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Archive for May, 2012


Do you understand the importance of “portfolio selection”?

Jeff Sommers’ May 19, 2012 article in The New York Times” discussed Facebook with Harry M. Markowitz.  Actually it was an article about investing.  “Mr. Markowitz, a 1990 Nobel laureate in economics, is the father of modern portfolio theory.   Mr. Sommers described Mr. Markowitz as follows: “…may have had a greater influence on current theories of finance and investing than any other livening person.”
Mr. Markowitz thinks that investors should put themselves in a position where the ups and downs of a stock should not matter.  His philosophy is that “Rational investors ought to assemble rigorously diversified portfolios of stocks and bonds with a mix of risk and return optimized for their own needs and beliefs.”
“Building diversified portfolios instead of hunting for hot stocks may not be revolutionary today -60 years latter – yet Facebook Frenzy in the air, the idea may be more important than ever.  “Markowitz’s most original contribution was his insistence on distinguishing between the riskiness of an individual stock and the riskiness of an entire portfolio.”  “…his theory …for unskilled investors without knowledge of the market:  forget about individual stocks… and buy broad low-cost stocks and bond index funds instead.  Allocate them in a proportion that gives you a level of volatility with which you are comfortable.”
“Understand that with more bonds and, presumably less risk, you may end up with a lower long-term return.”  The heart of his approach was understated in the article with his statement: “Rebalance periodically, and change the allocation if your needs or beliefs change.”  The allocation, portfolio selection, is the most important factor in investing.  The allocation does not remain fixed.  Among the many factors that will change are: living standards, life events, financial goals, health and geopolitical factors.  One advantage of reviewing your portfolio periodically is to identify the changes so that your allocation can be changed to reflect these changes.

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Tax calculator shows impact of federal, state and local obligations.


Do you think you can avoid the recent mistakes of J.P. Morgan?

There has been a lot written about their recent losses. From my perspective, Jason Zweig’s May 11th
article in The Wall Street Journal identified the issues for individual
investors. Being aware of the findings
of behavioral finance can help the individual to maintain a health perspective.
“The literal meaning of the word ‘invest’ –from the Latin vestire, to clothe or dress-is to wrap oneself up in
something. Experiments…have shown that
people who bet on an outcome become up to three times more confident that it
will occur than people who didn’t put up any money.”
Zweig discusses the philosophies of Richard Feynman, a Nobel Prize-winning
physicist. “The Feynman principal…is…you
must not fool yourself-and you are the easiest person to fool,”
“for investors, the bigger the commitment , the more certain they become that
they must have been right to make it-and the harder it becomes to let go.” “Not trying to disprove your own beliefs is
an especially dangerous deception. …You…can fool yourself by placing too much
faith in the findings of…experts.”
The article suggests some things you can do to avoid deceiving yourself. You can set target values and dates to review
the holding. Revaluate the holding at
those dates and values to see if it has met your expectations. Seek out the opinion of others. Do not rely on only one source. Find different sources to test your
thinking. You are probably wrong if you
ridicule someone else with a different opinion.
“Above all, remember that the smarter you are, the more easily you can fool

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“Don’t tax you, don’t tax me, tax the fellow behind the tree!”

The above quote of Senator Russell Long of Louisiana was from Eric Pianin’s April 27, 2012 article in The Fiscal Times.  The article is a good discussion of how difficult it will be to achieve tax reform.  “…once…tax breaks become part of the law, it is like pulling teeth to get them out of there. “  Many of the largest deductions are the most popular.  These include deductions for: home real estate taxes, employer-provided health insurance, home mortgage interest, capital gains rates, and contributions to qualified retirement plans such as 401(k) plans.   These will be politically difficult to eliminate. 
Treasury estimates that the deductions and credits total about $1.3 trillion.  Eliminating these deductions and credits would increase taxes collected by $1.3 trillion.   Some of the proposals would reduce rates to reduce the taxes collected.  This would result in the same net tax collected.  For those that incur expenditures that are now tax deductible or qualify for a credit will see their household expenditures increase. 
There seems to be agreement that our business tax rates need to be reduced to improve our global competitive position.  This would also reduce the taxes collected.
Tax planning for 2012 will require more effort because of the many possible changes to the tax laws.  There is not enough time and energy to resolve these issues before the election.  It is not possible to know what the lame duck Congress will do.   Start to identify your tax strategies in September.  Separate the strategies that can be implemented by December 31, 2012.  Establish a time line on when each strategy needs to be made.  This will permit you to know a when a decision needs to be made that can be completed in 2012

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