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Archive for July, 2012


“Lessons to bear”

John Wasik, a journalist for Reuters, article in the July 29th Chicago Tribune discussed some lessons he has learned.  His experiences include; speculation in alternative investments, buying and selling at the wrong time, following the crowd and other efforts that resulted in losses. 
The first lesson he discusses is the value of liquidity.  Being in a position to pay for the unexpected expenses such as health care avoids the need to liquidate assets when they are depresses can be costly.  When the reserves are depleted, they need to be built up to a reasonable level.  He highlighted that his reserves are in federally insured accounts and bond funds with short term bonds.   That is, reserve funds should not be subject to the risks of fluctuating values.  For long term savings he tries to find a tax favored vehicle such as low-cost 529 college saving plans.

Next the article discusses the uncertainties relating to Medicare and social security.  Most discussions relate to reduced benefits from these programs.  Future retirees will need to have more savings to pay for future health care costs.  This increases the amount that will need to be saved.
He also is rebuilding his portfolio that does not follow the S&P 500 large stock index.  This should reduce the amount he expects to lose in the next down market.

He is striving to learn more about investing and measurements of risk.  Another area he is concentrating on is global developments and changes and their consequences.   That is, he is increasing his human capital to improve his financial investments.
His article can be used as a primer for starting a plan to help his readers us money to allow the reader to get to where they want to be.
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Self-employed individuals may deduct their Medicare Premiums

Self-employed individuals can deduct Medicare premiums from their self-employment income.  Premiums paid by for the taxpayer, their spouse, dependents or children are deductible. The deduction is limited to the earned income of the entity that has a Medicare plan providing the coverage.  Sole proprietors, partners in a partnership, and 2-percent shareholders in an S corporation are employees for this purpose.

The deduction is not allowed for any month in which the self-employed person is eligible to participate in any subsidized health plan maintained by an employer of that person or their spouse.
The deduction is available whether a partner pays the premiums and is reimbursed by the partnership or if the partnership pays the premiums.

A self-employed person that did not deduct Medicare premiums for a prior year may file an amended tax return claiming the deduction.  .An amended tax return can only be claimed if the statute of limitations is still opened. 
The detectability of the Medicare Premiums was not clear prior to May 1, 2012.That is the date of the memorandum (number 201228037) from the Office of Chief Counsel Internal Revenue Service was issued. 
If you are not sure if you should file an amended tax return for an earlier year, contact your CPA or other tax return preparer.

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Articles about studies that show that our brains may limit our financial abilities.

Jason Zweig’s article, “Why We’re Driven to Trade”  in the July 21st Wall Street Journal is an example.  Many people approach investing with a short-term view rather than a long-term view.  “In a study published last month in the Journal of Neuroscience, researchers from California Institute of Technology, New York University and the University of Iowa looked at how people use past rewards to predict future payoffs.” 
“When confronted with the unpredictable… the frontopolar cortex [brain] refuses to admit defeat.  It draws on all your computational abilities to search for patters in random data.  In the absence of real patters, it will detect illusory ones.  And it will prompt you to act on them.  No wonder so many investors find it hard to muster the willpower to buy and hold a handful of investments for years at a time.”

“In the lousy markets of the past decade, various alternatives such as ‘tactical asset allocation’ (or market timing), mathematical risk-reduction techniques and even plain old intuition haven’t worked out all that well, either.”

“Every investing decision you make should should be the result of a deliberate process.  Start by creating a checklist of criteria that every stock or fund must meet before you buy or sell.  Make sure you never buy or sell an investment exclusively because its price has gone up or down.  In advance, list three reasons having nothing to do with price that would justify buying or selling.”

“You don’t have to trade like mad just because the people who grab headlines hold stocks for a few minutes or seconds at a time.  Knowing the limits of your knowledge is the highest form of intelligence.”

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“Wall Streeters Lose $2 Billion In 401(k) Bet On Own Firms”

This Bloomberg July 8th article provides an interesting discussion about an employee’s added risks in investing in their employer’s stock.  The article looks at the 5 largest “Wall Street banks.”   That makes the article even more interesting.  It indicates that those “…who dispense financial advice… aren’t following a basic investment tenet with their own money…”
Those who invest in their companies are at risk for losses “…of both a nest egg as well as a source of income.”  If their companies falters their current and/or future income may be negatively impacted and their net worth (investments in their 401(k) plans) maybe also be negatively impacted.  “You’re already relying on that company for your job, your income, benefits and everything else.”  That is, you lose is magnified.
“Any amount exceeding 20 percent is deemed a concentrated position.”   Some advisors believe that employees should not hold more than 10 percent of the stock of their employers in their retirement accounts.  
“The federal Pension Protection Act of 2006 require companies to allow diversification away from company stock in 401(k) plans.  There has been litigation against large employers alleging that the plans violate the prudent investor rule and/or the Pension Protection Act of 2006.
Because of employer matches of 401(k) contributions and stock options it is likely that some employees will have concentrated positions in their employers stock.  This is a significant factor in how their other assets are invested.  This has a significant impact on how the makeup up of the rest of their portfolio.  The portfolios should minimize the impact of the concentrated stock position in their employer’s stock.
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More financial scandals!

