Monday, January 26, 2015

The NFL and the IRS: Birds of a feather

As a lifelong Detroit Lions fan, I can still envision the game-winning touchdown catch Calvin Johnson made in Chicago in September of 2012. You can watch the replay over and over and 99 out of 100 people will say, “Wow, that was a fantastic catch.”

Unfortunately for the Detroit Lions, the one person that didn’t call it a catch was an NFL referee. Consequently, the Lions lost.

Fast-forward to this season with the Detroit Lions and Dallas in the playoffs. A critical penalty was called against Dallas and announced on the public address system. Seventeen seconds later it was suddenly not a penalty and play resumed as if the flag were never thrown.

Football experts claimed they had never seen anything like this before and Dallas won the game. One week later, a Dallas player made what appeared to be a phenomenal winning touchdown catch. Again, everybody but the referees saw a spectacular catch and the pass was ruled incomplete.

So why am I bringing this up in a personal finance column? Because fans are being turned off by the NFL. Not because it isn’t exciting, but rather, because the rules have become overly complex. What appears logical or common sense isn’t happening on the field of play.

In today’s overly complex world, I think people want the rules simple and straightforward and they want them applied fairly across the board.

Segue to the real world. People are just beginning to receive the documents they need to complete their 2014 tax returns. Some taxpayers will soon be opening up the tax programs on their computers. Others will be calling the IRS for clarification or looking up tax information online. And many will bring shoeboxes full of papers to their tax preparers.

The point is simple; the tax code isn’t. Nor is it logical. What makes sense to you and how you interpret the tax code isn’t the issue. Your interpretation of the tax code is irrelevant. Just as your take on a touchdown catch doesn’t matter. The only opinions that matter are those of the NFL referees and the IRS.

A recent example of the overly complex IRS tax code is the new health care law. The IRS published a twenty-one-page booklet that explains the new law. There is also a booklet with a dozen pages with instructions on how to claim one of the 19 exemptions.

If by chance you’re eligible for a health care subsidy, there’s a two-page Premium Tax Credit form with thirty-six simple steps to complete. Also new to the 1040 form this year is a box labeled “full year coverage.”

The NFL is exciting, but the rulebook is becoming so overly complex the television analysts now have rules experts to explain to the fans why the catch they saw really wasn’t a catch.

The IRS has pages and pages of rules and regulations that often defy logic. While growing up, many youngsters dream of playing in the NFL in front of all the fans. Nobody grows up with the goal of being in front of even one IRS agent.

I believe the time has come for both the NFL and IRS to re- examine their rules with the objective of simplifying and bringing logic and common sense back into the entire process.

Monday, January 19, 2015

How many baskets are your eggs in?

Over the years I have frequently stated that most investors would be well served by maintaining a diversified portfolio. While I am certainly not alone in this opinion, I want to highlight exactly why I’m a strong proponent of diversification.

First, I have to acknowledge that some investors have indeed made a lot of money by focusing their investment dollars into one category, such as stocks or real estate. Others have garnered significant returns by putting all their money into just one stock.

So, yes, there is the potential to make a lot of money by putting all your investing dollars into a narrow category. But there is also significantly more risk.

Throughout my career, I don’t believe there’s a point of view I haven’t heard. One good example is real estate. How many times have you heard the “experts” claim that you could never lose money in real estate?

Recent history has proven that opinion inaccurate as both commercial and residential real estate have actually decreased in value. Unfortunately, many people learned the hard way by not only losing money, but also their residence.

It was a sad and expensive lesson, but it did conclusively prove that real estate values could fluctuate.

Gold is another poster child for fluctuation. For a long time infomercials flooded the airwaves advising everyone to buy gold for portfolio stability.

But it wasn’t stable. It’s down substantially, whether it was purchased in its physical form or as a stock or ETF. And investors who bought at the peak are a long way from getting their heads above water.

Another commodity that’s dramatically plummeted in market value is oil. If you invested in oil, you’re very likely to be hurting badly at the moment. My condolences.

Most investors are aware of the inherent risk in stocks. In the 1950s GM President Charles Wilson stated, “…because for years I thought what was good for the country was good for General Motors and vice versa.” At the time GM had an aura around it much as Apple does today.

Unfortunately, far too many people had a significant percentage of their nest egg tied up in GM stock. I’m not trying to pick on GM, but it is further substantiation that it’s inherently risky to put all your eggs in one basket.

Locally, there are two recent examples that even bonds carry risk. Going back to GM, during the bankruptcy bondholders who thought they were first in line took a back seat to the unions. And when the City of Detroit went bankrupt, city bondholders also took a significant hit.

I don’t want to come off sounding like a purveyor of doom and gloom, but the point is, to a certain degree, everything carries an element of risk. Most investors would be better served being diversified not only among various asset classes, but also diversified within each class.

For example, in a category such as domestic stocks, rather than putting the entire amount into just ABC stock, consider adding DEF. And maybe even XYZ as well.

Simply stated, in our unpredictable, constantly changing economic environment, I firmly believe that most investors will be better served in the long term by utilizing a well-balanced, diversified portfolio. But even that requires periodic review and modifications.

Monday, January 12, 2015

Did you lose out by playing it safe? How to lose money by playing it safe

One of the most common measuring sticks of the investment world is the often mentioned and frequently quoted Dow Jones Industrial Average. As you may have noted, it ended 2014 just under 17,900 after having broken the 18,000 mark.

Six years ago, in January 2009, the DJIA was just over 9,000. In other words, it was up roughly 100 percent. Yes, it dipped down to 6,000 along the way before bouncing back. And the uncertainty probably caused a lot of people to lose sleep during that stretch.

Nonetheless, as we kick off a new year, most investors who are equity investors are significantly better off today than they were at this point in 2009.

Of course, nobody knows what the future will bring and, as I always like to point out, historical performance is no assurance of what the future will bring.

So, while some equity investors saw their portfolios more than double, others may not have fared as well. But everyone had the opportunity for gains that were at least respectable.

The bottom line is that equity investors who had an iron stomach and stuck with the investment world’s ups and downs are likely to be further ahead than they were six years ago.

There were plenty of skittish investors back then. Many panicked in March of 2009 when the Dow was in a free fall. Several said goodbye to the market, cashed in their chips and parked their dollars in a bank or credit union.

In other words they were on the sidelines and missed out on a pretty amazing run up. On top of that, the financial world rubbed a little salt in their wounds. That’s because in addition to missing out on the run up, they also earned extremely low interest while their dollars were sitting on the sidelines in a bank or credit union savings account.

I feel badly for these people. In all likelihood they let their fear and emotions drive their investments. As a result they’ve made little headway since 2009.

I’m a firm believer in setting aside funds for emergencies and other short term needs. But having your investment portfolio perform barely above flat line is a recipe for problems in the years ahead.

With gasoline prices falling, they’re just a stone’s throw away from their January 2009 levels. However, with the exception of gasoline, just about every thing else costs significantly more than it did in 2009. College tuition and health care are just two areas that have seen skyrocketing costs.

We live, today, in a world of financial uncertainty. It can be gut wrenching to invest in the markets, but being on the sidelines can also be dangerous.

Nobody knows what the world will look like six years down the road. But the likelihood is high that the costs of goods and services will continue to escalate. A static dollar cannot keep pace with the increasing costs of goods and services.

I don’t believe in extremes. Investing entirely in equities carries too much market risk. At the other end of the spectrum, depositing everything into cash makes you vulnerable to rising costs. Most investors would be best served to have a diversified well-balanced portfolio and to avoid the emotions of fear and greed.