Financial Frontlines®

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?

Medicare.We are receiving many calls from retirees about their Social Security retirement payments decreasing. This payment decrease can be traced back to the increase in Medicare Part B premiums. Medicare Part B premium increases apply to higher income beneficiaries with a modified adjusted gross income greater than $85,000 for individuals and $170,000 for couples in 2008. The Part B premium increases also apply to new enrollees in Medicare-Social Security but you obviously don’t notice an premium increase since this is your going-in rate. If you don’t see a premium increase and the resulting decrease in your Social Security payment, you are one of the 75% of Medicare enrollees unaffected by this change because you didn’t meet the income requirement.

Retired Pay. The decrease in military retired pay for some continues to be a popular topic. This is due to the 2009 Stimulus Plan expiring. Last year retirees received a break (decrease) in your federal withholding tax in military retired pay. The withholding tax reduction expired for 2010 so the withholding taxes went back up. For most, this is around $17. That’s the cause of the decrease in retired pay. Chances are you didn’t see a change if you submitted a specific amount of withholding tax to your pay agent (DFAS for most) on an IRS form W-4. The increased withholding taxes are in the tax tables under the categories like “single” or “married filing jointly.” When you stipulate a category, your withholding is determined by the tax tables that changed due to the Stimulus Plan expiring.

Military Eligible for Income Tax Filing Extensions. If you serve outside the U.S. or in a combat zone, you qualify for extensions in filing your income taxes. For outside the U.S., you qualify for an extension if you are outside the U.S. on the due date of the return. You can receive a 2 month extension. If you want more time, file an IRS Form 4868 and check block 8 for out of the country for 4 more months. If you’re in a combat zone, you have an extension for the time served in the combat zone plus up to 180 days starting the day you leave the zone. You could qualify for a longer extension depending on when you left for the combat zone. Assessment and collection deadlines will be extended and you will not be charged interest or penalties attributable to the extension period. The deadline extensions also apply to individuals serving in the combat zone in support of the U.S. Armed Forces, such as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces. Members of the U.S. Armed Forces who perform military service in an area outside a combat zone qualify for the extension of time provisions if their service is in direct support of military operations in the combat zone, and they receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense. You are able to notify IRS directly of your request for combat zone relief for extensions of deadlines through a special e-mail address: combatzone@irs.gov. For more info on these tax filing extensions see this IRS page.

There is a simple solution to every complex problem.  Unfortunately it never works.  Case in point: using historical data to choose a mutual fund.

It certainly seems logical to use past returns to choose from the enormous number of mutual funds.  Not only does it appear to be an apples-to-apples comparison but the winners are easy to identify.

And there is no shortage of data.  In January there are typically dozens of articles on the “best performing” mutual funds for the previous year.  Occasionally an article highlights “the best of the best” – funds that have outperformed their peers or the market as a whole for multi-year periods.  Many times the articles go on to describe the fund manager’s strategy and the reasons behind his success. 

All of this information should be taken with a large grain of salt.  There are some very good reasons why regulators require mutual funds that advertise performance history to include the disclaimer:  past performance does not guarantee future results.

The biggest reason to be skeptical is that in many cases a manager who appears to be a financial genius turns out to be someone who took a very big risk and got lucky.  Last year was a particularly good year for risk-takers.  Very risky asset classes such as “high yield bonds” (better known as “junk bonds”) and “emerging markets” returned two or three times as much as conservative investment like the S&P 500.   Of course, in bad markets these risky investments can, and do, lose a lot more than the S&P 500.  And while human nature tempts us to believe the opposite, it just isn’t possible to predict when a risk-taking fund manager’s lucky streak is going to begin or end.

Nor will historical data help you pick the next winners among more conservative fund managers.  Study after study has shown historical returns to be an unreliable indicator of future superior performance (although poor performance tends to followed by more poor performance).

There are always exceptions to the rule.  Bill Miller of Legg Mason Value Trust “beat the market” for an impressive fifteen years in a row (ending in 2005).  The problem is that nowhere during that fifteen year period could you have been certain that his streak would continue.  Nevertheless, the fund attracted enormous amounts of money on the strength of its relative performance only to lose an incredible 72% of its value in the eighteen months preceding the market low of last March. 

