February 23, 2009


This past week I read a great article put forth by Davis Advisors. Although I will only share snippets from the article, the entire article is available at their website. The article shares wisdom from some of the greatest investors of the past century (Warren Buffett, Benjamin Graham, Peter Lynch...). It is a worthwhile, thought-provoking read.

Avoid Self-Destructive Investor Behavior.
Emotions tend to wreak havoc on investment returns (particularly in challenging times like these). Check out the following chart ...

It is mind boggling to see the impact that emotions (namely fear and greed) play in investor returns - market timing, abandoning one's investment plan, chasing the 'new' or 'hot' thing [at the wrong time] can truly cripple one's financial game plan.

Understand that Crises are Inevitable.
Stock investors throughout history have always encountered crises and uncertainty, yet the market has continued to grow over the long term.
-- 1970s - Stagflation, rising energy, market decline of 44% in 2 years.
-- 1980s - Black Monday (22% market decline in one day).
-- 1990s - Savings & loan crisis, Asian financial crises.
-- 2000s - Bursting of tech bubble, 9/11, credit/real estate crisis.

In spite of challenges, the market has shown itself to be resilient; the long-term stock market trend has always been positive. Keeping this in mind may keep you from overreacting emotionally to market events and uncertainty.

Be Patient.
Patience is one of the most common attributes among great investors. Investing shouldn't be viewed as a short-term prospect ... Between 1928 and 2007, stocks returned positive returns in 59 of 80 one year periods (74% of the time). When looking at longer periods of time (5 years - see chart below), stocks delivered positive returns 93% of the time (71 out of 76 five year periods). Historically, stocks have rewarded patient, long-term investors.

Disregard Short-Term Forecasts and Predictions.
During challenging times, the media often becomes a focal point of attention. There is nothing wrong with watching CNBC or other financial programs or prognosticators (I'm guilty too). What does history teach us? Don't waste your time and energy focusing on things that are unpredictable and uncontrollable (i.e., When is the market going to bottom?). Instead, focus attention on things you can control - your asset allocation, evaluating your tolerance for risk, etc. The chart below is a clear example of just how difficult forecasting the future is even for "the pros" (who got it wrong about 2 times out of 3 in this example).
The results tracked the average interest rate forecast from the Wall Street Journal Survey of Economists from December 1982 - June 2008 compared to what interest rates actually did ...

The past year has been difficult for ALL investors. Avoid compounding the problem by making emotional/irrational investment decisions.

February 16, 2009


All of us are aware of the commonly discussed financial tools available to improve one's financial standing - saving/spending plan, Roth IRAs (and other tax-advantaged investment accounts), insurance, etc. Another very powerful financial tool available to most (yet unused by many) is a Flexible Spending Account. A Flexible Spending Account (FSA) is a program (available through one's employer) that offers tax advantages and allows employees to pay for [eligible] out-of-pocket health care and dependent care expenses with pre-tax dollars. Using pre-tax dollars provides an immediate benefit on those expenses that equals the taxes you would otherwise have paid on that money. In plain english -- a no-brainer!

Each year, employers provide an "open" period where you can elect to participate in an FSA (as well as make modifications to your other cafeteria plan benefits). If you miss this window, a "qualifying life event" is needed to avoid waiting until next year to enroll. Birth, adoption, and change in marital status are examples of common qualifying events.

The amount you choose to contribute on an annual basis is withdrawn from your paycheck in equal installments each pay period. Most employer plans offer two different flexible spending accounts - one for qualified medical/dental expenses, and one for dependent care expenses. You can opt to participate in one without participating in the other; you cannot, however, move unused money from one type of FSA to another.

It is important to give some thought to determining how much money you plan to contribute, because if you don't use the money you will lose it! For example, if you have $100/month contributed to the FSA ($1200 for the year) and have $1,000 of submitted [allowable] expenses, you will lose the unused $200. You do have a 2 1/2 month 'extension' (until March 15) at the end of the calendar year to submit claims toward the prior calendar year, not just a 12-month window.

FSA for Health Care Expenses.
The FSA to cover medical expenses not covered by insurance is the most commonly utilized plan. As you incur medical expenses not covered by your insurance, you submit an invoice* with proof of payment to the plan administrator who will then issue payment. Any medical expense the IRS considers deductible (that is not reimbursed through your insurance) can be reimbursed through the FSA. Examples include co-pays, deductibles, braces, prescriptions, lasic surgery ... IRS Publication 502 provides an exhaustive list of allowable (and non allowable) medical and dental expenses. Your employer may edit this broad list, so make sure you check in advance to ensure your desired expenses will be covered. Unlike dependent care FSAs, there is no IRS cap on medical FSA contribution limits. The annual cap will vary by employer.

FSA for Dependent Care Expenses.
The dependent care FSA is federally capped at $5,000 per year. While married spouses can each elect to have this amount deducted from their paycheck and applied to expenses, at tax time all withdrawals in excess of $5,000 are taxed. While medical FSAs almost always favor the taxpayer, dependent care FSAs can be more complicated. They involve examining trade offs between pre-tax deductions and tax credits. Enhancements to child tax credits in recent years have made them more attractive than dependent care FSAs for many taxpayers.

*Many employer FSAs now provide debit cards which allow for an electronic transfer of pre-tax dollars from an employee account when paying for qualified expenses. Employees can use their medical and dependent care funds by using their card at the point of service. The traditional paper process is eliminated, as are worries of lost receipts or expenses you'd otherwise forget. A nice improvement.

