Don't forget to contribute the maximum amount to
retirement plans before April 15 to reduce your taxes for 2007. In addition to
employer-sponsored plans, you may be eligible for self-employment tax deferred
retirement plan if you have income from work outside your main job. You should
also fully fund individual retirement accounts such as IRAs and Roth IRAs.
There are income limitations with these plans, so ask your financial adviser to
make certain you qualify.
We also recommend that you fund your 2008 contribution as early in the year as
possible to optimize compounding opportunities. Contributions limits for 2007
and 2008 are as follows:
Emotion and the Investor
Volatility made the past year a difficult one for
investors. With every fall or upward move in the market, we were treated to a
host of financial experts proclaiming either ongoing doom or the resurgence of
the bull market. But if there was one prevailing emotion for investors in 2007,
it was fear. Fear of losing money, and fear of missing out on opportunities to
rebuild portfolios that were still feeling the pain of the 2000-2002 market
decline.
Behind that fear were a number of very reasonable
concerns ranging from the housing market to the sub-prime lending debacle,
energy prices, consumer indebtedness, inflation and more.
The problem with fear, however, and for that matter
any emotion, is that it makes a lousy investor.
One of the latest studies of the mental processes
of successful investors is a field called Neuroeconomics that explores the role
biology plays in economic decision making, by combining insights from cognitive
neuroscience, psychology and economics. Among the neuroeconomists' recent work
was an interesting study in 2005 that looked at the investing success of
individuals who had suffered damage to the region of the brain that controls
emotions, inhibiting their ability to experience basic feelings such as fear or
anxiety. The researchers' conclusion: the individuals' lack of emotional
responsiveness actually gave them an advantage when playing investment games.
A different side of the emotional spectrum comes
into play when individuals invest for the pleasure of winning. When small wins
no longer bring the same jolt of pleasure, the investor ups the ante, risking
increasingly larger amounts to regain the pleasurable experience of winning.
Behavioral finance theorists are also quick point
to emotions as the reason many investors sabotage their own financial success.
Among the common mental mistakes identified by behavioral finance is allowing
emotional connections to over-ride reason.
With that said, emotions play a very important role in life. Researchers in the study of the brain-damaged individuals found a lack of fear resulted in a much higher level of trust in the good intentions of others, often to the detriment of the individual.
The challenge for investors is to remove emotion
from the investment process as much as possible. That starts with recognizing
that we are vulnerable to emotions and that those emotions can make us act
counter to what is good for us. The next step is to set up rules that help
remove emotion as much as possible from the decision process.
In our management of client assets, we do this
through quantitative decision models that depend on mathematics and trend
analysis rather than subjective judgments. We let the market tell us what is
happening rather than trying to impose an emotional decision that may not
necessarily be based on facts.
For investors who are able to do the same with
their portfolios, this is a good way to go. But not everyone operates along
those lines. That's when using a good investment manager is invaluable.
An investment manager typically has several
advantages over the individual when it comes to managing assets. Expertise and
time are two key advantages. A good money manager has spent years studying
financial markets, developing investment approaches and backtesting them prior
to investing to understand the strengths and vulnerabilities of the approaches.
The individual also invests on a full-time basis. In today's fast moving
markets, this can be a distinct advantage.
A professional manager should also have the benefit
of emotional distance. While a registered investment advisor has a fiduciary
obligation to act in the client's best interest, it's not his money. While that
sounds a bit callous, it also helps the manager put losses and gains in
perspective. Yes, the manager wants the client to do well, but setbacks and
gains tend to stay in perspective of long-term goals. By keeping emotion at a
minimum in the investing decision, the manager is in a better position to make
good buy and sell decisions.
1.Baba Shiv, George Loewenstein, Antoine
Bechara, Hanna Damasio, Antonio R. Damasio, Investment Behavior and the
Negative Side of Emotion, Psychological Science 16 (6), 435-439. June 2005.
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Health Insurance Options for the Retiree
When planning for retirement, it's relatively easy
to quantify many of your future expenses until you get to the monster in the
dark - healthcare costs. Today's retirees are living longer, healthier lives
than ever in history. Cancer, stroke, heart attacks and other diseases that
felled our grandparents are no longer a death sentence. But the costs of
holding those killers at bay can be high.
While it is (at least for now) a personal decision
whether or not to have health insurance, a lack of insurance can literally be
the difference between life or death and the loss of financial security. If you
incur medical costs that are not covered by insurance, the providers will hold
you personally responsible for those costs to the extent of turning your debts
over to collection agencies.
The first step to coping with the issue of health
care is to understand what resources you have.
If you retire before age 65, unless you have kidney
disease or are disabled (thus qualifying for early Medicare), you need to
purchase private health insurance. You may be able to do so through your former
employer under the Consolidated Omnibus Budget and Reconciliation Act (COBRA)
for up to 18 months after being laid off or unemployed by the company for some
reason. Your other options are:
. Investigate peer group health insurance programs.
