February 2018
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Use a QCD for your RMD from your IRA

Have you heard of the qualified charitable distribution (QCD)? If not, you’re in good company.

If you’re 70 ½ or older, reading the rest of this may save you quite a bit in taxes. If you’re not, read this anyway and tell your parents, friends, and anyone who is.

If you donate funds to a charity directly from your IRA (or inherited IRA) it can satisfy part or all your required minimum distribution (RMD) for the year.

When you take an RMD from your retirement account it’s treated as a distribution and taxed at your ordinary income tax rate. After all, Uncle Sam waited a long time to get some of the spoils from your tax deferred contributions (and their growth). It’s only fair he gets his cut.

But Sam is a good Uncle and in a moment of charitable compassion, in 2015 he enacted a law (with several hundred of his friends in Congress) that allows a person to donate to charity without any tax on the distributed amount.

What’s that you say? I love the idea. How do I do it? Here are the steps:

  • Ask your IRA custodian for the forms to send a donation from your account directly to the charity. Never take the distribution yourself or it will be taxed.
  • Have your IRA custodian transfer the assets to the charity
  • Report your QCD on Form 1099-R along with your Form 1040 tax return

There are a few things to consider. First, the maximum annual amount that can qualify for a QCD is $100,000. You can give more than $100,000 but the excess does not count towards your RMD in a subsequent year. Also, you don’t want to do a QCD from your ROTH IRA because the ROTH already has the tax-free provision. Finally, you can’t also take a tax deduction for your QCD donation. That’s double dipping and your good Uncle wouldn’t like that.

Keep Calm and Carry On

Keep Calm and Carry On was the saying on a motivational poster created in 1939 by the British Government. It was intended to keep the spirits of the British citizens from plummeting in the face of air attacks from the Luftwaffe and risks to the lives and businesses of the British people.

Ironically, over 2 million Keep Calm and Carry On posters were printed, though very few actually got posted in public. No one knows exactly why. That is, since about the year 2000 when one of the original posters was found by a used bookstore owner in England. Shortly after the owner framed and hung the poster he realized it caught the attention of a great many people. So many, that the bookstore owner started selling copies of the poster. A series of the original posters even appeared on the Antiques Roadshow.

Lo and behold a cottage industry was born. Since 2000 there have been variations on that theme in all corners of life, work and play. Soccer shirts adorn the “Keep Calm and Play On” (play-on is a phrase often uttered by the soccer referee to ignore an apparent foul), tea lovers wear “Keep Calm and Drink Tea”, and shopaholics are especially fond of, “Keep Calm and Buy Stuff”.

The “keep calm and carry on” theme fits nicely into the world of the individual investor. Interestingly, the posters were rediscovered in 2000, which happened to be the year the dotcom bubble burst. KCCO turned out to be very good advice for those of us owning real companies in those days.  If you owned Pets.com, WebVan.com and a host of others, your portfolio took a shellacking. For everyone else, remaining calm when the bubble burst turned out to be a money making decision. Of course, 2008 was a painful lesson given the emotional toll a 30% decline in the stock market has on individual investors (and no less a toll on those of us entrusted to manage your money).

Staying the course since the March 9, 2009 stock market bottom of the “great recession” turned out to be a brilliant investing strategy. Up until this recent “correction”, (officially a 10%-20% decline in the market), we have enjoyed an S&P 500 that increased over 200% (including dividends) since the March 9, 2009 bottom.  In fact, Kiplinger’s, the well-known and respected financial publisher tells us stock market corrections happen every two years, on average.

We had something like this correction occur in 2014. At that time I remember an interview with John Bogle, the 86 year old founder of Vanguard. He’s lived through his share of market corrections. His advice to investors, “don’t just do something, stand there”. While our philosophy may not be quite as passive as what Bogle suggested (i.e. we still advocate rebalancing portfolios per a defined strategy and timeline) it certainly is no time for knee-jerk reactions.

So what’s an investor to do?

Since everyone reading this article is not at risk of bombs coming through their living room ceiling (as was the case in 1939 London). I suggest the British Government had it right.

Keep Calm and Carry On. Oh, and turn off CNBC.

How Much is a Billion Pennies?