There were two articles in today’s Chicago Tribune: “Wrongdoers must pay price” by Phil Rosenthal and “Peregrine, MF Global raise oversight questions” by Ameet Sachdev and Peter Frost.  The both raise questions about regulations.  Industry funded  regulators (watchdogs) are involved in many of the financial scandals.  I wonder if industry funded organizations were intended to reduce government regulations? 
Rosenthal’s column is clearer in defining the issues.  He quotes Rep. Brad Miller, D-NC a member  of the House Committee on Financial Services.  “What is disturbing is just how pervasive cheating and fraud have become.  It appears to be part of the culture of the industry.” Rosenthal continues “It all bleeds together after MF Global’s vaporized assets, bankers’ rigging of the London Interbank Offered Rate (or Libor), dicey bets by JP Morgan Chase traders and the subprime-mortgage mess.  It’s a wound that won’t heal. until it’s treated.”
Quoting Miller, the article continues “We now have heard so much that cannot be excused…”.  “there has been strong evidence of pervasive fraud in the conduct that led up to the financial crisis…”
Rosenthal the cites results os survey of financial workers that indicate a significant portion believe that “…corrupt behavior could fuel success in business…”.
He quotes Francine McKenna, a Chicago expert on the accounting and auditing: “… the financial crisis was like the tide going out.  A lot of buried problems were exposed.” (Think Madoff).  McKenna asks if these are instances we know of “…think about all the other things they have been telling us…””We are seeing systematic abuse.”
“McKenna thinks things might change  ‘if the persecutors were seriously dealing a blow to individuals, not to companies…”
We read that the Europeans are in the condition they are in because they do not have the centralized institutions we have.  Does that indicate that we would be in better financial shape if our institutions were not governed by their industry?
These articles raise many questions that deserve serious consideration.

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Due Diligence is required in selecting target-date funds.

The Wall Street Journal July 8, 2012 published another article discussing target-date funds,  “One Target, but Many Ways to Hit It”.  The sub-title of Michael A. Pollock’s article is “Target-date retirement funds sound simple.  But competing strategies make it tough to choose one.”  The article starts with: “With target-date funds, the targets themselves never change.  But the strategies for hitting those targets are all over the place.” 
“But even as dollars pour into such funds, the asset-management industry continues to debate how best to design the funds for their central mission. 
This article provides a discussion of the factors that differ among the various investment firms.  Understanding these issues may help you select the target date funds that fits your personal profile.  It will help if you know what your financial goals are, when the goals occur, your current investment assets, your health, whether you can tolerate the fluctuation in the values,  your tolerance for losses, and many other factors.
You should understand the mix of assets (stock, bonds, alternatives) and how they change to the target date.  As important is how they change after the target date.  How does the fund inform the investors when they change these factors and the timeliness of the disclosures should be considered.  Naturally, the expenses of the fund should be a factor.
With these factors you can pick the fund that comes closest to your situation.
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Would you want to know if a fund manger invested in companies that he/she has an interest in?

There is a lot of information relating to mutual funds available.  Some is disclosed in materials distributed by the fund and some by third parties.  Morningstar is known for its reporting and grading of mutual funds and other investments.  Years ago, after disclosure of conflict of interest issues were made public, started to publish “Stewardship Grades”.  Morningstar does not think that the Stewardship Grades should  be used to determine if a fund should be held.  It should be one of the factors considered.  This is a way to measure how the fund management and its parent  viewed their relationship with their fund shareholders.  The grade is based on their proprietary data and information pulled from public regulatory filings.  Their analysis includes; corporate culture, manger incentives, fees, regulatory history and for U.S. fund firms the board quality.

Json Zweig’s June 15th article in The Wall Street Journal, “A Fund Manger’s Home Cooking”, discussed the dealings of Daniel J. Rice II.  He was a co-manger of several BlackRock funds.  Issues were raised regarding his personal dealings.  The funds he manges invested in energy and other natural  resources stocks.  He also had “…a “multimillion-dollar side business in the energy industry.”  There was not any disclosure initially when these issues were raised.  When asked, “a BlackRock spokeswoman says the firm didn’t disclose these relationships because it isn’t required to.”  “While BlackRock is the world’s largest asset manager…Mr. Rice’s family company has raised capital through some firms that have run afoul of regulations.”  When the issues started to circulate, Mr. Rice stepped down as the co-manager of its energy mutual funds.
I do not know how or if this situation impacts Morningstars’ Stewardship Grade.  If I owned any of the funds I would like to know if there was a situation where the funds interests could be in conflict with that of the fund manager.
Morningstar does
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