Smartphones and other portable devices allow the user to stay connected from even the most remote locations.  Social networking sites like Twitter and Facebook have amplified the chatter to a level that no one would have dreamed of at the beginning of the millennium.

A troubling byproduct of this flood of information is the ease with which extreme messages are being propagated.  From cable news shows to the blog-o-sphere, we are being bombarded with ideological beliefs that are driven mostly by emotion and have little use for facts.  During turbulent times especially, irrational views can become pervasive because they touch emotional nerves that otherwise would not be as sensitive.

A Ratings Game

Avoid Extremes

Larger than life persona’s on both ends of the spectrum do their best to keep us all in a constant state of anxiety because they know that if we are provoked enough we will continue to tune in.  The name of the game is ratings, because higher ratings translate into higher advertising revenue.

Glenn Beck and Michael Moore are polar opposites on the political sphere, but they have more in common than either one of them would care to admit.  The challenge they face is trying to blend editorial content within a format that is meant to entertain.  They both endeavor to create an emotional response in their audiences by enhancing certain aspects of the subject matter while leaving important details out that would possibly cause a different reaction.

Motivation that was born of their formative experiences is altered by a cycle of capitalistic one-upmanship that can distort even the purest of intentions.

Unfortunately, blurring of the lines between truth and fiction in the information landscape is all too common, and often the consequence for the consumer is drawing a conclusion without having heard the full story.

Separating Fact from Fiction

Keeping fact separated from emotion is an important part of our job and something that we spend a great deal of time doing.  A healthy dose of skepticism is necessary, as we have found that even the most respected source of information can often be influenced by their biases.

We employ various methods, such as quantitative research, to enhance the opinions and analysis gathered from our trusted sources.  We also talk to people in our industry as well as our clients to get a perspective as to how others are experiencing the economy.

There is no easy solution to charting the course that we feel will provide the best opportunity for success.  By remaining consistently disciplined in a long-term approach to investing, we believe that we can gain an advantage by filtering out the noise.

Photo Credit : truthout.org

Deflation Fighter?

Gold’s average annual return (using average monthly price) from 1980 through 1986 as it followed the inflation rate down is a negative 10%; from 1980 to 2005 it is a negative 2%.  Meanwhile, gold didn’t hit its average monthly high again until over twenty five years later when it began its recent bull run in 2006.  Since 2006, gold has averaged a return of over 17% per year.  However, inflation has hardly been out of control during this time and, in fact, the prevailing fears currently facing the markets are those of deflation.  So how is it that a commodity that has a history of being used as protection against inflation is suddenly a haven in a deflationary environment?

Yosemite Sam’s Investment Choice

Gold is also a reflection of the overall faith (or lack thereof) in the economic and political system. Issues such as the European debt crisis, the Gulf oil spill, persistent joblessness, a housing crash hangover, etc. have created a sense that the problems we face are too big and might lead to widespread economic collapse.  Currencies will tumble in value in a collapse scenario, so the hedge with gold is that you will have protected your ability to trade for goods and services through the relative stability of its value.  That, in effect, is the bet that is being made by those who are pushing gold up into stratospheric territory.  The gold bet in 1980 didn’t break even for another twenty five years (even longer when adjusted for inflation), it will be interesting to see how well today’s gold bet plays out.

Are your Investments Growing?

Controlling Your Emotions?

Morningstar, an independent investment research company, compiled returns for how the average mutual fund investor did during the 2000’s. The research added a layer of analysis to the total return calculation by also tracking the cash flows in and out of the mutual fund.  They wanted to see what the performance looked like if you took into account additional buys and sells in the fund during the same time frame.  Then they compared the findings to the buy-and-hold strategy that mutual funds use to report investment performance.  What the findings show is that most investors suffer from bad timing as they get in when prices are high and get out when prices are low.  This is a reflection of how market forces can drive investor emotions and result in behaviors that cause poor relative investment performance.

Slow And Steady

Another interesting discovery is how fund companies provide different investing experiences for the average investor.  The institutions that stick to fundamentally sound investment principles were proven to have better investor returns relative to total returns than those companies that use a short-term, current-trends marketing strategy to attract investors.

