Lower the Risk in Your Portfolio

Diversification can help reduce the variance you may see in your month to month portfolio valuations.

If you are an average investor, any one month’s downturn might have you second guessing whether your investment plan is still on track. You may even consider selling positions, as you look to regain confidence in the future direction of your portfolios.

Market downturns do happen, as the nature of the equity markets is to oscillate.  Normal volatility for a portfolio can be said to lie somewhere in the range of average fluctuations for stock and bond indexes.  If your holdings include both stocks and bonds then you would measure volatility against the same weights of the relevant indexes.

On any one day, the market might swing a few percentage points while bonds might oscillate relatively less.  On days or in times of enhanced volatility, the market fluctuations may move beyond their normal range, that is, beyond one standard deviation.

Before judging whether your own portfolio is too sensitive to market changes, meriting a reset, you might first examine historic rates of fluctuation for various indexes. You can then judge whether you should lower your weight in stocks or risky holdings, to lower the rate of change of a portfolio with closer tendency to a mean.

Fourth quarter is a great time to take stock of your risk profile as we near the year’s end. You may want to recalibrate, to subtract some risk from your holdings as you look for more reward on the upside.  Having losses to deduct in a taxable portfolio may actually be a good thing if you are netting losses to reduce taxable gains for this year’s tax filing. This is especially important for investors in higher tax brackets, as rates of taxation for gains have climbed upward.

However, in identifying candidates to sell it is also important to consider the relative role of various assets in a portfolio. Ideally, you don’t want all holdings going up at the same time; neither do you want them going down at the same time. This would be perfect correlation. By maintaining some uncorrelated assets, holdings that actually complement one another, you can lower the overall volatility as measured by standard deviation.

Turning back to the subject of volatility, I’ll use an example drawn from six years of data, comparing a large household consumer products company stock with the S&P 500 index, and a corporate bond index.  The table below shows that the household products stock, considered to be a consumer staple, is much less reactive than the general S&P 500 index.  The corporate bond index is much less reactive than either of the stock indexes.

Reactiveness is measured by standard deviations, that is the amount of movement around the average returns expected for these holdings.  Returns fall along a bell curve, with 95% of curves being within an expected range of one or two standard deviations. The larger swings would be isolated experiences, in less common years such as 2008.

Don’t focus too deeply on lowering your volatility, without thinking about the return that you will need to achieve your goals.  Equities on the average return more growth than do bonds. Unless you have accumulated significant assets already, you may be forced to consider some market volatility to reach your goals. Market returns can help grow your assets over time using to supplement your cash infusions.

Including some non-correlated assets can help reduce average volatility by introducing different rhythms to market fluctuation. Non-correlated assets may include additions of real estate (REITS), precious metals, foreign currency indexes, market neutral funds or muni bonds into a portfolio mix.  It’s important to consider these assets in your portfolio mix if you are noticing too much swing in any given month or interval.

So what is “average” volatility? One large banking institution published statistics this year stating that US Large Cap stocks can move 16% up or down in any one year; while muni bonds may only move 4% in the same period. Emerging market stocks and indexes might move as much as 25% up or down in a single year. Commodities can be almost as volatile.* For this reason some of these assets should be used only in small measure, to remain within a moderate risk tolerance range.

Putting together the right balance of assets to lower volatility demands careful consideration of these statistical realities.  If any one stock is throwing the whole portfolio out of balance, it might be a signal to harvest it.  Should you find you are increasingly less tolerant of the outliers consider taking less risk going forward.  This is a great discussion to have with a financial planner who can help you balance risk and reward as you save toward goals.

**J.P. Morgan correlations and volatility study, 9/30/2014.

What to Ask Parents About Their Wills or Trusts

First, know where the safe deposit box is located!
Second, know whether you are an executor!

Adult children of elderly parents often know little about their parents’ trusts until their parents pass away. It’s only then that they discover problems that bedevil settlement of their parents’ estates.

Or they discover missing clauses or sections in the trust during their parents’ lifetime, when it’s clear that their parents no longer are of sound mind. Then it may be too late to take action without an expensive court process.

As a financial planner, I frequently hear the stories of good intentions gone wrong, after mom or dad has passed away. In one case, a woman’s elderly mother had left an IRA account to the woman’s brother. Unfortunately the brother predeceased the mother and the beneficiary on the account was never changed. The trust never mentioned the IRA, so did not have jurisdiction. As a result, the woman, n

ow her mother’s executor, will probably have to ask a probate court to grant her the assets.

Mom never shared the trust with her adult daughter before she passed away. Otherwise, this problem could have been fixed before it became an issue.

