Financial Frontlines ™

Now that the stock market has rallied back 70% from the lows of last March, the pain of loss and the fear what might happen next have been forgotten.  Even those investors who sold out last year are beginning to compare recent stock market performance to the meager returns on their “safe” investments and wondering if they should get back into stocks. 

Human nature is fascinating.  Despite the fact that we all know we should be buying low and selling high, we always seem to feel better doing the exact opposite.

Feelings can be a powerful tool, particularly our intuition.  There are countless tales of men in combat who survived ambushes or booby traps simply because they “had a funny feeling that something was just not right.”   Intuition also helps us in everyday situations when we get that gut feeling that someone isn’t telling us the truth or something is out of place.  We ignore those hunches at our peril.

But the stock market is different.  When it comes to investing, that gut feeling is far more likely to lead you astray then help you.  We routinely feel comfortable (if not euphoric) at market tops and afraid (if not panicky) when the market is bottoming.  What is worse is that our feelings are much more powerful than our reasoning which is why so many people end up buying high and selling low.

There have been three huge rallies over the last twelve years.  The first two (up 60% and 100%) were followed by gut-wrenching declines (down 50% and 55% respectively).  The current rally that brought the market back 70% from the lows has produced wide-spread feelings of overconfidence among investors (not to mention complacency about the risks).  Acting on those feelings is both natural and hazardous.

This is why you need a written investment plan that is customized to your personal situation and based on a proven investment strategy.  Without a well-developed plan we are slaves to our emotions – whether we realize it or not.  Nearly forty years in this business have taught me that the biggest obstacle to financial success is our own human nature.  Ignoring that fact could cost you a lot of money.

The following is from a MOAA member who works with the IRS as a member of the Taxpayer Advocacy Panel or TAP.  He provides useful information that may help if you find the going tough during this tax season.  Enjoy.

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By:  JOHN S.S. KIM, LtCol, USAF (Retired), TAP Representative from Hawaii

The IRS wants to help you.  IT’S TRUE!!  As we rapidly approach the IRS deadline to file last year’s income taxes, the IRS wants to know of any problems you may have experienced, issues that may have arisen, or suggestions that you may have for improving the process.  In fact, there is a whole staff of IRS employees and volunteers from every state (including the District of Columbia and Puerto Rico) whose purpose is to receive, research, and resolve tax issues and suggestions.  That organization, the TAXPAYER ADVOCACY PANEL (TAP), serves as focus groups for the IRS providing input on strategic initiatives and providing a venue for raising issues identified by citizens.

While TAP does not directly work issues related to or requiring legislative or statutory changes, it has dealt with hard to use forms, confusing instructions, errors in computer processing, and with numerous suggestions to make filing easier for all citizens.

For more information, you can go to the TAP website at  http://www.improveirs.org/ or call the national toll-free phone number: 1-888-912-1227.

If you are interested in serving as a TAP member from your state, TAP will be conducting a new recruiting cycle from March 15 to April 30.  Information about application procedures and timelines are available on the website as well.

TAP want to help the IRS improve the tax filing processes.  To do that, we need input from you.  As you go through this year’s filing season, keep notes about things that didn’t seem to work right, frustrations that you encountered, and suggestions that you may have thought of.  Then, communicate those notes to the TAP.  Even better—apply to become a member of this federal organization whose sole existence is to help American citizens.

As current or former military members and families, we have all previously dedicated ourselves to service our country.  We are willing to contribute resources to keep America strong and free—and that includes paying our fair share of taxes.  The TAP is ready, willing, and able to help make that process better.

Every tax season the email scammers take flight.

Phishing. The most common form of scam is called phishing (fishing). These are emails that look like official IRS correspondence and direct you to either take an action off the email or route you to an artificial IRS web site. The objective is collecting your personal information. Don’t be fooled. The IRS does not email anyone. For details of known tax scams check out this real IRS site.

“Net Disability Exclusion.” Lately we have seen and heard about an email floating around that explains how you can recalculate your taxes to gain additional tax benefits from tax-free disability payments. The subject of the email is about the “Net Disability Exclusion” for military retired pay. We highly suggest you consult with a tax attorney, CPA or other tax specialist before you try this procedure.