- FSA Facts
- Health Savings Accounts & Medical Savings Accounts
- IRS Publication 969 (Tax-Favored Health Plans)
- Review this calculator to estimate your potential annual tax savings.

February 09, 2009



Numerous resources are available to assist the majority of taxpayers with free tax preparation assistance as well as free electronic filing of tax forms. Trained community volunteers are now available through the VITA (Volunteer Income Tax Assistance) Program or the Tax Counseling for the Elderly Program. These free programs are a tremendous boon to consumers as they provide an avenue to avoid tax preparation fees as well as costly refund anticipation loans.

In addition to free assistance in preparing tax returns, most sites also provide free electronic tax filing (e-file). E-filing will enable you to receive your refund more quickly and also offers options for directly depositing the refund into checking, savings, IRAs, and other types of accounts.

Check dates and times of service availability in advance. Some services will not be offered 8-5 Monday through Friday as locations are staffed by volunteers. Many offices, however, will offer some evening and weekend hours.

The VITA Program offers free tax help to low- to moderate-income (generally, $42,000 and below) people needing assistance in preparing their own tax returns. VITA sites are generally located at community centers, libraries, schools, and other convenient/accessible locations. To locate the nearest VITA site, call: 1-800-829-1040.

The military also has a strong VITA Program. Marines, airmen, soldiers, sailors, guardsmen, and their families receive free tax preparation assistance at offices within their installations. These sites provide free tax information, tax preparation, and assistance to military members and their families. The primary distinction with this and other VITA sites is the ability to work with individuals that are trained and equipped to address military-specific tax issues.

The Tax Counseling for the Elderly (TCE) Program provides free tax help to people aged 60 and older. In conjunction with the IRS-sponsored TCE Program, AARP offers their Tax-Aide counseling program at more than 7,000 sites nationwide during the filing season (February 1 – April 15). Trained and certified AARP Tax-Aide volunteer counselors help people of low-to-middle income with special attention to those ages 60 and older. For more information on TCE call 1-800-829-1040. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit the AARP Tax-Aide website.

Documents you will need to bring with you
-- Proof of identification
-- Social Security cards for all parties
-- Birth dates for all parties
-- Wage and earning statements for all income (i.e., W-2s)
-- Interest and dividend statements (Forms 1099)
-- A copy of last year’s Federal and State tax returns (when possible)
-- Bank account and routing numbers (for direct deposit)
-- Day care info (amount paid, provider tax identifying number)

-- Current Tax Info (deductions, exemptions, tax brackets, etc.)
-- Do I Have To File? (typically worthwhile even if you don’t “have to”)
-- Education Tax Benefits
-- Federal Tax Forms
-- Free File Online Tax Preparation Sites
-- State Tax Forms
-- Understanding Taxes (interactive IRS tutorial)

February 02, 2009


It seems that in the past few months an inordinate amount of financial scams have been uncovered. You’ve likely seen the media buzz surrounding the Bernie Madoff allegations of swindling $50 billion from investors. To me, there is a common thread that appears to be at the heart of many of these exposed financial ‘schemes.’ Many people expect greed and/or ignorance to be at the heart of a financial scam. Granted, these factors have their place. I’m not going to pretend that greed doesn’t play a role for an individual lured by someone like Nicholas Cosmo (recently arrested) and his promises of annual returns as high as 80%! I do believe that there is another lesson we can learn, however … the very real risks of affinity fraud.

The SEC defines affinity fraud as “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, elderly, or professional groups.” These types of scams work by exploiting the trust and friendship shared by groups of people who share a common bond. No group is immune from being a target. The Wall Street Journal and ABC News (Different Worlds, One Scam) both have carried recent news stories about the phenomenon.


As every investor has learned in the past year (if it wasn’t learned or realized prior), investing ALWAYS involves some degree of risk. The objective is to eliminate unnecessary risks by asking questions and gathering facts about any investment prior to purchasing it. The SEC (http://www.sec.gov/investor/pubs/affinity.htm) outlines a list of things ‘to do’ to minimize the risks of falling prey to these types of affinity scams …

CHECK OUT EVERYTHING. No matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely upon the recommendation of a member of a group (i.e., professional organization, social, church, ethnicity) to which you belong. Investigate the investment opportunity thoroughly and check the truth of what you are told; the person telling you about the investment may also have been fooled into believing it is legitimate (when it is not).

AVOID THE PROMISE OF SPECTACULAR PROFITS/“GUARANTEED” RETURNS. Your parents were right when they told you that if ‘it seems too good to be true, it probably is.’ Be leery of any investment that is said to have no risks. The greater the potential return, the greater the risk of loss. Any promise of a quick profit with little or no risk is a classic warning sign.

OFFER IS NOT IN WRITING. You have good cause to be skeptical of any opportunity that is not in writing. Any opportunity you are told to be hush-hush about should also raise your suspicions.

TIME-SENSITIVE OFFERS. Be on the lookout for opportunities that are “once-in-a-lifetime” (particularly when the recommendation is based on “inside” information). Avoid situations where there is pressure to rush into buying before you have the chance to think avoid/investigate the opportunity. If the offer will “go away” tomorrow if you don’t buy in today, you should probably walk away.

E-MAIL/INTERNET TARGETING. More and more frequently, scams are being perpetrated over the Internet, targeting groups through e-mail spam. If your “can’t miss” investment comes via e-mail, forward it to the SEC enforcement team (enforcement@sec.gov) and delete it.

If you have been targeted [or victimized] by an affinity fraud scheme, contact:
- The SEC Complaint Center
- Your State’s Securities Administrator