Industry associations and professional organizations offer group and individual
health plans. You may be able to find out about further plans through your
local chamber of commerce and the National Association for the Self-Employed (http://benefits.nase.org).
. Work with an insurance agent to find the policy
that works best for your circumstances,
. Contact your state regarding state-funded
insurance programs that provide health coverage to low-income families.
Medicare Basics
Once you make it to age 65, you qualify to apply
for Medicare. In general, you are eligible for Medicare if you (or your spouse)
worked for at least 10 years in Medicare-covered employment, are at least 65
years old and a citizen or permanent resident of the United States of America.
During those years of Medicare-covered employment, you paid for your future
Medicare coverage through payroll taxes of 2.9% (1.45% withheld from the worker
and a matching 1.45% paid by the employer, or 2.9% if self-employed) of the
wages, salaries and other compensation in connection with employment.
If you do not have 40 or more quarters in which you
paid Federal Insurance Contributions Act taxes, you may purchase Medicare
coverage for a monthly premium. Medicare is not an automatic enrollment. You
have to apply. Like private health insurance plans, there are co-pays and
deductibles. All Medicare benefits are subject to medical necessity and there
are complex rules used to manage the benefit.
Medicare Part A covers hospital stays, including
limited stays in a skilled nursing facility if certain criteria are met. Part B
covers medical care generally provided on an outpatient basis and helps with
durable medical equipment (DME), including canes, walkers, wheelchairs, etc.
Drug costs are covered only if administered in the
physician's office under Part B. As of January 2006, Medicare Part D provides
drug coverage.
Advantage or "Gap" Plans
Medicare A and B plans don't pay all of your health
care costs. There are costs that you must cover, like coinsurance, copayments,
and deductibles - the "gaps" in Medicare coverage. "Medigap" insurance can be
purchased to cover those costs as well as a "Medicare Advantage" plan to
receive medical care in a format you prefer.
Medicare Advantage plans (also called Medicare Part
C) give beneficiaries the option to receive Medicare benefits through private
health insurance plans, sometimes with an additional monthly premium. Medicare
Advantage plans are required to mirror the benefits offered by Original
Medicare, or provide richer benefits than those which the individual would
receive through Medicare.
Under Medicare Advantage Insurance you have five
options that tend to follow traditional health insurance formats:
. Preferred Provider Organization (PPO): You choose
a primary care physician who is a member of the organization and agree to use
plan providers within the organization.
. Provider Sponsored Organization (PSO): A managed
care plan with a network of providers.
. Private Fee for Service Plans (PFFS): This is an
insurance plan, not a managed care plan. While care is still provided on a
medical necessity basis, the plan determines the necessity. You see any
providers you choose, as long as the provider agrees to accept the payment
schedule.
. Religious Fraternal Benefit Society Plans: A
managed care plan type formed by a religious or fraternal organization.
Enrollment may be restricted.
. Medical Savings Accounts (MSA): A health
insurance policy with a high deductible combined with a savings account.
Medicare pays the insurance policy premium and deposits money into your MSA
each month. You can use the money in your MSA to pay your medical costs (tax
free) to your choice of providers. The providers have no limit on what they
charge.
Prescription Drug Coverage under Part D
Anyone with Medicare Part A or B coverage is
eligible for Part D, which went into effect in 2006. To receive this benefit,
you must enroll in a stand-alone Prescription Drug Plan (PDP) or Medicare
Advantage plan with prescription drug coverage (MA-PD). Coverage is not
standardized, requiring some careful shopping before you enroll.
Medicaid is a State Sponsored Program To Help Low
Income Families
Medicaid comes into play for individuals and
families with low incomes and resources. Medicaid is a state-administered
program. Each state sets its own guidelines subject to federal rules. Certain
services must be covered by the states in order to receive federal funds.
Additional services are optional. It is possible to be dual-qualified for both
Medicare and Medicaid.
Long-Term Care is a Separate Consideration
Medicare does not pay for custodial, non-skilled,
or long-term care activities, including services such as personal hygiene,
cooking, cleaning, etc. While Medicaid does cover long-term care, you must be
essentially destitute to qualify, a circumstance preferably avoided.
Will you need long-term care? Only time can answer
that question, but you can get an idea of its probability by considering the
health of parents and other family members. Depending upon your financial
condition, it may be prudent to purchase long-term care insurance now, while
you know you have the resources, rather than leave it to chance.
Travel Medical Insurance is Essential Outside the
U.S.
Medicare Parts A and B do not cover individuals
while they're traveling outside the United States. You need to have special
travel medical insurance before you leave the U.S.
The Future of Medicare
Just like Social Security, Medicare faces funding
issues. In its 2006 annual report to Congress, the Medicare Board of Trustees
reported that the program's hospital insurance trust fund could run out of
money by 2018. The problem is that, much like Social Security, there is no set
aside cache of money to pay current expenses. Expenses are met through current
tax payments. With the ratio of workers paying Medicare taxes to retirees
drawing benefits shrinking at the same time the cost of health care services
per person is increasing, funding issues are inevitable . Because of the
uncertainty of Medicare's long-term future and the potential for "rationing" of
health care to control costs, it can be very prudent to set aside funds that
may be needed for private health insurance during retirement.
