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2014

Fear Leads to 3 Costly Mistakes

By | 2014, Money Moxie, Newsletter | No Comments

To hear bad news, all you have to do is turn on the TV. Every other day another story appears about how we are in a bubble and stocks are going to crash, especially if you listen to the eternal pessimists. On the flip side if you listen to the eternal optimists, stocks have a lot of room to run. So, to which side should you listen?

You can usually find opinions at both extremes. The truth, however, usually falls in the middle. So, the next time you are ready to make a knee jerk reaction to some bad news, think through these mistakes to make sure you are making the right decision.

Trying to time the market and go into cash – It’s hard not to react to bad news because it is in our emotional makeup to protect ourselves. The next time you hear a pundit or a co-worker saying there is a bubble and stocks are headed down, try not to jump on that emotional roller coaster.

Just remember, “When you sell, you have to be right twice.”1 Not only do you have to time it right when you get out, you also have to time it right when you get back in. That leads to the next mistake.

Holding on to cash and not reinvesting – If you have sold some investments into cash, it is hard to figure out when to reinvest. You have heard the adage, “Buy low, sell high,” but implementing it is very hard to do.
Mark Yusko said, “Investing is the only business I know that when things go on sale, people run out of the store.”2

Don’t just sit on cash that is earning hardly anything. Look at market volatility as an opportunity and redeploy your cash into investments with at least a little growth potential.

Short-term thinking – The most common mistake people make is to change their entire portfolio structure based on what is happening right now.

One example is a retiree moving all of his investments into cash because of a conflict on the other side of the world. That is like boarding up your house to protect against a hurricane when the forecast is for an afternoon thunderstorm.

A properly designed investment plan should be able to weather the storms on the horizon. Don’t short circuit your plan by making a knee jerk reaction to the news of the day. Make sure that your investment plan is driven by your goals and values, and stick with it.

 

1. Fearing a bubble can lead to 5 costly mistakes, CNBC 11/10/14. http://finance.yahoo.com/news/fearing-bubble-lead-5-costly-140000840.html
2. http://mebfaber.com/2011/03/12/when-things-go-on-sale-people-run-out-of-the-store/#sthash.3bJmQucQ.dpuf

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Do I Really Need A Backup?

By | 2014, Money Moxie, Newsletter | No Comments

The holiday season is upon us and with that comes gatherings of family and friends. Chances are there will be plenty of opportunities for pictures. Before you head over the hills or through the woods, take a moment and save the pictures you have taken with your camera to your computer.

Saving photos on your computer will free up space on your memory card to capture all the fun memories this time of year brings. For any of you that love to take pictures with your smartphones, remember to save those pictures off to your computer as well. You will be glad you did if your phone doesn’t make it through the season.

There are even options to have the images stored in the cloud as a backup.

It’s also a good time of year to make sure all your other files are being backed up. Can you afford to lose everything on your hard drive?

It’s not a question of if your computer hard drive will crash, but when.

There are many ways to back up your important documents and pictures from your computer. You can purchase an external hard drive and have it automatically backup the requested files or you could use a cloud service like Backblaze or Crashplan.

There are pros and cons to purchasing a hard drive versus using a cloud service; however, the most important thing is to back up your information and have it be automatic. If you have to think about doing it, it won’t happen. Feel free to call us if you have any questions.

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Need Help Allocating Your 401(k)?

By | 2014, Money Moxie, Newsletter | No Comments

One of the most common questions we get at SFS is “How should I invest my 401(k)?” This is a critical question, especially considering that 18% of retirement assets are tied up in these accounts (source: Investment Company Institute). Managing your 401(k) may be the most important place to place your financial focus after managing your spending.

First things first—start saving now. Starting early is the best way to get compounding rates of return to work in your favor. Remember, Albert Einstein called compounding rates of return the “8th wonder of the world.”

Next, take advantage of free money by getting the full match your employer offers. Not all 401(k) plans include a match, but if yours does, then make sure you get the full benefit. The rate at which you save is far more important than the rate of return you get. So, keep saving for the future.

Now let’s get into the investing nitty-gritty. Every person must decide how much risk to take in his or her savings. Your risk tolerance should be based on your ability, willingness, and possibly your need to take risk. It will be different than that of your friends and coworkers. It may even be different than that of your spouse.

Your ability to take risk includes factors like your overall financial situation and your time horizon. The more savings you have, the more risk you can take. The longer you plan to invest, the more risk you can take. Why? Your chances of positive returns in stocks go up the longer you invest.

