Investing

Matrix Book 2019

Check out this video from Dimensional:

The Matrix Book is a unique a tool for seeing decades of returns and telling stories about investing. In this video, Joel Hefner explains how a globally diversified approach can help investors stay on track toward achieving their long-term goals.

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 info@diversifiedassetmanagement.com.

 

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.

Mutual Fund Landscape 2019

Each year, Dimensional analyzes returns from a large sample of US-based mutual funds. Our objective is to assess the performance of mutual fund managers relative to benchmarks.*

This year’s study updates results through 2018. The evidence shows that a majority of fund managers in the sample failed to deliver benchmark-beating returns after costs.

We believe that the results of this research provide a strong case for relying on market prices when making investment decisions.

The global financial markets process millions of trades worth hundreds of billions of dollars each day. These trades reflect the viewpoints of buyers and sellers who are investing their capital. Using these trades as inputs, the market functions as a powerful information-processing mechanism, aggregating vast amounts of dispersed information into prices and driving them toward fair value. Investors who attempt to outguess prices are pitting their knowledge against the collective wisdom of all market participants.

So, are investors better off relying on market prices or searching for mispriced securities?

Mutual fund industry performance offers one test of the market’s pricing power. If markets do not effectively incorporate information into securities prices, then opportunities may arise for professional managers to identify pricing “mistakes” and convert them into higher returns. In this scenario, we might expect to see many mutual funds outperforming benchmarks. But the evidence suggests otherwise.

Across thousands of funds covering a broad range of manager philosophies, objectives, and styles, a majority of the funds evaluated did not outperform benchmarks after costs. These findings suggest that investors can rely on market prices.

Let’s consider the details. Download the full report here:

Mutual Fund Landscape 2019

*In the study results, “benchmark” refers to the primary prospectus benchmark used to evaluate the performance of each respective mutual fund in the sample where available. See Data Appendix for additional information.

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 info@diversifiedassetmanagement.com.

 

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.

The Uncommon Average

May 2019

“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.”

—David Booth

The US stock market has delivered an average annual return of around 10% since 1926.[1] But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 Index had a return within this range in only six of the past 93 calendar years. In most years, the index’s return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.


[1]. As measured by the S&P 500 Index from 1926–2018.

Capture-5-8-19.JPG

TUNING IN TO DIFFERENT FREQUENCIES

Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the US market. The data show that, while positive performance is never assured, investors’ odds improve over longer time horizons.

Capture2-5-8-19.JPG

Conclusion

While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments. 

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 info@diversifiedassetmanagement.com.

 

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.

The Index Bogeyman

Over the last several years, index funds have received increased attention from investors and the financial media. Some have even made claims that the increased usage of index funds may be distorting market prices. For many, this argument hinges on the premise that indexing reduces the efficacy of price discovery. If index funds are becoming increasingly popular and investors are “blindly” buying an index’s underlying holdings, sufficient price discovery may not be happening in the market.

But should the rise of index funds be a cause of concern for investors? Using data and reasoning, we can examine this assertion and help investors understand that markets continue to work, and investors can still rely on market prices despite the increased prevalence of indexing.

Click here to read more:

The Index Bogeyman

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 info@diversifiedassetmanagement.com.

 

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.

Lessons from the Matrix Book, 2018

Check out this video from Dimensional:

The Matrix Book is a unique a tool for seeing decades of returns and telling stories about investing. In these videos, Joel Hefner shows how the Matrix Book can illustrate some of the tradeoffs associated with investing as well as how investors can improve their chances of having a successful investment experience.

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 info@diversifiedassetmanagement.com.

 

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.

Perspective on Premiums

Investors may be tempted to extrapolate recent returns into the future, which can lead them to abandon their investment philosophy at potentially inopportune times. While negative outcomes are disappointing, investors should view them with the proper perspective and stay the course.

When you leave your server a tip, do you round it to a whole-dollar amount and often in multiples of $5? Does a 60th birthday seem more significant than a 59th? If you answer yes to these questions, you’re not alone. Most of us prefer round numbers. This preference leads many investors to review results by calendar year and to consider 10-year periods when evaluating long-term returns. People tend to place greater emphasis on the latest period due to recency bias and to extrapolate recent results into the future. For these reasons, we should put recent performance into the proper perspective.

Click here to Read More:

Perspective on Premiums

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 info@diversifiedassetmanagement.com.

 

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.

Getting to the Point of a Point

A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.”

These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.

Impact of Index Construction

The Dow Jones Industrial Average was first calculated in 1896 and currently consists of 30 large cap US stocks. The Dow is a price-weighted index, which is different than more common market capitalization-weighted indices.

Click here to Read More:

Getting to the Point of a Point

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 info@diversifiedassetmanagement.com.

 

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.

Can I contribute to my Roth IRA?

Roth IRAs were created with the Taxpayer Relief Act of 1997 as an alternative to the Traditional IRA.  Although they share contribution limits, they differ in tax-treatment.  Traditional IRAs are tax-deferred, similar to a 401(k) plan.  This means that pre-tax money is contributed to the plan, and is taxed at ordinary income rates as it is withdrawn.  The Roth IRA gave taxpayers a different choice: pay tax now and avoid paying tax on future growth.  Read below to see if you can contribute to a Roth IRA. 

Do you or your spouse have earned income?

