yours or your children's.

 

Be Sensitive. To some extent, our financial lives influence how we view ourselves as independent human beings. For many, old age is a time of coping with a series of physical and emotional losses: hearing, eyesight, mobility, memory, as well as friendships. With any conversation about money, be sensitive to the fears and concerns your parents may harbor about their possible loss of control or independence.

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Dollar Cost Averaging: A Simple and Systematic Way to Invest

When the economy and the stock market send mixed signals, investors inevitably ask, "Is this a good time to invest?" But without a crystal ball, you'll never know for sure when to move in and out of the market -- and if you guess wrong, you could miss out on the market's best days.

 

A better approach for uncertain markets may be to use an investment process called dollar cost averaging (DCA).

 

The idea behind DCA is a simple one: Instead of trying to "time the market" -- and potentially buying or selling at the wrong time -- you invest a set amount of money at regular intervals. This means that you automatically buy more shares when prices drop and fewer when prices rise. When you compare the higher and lower share prices you've paid over time with the number of shares you've accumulated, you may see an interesting trend develop: The average cost per share may be lower than the average price per share.

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Bequest or Beneficiary: In Estate Planning, the Difference Is Crucial

The scenario plays out over and over again in attorneys' offices: A family brings a parent's will to be probated. The will is complete, well-thought-out, and takes into consideration current tax law. But under closer examination, the attorney discovers that the deceased's estate plan doesn't work. Why? Because a substantial portion of the parent's assets pass by beneficiary designation and are not controlled by a will.

 

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

 

The upside of these arrangements is that when the account holder dies, the monies go directly to the beneficiary named on the account, bypassing the sometimes lengthy and costly probate process. The "fatal flaw" of beneficiary-designated assets is that because they are not considered probate assets, they pass "under the radar screen" and trump the directions spelled out in a will. This all too often leads to unintended consequences -- individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

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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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