Financial Symmetry’s composite results for the decade were an average annual rate of return of 4.93% compared to the average annual investor return of 1.68% across all funds.

Photo Credit: TheGiantVermin

Photo Credit: alancleaver_2000

Know Your IRS Numbers

Unfortunately, there’s no rhyme or reason that will help you to remember the different IRS form codes.  But, remembering the following two will assist you greatly if you encounter a situation like we described above.  After you initiate a rollover of a former 401k or 403b, you should expect to receive a Form 1099R.  This form is used to report distributions from IRAs whether they are taxable or not.  The second form, Form 5498, you will need is not as well-known but equally as important.  This form’s purpose is to report the rollover contribution made to your new IRA.  These two forms work from opposite ends in the event of a rollover, conversion or recharacterization.  Be especially vigilant when reviewing this information when a transaction starts at one trustee and ends up at another.

For example, if you completed a direct trustee-to-trustee rollover out of a Fidelity 401k into a Vanguard IRA you should receive a 1099R from Fidelity and a form 5498 from Vanguard.  The Fidelity 1099R should show the total amount in box 1 and a code G in box 7 for the direct rollover.  The Vanguard 5498 should show the same amount in box 2 Rollover contributions.

If you completed the rollover within 60 days, where you received a check from one trustee and then made the rollover contribution within that time frame you’ll want to make sure that the form 5498 is accurately reporting the rollover in box 2.  More than likely the trustee issuing the 1099R for the distribution will report a taxable transaction.  You should indicate “rollover” on your tax return and the IRS will get the form 5498 to back that up.

May 31st Tax Deadline?

The trustee that maintains your individual retirement accounts (IRAs) is required by the IRS to report contributions, required minimum distributions and the fair market value of the account by May 31.  This date may seem like an odd time to receive a tax form since you’ve probably already filed your return.  However, form 5498 reports contributions made to an IRA during the tax year as well as those made after December 31, but before April 15^th for the previous tax year.  Make sure that those contributions match up to what you have reported on your tax return. If not, contact the trustee that sent the form 5498 and request a correction.

RMD’s not WMD’s

Another place to be sure that the information provided by the trustee matches your records is Required Minimum Distributions.  There are some fairly complicated rules regarding RMDs, especially if the account was inherited, so it makes sense to double check the accuracy on form 5498.

Understanding how this form is used by the IRS can help keep your tax headaches to a minimum.

photo credit: saturnism

What if you never again had to prepare your tax return? Or pay someone to do it for you?  The catch is that the IRS would be the ones who prepare it.  Sound a little scary?  The Bipartisan Tax Fairness and Simplification Act of 2010 introduced in the Senate has a provision for just that scenario.

http://www.theatlantic.com/business/archive/2010/02/will-the-new- tax- reform-bill-kill-h-r-block/36605/

(1) Countries that went away from the gold standard sooner fared much better during the Great Depression than those that held longer (like the U.S.)

(2) Average inflation, under the gold standard, is determined by the pace at which gold is mined

http://www.j-bradford-delong.net/Politics/whynotthegoldstandard.html

The repeal of the federal estate tax is only in effect for 2010.  After this year, the estate tax is scheduled to be reinstated at levels prior to President Bush’s tax cuts becoming law.  So, rather than receiving a $3.5 million exemption per person and a top tax rate of 45% as was available in 2009, 2011 estate tax law will offer only a $1 million exemption and a maximum rate of 55%.  You don’t have to do the math to realize how big of a change this is.

Secondly, there are some unintended consequences that may come into play as a result of this repeal.  A common estate planning strategy is to use something called a “bypass trust” with the intention of taking advantage of the maximum estate tax exemption.  This strategy was used based on the federal estate tax law being in effect.

Since there is no estate tax for 2010, the wording in the legal documents that are the basis for creation of the trust could be problematic.  They might say something like, “Place all of my assets that are not subject to the estate tax into a trust for my children, then leave everything else to my spouse.”  In the worst case scenario, a spouse could be left with nothing as all of the assets are directed into the trust because they aren’t subject to any estate tax.  Most states have some protection afforded the spouse, however, the potential litigation involved could certainly drain the assets being contested.  This could get especially nasty if there were children from a previous marriage involved.