“Earned income” means income from wages, salaries, or bonuses.  An example of “unearned income” would be investment income or an inheritance.  If you have earned income, move on to the next question.  If you do not have any earned income, you are not eligible to contribute to a Roth IRA.  Note that if you only contribute to IRAs up to your earned income.  For example, if your earned income is $3,000 then your maximum contribution is $3,000.

Did you make a contribution to a Traditional IRA for the tax year?

If you have contributed to a Traditional IRA this tax year, the amount contributed will count against your $6,000 (2019) allowed IRA contribution for the year.  If you have not contributed to a Traditional IRA or have not contributed the full allowable amount, then you will be able to contribute to your Roth.

What is your tax-filing status?

Married

If your Modified Adjusted Gross Income (MAGI) is less than $193,000, then you and your spouse can make a full contribution.  If your income is between $193,000 and $203,000 you will be subject to the contribution phase-out.  You will be able to make a partial contribution to your Roth IRA.  If your income is $203,000 or greater, you are above the income limit and allowed no Roth IRA contribution.

Single

If your Modified Adjusted Gross Income (MAGI) is less than $122,000, then you can make a full contribution.  If your income is between $122,000 and $137,000 you will be allowed a partial contribution.  If your income exceeds $137,000, no Roth IRA contribution is allowed.

If you’ve made it this far, there is a good chance you can contribute to a Roth IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about contributing for a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

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 info@diversifiedassetmanagement.com.

 

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.

 

 

Don’t Be Your Own Worst Enemy

Understanding behavioral finance can give you the edge


Key Takeaways

  • Behavioral finance uses theoretical and empirical academic research to explain why investors often fail to act rationally.

  • Understanding both the “how” and the “why” of irrational investor behavior can save you millions over a lifetime.

  • Research shows that many individuals are overconfident, under-diversified, short-sighted and easily swayed by the media.



If the world were full of “rational” individuals who could maximize their wealth while minimizing risk, there would be no need for wealth advisors. Rational individuals would assess their risk tolerance and then determine an investment portfolio that met their ideal level of risk aversion. However, we know that most individuals are not capable of being 100-percent rational, especially during times of stress. That’s why it’s so important to have a trusted coach, guide, consigliere or voice of reason to prevent you from being your own worst financial decision-making enemy.

Behavioral finance encompasses a body of theoretical and empirical academic research that seeks to explain why people, especially investors, do not act in a rational manner. Understanding behavioral finance can be invaluable to your investing and wealth building success. Think of the moniker “behavioral” as describing how and why individuals behave the way they do.

First let’s look at the “how.” Here are some findings, based on empirical research, that explain how investors tend to behave when they don’t have expert guidance to help them:

  • They invest in under-diversified portfolios.

  • They trade actively with high turnover and high transaction costs, which causes a significant drag on returns.

  • They are influenced by where they work and live. They invest heavily in the stock of their employers, and they tend to invest in stock of companies based in their home country, and even in companies located near where they live.

  • They are often influenced by companies that receive lots of media attention.

  • They tend to buy, rather than sell, companies that are mentioned positively in the news.

  • They tend to sell their winning investments, while holding on to their losing investments way too long in the inevitable chase to get back to “breakeven.”

  • Men tend to trade more often than women do. The turnover and costs associated with active trading explains why men tend to achieve lower absolute returns on their money than women do.

Now let’s look at why individuals behave a certain way, which is based on theoretical research. Here are some theories:

  • Psychological research supports the theory that individuals are generally overconfident. This hubris explains why investors tend to trade too actively and to have dangerously under-diversified portfolios.

  • Research supports the theory that most investors believe they are “better than the average” investors, which makes about half the population delusional, not to mention overconfident.

  • Psychological research supports the theory that investing in stocks is a sensation-seeking activity for many individuals. It’s a form of entertainment and it provides many individuals with an adrenaline rush that’s akin to the thrill people get from gambling.

Conclusion
Behavioral finance literature serves as a reminder of why it is so important to protect yourself from your ego and emotions. That’s where a truly objective advisor with your best interests in mind comes in. The appropriate stewardship of your wealth is a responsibility to yourself, to your family, to your house of worship, your community and your country.  As with so many things in life, enjoy your wealth, but do so responsibly. Don’t try to do it yourself.


If you or someone close to you has concerns about their financial decision-making process, please don’t hesitate to contact me. I’m happy to help.

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 info@diversifiedassetmanagement.com.

 

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.

 

Will My Roth IRA Conversion be Penalty-Free?

There are several situations in which a Roth Conversion could benefit your future tax situation.  Whether you have lower income this year or want to take advantage of low tax rates, you will want to make sure you avoid any penalties.  Let’s take a look:

Are you converting a Traditional IRA?

If your answer is “yes”, move on to the next question.  If you are converting a SIMPLE IRA, the answer is a bit more complicated depending on how long you have had the Simple IRA.  Check out our chart to learn more.

Are you expecting to take a distribution within 5 years of your conversion?

If you are far from retirement, then your answer to this will likely be “no”, then you can convert any amount.  Remember that any conversion amount is taxed as ordinary income and could increase your Medicare Part B & D premiums.  If you plan to take distributions within 5 years and are under 59.5, you may be subject to a penalty. If you are taking Required Minimum Distributions then you will have to take your RMD before any conversion.