If you figured out in your head in less than 10 seconds that a billion pennies equals 10 million dollars perhaps you qualify as a “Quant”. The quants are the super geniuses employed by Wall Street firms to come up with new algorithms, ways to make money, finding a decided edge, and, in fact, finding ways to make billions of pennies. In your high school class these were the nerds, the people so far “off the grid” they practically levitated. Today they are the Masters of the Universe on Wall St. But this is not an article about the quants. If you’re interested in that subject I encourage you to read, “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it”, By Scott Peterson.

This article is about the furor unleased by Michael Lewis’ new book, “Flash Boys”. The quants play a role in the phenomenon he writes about in the book. It’s called High Frequency Trading (HFT). The high frequency trading crowd seek an advantage on large block institutional stock trades by taking advantage of Physics, in particular, the speed of light. By locating their data centers as close as physically possible to one of the twelve stock exchanges in the U.S. (did you know there were 12 exchanges in this country?) they are, in effect,  “gaming the system”, literally by taking advantage of the speed of light.

By receiving a stock order in a building, say, across the river (in New Jersey) from the NY Stock Exchange, the HFT company’s computer systems see that order fractions of a second before it reaches, say, central New Jersey, maybe 10 miles inland. The HFT can adjust the price of a stock by fractions of a penny and then execute a trade to some other institutional investor, thus, keeping the fractions of a penny as their profit on the trade.

Since we’re talking about investments, and benchmarks are important in investment analysis, let me share some time related benchmarks for purposes of our discussion.

It takes 10 milliseconds (10 ms) to blink your eye. When I was a young engineer building radar systems our aircraft computer would take 10 milliseconds to scan the space around the aircraft. In exactly 10 milliseconds it could “see” the radar signal of objects, in 360 degrees and tens of miles away.  If all that could be done in 10 ms, imagine how much can be done with modern day computers in 210 ms? Two-hundred-ten milliseconds is the amount of time HFT  systems have to manipulate a stock price. That is, buy it from “party A” at a fraction of a penny less than what they sell it for to “party B”. Doing this over hundreds or thousands of trades per day and making fractions of pennies (on millions of shares of stock) eventually gets you to a billion pennies (or billions of pennies) of profit. Carl Sagan might have found this an interesting topic if he were still around.

And so, this is where all the controversy arises; the “everyday” institutional traders are being taken advantage of by high frequency traders and are now shining a light on the whole practice.  It’s true, the HFTs have pulled-one-over on the large financial institutions, but, the latter complaining seems a bit like “the pot calling the kettle black”, don’t you think? Wall Street firms have been legally “gaming” each other and individual investors since stocks were traded underneath the Buttonwood Tree in lower Manhattan (the site of today’s NYSE).

Wasn’t Goldman Sachs taking advantage of investors when they were creating “junk” level Collateralized Debt Obligations while at the same time (in another part of their firm), selling-short these same investments? It was all very legal though not very ethical. Is the practice of high frequency trading unethical, probably; immoral, could be; deceitful, undoubtedly; illegal, nope. We should probably expect a Congressional Hearing to address the “outrage of it all”.

Should we as individual investors care, nah! This is just another creative use of technology that Wall St. has derived to gain an edge on the competition. Other technological advances in the last thirty years have brought us discount brokers, $8 trade commissions, minimal bid-ask spreads and other reductions in cost to investors. We have benefitted far more from these cost reductions than we are being hurt by the system of price manipulation by institutional investors amongst themselves.

The activity of high frequency trading seems just another example of exploiting market inefficiencies over the short term. Well, it doesn’t get any shorter-term than trading in milliseconds.

There are plenty of reasons why I lose sleep at night but the effects of high frequency trading is not one of them. I think I’ll stick with doing my investing over a slightly longer time horizon than 210 milliseconds, say, a lifetime.



Music Sometimes Trumps the Written Word

Rather than opine on economics, investments, or other things personal finance I thought I would let this blog entry speak for itself.


Seasons Greetings,



Sexy, Edgy, and Hot: What a Combination

Before you get too excited, the reference is to the Tesla Model S.

It’s all of those things, and candidly, I would love to own one, even though “hot” in this case is both an apt metaphor and a reference to the fire-prone battery system.

Tesla will get its battery problems sorted out. It could have happened to anyone. Oh wait, it did . . . Boeing, and they have the best engineers in the world.