Since then Miller’s fund has rebounded (although it hasn’t recovered all of its losses) and has recently been included on lists of funds that “beat the market in 2009.”  Investors who buy the fund on the strength of last year’s performance don’t realize that their decision is based more on luck than skill.

Be Cautious About Giving Info to Census Workers

With the U.S. Census process beginning, the Better Business Bureau (BBB) advises people to be cooperative, but cautious, so as not to become a victim of fraud or identity theft.

The first phase of the 2010 U.S. Census is under way as workers have begun verifying the addresses of households across the country. Eventually, more than 140,000 U.S. Census workers will count every person in the United States and will gather information about every person living at each address including name, age, gender, race, and other relevant data.

The big question is – how do you tell the difference between a U.S. Census worker and a con artist? BBB offers the following advice:

** If a U.S. Census worker knocks on your door, they will have a badge, a handheld device, a Census Bureau canvas bag, and a confidentiality notice. Ask to see their identification and their badge before answering their questions. However, you should never invite anyone you don’t know into your home.

** Census workers are currently only knocking on doors to verify address information. Do not give your Social Security number, credit card or banking information to anyone, even if they claim they need it for the U.S. Census. While the Census Bureau might ask for basic financial information, such as a salary range, the Census Bureau will not ask for Social Security, bank account, or credit card numbers nor will employees solicit donations.

Eventually, Census workers may contact you by telephone, mail, or in person at home. However, the Census Bureau will not contact you by Email, so be on the lookout for Email scams impersonating the Census.

Never click on a link or open any attachments in an Email that are supposedly from the U.S. Census Bureau.

For more advice on avoiding identity theft and fraud, visit:

http://www.bbb.org/us/article/10306

http://www.snopes.com/fraud/identity/census.asp

Agent Orange. You may be aware that the VA recently added (October 2009) new illnesses to the list of Agent Orange Service-connected diseases. If not, check out my Post from 14 Oct 09 here.

We’ve come to find out the announcement was a bit premature.  While the diseases have been added to the list, the claims processes, rating factors and systems are not ready to handle the claims.  The VA has told Veteran Service Offices to process claims as normal however, the claims decision will be “deferred.”  This means your claim will be held until the bureacracy catches up and then the claim will be processed.  Filing a claim, even when deferred, gets your claim date in the system so any retro payments will be based on the claim date.

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Deadline to Apply for Retroactive Stop-Loss Pay Extended to 18 Mar 2011

Calling all service members who served after September 11, 2001 and were stop-lossed; the Service kept you longer than your service commitment date.  It is estimated that there are 86,000 former service members eligible for this pay.

You  earned extra pay due to your stop-loss service time but you have to apply to get the money.  Surviving spouses may also qualify for this money.

The deadline to file for retroactive stop-loss pay was just extended by Congress to 18 March 2011.

Each service member is due $500 for each month of stop-loss service.

Please help spread the word if you know anyone who served in the armed forces after September 2001.

To apply to go: http://www.defense.gov/home/features/2010/0710_stoploss/

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Stop-Loss.  Another delay in the works as the Services determine the impact of a provision in the law overlooked previously.  If you were stop-lossed and later re-upped/accepted a reenlistment-retention bonus, you are not eligible for stop-loss pay.  There won’t be a recoupment of money if you have been paid (so few have been paid in total).  The intent is to pay members extended beyond their term of service and who were getting out of the Service.  The intent wasn’t to pay people who were staying in.  Now there is more paperwork to be reviewed to determine who is eligible and who isn’t.  Here’s more info.

Retired Pay.   Noticed a change in your retired pay?  Here’s the deal…  Last February as part of an economic stimulus program, your tax withholding was reduced to put more money in your pocket.  The stimulus was not continued into 2010 so the tax withholding rates went back up and your retired pay went down.  Usually the difference is around $17.  If you don’t like the amount received or paid in taxes, just fill out a new IRS W-4 form and sent to DFAS or your pay agent.  You can also go to the DFAS “My Pay” web site to change your tax withholding.