Advantages of a Roth IRA

Roth IRA’s are particularly advantageous if there are changes (increases) in tax rates. Here are ways you could be subject to higher taxes in the future.

1.      The Government raises tax rates.

2.      One spouse passes away and now you are subject to single rates instead of married rates. When a spouse passes away, your expenses are not cut in half but the brackets are cut in half.

3.      Your expenses dramatically increase because you are in an assisted living facility or a nursing home.

If you’ve made it this far, there is a good chance you can make a Roth IRA conversion penalty-free.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for converting a IRA to a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

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 info@diversifiedassetmanagement.com.

 

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.

Déjà Vu All Over Again

Here is a nice article from Dimensional:

February 2019

Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities.

Over the years, these approaches have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”

What’s hot becomes what’s not                                             

Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.

The Fund Graveyard

Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.

With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.

It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured.

What am I really getting?

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

1.     What is this strategy claiming to provide that is not already in my portfolio?

2.     If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?

3.     Am I comfortable with the range of potential outcomes?

If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.

In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial advisor can help individual investors create a plan that fits their needs and risk tolerance. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.

Conclusion

Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.

 

Source: Dimensional Fund Advisors LP.

Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no guarantee a investing strategy will be successful. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.

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 info@diversifiedassetmanagement.com.

 

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.

Is a Cash Balance Plan Right for You? Part 2

Real world examples and risk factors to consider
Robert J. Pyle, CFP®, CFA

As we discussed in Part 1, if you’re a high-earning business owner or professional Cash Balance Plans (CBPs) are an excellent tool for supercharging the value of your nest egg in the last stretch of your career. They can possibly enable you to retire even sooner than you thought you could. Here are some examples of how CBPs can work for you:


Real world examples

I just completed a proposal for a dentist who earned a $224,000 salary. At that income level, he could have maxed out his annual SEP contribution at $56,000…..or he could sock away $143,000 a year via a CBP. Even better, the CBP enabled him to make an additional retirement contributions for her staff.  When times are flush, most high-earning entrepreneurs and professionals don’t have to think twice about making their CBP contributions. But, what about when the financial markets and economy are in the tank?

Back in 2008, at the start of the global financial crisis, a couple came to me because they wanted to save the maximum before they planned to stop working. The wife was a corporate executive and the husband was a self-employed entrepreneur.  Both were in their early 60s and wanted to retire in half a dozen years. The corporate executive was already saving the maximum in her 401(k) and continued to do so from 2008 ($20,500) through 2014 ($23,500). The self-employed entrepreneur, age 61 at the time, was making about $200,000 a year and wanted to set up a plan to shelter his self-employed income.

We explored a defined benefit plan (DB) because that allowed the couple to save significantly more than they could have saved via a 401(k) alone. In fact, the single 401(k) could be paired with the defined benefit plan for extra deferral, if desired. The couple was a good fit for a defined benefit plan since they were in their early 60s, and the entrepreneur was self-employed and had no employees. We completed the paperwork and set a target contribution rate of $100,000 per year for the defined benefit plan and they were off and saving. 

Despite the terrible stock market at the start of their savings initiative, they managed to contribute $700,000 to the DB by the time they retired in 2014--all of which was tax deductible. This strategy ended up saving them about $140,000 in taxes. They also contributed to a Roth 401(k) in the early years of their savings commitment, when the market was low and that money grew tax-free.

With a DBP, you typically want to have a conservative portfolio with a target rate of return pegged at roughly 3 percent to 5 percent. You want stable returns so you will have predictable contribution amounts each year. The portfolio we constructed was roughly 75 percent bond funds and 25 percent stock funds. That allocation helped the couple preserve capital during the market slump of 2008-2009 because we dollar cost averaged the funding for the plan over its duration.

With this strategy, you don’t want to exceed a 5-percent return by too much because your contribution decreases and thus, your tax deduction decreases. On the other hand, if the portfolio generates a really poor return, then you, the employer have to make up a larger contribution. If you have a substandard return, it typically corresponds to a weak economy and you have to make up a larger contribution when your income is off. So, you want to set the return target at a reasonable, conservative level.

Solution

We rolled over the DBP into an IRA and the Roth 401(k) to a Roth IRA. For the corporate executive, we rolled over her 401(k) to an IRA.  They were now set for retirement and can continue to enjoy life without the worry as to how to create their retirement paycheck. 

Are there any income and age limits for contributing to a CBP?

Income limits are $280,000 a year in W-2 income. Depending on your age, you could potentially contribute over 90 percent of that income into a CBP.

Source, The Retirement Advantage  2019 | Click here for complete table


For successful professionals, a good time to set up a CBP is during your prime earning years, typically between age 50 and 60. You certainly don’t want to wait until age 70 to start a CBP because you want to be able to make large tax-advantage contribution for at least three to five years. You can’t start a CBP and then shut it down after only one year.

We did a proposal for an orthodontist recently who liked the idea of a CBP for himself, but he also wanted to reward several long time employees. Unfortunately, the ratios weren’t as good as we would have liked since many of the employees were even older than the owner, so they would have required a much larger contribution. The ratio in this case was 80 percent of the contribution to the owner and 20 percent to the employees. We like to see the ratio in the 85- to 90-percent range, however.