Since this is an article about finance and investments let’s “change gears” and discuss Tesla Motors (TSLA) as a proxy for investing in general.

The stock trades around $135 per share, down from $194 just a few short weeks ago. Its price hovered between and $20 and $40 per share for most of its short lifespan until April of 2013 when it began a meteoric rise to the high levels of recent weeks. To its credit, the car got a very favorable safety report which contributed to the march upward in the stock price. The car is beautiful. Sometimes we even refer to vehicles in the “feminine” by saying, she is beautiful.

Now let’s look under the hood (pun intended), not at the engine (it’s beautiful) but at the financials. The stock rose 338% from April through October. The S&P 500 is up about 9% over that same period. The price/earnings ratio of TSLA is non-existent because there are no “earnings” yet. In fact the company is losing about $1.95 per share. Schwab projects a forward P/E next year of 241, which compares to about 17 for the S&P 500.

Sexy, edgy and hot might be good reasons to purchase a car, a tuxedo, or an evening gown but they are terrible reasons to purchase investment assets. In that part of your life, stick to boring, steady, and proven over time.

Disclosure: TSLA stock is not in my personal or any client accounts. It has never been and there is no intention to purchase any in the foreseeable future.

Government Shutdown: Constitutional Crisis or Political Gamesmanship?

The Congress seems compelled to take this game of chicken right down to the wire.  An 11th hour agreement, even if only resulting in a temporary delay, will allow many members of Congress to discreetly wipe the egg off their faces.  Neither side can acquiesce now. After all, there’s still a whole day before disaster strikes.

I’ll leave the T.V. networks and newspapers to make the case of whether the Republicans or the Democrats bare 51% of the responsibility (or maybe 80%) for driving the country to this economic pain point.

The problem is, we’ve already thrown the proverbial “baby out with the bathwater”.  The U.S. has become the laughing stock of the world.  America has been the world’s one true economic super-power for a hundred years. Antics like risking a government default jeopardize the likelihood of maintaining that position into the distant future.

If an actual default occurs, the damage to the U.S. reputation would take a long time to repair, if it were repairable at all. The rest of the world (with few exceptions) looks to the U.S. as the fortress of economic strength and stability. The threat of default is making foreign governments question our position as that fortress to the world. An actual default might be the tipping point that leads the rest of the world away from the purveyor of “full faith and credit” to the world.

Imagine a conversation with Treasury Secretary Jack Lew if the country defaults on its debts come this Friday. “Mr. Secretary, what’s the priority for paying the bills of the country? Will it be paying interest on Treasury Bonds or paying Social Security recipients? The Chinese won’t be happy to miss an interest payment, you know. But wait, the Chinese are only the second largest owner of U.S. Treasury debt. The largest owner is the Social Security Trust fund. Can we hold-off paying U.S. service member salaries for a while”?

I haven’t heard a single person in the news say they think the U.S. will default. That’s why the stock market has virtually shrugged off the risk of default. The “smart-money” says this is all political gamesmanship. If the smart money is right, the economic damage to the U.S. will be contained but the damage to U.S. credibility has already begun.

If the country defaults and misses important payments, the short and long term results will be unthinkable. Are we a government “of the people, by the people and for the people”, or are we a government, “of the Republicans, of the Democrats, and of the Tea Party”?

Retirement Advice or Not: What’s Best for You?

Deloitte (the accounting and financial services firm) recently released the results of a study that asked people about their decision to engage professional help in retirement planning. With millions of Baby Boomers entering or nearing retirement, planning for it will be a hot topic for years to come.

The study found that about 66% of people don’t consult professionals for advice. Of those with more than 15 years until retirement the number is about 75%.

A third of respondents felt they didn’t need professional advice, yet only 22% of all respondents feel confident that they can meet their financial goals in retirement.

The obvious question then, is: why do so few people seek professional retirement advice?  Unfortunately, the answer is much less obvious. Only 13% said they had a bad experience in the past. Another 12% said they couldn’t afford to hire a professional.

Many people simply don’t want or feel they need professional advice.  Maybe they have not saved enough and don’t want to hear “the answer”. Others (think entrepreneurs, executives, other 50 hr. work-week professionals) simply don’t love the elements of personal finance enough to make the time to do it. They hope it’s enough to contribute to their 401k or profit sharing plan at work.