More complex cases may involve bypass trusts. These are trusts originally intended to take advantage of the federal estate tax exclusion thresholds. If a spouse predeceased his wife or her husband, then his or her assets were put into the “bypass” trust for the eventual distribution to children at a later date. The surviving spouse is able to derive income from the assets during his or her lifetime.

If the bypass trust was truly intended to protect assets for children, however, additional clauses in the trust may have been inserted, or should be inserted, to accomplish this purpose. Otherwise the surviving spouse may be able to encumber the account – using a reverse mortgage on the deceased spouses’ home equity portion – or totally drain the account, as he or she wished. The latter example is more of an issue in blended family situations.

If you are an adult child, and will be the eventual executor of a parent’s estate, it would be wise to ask questions in advance that will save you trouble and heartache later. If you can work with parents while they are alive you can review their trusts with your own attorney to see what actions may be needed now to help later. In this way, you will know in advance where important documents are kept; whether beneficiary designations on accounts match those indicated by wills or trust documents, and whether in the event of incapacity of your parent, there is a means for directing finances while your parent is in care.

Ron Kamins, an estate planning attorney in San Rafael, suggested some of the following questions when approaching elderly parents. You might preface the inquiry with an explanatory statement, such as, “Mom, (or dad), I want to be able to care for you later the way you would want. I am concerned that I do not know enough about your wishes, should you take ill or pass away. I have some questions that I need to ask, as I will probably have a role in taking care of you and arranging your care.”

1)    Am I an executor of your trust? If not, then who is the executor?

2)    Where are the original copies of your trust or will documents kept?

3)    When were they last amended or reviewed?

4)    Is there a living will, covering your last wishes for health care? For your religious preferences, for a service after death? For burial?

5)    Is there a bypass trust? If so, you might want to ask your attorney if this is still needed, because of changes in the federal estate tax law.

6)    If you – dad (or mom) has remarried after another parent passes, ask him or her, “Do you want your part of the estate in the bypass trust protected for yourself or other heirs? Or do you want to take care of the your new spouse first?”

7)    Do you have separate property in your trust, vs. marital or community property? Explain the difference, if necessary. For definitions, see http://www.irs.gov/irm/part25/irm_25-018-001.html.

8)    If there is a family business, ask your parent how will succession be handled. Could an outsider inadvertently obtain control, should shares pass to a non family member after the death of your mother or father?

Answers to these questions, Kamins said, will probably lead to further investigation of what may be necessary going forward. If your parent has inadequate finances, you may be needing to plan for his or her care to come from your budget, and those of siblings. It pays to learn about a problem in advance, before it becomes a problem.

Finding Gold in Your Social Security Nugget

Drawing income later usually boosts payouts

For many Americans, Social Security still constitutes an important part of their retirement income plans, for security in retirement. Yet few people know how to optimize these benefits to obtain the highest payout.

There are many variables that come into play when computing benefits. I recently hosted a seminar on this topic with an expert from AXA Equitable Life.

Following are some of the tips we shared, at the meeting.

Keep in mind that individual situations can vary greatly. For cases involving coordination of benefits with disability payments, for instance, it is wise to consult with a local Social Security office.

Maximum Benefit

Social Security is a government benefit intended to provide income that you cannot outlive. Currently, it is inflation- adjusted, and does provide survivorship benefits. The maximum benefit for 2013 was $2,533 monthly. If we assume a 3% adjustment for inflation every year, the potential payout over a 30 year period of this sum could be as much as $1.5 million.

How It’s Computed

The Social Security Administration bases is payout formulas based on the highest 35 earning years, and indexes earnings to inflation. This formula results in an Average Indexed Monthly Earnings figure, which is used to compute the actual benefit to be paid. You can check on your expected benefit at the websitehttp://www.ssa.gov, using the online calculator.

Living on Social Security

The Social Security program was never meant to totally replace one’s working wages. Rather it was created as a supplemental source of retirement income, at a time when many American workers still received pensions from employers. Currently, 401K plans rather than pensions are more often offered to employees, meaning that employees themselves must decide how much to save for retirement. There is a higher risk, therefore, that people will underestimate the amount necessary to save, to finance retirement over as many as 30 years or longer.

Maximizing Benefits

People who can wait until 65 or as late as 70 can increase their rate of payout greatly over people who begin benefits earlier. For instance, someone starting benefits at age 70 can receive almost 130% more as a monthly payout.

If you or someone you know has already started benefits, you can still restart the payout at a later age, to increase the monthly amount. You would request form SSA 521 from the Social Security Administration to do so. Stopping benefits may mean repayment of benefits already received.

People who work while taking benefits lose $1 for every $2 earned, if they are not yet 65 years of age. They also increase the taxation of the benefit, which is not fully tax protected over a base amount to begin with.

Special Situations

A spouse can receive half of a primary work’s benefits. Spouses can get the higher of their own benefit or the spousal benefit. Former spouses may be entitled to spousal benefits but they must have been married for at least 10 years, and not have remarried.