Age gap matters

It’s also helpful to have a significant age gap between you and your employees. Many folks don’t realize this. CBPs are “age weighted,” so it helps to have younger employees. Because those employees are older, they’re much closer to retirement, and would need to receive a larger contribution from the plan.

How profitable does your business/practice need to be for a CBP to make sense?

You have to pay yourself a reasonable W-2 salary and you have to have money on top of that for the CBP. A good rule of thumb is to be making at least $150,000 a year consistently from your business or practice. So, if you designed a plan to save $150,000 in the CBP, you’ll need $300,000 in salary plus distributions. What typically happens is the doctor/dentist pays themselves $150,000 a year in salary and then takes $150,000 in distributions from their corporation. Well, that $150,000 now has to go into the CBP, so you have to have a decent amount of disposable income.

Can employees adjust their contributions?
 
A CBP is usually paired with a 401(k) plan, so employees will have their normal 401(k) limits. In a CBP, the employer has to do a CBP “pay credit” as well as a profit-sharing contribution. The pay credit is usually about 3 percent and the profit-sharing contribution is typically in the range of 5-percent to 10- percent of an employee’s pay.


Setting up and administrating a CBP

You want a plan administrator who can navigate all the paperwork and coordinate with your CPA. There are many financial advisors out there who have expertise in setting up CBPs. You don’t have to work with someone locally; just make sure they are highly experienced and reputable.

CBPs can be more costly to employers than 401(k) plans because an actuary must certify each year that the plan is properly funded. Typical costs include $2,000 to $5,000 in setup fees, although setup costs can sometimes be waived. You’re also looking at $2,000 to $10,000 in annual administration fees, and investment-management fees ranging from 0.25 percent to 1 percent of assets.


Risks

CBPs can be tremendously beneficial for retirement saving. Just make sure you and your advisors are aware of the risk of such plans. Remember that you (the owner/employer) bear the actuarial risk for the CBP. Another risk is if the experts of your plan--the actuaries, record-keepers or investment managers—fail to live up to the plan’s expectations. You, the employer ultimately bear responsibility for providing the promised benefit to employees if a key piece of the plan doesn't work. Like a DBP, an underfunded CBP plan requires steady and consistent payments by you, the employer, regardless of economic times or your financial health. The required contributions of a DBP and CBP can strain the weakened financial health of the sponsoring organization. This is a key item to consider when establishing a CBP and what level of funding can be sustained on a go-forward basis. 

Conclusion

If you’re behind in your retirement savings, CBPs are an excellent tool for supercharging the value of your nest egg and can possibly allow you to retire even sooner than you thought. They take a little more set-up and discipline to execute, but once those supercharged retirement account statements start rolling in, I rarely find a successful owner or professional who doesn’t think the extra effort was worth it.

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 info@diversifiedassetmanagement.com.

 

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.

 


Is a Cash Balance Plan Right for You? Part 1

Key questions to consider before pulling the trigger

By Robert J. Pyle, CFP®, CFA


You’ve worked incredibly hard to build your business, medical practice or law practice. But, despite enjoying a robust income and the material trappings of success, many business owners and professional are surprised to learn that their retirement savings are way behind where they need to be if they want to continue living the lifestyle to which they’ve become accustomed.

In response, many self-employed high earners are increasingly turning to Cash Balance Plans (CBPs) in the latter stages of their careers to dramatically supplement their 401(k)s—and their staffs’ 401(k)s as well. Think of a CBP as a supercharged (and tax advantaged) retirement catchup program. For a 55-year-old, the CBP contribution limit is around $265,000, while for a 65-year-old, the CBP limit is $333,000—more than five times the ($62,000) limit they could contribute to a 401(k) this year.

Boomers who are sole proprietors or partners in medical, legal and other professional groups account for much of the growth in CBPs. For many older business owners, the tax advantages that come with plowing six-figure annual contributions into the CBPs far outweigh the costs.


As I wrote in my earlier article: CBPs: Offering a Break to Successful Doctors, Dentists and Small Business Owners, CBPs can offer tremendous benefits for business owners and professionals who own their own practices….especially if they’re in the latter stages of their careers. There are just some important caveats to consider before taking this aggressive retirement catchup plunge.


CBPs benefit your employees as well


Business owners should expect to make profit sharing contributions for rank-and-file employees amounting to roughly 5 percent to 8 percent of pay in a CBP. Compare that to the 3 percent contribution that's typical in a 401(k) plan. Participant accounts also receive an annual "interest credit," which may be a fixed rate, such as 3-5 percent, or a variable rate, such as the 30-year Treasury rate. At retirement, participants can take an annuity based on their account balance. Many plans also offer a lump sum that can be rolled into an IRA or another employer's plan.

Common retirement planning mistakes among successful doctors


Three things are pretty common:

1) They’re not saving enough for retirement.

2) They’re overconfident. Because of their wealth and intellect, doctors get invited to participate in many “special investment opportunities.” They tend to investment in private placements, real estate and other complex, high-risk opportunities without doing their homework.
3) They feel pressure to live the successful doctor’s lifestyle. After years of schooling and residency, they often feel pressure to spend lavishly on high-end cars, homes, private schools, country clubs and vacations to keep up with other doctors. There’s also pressure to keep a spouse happy who has patiently waited and sometimes supported them, for years and years of medical school, residency and further training before the high income years began.

