Category: Education

Market Myth #2: It’s all about beating the market.

For many amateur investors the object is to beat the market.  They are abetted in this belief by the many magazines and newsletters that make the market the benchmark of what a successful investor should emulate.  People spend hours scouring the media looking for stock tips and investing ideas as if investing was a sport, like horse race, where the object is to beat the others to the finish line.

The fact is that “beating the market” does not address any individual’s actual financial goals.  It’s a meaningless statistic.  And it’s dangerous.

The fact is that most professional investors don’t beat the market on a consistent basis.  Even index funds, designed to replicate the market, don’t actually beat the market.  At best they provide market rates of return minus a fee.  Attempting to beat the market exposes the investor to more risk than is prudent.

Your portfolio should be built around your needs and consistent with your risk tolerance.

What does this mean?  Your portfolio should provide a return that’s keeping you ahead of the cost of living, that allows you to retire in comfort, and is conservative enough that you will not be scared out of the market during the inevitable corrections.

Want to create a portfolio that’s right for you?  Contact us.

Market myth #1: the stock market can make you rich.

This is one of a series of posts about common market myths that can be dangerous to your wealth.

The market is rarely the place where fortunes are made.  Real people get rich by creating and running great companies.  Bill Gates became the richest man by building and running Microsoft.  Steve Jobs the same way.  The Walton Family, ditto.

In the less rarefied world of multi-millionaires, millionaires and semi-millionaires the same thing is true.  People get rich (or well-to-do) by starting a business, studying and becoming a professional or just working for a living and saving part of what they earn.

This is not to disparage the market as a  tool for protecting  wealth, maintaining purchasing power, living well in retirement and getting a fair rate of return on your money.  But the idea that you can get rich by trading stocks is a myth that can actually destroy your financial well-being.

One of the best ways of avoiding the temptation to use the market as a “casino,” a place where you can “win the lottery” is to turn to a professional investment advisor.  Someone who knows what’s possible and what’s not.  Someone who is in the business of getting you a fair rate of return on your money while minimizing the risk that you will lose it.  An independent, fee only RIA is someone who will not try to sell you one the latest investment fad that the  wire-houses are selling, but who will act in your best interest, because that’s in his best interest.

Have a question about the markets?  Ask us.

What to do when couples disagree on investing

It’s well known in the investment business that women are more risk averse than men. There are, of course, exceptions and I should qualify that by saying that’s true of “most” women and men.

In most cases this does not cause problems when couples invest. That’s because there is usually a division of labor with one spouse making most of the investment decisions. However, when spouses collaborate on investing, a significant difference of opinion can cause a lot of stress in a marriage. Differences in money management styles between two partners can ruin a marriage.

That’s the time for the couple to meet with a trusted financial advisor who can provide unbiased advice and professional expertise. Getting an intermediary involved in what could be a serious dispute usually helps. This often allows a couple to come to an understanding that both can agree works for them.

If you and your partner have disagreements about money and investing, get in touch with us.

And don’t forget to read the first three chapters of BEFORE I GO.  It’s free.

More information on Social Security benefits.

Let’s face it, Social Security is a confusing mix of benefits.  Depending on your age, health, marital status and the age of your spouse, your benefits can vary significantly.  Once you make a decision, it’s often impossible to change your mind or correct a mistake.

For example, how do you determine the Social Security benefits available to a 50-year-old disabled divorcee whose ex-spouse is deceased?

We have a series of “Social Security Savvy” guides available for people in different stages of life to help answer those questions.  They are titled:

  • Making Smart Decisions if you are Married.
  • Making Smart Decisions if you are Divorced.
  • Making Smart Decisions if you are Widowed.

For copies of these brief, easy-to-read guides, contact us via our website or e-mail us.

  [contact-form subject='[Korving {030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}26amp; Company Blog’][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Comment’ type=’textarea’ required=’1’/][/contact-form]

401k Distribution after Death

People who leave an employer frequently leave their 401(k) behind.  Usually, the wise thing to do is to roll that 401(k) into a rollover IRA.  But with so many other things to do when changing jobs, deciding what to do with the old 401(k) is often low on the list of priorities.

But there is another way of leaving an employer other than changing jobs.  Some people die while still employed.  And here is where the issue can get tricky.

When funds are left in a 401k after death, those must be distributed to the benefactor chosen by the participant. The way they are distributed depends on the choices of the company administering the 401k along with personal choices of the benefactor.
There are two rules that apply to an after-death distribution. One of the two must be used in all cases. The first allows for payments to be made within 5 years of the death of the participant. The second option allows a benefactor to received payments through his or her lifetime on a regular basis. The company administering the 401k may limit the option it will provide. Or, the benefactor may choose the preferred option. In any case, the election must be made by December 31 in the year of the death of the participant.