Another consequence of this repeal is the impact on the “step-up in basis” rule.  This rule basically said that whatever valuation an asset had on the owner’s date of death is the value that the heirs could use as their new tax basis.  For example, if Mrs. Smith died in 2009 while owning stock in IBM that she purchased thirty years ago, under the step-up rule, her heirs could use the stock price as of the day of death to calculate basis for any future sales of the stock.

For 2010, things are a little bit different.  Heirs are only able to use the step-up rule for $1.3 million worth of asset appreciation.  Spouses get an addition $3 million in appreciation.  If Mrs. Smith dies in 2010, depending on the size of her estate, her heirs would need to know what amount Mrs. Smith purchased the IBM stock for, any dividends that were reinvested, and stock splits received in order to assign tax basis.  Not only is this a costly change for heirs, but also a documentation nightmare for tax preparers.  Like the estate tax, the unlimited step-up is scheduled to return in 2011.

Many observers of this mess think that Congress will retroactively impose a fix to undo the estate tax repeal.  However, that is certainly not a given and even if it does happen, what new, unintended consequences will be inflicted on otherwise well-laid plans?

• Should you take losses or pull in capital gains?  It depends on your likely tax bracket…Take a look at your 2008 tax return. The IRS will allow taxpayers to deduct a maximum of $3000 in investment losses against ordinary income.  Many investors had a lot more than $3000 in realized losses in 2008 and, as a result, have a carry forward of the unused losses to 2009.  The opportunity now is that the IRS allows an unlimited amount of realized investment gains to be offset by realized investment losses.  So if you held on to an investment that has recovered much of its value this year, now may be a good time to sell.  If you don’t have any losses from 2008 to use consider selling something at a loss now.  Like we said above, the IRS allows $3000 of realized investment losses to be used as a deduction against ordinary income.  If you are in a higher tax bracket, that can be a valuable tax savings.

• If you are in the 10 and 15 percent tax brackets you can realize capital gains on investments held for more than a year at a zero percent tax rate in 2009.

• Watch out for the social security bubble – Up to 85% of your benefits could be subject to income taxation depending on other sources of income.

• Taxpayers normally subject to required minimum distributions from tax deferred accounts have been granted a waiver for 2009. It may make sense, however, to take some amount from those accounts depending on tax bracket.  Also, remember that you have sixty days from the distribution date to rollover into an IRA if you change your mind.

• Look at making a Roth conversion.  Because of the tax-free nature of the withdrawals, you need to consider your current tax bracket vs. your future tax bracket.

• Consider donating appreciated stock rather than writing a check.

• Make your property tax and estimated state income tax payments by December 31 if you want the write off for federal tax purposes.  Make sure that you consider the implications for alternative minimum tax.

• Weigh 2009 and 2010 together.  For example, you might want to wait until January to make property tax and state estimated tax payments if you think you will be in a higher tax bracket in 2010.

• If you are in the position to do so, you can gift to as many individuals as you wish up to $13,000 as the allowed gift tax exclusion.  If you are married, your spouse can gift $13,000 to those same individuals.

• The Hope Education Credit was renamed the “American Opportunity Tax Credit” for 2009.  This maximum credit for the first four years of postsecondary education is now increased to $2500.  This includes course materials costs in addition to tuition and fees.

Will discussed tax-loss harvesting, an important but often over-looked tax strategy.  Click here to read the article, “Taking the Sting Out of Investment Loses” by Russell Wild, MBA.

He writes:

“The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.”

While we agree with Professor Krugman that a lower dollar can help to even out our trade balance, if it falls too low, however, it could create unwelcome inflationary pressures. The Federal Reserve will look to prevent an inflationary event by tightening the monetary spigot which includes raising interest rates.  Krugman argues that this would be a disastrous policy move at this stage of the economic recovery.  He was an ardent proponent of government intervention in the form of stimulus and believes that we didn’t do enough.

Click here for the original article, “Misquided Monetary Mentalities.”