Common retirement planning mistakes among successful dentists


Dentists are similar to doctors when it comes to their money (see above), although dentists tend to be a bit more conservative in their investments. They’re not as likely to invest in private placements and real estate ventures for instance. Like doctors, dentists are often unaware of how nicely CBPs can set them up in their post-practicing years. They’re often not aware that they have retirement savings options beyond their 401(k)…$19,000 ($25,000 if age 50 and over). For instance, many dentists don’t realize that with a CBP they could potentially contribute $200,000 or more. It’s very important for high earning business owners and medical professionals to coordinate with their CPA who really understands how CBPs work and can sign off on them.

Common objections to setting up a CBP

First, the high earning professional or business owner must commit to saving a large chunk of their earnings for three to five years—that means having the discipline not to spend all of their disposable income on other things such as expensive toys, memberships, vacations and other luxuries.

Another barrier they face is a reluctance to switch from the old way of doing things to the new way. Just like many struggle to adapt to a new billing system or new technology for their businesses or practices, the same goes for their retirement savings. Because they’re essentially playing retirement catchup, they’re committing to stashing away a significant portion of their salary for their golden years. It can “pinch” a little at first. By contrast, a 401(k) or Simple IRA  contribution is a paycheck “deduction” that they barely notice.

A CBP certainly has huge benefits, but it requires a different mindset about savings and it requires more administration and discipline, etc. However, if you have a good, trustworthy office administrator or if you have a 401(k) plan that’s integrated with your payroll, then that can make things much easier. It’s very important to have a system that integrates payroll, 401(k) and CBP. That can simplify things tremendously. For example, 401(k) contributions can be taken directly out of payroll and CBP contributions can be taken directly out of the owner/employer’s bank account.

Before jumping headfirst into the world of CBPs, I recommend that high earning business owners and professional rolling it out in stages over time.

1. Start with a SIMPLE IRA.
2. Then move to 401(k) plan that you can max out--and make employee contributions.

3. Add a profit sharing component for employees which typically is in the 2% range and this will usually allow you to max out at $56,000 (under 50) or $62,000 (age 50 and over)
4.  Once comfortable with the mechanics of a 401(k) and profit sharing, then introduce a CBP.


Conclusion

If you’re behind in your retirement savings, CBPs are an excellent tool for supercharging the value of your nest egg and can possibly allow you to retire even sooner than you thought. CBPs take a little more set-up and discipline to execute, but once those supercharged retirement account statements start rolling in, I rarely find a successful owner or professional who doesn’t think the extra effort was worth it.

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 info@diversifiedassetmanagement.com.

 

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.

 


Am I eligible for a Qualified Business Income (QBI) Deduction?

Due to recent tax law changes effective 2018, many are left in a state of confusion about what tax credits or deductions their business may qualify for.  For business owners, the Qualified Business Income deduction is one of the most advantageous new deductions available to them.  It allows for qualified businesses to deduct up to 20% of their income, reducing their tax bill by a considerable margin.  What makes a business a “Qualified Business?”

There are a several requirements to qualify for the QBI deduction.  Could your business be qualified for these tax deductions?  Read on to find out:

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 info@diversifiedassetmanagement.com.

 

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.

Optimizing Your Capital Gain Treatment Part 2

It’s a new world. When it comes to carried interest, real estate and collectibles, carefully document your purpose for holding these assets

Key Takeaways:

  • Long-term capital gains associated with assets held over one year are generally taxed at a maximum federal rate of 20 percent — not the top ordinary rate of 37 percent.

  • Just be careful if you are planning to sell collectibles, gold futures or foreign currency. The tax rate is generally higher.

  • The more you can document your purpose for holding your assets (at the time of purchase and disposition), the better your chances of a favorable tax result.

  • The deductibility of net capital losses in excess of $3,000 is generally deferred to future years.

There’s no shortage of confusion about the current tax landscape—both short-term and long term—but here are some steps you can take to protect yourself from paying a higher tax rate than necessary as we march into a new normal world.

 

Carried Interest

The Tax Cuts and Jobs Act lengthens the long-term holding period with respect to partnership interests received in connection with the performance of services. Profit interests held for three years or less at the time of disposition will generate short-term capital gain, taxed at ordinary income rates, regardless of whether or not a section 83(b) election was made. Prior law required a holding period greater than one-year to secure the beneficial maximum (20%) federal long-term capital gain tax rate.

Real estate

Real estate case law is too technical for the purposes of this article. Let’s just say the courts look at the following factors when trying to determine a personal real-estate owner’s intent:

  • Number and frequency of sales.

  • Extent of improvements.

  • Sales efforts, including through an agent.

  • Purpose for acquiring, holding and selling.

  • Manner in which property is acquired.

  • Length of holding period.

  • Investment of taxpayer’s time and effort, compared to time and effort devoted to other activities.

Unfortunately, the cases do not lay out a consistent weighting of these general factors. Always check with your legal and tax advisors before engaging in any type of real-estate transaction.


Collectibles

Works of art, rare vehicles, antiques, gems, stamps, coins, etc., may be purchased for personal enjoyment, but gains or losses from their sale are generally taxed as capital gains and losses. But, here’s the rub: Collectibles are a special class of capital asset to which a capital gain rate of 28 percent (not 20%) applies if the collectible items are sold after being held for more than one year (i.e. long-term).