This is a very simplistic overview of
Medicare. Please consult with your financial or health care advisor prior to
making any health care insurance decisions.
2."Health Care System Crisis: Growing Challenges
Point to Need for Fundamental Reform," April 2004, Government Accountability
Office
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Appealing Property Taxes
One of the first rules of accumulating wealth is to
not pay any more in taxes than you are legally obligated to do. Which brings up
the issue of property taxes.
Falling real estate values in many areas of the
U.S. could mean your property tax assessment is too high. Because lower
valuations will mean a big hit for county revenues, you may also find your
county assessor's office slower at lowering appraised values than it has been
at raising them over the past few years.
Appealing a tax assessment starts with the question of whether or not your home
has been valued fairly and if it is classified properly. A residential property
is going to be taxed at a lower rate than a commercial property. Agricultural
properties are lower yet. The best place to start is typically by looking at
the sales prices of comparable properties at the time your assessment was made
and double checking how those properties are classified. For a list of sales in
your area over the past two years, visit the office or website of your local
county property appraiser or tax assessor. If you have recently received your
2008 appraised value, the county will often include a list of comparable
properties it considered in determining your valuation.
When comparing values, look at the size of the
homes, lot size and the average assessed value per square foot. You also need
to consider type of construction and amenities. If your property's value seems
out of line, there's a chance you can lower your property tax bill by appealing
the assessment. But make certain you follow the proper procedures to avoid
wasting time.
To appeal your assessment, contact your county
assessor's office for information on the appeal process and the proper forms.
Ask questions when you call, but don't get defensive. Sometimes a friendly
conversation can resolve the problem quickly without going through the formal
appeal process.
If there are particular circumstances that make the
county's valuation too high, you may want to consider hiring an appraiser to
provide a professional assessment of your property's value. Because many
counties now use computerized programs to arrive as assessed values, it can be
difficult to dispute a valuation when special factors come into play without a
professional's opinion.
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Lessons from the Sub-Prime Crisis
The sub-prime lending crisis currently impacting
the financial markets is also a primer in investment basics that we as
individuals would do well to remember.
(1) Markets are not efficient.
(2) The pursuit of excessive returns involves higher levels of risk.
(3) Supply and demand are the ultimate determinants of value.
(4) History has lessons that matter today.
Markets are not efficient.
The efficient market theory requires that market
participants have rational expectations; that on average, the population is
correct (even if no one person is) and whenever new relevant information
appears, investors update their expectations appropriately. The problem is that
at market extremes irrational behavior is often the norm. Late stages of a bull
market are driven by buyers who take little notice of underlying value. As the
market collapses, investors sell positions regardless of the value that their
investments represent.
The pursuit of excessive returns involves higher
levels of risk.
Risk is the potential that an investment will lose
money. Everyone who purchased a home with adjustable rate mortgages, zero-down
mortgages, interest only balloon mortgages, inaccurate financial data, etc.
took on the risks that housing prices would not continue double-digit gains and
interest rates could increase. Every investor that purchased mortgage-backed
securities based on these mortgages assumed the same risks. Many investors
compounded that risk by using leverage to further enhance their returns.
Bubbles collapse. They always have and always will
because the market cannot sustain excessive returns indefinitely. The fact that
the Federal Reserve is in the process of bailing out these investors through
lower interest rates raises the concern that investors will not learn from the
experience. But then again, they don't appear to have learned from prior
bubbles, either.
Supply and demand are the ultimate determinants of
value.
Many of the mortgage-backed securities that are now
trading at a fraction of their prior value still have real value. A majority
may eventually be paid in full. But demand has disappeared at the same time
supply increased as many investors are forced to sell their positions. As a
result prices have tumbled creating a new opportunity for those with the cash
and wherewithal to accurately evaluate these investments. But the players with
cash are not the ones who take excessive risk.
History has lessons that matter today.
Included in every investment prospectus, ad and
performance report are a variation of the words, "Past performance is not
indicative of future returns." While there is plenty of truth to that
statement, the past still provides us with clues to the future because what has
not changed is human nature. There's an entire field of study called behavioral
finance that looks at how people react to different situations in the financial
markets. Behavioral finance and other fields of research have proved that
patterns repeat.
We would all do well to remember the lessons of
history in our own investments. Nothing goes straight up forever; there are
always corrections along the way. Any asset which gets priced in a free market
tends to be impacted by variations in other assets in that market. Every
investment has the potential for loss as well as gain.
As an investment advisor, one of my hardest jobs is
often explaining why investing in the top performing mutual fund, the hot
sector, or latest greatest investment may be okay for a portion of the
portfolio but not to the extent that a loss will jeopardize the individual's
financial future. The relationship of risk and return is not just a theory.
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