While we are not tax specialists here at MOAA, we have researched this “Net Disability Exclusion” and believe the procedure to be a misinterpretation of the tax code. We found a letter from the IRS detailing this procedure and how the IRS finds it questionable. From our review, the procedure appears to either claim a tax benefit for a disability twice or seeks to claim a tax benefit for a Service rated disability the member doesn’t have. In the later case, these are typically people who have a VA rating but not a Service rating. Be careful.

Lately I’ve been reading quite a bit about the new laws that apply to credit cards. Some articles are about how the credit cards companies still have loopholes to get us in other ways. Do these “reforms” really matter to most folks and is anyone really surprised by the fact that the credit card companies will find other ways to make money?

None of the legal reforms matter if you control your debt affairs properly. That’s the bottom line. You’re not at the mercy of the credit card companies and Uncle Sam is not your salvation. You have the control over your finances, always have and hopefully always will. Take back your power to control your destiny! These reforms mean more to those who use credit unwisely and the unwise will still get burned in the long run; reforms or no reforms. Laws can never compensate for questionable financial behavior.

Are you in debt in a bad way? I’m talking about where your debt never goes away and where debt is how you get by month to month because there is not enough money coming in to cover your life. There is a solution but it’s not easy and it takes supreme discipline. You’ve got to collect the financial data of your life and apply a structure to break debt’s hold on you. It’s hard because you want a higher life style than you can afford. You have to get a grip on the fact you can’t keep up with the Jones and won’t get everything you want. But you’ll get what you need—and you’ll be happy with that. The game plan…

First. Collect the data that indicates all the dollar outflows for your month. Group the outflows into categories like, rent, mortgage, car payments, credit card payments, food, clothes, cable TV, entertainment, on and on. Now put them in order of most important to least important. Now the hard part; discontinue those expenses that are the least important until you have more money coming in than goes out. Say good bye to all those luxuries. If it’s more than you can afford, it’s a luxury. In a worst case scenario, you may have to come to grips with the fact that your abode is more than you can afford requiring you to downsize.

Next. Rank order all the debts from the one with the highest interest rate to the one with the lowest interest rate. Pay the minimum payment on all the debts except the one with the highest interest rate. Pay the minimum plus add an amount to it that you can pay every month until the debt is eliminated. For example, if the minimum payment is $30, add another $50 to it and make the $80 payment religiously every month until the top debt is eliminated. When it’s gone, add the $80 to the minimum payment of the next debt’s minimum payment. For example, the second debt’s minimum payment is $25 and you add the $80 from the eliminated first debt for a $105 monthly payment. Continue this “snowball” process until your debts are eliminated. The key here is paying more than the minimum payment. Only paying the minimum each month ensures you will never get out of debt.

Finally. With the money you were using to pay down debt, keep the money out of your pocket by setting up a direct deposit plan from your pay check to a savings account. By this time, you are used to not having the money as it was paying the debt. Stay accustomed to the money staying out of pocket by having it deducted from your pay check.

Your financial health is dependent on you living below your means. If you don’t like your standard of living, fix it by doing things necessary to raise your standard of living. Change jobs, go to school, get training, seek out special expertise or new responsibilities on the job, get certified, do anything but use credit. Using credit does not raise your standard of living; it puts you in a hole and gives you a false sense of accomplishment. Credit is faking it and only hurts you. Take back the power.

Attitude has a huge influence on our decision-making.  Whether we are trusting or dubious, optimistic or pessimistic determines the issues and questions we judge to be important in the process.

A good example is buying a car. We have different attitudes when considering a new car than we do when looking at used cars.  With new cars we are distracted by the – well, newness – all shiny and fresh and with that new car smell.  With used cars we notice the scratches and road dings and that funny odor when you turn on the air conditioner.

With used cars we wonder why the owner wants to sell – is he hiding something that is wrong with the car?  We are, in a word, skeptical. 

Buying a stock is very much like buying a used car.  In virtually all cases (except for initial public offerings) the stock you buy is being sold by someone else.  You are buying a used stock.

So it pays to be just as skeptical when buying a used stock as when buying a used car.  In fact, you should ask the same questions: “Why does the owner want to sell – is he is hiding something that is wrong with the stock?”

If you think that’s silly, how would you feel if you knew you were buying the same stock Warren Buffett was selling?