Note that recently popular investments in gold and silver, whether in the form of coins, bullion or held through an exchange-traded fund, are generally treated as “collectibles” subject to the higher 28 percent rate. However, gold mining stocks are subject to the general capital gains rate applicable to other securities. Gold futures, foreign currency and other commodities are generally subject to a blended rate of capital gains tax (60 percent long-term, 40 percent short-term).

Bitcoin and other cryptocurrencies are treated as “property” rather than currency and will trigger long-term or short-term capital gains when the funds are sold, traded or spent. Cryptocurrencies are NOT classified as collectibles.

The difficulties arise if you get to the point that you are considered a dealer rather than a collector, or if you are a legitimate dealer but start selling items from your personal collection. In most cases, the following factors in determining whether sales of collectibles result in capital gain or ordinary income:

  • Extent of time and effort devoted to enhancing the collectible items

  • Extent of advertising, versus unsolicited offers

  • Holding period and frequency of sales from personal collection

  • Sales of collectibles as sole or primary source of taxpayer’s income

The Tax Cuts and Jobs Act, will end any further discussion about whether gain on the sale of collectibles can be deferred through the use of a like-kind exchange. The tax bill limits the application of section 1031 to real property disposed of after December 31, 2017.

Recommended steps to preserve capital gain treatment:

  • Clearly identify assets held for investment in books and records, segregating them from assets held for sale or development.

  • In the case of collectibles, physically segregate and document the personal collection from inventory held for sale.

  • Memorialize the reason(s) for a change in intent for holding: e.g., death or divorce of principals, legal entanglements, economic changes or new alternate opportunities presented.

  • If a property acquired with the intent to rent is sold prematurely, then retain documentation that supports the decision to sell: e.g., unsuccessful marketing and advertising, failed leases, news clippings of an adverse event or sluggish rental market.

  • If a property is rented out after making substantial improvements, then document all efforts to rent, and list or advertise it for sale only after a reasonable period of rental.

  • Consider selling appreciated/unimproved property to a separate entity before undertaking development. This would necessitate early gain recognition, but may preserve the capital gain treatment on the appreciation that’s realized during the predevelopment period.

  • Consider the application of Section 1237, a limited safe harbor, permitting certain non-C Corporation investors to divide unimproved land into parcels or lots before sale, without resulting in a conversion to dealer status.

Conclusion

Characterizing an asset as ordinary or capital can result in a significant tax rate differential. It can also affect your ability to net gains and losses against other taxable activities. So you must spend the time and effort needed to document the intent of the acquisition of an asset, as well as any facts that might change the character of the asset, during the holding period.

Sure, we’re all busy. But, in today’s new regulatory and tax landscape, don’t you think it’s worth taking the time to do so in order to potentially cut your future tax rate in half?

 

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 info@diversifiedassetmanagement.com.

 

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.

 

Optimize Your Capital Gain Treatment

Carefully document the purpose for holding your assets


Key Takeaways:

  • Long-term capital gains associated with assets held over one year are generally taxed at a maximum federal rate of 20 percent — not the top ordinary rate of 39.6 percent.

  • Just be careful if you are planning to sell collectibles, gold futures or foreign currency. The tax rate is generally higher.

  • The more you can document your purpose for holding your assets (at the time of purchase and disposition), the better your chances of a favorable tax result.

  • The deductibility of net capital losses in excess of $3,000 is generally deferred to future years.

 

There’s no shortage of confusion about the current tax landscape—both short-term and long term—but here are some steps you can take to protect yourself from paying a higher tax rate than necessary as we march into a new normal world.

Capital assets vs. ordinary income assets

The IRS oddly defines a capital asset by describing what it is not, rather than describing what it is. For instance, the following “ordinary income” assets are not considered capital assets: Inventory, property held for sale to customers, artistic compositions created by the taxpayer’s personal efforts, and accounts or notes receivable acquired or originating in the ordinary course of a trade or business. With the 2017 Tax Cuts and Jobs Act signed into law, self-created patents and other intellectual property will be added to this list.

Assets used in a trade or business that qualify for depreciation, also known as “Section 1231 Assets,” are not capital assets. However, a disposition of such property that results in a gain may enjoy, at least partially, capital gain treatment.

Most other noncash assets are considered capital assets. However, the tax consequences upon disposition are further dependent on whether these assets are held for investment or personal use.

Personal assets

Assets acquired primarily for personal use are generally not purchased with the primary intent of anticipating future appreciation. Nevertheless, if such an asset does appreciate, the gain from its sale is taxed as a capital gain. In the case of a gain on the sale of a personal residence, the capital gain is first reduced by a generous exclusion, in most cases up to $500,000 for joint filers. Losses on sales of personal assets, however, are rarely deductible.

Investment assets

In addition to creating wealth through appreciation, investment assets may also produce a current income stream in the form of interest, dividends, royalties or rents. The most common investments are:

  • Real property

  • Securities

  • Collectibles

Dealer vs. investor vs. trader

In the case of the three asset categories above, whether a holding is considered an “ordinary income asset” or a “capital asset” depends primarily on what you intend to do with those assets. Intent is most important at the time of disposition (i.e. sale), but asset re-characterization during the holding period may be more closely scrutinized in an audit.