The majority of “boomers” don’t have a pension plan in retirement (like their parents). Social Security should be there but it is not enough.  The majority of retirement income will still need to come from invested assets, or from continued employment (which is not always a bad thing).

Regardless of the reasons to engage, or not to engage professional retirement advice, most people agree that retirement planning is critical and complex.   It’s not terribly hard but it does take time, effort and a great deal of interest in the subject.

Here’s a list of competencies and interest areas for the “do-it-yourself” retirement planner. If that’s not you, then use this list to qualify a professional who can demonstrate expertise in these areas:

  • Interest in Economics (domestic and international)
  • Enjoyment of the study and application of personal finance
  • Strong familiarity with asset allocation models and portfolio diversification (i.e. stocks, bonds, real-estate, natural resources, art, collectibles, etc.)
  • Ability to construct Time Value of Money scenarios on a financial calculator
  • Comfort analyzing and modeling future market returns and rates of inflation into calculations
  • Ability to project income needs in the 10,20, or even 40 year time horizon
  • Factoring the effects of inflation on purchasing power and investment returns
  • Ability to identify the strengths and weaknesses in an estate plan
  • Determination of a family’s insurance need (i.e. Long Term Care) and its impact on retirement
  • Running retirement simulation scenarios using various calculators (many are available online)
  • Regularly reading the financial press and comments from smart people around the world
  • Time and interest  in researching  assets and asset classes for your portfolio
  • Measuring and tracking results and adjusting when necessary

This IPO is a Guaranteed Payoff

2012 will not be a record year for the number of initial public offerings but it certainly will be a memorable one.

Data compiled by Renaissance Capital indicates there were 128 IPOs this year. That’s about the average over the past ten years. The amount of capital raised however, at $43 billion, was the second highest for a year in that same ten year period. Of course, about $16 billion of that came from the Facebook (FB) IPO. FB stock is down about 29% since its frantic and problematic debut in May of this year.  

Outside of people cutoff from modern technology, everyone heard of the Facebook IPO but most of this year’s IPOS are not known to the general public. The stocks of some are up while others are down. Data from Renaissance Capital shows Guidewire Software and Intercept Pharmaceuticals are up more than 130% while Envivio and Café Press are both down more than 70% this year (I don’t own, nor am I recommending these).

I rarely recommend anyone buy a stock at its initial public offering. Nevertheless, I have finally found an IPO I can recommend without hesitation, and it is fitting for investors of all types and risk tolerance.  You see, it’s not an Initial Public Offering at all; it’s an Initial Puppy Offering (IPO) and it’s from Canine Companions for Independence.  That’s right, if you watched CNBC yesterday morning (Dec. 20th) you would have seen Canine Companions for Independence www.cci.org ringing the opening bell on the New York Stock Exchange along with their longtime partner Eukanuba Dog Foods.

Canine Companions for Independence is a national non-profit organization that provides highly trained assistance dogs, free of charge, to children, adults and veterans with disabilities. They created the Initial Puppy Offering, to help meet the skyrocketing demand for assistance dogs across the United States.

Eukanuba Dog Foods (A Division of P&G) is an “Angel Investor” in this IPO with their generous donation of $100,000. But anyone can be an angel investor with as little as a fifty dollar investment in the Initial Puppy Offering. I have the IPO certificate hanging on my office wall and it’s quite a conversation piece.

This is one IPO that is guaranteed to pay-off.


The 7 harmful vices

In his new book, Behavioral Finance and Wealth Management, Michael M. Pompian highlights seven primary biases he thinks can be keeping investors from achieving their financial goals.

Pompian polled 178 individual investors about 20 key behavioral biases. The following ones had a greater than 50% affirmative response rate:

1)      Loss Aversion Bias: The pain of losses is greater than the pleasure of gains

Have you ever lost sleep thinking about your winning investments?

2)      Anchoring: Getting “anchored” to a price point when making an investment decision

Buying or selling at a particular price point is often a good and disciplined strategy. The key is whether the price point is part of a strategy or a figure determined out of emotion or psychology.

3)      Hindsight Bias: Believing that investment outcomes should have been able to be predicted

A lot of people missed the Apple opportunity. Stop kicking yourself.