Willingness to take risk is more difficult to determine. The essential question is how well will you be able to handle a drop in the value of your investments? If you view a fall in the stock market as an opportunity to buy more then you may have a high tolerance for risk.

When it comes to picking investments, the easiest route is to find an investment that approximates your retirement date. These all-in-one solutions provide some diversification. While diversification is far from a guarantee, it is still a good way to help manage risk. The pitfall of the retirement date choices is that these don’t take into account your personal situation (health, income, assets, debt, etc.) and they may not even disclose exactly how they are invested.

If you choose to select your own mix, be careful. Selecting the hottest performer last year can get you in a lot of trouble. Distributing your account balance evenly into each option is certainly not the way to go either.

This is where a little research and help from a professional can help. Give us a call. We can help you navigate the 401(k) maze.

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9 Ways to Reduce Taxable Income This Year

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It is hard to believe 2014 is swiftly drawing to a close. At this point, what can you do to better manage your taxes? Here are several ideas you can consider:

9 Ways to Reduce Taxable Income

Maximize retirement contributions.
All contributions to your traditional 401(k) or other tax deferred retirement accounts are made before taxes are calculated. This means that if you make a maximum $17,500 contribution to a 401(k) your taxable income is reduced by $17,500. So, why not pay yourself rather than Uncle Sam? Generally speaking, you can modify your contributions at any time during the year, but check with your benefits office to be sure of your plan’s rules.

Harvest tax losses.
After several years of market growth you may want to lock in some of your investment gains. The downside is you will also trigger a tax on any growth over your initial investment. Consider dumping some of your portfolio losers. This will allow you to offset your taxable gains with losses resulting in a zero tax bill if the numbers are the same. Keep in mind you can only offset long-term gains with long-term losses. The same applies to short-term gains and losses. We can help you identify any tax harvesting opportunities in your portfolio.

Defer income.
If you have control over when you will receive income, consider deferring some of your income until next year. This generally applies to those earning commissions, bonuses, consulting fees, or self-employment income. A quick exercise to determine where you are tax-wise and how much income should be deferred to prevent you from hitting the next marginal tax bracket is recommended. This can be done by consulting with your tax professional. Some programs such as Turbo Tax allow you to run a pro-forma tax filing to get an idea of where you stand.

Make up tax shortfalls.
If you have not paid enough withholding or estimated tax throughout the year, there is still time make up the difference before the year ends. Increasing your tax withholding or making an estimated tax payment will help avoid any underpayment penalties.

Bunch itemized deductions.
Retirement brings with it some unexpected tax situations. For many there are not enough deductions each year to itemize on Schedule A of the tax return, in effect minimizing any tax advantages. By bunching deductions every other year, you can itemize one year and take the standard deduction the next year. This could be applied by prepaying state taxes every other year, making charitable donations every other year, moving up or pushing back a non-urgent medical procedure, and much more. Your tax professional can share ideas that fit your specific situation.

Make stock donations.
If you have held taxable investments for more than a year and they have increased in value, you can donate the stock directly to a qualifying charity. This avoids any capital gains you may owe on the growth of your investment. Nevertheless, you can still itemize the full value of the donation. Even better, the receiving charity pays no tax on the gift. You are then free to invest the cash you would have donated, creating the opportunity for future stock donations.

Be generous to charities.
Gifting cash to a qualified charitable organization also has tax perks. You can deduct the cash donation on Schedule A when you file your return. (Be sure to keep receipts for all cash donations.) You also get the benefit of helping others, while this may be a completely intangible outcome; the good feeling of making a difference in the world goes well beyond any tax advantages.

Maximize gift tax exclusions.
If your estate is growing considerably, you may want to gift something to your children and grandchildren while you can watch them enjoy the gift. You can give $14,000 annually to as many people as you wish. Neither you nor the happy recipients will pay gift taxes or estate taxes. If you are married your spouse can gift the same amount. Get double tax benefits by gifting appreciated stock and avoiding the capital gains taxes. The capital gains basis will transfer to the recipient, who is most likely in a lower tax bracket.

Schedule a financial checkup.
Throughout the year there may have been changes to your personal situation. This is a good time to review beneficiary designations, retirement plan contributions, estate planning options, and investment strategies. Your advisor can make you aware of and help you take full advantage of a wide range of planning opportunities.