In general, a “dealer” acts as a merchant or middleman, purchasing assets at one price and selling them to customers at a higher price to reflect compensation (“markup”) for risk, handling costs and other services. An “investor” holds property to benefit from the appreciation upon a later disposition. Difficulties arise when you, the taxpayer, act as a dealer in some transactions and as an investor in others—or if you acquire an asset with the intent to resell it, and then decide later to retain it as an investment.

Conclusion

Characterizing an asset as ordinary or capital can result in a significant tax rate differential. It can also affect your ability to net gains and losses against other taxable activities. So you must spend the time and effort needed to document the intent of the acquisition of an asset, as well as any facts that might change the character of the asset, during the holding period.

Sure, we’re all busy. But, in today’s unpredictable regulatory and tax landscape, don’t you think it’s worth taking the time to do so in order to potentially cut your future tax rate in half?’

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 info@diversifiedassetmanagement.com.

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.

Investors Are Their Own Worst Enemies

Why we succumb again and again to our worst behavioral biases

By Robert Pyle


Key Takeaways

  • There are four common behavioral biases that tend to derail investors.

  • Unsettling times can bring these biases to the surface, even among normally level-headed investors and savers.

  • Learning how to detect the signs of hindsight, loss aversion, pattern recognition and recency bias can save you tremendous sums over the long term—and improve your sleep

Study after study shows that investors are often their own worst enemies. Why? Because we have emotions and we have biases, some we many not even recognize.

As investors, we tend to leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards. All the while, we rush into nearly every move, only to fret and regret them long after the deed is done. The past few weeks of wrenching market volatility, global economic drama and screaming headlines has caused even the most level-headed of investors to start questioning their investment strategy.

 

Don’t!

Why do we have behavioral biases?

Most of the behavioral biases that influence our investment decisions come from myriad mental shortcuts we depend on to think more efficiently and to act more effectively in our busy lives.

Usually these mental short-cuts work well for us. They can be powerful allies when we encounter physical threats that demand reflexive reaction, or even when we’re simply trying to stay afloat amid the crush of deliberations and decisions we face every day. But, these biases are not always reliable

What do they do to us?

The same survival-driven instincts that are so helpful in our daily lives can become deadly when investing. They overlap with one another, gang up on us, confuse us and contribute to multiple levels of damage done.

Even after you’ve learned to recognize your biases, they’re hard to combat. They’re your brain’s natural instincts that kick in long before your higher functions kick in. Behavioral biases trick us into wallowing in what financial author and neurologist William J. Bernstein, MD, Ph.D., describes as a “petrie dish of financially pathologic behavior,” including:

 

1.      Counterproductive trading – incurring more trading expenses than are necessary, buying when prices are high and selling when they’re low.
 

2.      Excessive risk-taking – rejecting the “risk insurance” that global diversification provides, instead over-concentrating in recent winners and abandoning recent losers.
 

3.      Favoring emotions over evidence – disregarding decades of evidence-based advice on investment best practices.

 

What can we do about them?

First, become familiar with the most common behavioral biases, so you can easily recognize them and prevent them from derailing your investment decisions.

Anchor your investing in a solid plan.  

By anchoring your trading activities in a carefully constructed plan (with predetermined asset allocations that reflect your personal goals and risk tolerances), you’ll stand a much better chance of overcoming the bias-driven distractions that rock your resolve along the way.

An alphabetic overview of behavioral biases

 

Let’s review some of the biases that come into play after a volatile year in the financial markets. We may all question the value of diversification when the U.S. financial markets outperform the international markets as they did this year (as of mid-December 2018), but there can be long periods when international stocks outperform. For more, see Why Should You Diversify.

The main behavioral biases that come into play after a volatile year are:

1.      Hindsight Bias,

2.      Loss Aversion,

3.      Pattern Recognition, and

4.      Recency Bias.


It’s tempting to think we should not have had international stocks in our portfolios this year (recency and hindsight biases), even though in 2017 international stocks easily outperformed U.S. stocks and other asset classes. We tend to rely on our pattern recognition instincts to predict the current trend into the future. It’s like using yesterday’s weather to predict what the weather will be like every day going forward into the future. Then, we start telling ourselves we don’t want to buy international stocks because we are afraid they’ll go down (loss aversion).

If you read the summaries below, see if you are feeling some of these biases this year.

1. Hindsight

 

What is it? In his iconic book “Thinking, Fast and Slow,” author Daniel Kahneman describes hindsight bias as a “robust cognitive illusion” that causes us to believe our memory is correct when it is not—it’s the old “I knew it all along” illusion. For example, say you expected an election candidate to lose, but she ended up winning. When asked afterward how strongly you predicted the actual outcome, you’re likely to recall giving it higher odds than you originally did.

 

When is it harmful? Hindsight bias can be very dangerous for investors, since your best financial decisions come from realistic assessments of market risks and rewards. As Kahneman explains, hindsight bias leads observers to “assess the quality of a decision not by whether the process was sound, but by whether its outcome was good or bad.” If a high-risk investment happens to outperform, but you conveniently forget how risky that investment truly was, you may load up on too much of it and not be so lucky moving forward. On the flip side, you may too quickly abandon an underperforming holding, deceiving yourself into dismissing it as a bad bet to begin with.