If the surviving spouse is not aware of this rule and decides to leave the 401(k) with the employer, it’s entirely possible that he or she will receive a check for the entire amount of the 401(k) five years after death, minus 20% federal tax withholding.  If the amount in the 401(k) is substantial the entire amount may be taxed.  It is possible to roll the proceeds into an IRA if it’s done in time, but to avoid paying an income tax on the federal tax that was withheld, the amount of the tax has to be added to the rollover.  This creates a very unpleasant surprise for the surviving spouse.

What is the purpose of a stock market?

Before there was a stock market, there were stock companies.

A stock company allows individuals to pool their money to create an organization to operate and grow.  Stock is used to determine how much a person owns of a company.  Owning a stock does not necessarily create wealth.  Wealth creation can only occur if the stock can be sold to someone else who is willing to pay you more for it than what you originally paid.  This led to the creation of a market for people who owned shares in stock companies.

A stock market has two functions.  First, it allows the owners of stock to sell their ownership interest easily and quickly.  Second, it also allows people who would like to be owners to buy an ownership interest quickly and easily.  Now even people who do not have substantial financial resources can participate in the growth in value of large enterprises.

For example, the founders of Apple were able to raise money for their company by selling their shares of Apple stock to people who were willing to bet that the company would be successful.  That was 1976.  In 1980 the shares of Apple were first allowed to be publicly traded.  As a result, the founding shareholders were able to profit from their original investment and the company itself raised millions of dollars that it could invest in growth.  It also allowed people who did not personally know the founders to become partial owners and benefit from the company’s growth.  The stock market allowed people who believed in Apple computers to bet on the company’s future, and also provided them with a ready market for their shares if they needed to sell or decided they no longer believed in the company’s future.

The bottom line is that the stock market creates liquidity.  Without liquidity it becomes much harder for a company to raise the capital it needs to grow in a modern economy.

It’s your money. It’s easy to change financial advisors if you know how.

It’s estimated that as many as 25% of investors are dissatisfied with their current financial advisor.  Women investors and high net worth investors are the most dissatisfied.

If you’re not sure your financial advisor is providing the service and advice you deserve, getting a second opinion about your portfolio may provide the answers you’re looking for.

Most often, it isn’t investment performance that causes client dissatisfaction.  Here’s the acid test: do you feel good after you’ve had a conversation with your financial advisor of do you feel uncomfortable?  Were you being heard?  Were you being talked down to?  Was the advisor calling you to make a sale?

Change is rarely easy.  Many people don’t realize that finding another advisor and moving their account is actually easy.  You don’t have to talk with your current advisor or even let them know what’s going on.  Find another advisor first.

Once that’s done, your new advisor will lead you through the transfer process and show you exactly what to do.   He will prepare a new account form and a transfer form.  The rest is automatic.  Your new advisor and his custodian – the brokerage firm that will hold your investments for safekeeping – will monitor the transfer to make sure it goes smoothly.

If you wish to send your old advisor a gracious letter after the transfer process is started, feel free, but it’s not necessary as part of the transfer process.

If you want to get a copy of our brochure that goes into more detail, please ask for more information.
[contact-form][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][/contact-form]

Five year returns can be misleading

Chris Latham at Financial Advisor talks about the words “long-term” and the fact that there is no consensus about its meaning.  If one year is not long-term, is 2, 5, 10 or more?  The longer the period being measured, the closer we get to actually talking about the long-term.  Of course we have to take into consideration that fact that our individual time horizons are not infinite.  A 20-year-old can afford to think in terms of a 70 year time span, someone 70 years old cannot.

Many people will look at a five-year span and make a judgement about the market, a stock or a mutual fund.  But there’s something revealing that tells us that we can be misled by these statistics.

In fact, one calendar year can make all the difference in the minds of stock investors. Compare the five-year period ending in 2012 with the same span ending in 2013. They look like two completely different time frames, even though they share three identical years. Counting dividends, the five years ended in 2012 returned 1.7{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} on the S&P 500, while the five years ended in 2013 returned 17.9{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, the Times reports.
The long crawl up from the depths of the Great Recession accounts for the poor showing in the first snapshot, while last year’s 32.4{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} market rise accounts for the apparent miracle in the second.

Be cautious when viewing data that changes the beginning and end-points.  And keep in mind that market indexes are not important as a way of achieving financial freedom.

Top 10 Best Value Colleges

A column in Financial Advisor caught my eye.  For those  who have children who plan to go to college, this may be worth reading.

For clients with college bound children, a study by The Princeton Review ranks both public and private colleges and universities to determine the ones that offer the best academics at an affordable cost.

Based on criteria including academics, costs and financial aid, the study also considered the percentage of graduating seniors who borrowed from any loan program and the average debt those students had at graduation.