4)      Recency Bias: Taking investment action based on the most recent data or trend rather than putting current situations into historical perspective

Facebook anyone? The craze for that stock at the IPO far exceeded logical decision making based on traditional metrics like price/earnings ratio and the amount of revenue they were generating.

5)      Representativeness Bias: Making current investment decisions using the result of past similar investments as a frame of reference

You had investment success with an asset that has risen steadily over the past few years. Now that same investment is overpriced by historical standards yet you want to buy more. This one is often closely related with “anchoring”.  “I think I’ll wait ‘til the price hits 100 and then sell’.  Never mind at $87 the stock has a P/E ratio of 100!

6)      Status Quo Bias: Not taking action to change one’s investment portfolio (i.e. doing nothing when prompted to do so)

‘The market is up; I think I’ll wait to get in’. ‘The market is down; I don’t want to get in now’.

7)      Regret: Past (poor) decisions affect future investment decisions

Did you buy just before the 2008 crash and become so shell-shocked you never got back in?

If so, you missed out on reversal of all the paper losses (i.e. in the S&P 500) and further gains.

Pompian also identified a series of 19 secondary biases. He asked questions of the survey respondents to determine which biases seemed to correlate in higher percentages. One such case was those with the ‘status quo’ bias had a high tendency to have ‘regret’ as their secondary bias.

He writes it this way, ‘The major implication for status quo and regret is that these biases often keep otherwise good-intentioned investors out of a market that has recently generated sharp losses or sharp gains. Having experienced losses, our instincts tell us not to invest. Yet periods of depressed prices may present great buying opportunities. And we’ve all also been guilty of cutting risk out of fear of gains evaporating only to see the markets continue to run–especially when the Fed is so accommodating’!

It’s probably too much to ask that we, as investors, not have biases. Instead, it might be best to recognize our biases and work at not letting them get in the way of achieving our financial goals.


“Three reasons why you shouldn’t try to time the market”

#1:  Modern Portfolio Theory holds that markets are efficient and investors are rational. Given long enough periods of study this theory holds up very well. In fact, scholars have won the Nobel Prize putting forth their work in this area.

Of course the shorter the timespan the more likely it is that markets are inefficient and investors are completely irrational. After all, that’s how traders make money. They exploit hourly or even momentary events that represent a chance to make a score by jumping on a pricing inefficiency, a delay in data, etc.

Still, in an investor’s (not a trader’s) frame of reference, years vs. minutes, markets are pretty efficient and we can conclude investors (as a whole) are rational. If you’re already convinced just read the rest for fun.

If you don’t buy the Modern Portfolio Theory, consider reason #2: Behavioral Economics. Behavioral Economics (also called Behavioral Finance) is the study of how cognitive and emotional factors affect the economic decisions of individuals. Time after time we see people do just the opposite of what they should. It is not the goal to “buy high and sell low” yet that’s exactly what the average investor does all too often. They let their emotions dictate their behavior.

Baron Rothschild, an 18th century British nobleman made a fortune buying in the panic after Napoleon’s Waterloo. He is believed to have coined the phrase:  “Buy when there’s blood in the streets, even if the blood is your own”. 

We all had our own blood (investment losses) in the streets during the financial crisis of 2008. Yet, how many people were buying? Very few. Many were selling, and in dramatic fashion.  They were driven by behavioral economics to do exactly the wrong thing at the worst time. Staying out of the market for most of 2009 and 2010 helped cement losses, while remaining fully invested eventually reversed all the paper losses.

Really, how can you time this stuff?

OK, you’re still not convinced? Let’s look at #3…Simple statistics. From January 2008 through July 2012 there were 55 months. The S&P 500 was up more than 5% for 9 of those 55 months, or 16% of the time. There were 18 months that were up over 3% (33% of the time).

There were 16 months where the S&P was down at least 3% (29% of the time) for the month. In 13 of those months it was down by more than 5% (24% of the time).

A person might guess right once, or even a few times in succession but not over the long haul.

Just for fun, try this game. For each of the next six months predict if the S&P 500 will finish up or down, and by how much for the month. If your track record is pretty good then try it for another six months.

By that time, hopefully you will have concluded that trying to time the market is a fool’s game. If so, you very likely would have saved yourself money, or not left much of it on the table due to poor market timing.