 

2. Loss aversion

 

What is it? “Loss aversion” describes the phenomenon in which most people feel the pain of losing more strongly than they feel the joy of winning. This greatly alters the way we balance risk and reward. For example, in “Stumbling on Happiness,” Daniel Gilbert argues that most of us would refuse a bet that gives us an 85 percent chance of doubling our life savings if it contained a 15 percent chance of losing everything we own. Even though the bet offers very favorable odds of a big win, the fact that there remains a slight chance that we could go broke leads most people to decide the bet is not worth the risk.

 

When is it harmful? One way loss aversion works against you is when you decide to sit in cash or bonds during bear markets – or even during bull markets when you feel a correction is imminent. Study after study shows that sitting out the markets, even during a downturn, will cause you to have a lot less money over the long-term than if you had just stayed fully invested. And yet, the potential for future loss can frighten many of us into abandoning our carefully planned course toward the likelihood of long-term returns.

 

3. Pattern recognition

 

What is it? Is that a zebra, a cheetah or a light breeze moving through the grass? Since prehistoric times, when our ancestors depended on getting the right answer, right away, evolution has conditioned our brains to find and interpret patterns. Back then it was a survival skill and that’s why, our pattern-seeking impulses tend to treat even random events (like 10 coin flips, all heads) as if they’re orderly outcomes suggesting a predictive pattern. “Just as nature abhors a vacuum, people hate randomness,” wrote financial blogger Jason Zweig, as a result of our brain’s dopamine-induced “prediction addiction.”

 

When is it harmful? Speaking of seeing red, Zweig published this fascinating piece showing how something as simple as presenting financial numbers in red can make investors more fearful and risk-averse than if they saw the same numbers in black. That’s a powerful illustration of how pattern recognition can influence us – even when the so-called pattern (red = danger) is a red herring.


Is any given stream of breaking financial news a predictive pattern worth pursuing? Or is it simply a deceptive mirage? Given how hard it is to tell the difference (until hindsight reveals the truth), investors are best off ignoring the market’s many glittering distractions and focusing instead on their long-term goals.   

 

4. Recency

 

What is it? Recency causes you to pay more attention to your most recent experiences, and to downplay the significance of long-term conditions. For example, in their book “Nudge,” Nobel laureate Richard Thaler and Cass Sunstein observe: “If floods have not occurred in the immediate past, people who live on floodplains are far less likely to purchase insurance.” That’s recency, tricking people into ascribing more importance to the lack of recent flooding than to the bigger context of being located on a flood plain.

 

When is it harmful? Of course buying high and selling low is exactly the opposite of investors’ actual aspirations. And yet, no matter how many times our capital markets have moved through their bear-and-bull cycles, recency causes droves of investors to stumble every time. By reacting to the most recent market jolts instead of staying true to their plan for long-term growth, investors end up piling into high-priced hot stocks and locking in losses by selling low during the downturns. They allow recency to get the better of them … and their most rational, evidence-based investment decisions.

 

A Behavioral Bias Overview

The Bias

Its Symptoms

The Damage Done

1. Hindsight

“I knew it all along” (even if you didn’t). When your hindsight isn’t 20/20, your brain may subtly shift it until it is.

If you trust your “gut” instead of a disciplined investment strategy, you may be hitching your financial future to a skewed view of the past.

2. Loss aversion

No pain is even better than a gain. We humans are hardwired to abhor losing even more than we crave winning.

Loss aversion causes investors to try to dodge bear markets, despite overwhelming evidence that market timing is more likely to increase costs and decrease expected returns.

3. Pattern recognition

Looks can deceive. Our survival instincts strongly bias us toward finding predictive patterns, even in a random series.

By being predisposed to mistake random market runs as reliable patterns, investors are often left chasing expensive mirages.

4. Recency

Out of sight, out of mind. We tend to let recent events most heavily influence us, even for our long-range planning.

If you chase or flee the market’s most recent returns, you’ll end up piling into high-priced hot holdings and selling low during the downturns.

Conclusion

As human beings, we’re wired to flee from danger, make snap judgements, seek recurring patterns and use the past to try to predict the future. It’s not easy putting emotions aside during times of stress. But, those who can stick to their plan and remain rational in the face of uncertainty tend to fare well in both their financial lives and their personal lives.

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 info@diversifiedassetmanagement.com.

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.

ESG Funds Environmental Social Governance - Doing Well and Doing Good

If you are looking for ESG Funds (Environmental Social Governance), Dimensional has a strong lineup of eight low-cost ESG Funds. 

Click here to read more:

ESG Funds Environmental Social Governance - Doing Well and Doing Good

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 info@diversifiedassetmanagement.com.

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.

Dimensional Stories: Global Diversification

Here is a great video from on why you should diversify.

David Booth speaks on global diversification, highlighting its role in avoiding extreme investment outcomes and emphasizing the importance of staying the course over the long term.

Dimensional Stories: Global Diversification:

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 info@diversifiedassetmanagement.com.

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.

Why Should You Diversify?

Here is a nice article from Dimensional. 

As 2019 approaches, and with US stocks outperforming non-US stocks in recent years, some investors have again turned their attention towards the role that global diversification plays in their portfolios. For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%. As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US.

Click here to read more:

Why Should You Diversify?

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 info@diversifiedassetmanagement.com.

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.