For more information and ideas on how to maximize year-end planning opportunities, contact one of our wealth management consultants or your tax professional. Don’t wait too long; there is a deadline for getting everything finalized and some of our suggestions take time.

*Securities America and its representatives do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.
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Passwords, Hacked!

By | 2014, Money Moxie, Newsletter | No Comments

Nearly every website you visit wants you to create a login and password. Unfortunately, passwords are the only type of security that most sites are using to verify your identity. So if you want to protect your personal information then you need to make a habit of creating extremely strong passwords.

Some sites want the password to include letters and numbers. Others add the option of special characters. A good password is longer than 12 characters, and includes a combination of letters, numbers, and special characters. It should also be updated or changed every 3 months.

An example of a secure password could be: Xvot$Put=qi3. If that sounds complicated, then we’re on the right track. The more complicated, the harder it will be to crack.

password_security

That sounds great, but how do you keep track of all these logins and passwords AND still keep them secure? There are several ways to do this and it all depends on your personal preference. Some of these suggestions are more secure than others. You can:

Memorize them all.

Write them all down in a notepad that you keep somewhere secure.

Use a phrase you can remember, but would be hard for others to guess.

Have your Internet browser remember them all.

Use a third party installed software on your computer that remembers them all for you.

Install an App on your smartphone that generates/remembers passwords for you.

Do NOT use the same password with multiple logins. If one of your logins is compromised, the hacker could try it on any of your other logins with success. Take the time to make good passwords and change them every three months to try to avoid getting hacked. If you have any questions or concerns, please feel free to contact us.

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Fraud Alert: Email Scam

By | 2014, Money Moxie, Newsletter | No Comments

Hopefully everyone knows not to reply to an email sent by a “Nigerian prince.” However, criminals are becoming more sophisticated in their tactics. We recently learned of a new email scam during a national conference we attended. The reality of this scam was driven home when one of our own clients was hacked.

One day as I was sitting at my desk, I received an email from a client with whom I had spoken recently. The email said, “Are you in office?” As I was on the phone at the time, I replied I would call as soon as I was done with a call.

The response came, “We are currently out of town, we are here in Mexico and our cell phone is not working here , kindly email available accounts balances as of today.” (Hopefully, you noticed some of the grammar and punctuation mistakes as I did.)

What we had learned in our conference is that the new scam starts by hacking into an email by figuring out the password. Then the crook patiently finds out as much personal information as he can, including names, dates of birth, financial information, etc. Next, the crook will pose as the individual and try to make connections with the individual’s contacts (in this case, me). With so much information about the individual sometimes access is gained to a bank, credit card, or other financial account.

Dollar Sinking In The Sea

Our policy is to never send personal information via email, which inherently is unsecure. For that same reason we won’t accept trade requests via email.

When the email seemed to be fishy, I left a message for the client and waited until she contacted me. The client was indeed on vacation . . . , but not in Mexico. It is likely that the criminal knew she would be on vacation and waited for that moment to make a move.

Thankfully, none of the client’s financial accounts were compromised. However, the episode cost the clients an enormous amount of time and worry.

What lessons can be learned from this?

1. Use strong passwords and change them frequently.

2. Protect your computer. Make sure you have antivirus protection and that you have updated it recently.

3. Encrypt your wireless router by using a WPA key, or password, that will impede hackers using network sniffers.

4. Don’t give your passwords to others. (No one should ever ask.) If you aren’t sure you can trust the emailer/caller, don’t give them any personal information. Find the contact information through an independent source and contact the company that way.

5. Don’t be fooled by emails. Many scammers will send you an email that looks legitimate, but when you click on the link it will download a virus to your computer. Don’t click on any links if you haven’t subscribed to a service from that provider.

6. Limit online purchases and remember that even brick and mortar retailers can have their customer information breached.

If you do make purchases online use credit cards, which typically have fraud protection. If you are compromised the credit card company will usually write-off all of those charges. Debit cards allow thieves to take your money.

In this digital age, cybersecurity is increasingly important. Take a step towards protecting your personal and financial information by first protecting your email.

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The Virtuous Cycle of Rising Prices

By | 2014, Newsletter, Viewpoint | No Comments

Imagine waking up tomorrow to discover gasoline prices have dropped in half. What if milk, eggs, and all your groceries cost less as well? Suddenly, your money would be worth more. Sounds great, right? It wouldn’t take long for the heavy weight of reality to hit you.

