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Archive for April, 2011


Income tax withholding

Estimates are that 75% of income tax returns filed will have a refund this year.  The amount of the refunds appear to be greater than in prior years.  Behavioral economists find that people appreciate a large refunds more than the same amount received periodically throughout the year.   
I have talked to many people that do not have any or adequate cash reserves.  Some have real concerns about about how they will fund their children’s college or if they will have adequate assets for their own retirement.  It seems surprising that the refunds are not used for these purposes.  Instead the refunds are used for luxury items.  
You should know whether or not you need to set aside funds to meet future expenses.  Tax withholding can be reduces to save the funds periodically or taxes can be overwithheld.  The important issue is how the amounts are used.  Future spending should be anticipated and prioritized.  Then needs should be funded followed by wants and the wishes should be funded.  

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Fear Mongers

I posted an article under “Consumer Information” focused on identity theft.  “Fear Mongers” are prevalent throughout the “financial” industry.  They appeal to our emotions.  Often the marketing/pitch used tries to create the impression that the worry of the day will continue forever.  The action being promoted may not be justified.  Sometimes the potential financial loss is significantly less than the cost.  Generally, there are better alternatives than those being promoted. 
Recently I have talked to people that have responded to the fear mongers.  Often the cost they incurred was substantially more than the potential harm that would result from the feared event or condition.  Many have minimized their ability to adjust their situation to changing conditions.  Many have ignored the consequences of their actions.   Too often, it prevented them from meeting objectives of other elements of their plan.    
One benefit of planning is to recognize when to make changes.  No one has the ability to accurately forecast the future.  It is necessary to periodically look at where you are compared to where you expected to be.  The strategies you follow today may not apply tomorrow.  This is true even when you cannot know what tomorrow will bring.  Too often people take a course of action based on fear and not consider that they may need to change direction.
You should stop, look and listen when the fear mongers confront you.  Rarely, if ever, is it necessary to act today.  If you are told that you must act immediately, look at the alternatives.  This is often a good time to listen to another view.  Find someone without a vested interest.  The person should have the wisdom to understand your situation and identify the information that has not been considered.   

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“…simplicity is appealing but rarely effective…”

The above quote is from James B. Stewart’ April 9 Common Sense article in the Wall Street Journal.
The last paragraph of the article captures a lot about financial planning , not just investing.
“Like so many aspects of investing, simplicity is appealing but rarely effective. No matter what a person’s age, an asset-allocation plan has to start with an investor’s net worth, balance expected returns with expected needs and take into account risk tolerance. Every-one’s circumstances will be different. Some people simply can’t stomach volatility. But my hunch is that the age/allocation adage makes little sense for most people, and that many older investors should allocate more to stocks than they do.”

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Social Security suspends issuing annual statements.

Social Security has suspended issuing annual social security statements.  This was done to save money in light of the current budget situation. 
Estimates can be obtained on line.  You should review your earning history annually.  The earlier you find any errors the easier it will be to get them corrected.
Link to Social Security Administration

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Fund performance you receive may be less than the perfornce of the funds you own.

Investor generally do not get the full performance from the mutual funds they own.  Behavioral finance studies have identified some of the reasons for this.  Studies by firms like Morningstar and DALBAR have documented investors’ under-performance.  The same factors hamper investors that buy individual securities.
Chuck Jaffe discussed this in his April 3, 2011 commentary at MarketWatch.  He observes that funds should be chosen based on what they do and how they fit into an investors plan.

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Sell on the Rumor

“The surest way to profit from a takeover speculation in the stock market is to bet it’s wrong according to an article in Bloomberg Businessweek article in the January 17 – January 23, 2011 edition.
They examined 1,875 rumors about pending buyouts of 717 companies from 2005 to 2010.  Only 104 of the companies were acquired.  Initially the stock of the takeover companies jumped.  They generally declined in the following weeks.  In the day, week and month following the rumor the stocks fell while the Standard & Poor’s 500 stock index rose. 
One person they interviewed speculated that the rumors probably were started by someone interested in selling the stock.  Another person stated “You might be be able to see a unicorn before you see a market manipulation case established based on rumors.”
Bloomberg found that companies mentioned in takeover rumors were no more likely to be acquired than any other company.  The conclusion was that these rumors should be ignored.
That is probably true of  much of what you read and hear.  Most of what we see and hear is static.  If you follow the ups and downs of the market, you do not know if you should follow the buyers or the sellers.  Professional traders are continuously reacting to movements in the market.  Even if they were correct, the market would most likely have responded before you heard about it.  
Long term investing requires picking companies with strong management or funds with strong management that has the ability to respond to the the unknown future events.    

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