In the event of death, surviving spouses must be at least 60 years old to claim, if in good health, or at least 50 years old to claim, if disabled. You must also be married for at least 9 months prior to the spouse’s death. There may be exceptions for accidents.

Marital Strategies

Women statistically live 5 to6 years longer than men, according to the US Bureau of Census, 2000. Some couples decide to maximize the wife’s survivor’s benefit, if Social Security income is needed earlier than 62 or 65, by starting a payout only for the woman, not her husband. This assumes that the woman earned less in average wages than did her husband.

The husband, in the intervening years, could decide to take 50% of his wife’s benefit, until such time as he claims his own. The second Social Security pension based on the husband’s income could be started by the husband at age 66 or 70. Should he predecease the wife, she would receive a higher survivorship benefit than she would have if his benefit had started first instead. Breakeven on these strategies is usually achieved by ages 79-80.

Waiting on the husband’s higher benefit could further augment the amount received monthly. There is a reality here, as the majority of women aged 75-84 are widows.


Most Americans are aware that the Social Security Trust Fund is in danger of going bust. If the current rate of payout continues, along with current rates of collections, the trust fund would be exhausted in 2036. To avoid a complete cut in benefits , Congress may slash benefits by as much as 25% prior to this date. Solutions have been discussed but none are in the immediate offing.

Shared Wisdom

Complementary income is needed to supplement Social Security. For some people this may mean dividends and interest from a mix of stocks, bonds, mutual funds, and annuities. For other less fortunate people it may be continued employment, even if part time.

Social Security is just one source of income in a comprehensive retirement income plan. Other investments are needed.  Keep in mind that withdrawals from tax deferred accounts are fully taxable. A tax strategy can help maximize income using tax free Roth IRA or muni bond accounts.  Annuities can provide partial tax protection along with income guarantees.

I am happy to help. Let me know if you would like a copy of our slides, from the Social Security presentation.

Find and Save An Extra $400 in Your Monthly Budget

Hidden Treasure in Your Household Budget, Where to Find It

It is often recurring expenses that can be better managed to achieve
savings goals.

Month by month, I meet with clients seeking a golden goose. That is, the one investment that will make their retirement dreams come true.  Just as important to investment choices, however, is the process by which we accumulate savings, to invest.

Buying a single high growth stock or fund for a Roth IRA account may seem just the thing. The trick is to first accumulate the cash to fund the account that will make the purchase. And, of course, allowing for normal market volatility, investors need to make a number of purchase in different investments, to diversify the risk.

So how to get there? Here are some tips based on my years of sleuthing personal budgets for the extra cash. Check out some of these ideas, to free up your own $400 monthly or more. You may not have to clip monthly supermarket coupons to get there.

Automated payments

Check carefully though your monthly bank and credit card statements, for any subscription type expenditures related to possibly unnecessary services. These might include membership charges for a one time visit to a website, insurance for identity theft protection, product warranties, job loss insurance, and upgrades or renewals for installed software. Unchecked, these can add up to hundreds of dollars a year in silent fees deducted from your accounts.


Insuring your life, as well as auto and home is most usually very necessary. However, insurance is also one of the biggest ticket items in a household budget after mortgages, and property tax, or rent. It pays to shop around.   For instance, when shopping for life insurance, check first with companies that issue life insurance and annuities as their primary product lines. These companies may offer a lower premium cost than those that insure primarily personal and real property. If your health has improved, or if you can lose 10 pounds and reapply for consideration, consider checking around for a new quote. By the way, carry your own life insurance in addition to that offered by employers. You want to be covered while between jobs, such as when you change employers or are unexpectedly laid off.

If you have no dependents and no one depends on you for income or to share in paying for jointly incurred debt, then the life insurance may be optional. Remember, your estate will still be liable for your debt when you pass away. The life insurance proceeds can pay this off.

Mental health expenditures

Almost every budget that I review has what I call ‘mental health’ type expenditures. These might be as simple as a daily coffee latte or as complex as a $200 or more monthly purchase of new software, photography or outdoors equipment, or payments to a house cleaner.  Couples sometimes allot each other their share of these types of expenditures. Problems arise if the incoming cash flow cannot support all of these outflows or if new goals can’t be funded without trimming some of this discretionary expense back.

That said, a certain amount of ‘mental health’ spend is wise to maintain a healthy relationship, in a couple, and to release frustrations in a positive way. I work with my clients to cut or substitute less costly releases for life’s tensions.