Consider how knowledge of tomorrow’s pricing might affect today’s behavior. Assuming no shortages, we would be crazy to buy today what would cost less in 24 hours. While falling prices (deflation) sound nice on the surface, they can have disastrous consequences.

Deflation's Destruction

Deflation has been present in most economic depressions in history, including the Great Depression. The initial causes may include productivity increases, oversupply of goods, or scarcity of money.
A rise in productivity has been occurring for centuries with greater education and technology. In fact, a U.S. worker today, on average, can produce twice as much as a worker in 1975 and 50 percent more than a worker in 1995! Outsourcing to cheaper foreign labor has a similar effect on productivity as technology.

Supply of goods fluctuates, especially with food and energy. For example, a drought in 2012 led to a rise in grain prices like corn, which made feed cattle more expensive in 2013, which led to higher dairy and beef prices in 2014 (see Price Changes table).

Price Changes

Scarcity of money is where the U.S. Federal Reserve (Fed) comes in. The Fed encourages low unemployment and low inflation by managing the money supply.

The Fed cannot control the weather in the Midwest, extract more oil from Saudi Arabia, or raise the minimum wage in China. But the Fed will do everything it can to avoid deflation. Since 2008, it has spent over three trillion dollars to stabilize falling prices.

Rising prices are normal in a healthy economy. The 50 year average for inflation is 4.1 percent. This reasonable rate encourages spending and creates a virtuous cycle of economic growth (see Inflation’s Value graphic).

Inflation's Value

All the current numbers in this cycle are good, but below average. Over the last twelve months inflation has been 1.7 percent, wage increases averaged 2.8 percent, and consumer spending grew 3.6 percent.
The most recent U.S. growth rate showed an increase of 4.2 percent. That is a great number. If it is followed by another increase in another category like wages the growth cycle could pick up speed. The result could help the current bull market continue.

Definitions

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What’s Your Happiness Index?

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We have all heard the adage “Keeping up with the Joneses.” For many, this adage reflects a perception of happiness – seeing what others have and believing it creates an abundance of happiness in their lives. In reality, the desire to have more often results in less satisfaction.

When asked, most people would say if they had $_______ more (you can fill in the blank), they would be better off, financially speaking. It’s hard for most Americans to believe someone earning a handsome six figure income, say $400,000, can feel broke. But it happens.

This “getting ahead” mentality occurs at all income levels and generally has the same effect. As our income increases, even slightly, we think: “How can I spend this additional money?” More often than not, the answer is a purchase. Maybe it’s upsizing your home, moving to a better neighborhood, getting a new car, or buying a recreational toy. There is no limit to the human desire to have more.

We’d like to introduce a new idea. Perhaps getting ahead doesn’t mean buying more stuff. After all, what exactly are we getting ahead of? Contentment and happiness come when we are comfortable living within our means.

happiness

Financial Freedom
Debt does not create freedom. The treadmill of borrowing more money to buy more stuff gets tiresome and stressful. We become so focused on finding a way to pay for our lifestyle we seldom really live in and enjoy the present. Freedom comes from having enough discretionary income to cover the unexpected curve balls life can throw your way. Discretionary income provides the flexibility to slow down and enjoy the life we are living and the lifestyle we are striving to create.
Contentment Creates Happiness
This in no way implies that we shouldn’t strive to improve our lives and better our circumstances. The point we are trying to make is that using someone else’s lifestyle as a measuring stick for our personal happiness generally has the opposite effect. If we never feel we measure up financially, we’re going to be hard pressed to feel happy or content. Setting realistic expectations and balancing wants and needs is a starting point.

From there we must break down our income to first cover non-discretionary needs. This would be a roof over head, food on the table, electricity, etc. Then we prioritize wants and determine how to use current resources to cover these items. At the end, there should be discretionary money that is not appointed to any specific goal, other than creating excess cash – savings.

The Happiness Index
Balancing our wants with the ability to pay for them is a challenge. There have to be trade-offs. Buying the newest high-end luxury car may result in a high level of debt. On the other hand, a beat up jalopy with high miles may not last long. The idea is to purchase a vehicle that meets your needs and that you can reasonably afford. That way you feel good about the purchase and still have some cash flow flexibility. This decision making process is your happiness index.

Each time you spend a large amount of money or commit monthly cash flow to an ongoing expense, ask yourself, “How will this financial transaction impact my happiness?” Applying this technique will help set you on a positive financial course. In the words of author Mitch Anthony: “Be content with what you have right now. If you can’t enjoy it now, you won’t enjoy something
better later.”