The following public colleges are the top 10 of 75 , with No. 1 offering the highest value.

No. 10  State University of New York at Binghamton (Binghamton University)
No. 9 Truman State University
No. 8  College of William and Mary
No. 7  University of Florida
No. 6  University of California—Los Angeles
No. 5  University of Michigan—Ann Arbor
No. 4  North Carolina State University
No. 3  University of Virginia
No. 2  New College of Florida
No. 1  The University of North Carolina at Chapel Hill

Whether you agree or disagree with these rankings, the cost of attending college has rocketing into the stratosphere and sending your children to college requires a plan well in advance of their matriculation.  A few things to keep in mind is that in-state tuition is often a fraction of the cost of sending your son or daughter out-of-state.  Setting up a college savings plan is always a good idea since it allows the college funds to grow tax-free. Taking out a college loan has become so popular that today, the college loan debt exceeds a trillion dollars.  However, college loans cannot be discharged through bankruptcy, if the student does not graduate (and many do not) the loan still needs to be paid, and college loan payments often extend for decades after the student has left school.

 

Adding to Your Returns Four Ways

There are at least four things you can do to get better returns on your money.

  1. Create an asset allocation program and stick to it.  Don’t chase the market up and don’t sell at the bottom.  If you have created an asset allocation that is right for you, it should be robust enough to take advantage of rising markets and allow you to sleep well at night in declining markets.
  2. Be tax aware.  Don’t buy mutual funds in taxable accounts at the end of the year just before they make their capital gains distributions.  Take tax losses to offset capital gains.
  3. Keep an eye on costs.  Investment firms are increasingly turning to fees for services they once provided for free.  Your investment manager should be aware of the fees you are paying and keep them under control.
  4. Re-balance your portfolio regularly.  It may be tough to sell some of your winners and add to the losers, but it works.  It’s really tough to sell on euphoria and buy on fear, but some of our biggest winners were bought when nobody wanted them and they could be bought for pennies on the dollar.

Five things you need to do with retirement accounts

The average household is juggling no fewer than eight different retirement savings accounts, according to a recent survey.  Many investors are looking to simplify their lives by consolidating at least some of those accounts.  And nearly three-quarters of them consult with a financial advisor rather than seeking information from their employer, a fund provider or another source.

So what should you do if you have two, three or more retirement accounts?  First you have to keep in mind the rules about rolling or transferring retirement accounts to avoid paying taxes.

  • First, find a financial advisor you can trust, preferably an independent RIA, who can give you unbiased advice and guide you to your goal.  He should be able to create a retirement portfolio that’s designed just for your and will result in growth with the least amount if risk.
  • Second, make sure that assets from the various retirement accounts are transferred from custodian to custodian without passing through your hands to avoid taxes or penalties.
  • Third, make sure that fees are reasonable so that you, rather than the advisor, gets most of the gains.
  • Fourth, be sure that your advisor provides you with a performance review at least once a year so that you know how you are doing.
  • Fifth, remember that once you reach 70 1/2, you have to begin taking money our of your “regular” retirement account.  If you have a Roth retirement account you can delay until you need the income.

For more information, contact Korving & Company.

“An existing relationship, lower fees and good product selection are the three top factors driving IRA rollover decisions for retirees and pre-retirees,” says the website. So, for example, advisors helping a retired client decide what to do with a lifetime’s worth of 401(k) plan assets — scattered over three or four accounts — should probably pick a fund company with which the client has already had a positive experience. Millionaire investors care even more about prior relationships than the less affluent, according to the research. But they’re less swayed by a famous name. Among survey respondents with less than $1 million to invest, 28% said they’d choose a firm with a well-known “retirement brand” when rolling assets over. Among millionaires, only 19% said brand is a priority.

Dynasty Trusts

“Dynasty trusts,” are designed to avoid the federal estate tax.  It’s a never-ending trust that pays each generation of heirs only what they spend, while the rest of the money grows. In most states that is not possible because of an ancient rule limiting the duration of trusts to the lifetime of a living heir, plus 21 years.  South Dakota repealed that rule in 1983, and in addition it has no income tax.  As a result, a large number of very wealthy people opened offices in South Dakota to create a trust that can shield a big fortune from taxes for centuries, escaping tax bills as it hands out cash to great-great-great-grandchildren and beyond.

There is a long an informative article about the way South Dakota has used this as a way of attracting big money by literally renting out rooms in a former five-and-dime store in Sioux Falls.

As we head into the New Year, we hope that some of our readers are in the same league as the Pritzker family,  the Carlson Family Trust Co., serving the Minnesota family behind Radisson and the TGI Friday’s restaurant chain, and the heirs of hedge fund pioneer Jack Nash.  If not, we hope you get there soon.

Marketing and Design by Array Digital

©  Korving & Company, LLC