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How Long Will You Live?

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Financial planning would be a lot easier if we knew exactly how long each of us was going to live. Then you theoretically could spend your last dime on the day that you die, as the old adage goes. As it is, we are left to try to make certain plans around uncertain events.

JP Morgan created a retirement guide that shows your life expectancy probability at age 65. This may provide a little guidance as you plan for the future. No one knows for sure how much time they have to live, and there are a multitude of factors that contribute to your longevity, such as health habits and family history.

More than anything, these life expectancy statistics may help you from falling into the trap of thinking you will die early, when in fact you may have many wonderful years ahead of you. For example a 65-year-old woman has a 33 percent chance that she will live to the age of 90. Those are pretty good odds. Sorry men, your prognosis isn’t quite as good, but a 65-year-old man still has a 21 percent chance of living to the age of 90. A couple, where both are 65 years old, has a whopping 73 percent chance that one of them will live to the age of 90.

This increased longevity in large part is due to better health habits and improved health care, among other factors. These statistics are very generic, but they may cause you to rethink your retirement plan. It is better to plan to live a long life and save too much money, rather than spending all of your money and living too long. Statistics show that more people are afraid of running out of money than dying.

Of course there is always a balancing act between living the lifestyle you want in retirement and making your money last for your full retirement—counsel with a competent retirement planner to make sure that you are either saving enough for retirement or that your spending plan won’t leave your financial well dry.

You may or may not want to know how long you may live, but it is always a good practice to plan for best and worst case possibilities.

Long to live

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3 Reasons to Run with the Bulls

By | 2014, Money Moxie, Viewpoint | No Comments

Our current bull market is more than five years old. Since hitting a new high on March 28, 2013, the S&P 500 has continued to reach 67 more records—averaging almost one each week. Is this market too strong to continue or is it too powerful to end now?

Herbert Stein famously said, “If something cannot go on forever, it will stop.” This undisputable fact is profound in its application to life and investing. In other words, planning for growth over a lifetime is reasonable, but a new high every week is an unrealistic expectation.

On March 28, 2013, the S&P 500 stock index reached a new, record breaking high. I wrote about this event in the following Money Moxie article, “Patience is a Rewarding Virtue.” My conclusion then as it is now was to continue to hold on. Making money is what stock ownership is all about. I also pointed out that “The average return following a new high is positive for 1, 2, 3, 6, and even 12 months following the high.” Fortunately for investors that forecast was correct. In the 12 months following that new high the S&P 500 made over 18 percent.

Bulls and Bear

Don’t Fear a Correction
This is an unusually strong time to be investing in U.S. stocks and it will not last forever. The S&P 500 averages one 10 percent correction each year and a few 5 percent drops. This is all it takes to spook some investors, causing them to miss out on the growth that follows.

While short-term events can be shocking, long-term returns are predictable. Investing in a diversified portfolio for long periods of time, such as 10 or 20 years, almost always yields positive results. Whatever happens, hang in there. Once we accept the fact that corrections are a normal part of stock investing we will begin to see them as opportunities to invest.

Indicators Look Good
Bear markets are typically defined as a drop of 20 percent or greater. These large drops are extremely difficult to predict. (Those who do are like broken clocks-correct only twice a day.) However, bear markets have some common threads.

1. The yield curve is the difference between long-term and short-term interest rates. It has turned negative around nearly every bear market in the last 50 years, but it is extremely positive right now.

2. Energy prices matter more than any other price in the world. Oil use has an impact almost ten times greater on the economy than any other commodity. So it is no surprise that oil prices have spiked around the end of bull markets in the last 40 years. (1987 was the only exception!) Right now, oil prices look relatively stable and thanks to growing domestic production there is reason to think it will continue.

3. Consumer spending represents 70 percent of the U.S. economy. On average, Americans are spending nearly everything they make, so we cannot expect much more from them. Improvement will come as the number of unemployed workers drops and as employers raise wages. While watching for increases has been like watching paint dry, it is happening. Momentum is positive in the jobs front.

Conclusion
New market highs come for a reason. The economy is continuing to improve. The most important indicators are pointing in the positive direction. The greatest warning sign in stocks is that returns have perhaps been too good. That alone is only enough fuel for a small correction, not a major bear market. When one of these corrections comes we should try to see it as an opportunity. This is an incredible time to be an investor.

*Research by SFS. Data is from the Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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