Utility bills

Winter electric and gas bills can be particularly vexing, as they can upset the best laid plans for a monthly budget. Check over your historic electric and power usage to see what patterns emerge. Consider changing over to water or electricity saving appliances to cut consumption. In water rationed areas you might even explore possibilities for recycling greywater, if local health authorities make this option available to you. The average washing machine can use 40 gallons or more in doing one load of clothes. A high efficiency machine can ratchet this usage down to 12 gallons, and less power to do the same load. Once cooled, washwater can be pumped into ornamental areas of your garden or irrigate certain types of edible crops. Special detergent is required. Check with your local water department or see http://www.greywateraction.org for more details.

Food expenditures

For most families and couples, the weekly trip to the supermarket has been supplanted by weekly trips to 2 or 3 markets, including the local Farmers Market stalls. Without careful meal planning, food purchases can outpace actual consumption, resulting in a lot of food waste. Added to expenditures for meals out, a food budget can easily balloon in a busy month, particularly when families are juggling two careers and childrens’ after school activities. There are no quick fixes for this problem other than one old standby, the food budget cookie jar. In this scenario, food purchases would be budgeted and paid for with cash. The cash available is in the cookie jar. When there is no more money, you know you have exceeded the budget for food. This is not a suggestion necessarily to sacrifice eating for the remainder of the month. Rather, it is an exercise in heightening awareness of what you are actually spending so you can make some intelligent choices about what to cut back. Or how to buy what you need without incurring spoilage.


To better control spending, it’s important to map what you currently do. There are great interactive templates for this purposed available on the Internet. I can share one such template with you, which came from http://www.feedthepig.org, published by the American Institute of CPAs. Using such a template will not only show you how much you spend for any routine item, but also allow you to compute ratios, to see what percentage of your current budget may be spent on variable vs. fixed costs, and what percentage may be devoted to routine costs like food, housing, insurance, and vehicle expenses.

Ideally your PITI ratio, that is, your ratio of principal, interest, taxes and insurance to gross income, would be 28 percent or less. Your total debt payments to income ratio would be less than 36 percent. If you exceed these ratios, it’s time to review whether to carry a car loan or whether to simply buy a car outright, perhaps an older model that is less costly to insure. It also pays to review your general use of credit cards to cover non emergency expenses. Ideally, you would minimize the use of such cards, because of the interest liability their use incurs.


Using all of these tips combined should help you find extra cash to devote to your savings goals. Consider building up your emergency savings to avoid use of credit cards. If you haven’t already started a Roth IRA for yourself or your spouse, or a college savings fund for your child, consider repurposing your new found treasure to fund these goals. I am always available to help you reboot to make your dreams happen, hopefully faster. Your overarching goal should be to fund retirement and for this, you will need to set aside 10-20% typically of what you earn throughout your lifetime.  This assumes that you retire at age 65, and start saving no later than your 40s. If you are already older then the percentage to be saved can be much higher.

By the way, the ability to save is an essential life skill. Pass these tips on to others.

My Spouse Has Died, Now What?

Whether Expected or Totally a Surprise, Death Disrupts Family Finances

Checklists Can Help, As Can Trusted Friends and Family Members

The call came unexpectedly as of course they do. A friend was on the phone. She had just found her husband, in bed, deceased.  He had been home alone with a bad cold.

The rest of the story is also unexpected. She and I were just 31. Her husband was 42. Married just two years, they already had a child and some bank accounts. She asked me to help with funeral arrangements, and helping her through the start of a lifelong process of coping.

What we discovered together has stayed with me for years.  In working with my friend, I learned how difficult finances can be after a sudden death of a spouse.  Particularly when few things were set up the way they should be.

I share this story, because I want to help my clients prepare for the

unexpected twists and turns of life.  As well as deal with death when it unfortunately comes.

You’re both healthy, how to plan

Consider carefully how to title bank and savings accounts. And make sure that beneficiary information is current. Keep wills and trusts handy and up to date. Make sure that you carry enough insurance to replace your lost income or that of your spouse for a number of years.

In my friend’s situation, she and I quickly learned that there was no will or trust established by her husband. And that all accounts were titled in his name only, with no payable on death provision.  Two of his three life insurance contracts named his mother, not his wife and child, as his beneficiaries. Credit cards were in his name only.

The only immediate access to cash that she had in the few days after his death came from the payoff of the single life contract naming her as the beneficiary. We learned she would have to file court motions regarding the rest of his accounts.  This was the case though the accounts were funded with salary earnings, a marital asset.  However, once the dust settled, she sat down with a financial advisor to budget, and to carefully conserve her assets for herself and her child.  She also established her own will, and retitled accounts to pay on death for the benefit of her daughter.

Should your spouse die

In the immediate hours and days following the death of a loved one, don’t make any drastic financial decisions. Ask a trusted friend or family member to help make the necessary decisions around a funeral, and nothing more.  Contact your trusted legal and financial professionals when you are ready to discuss next steps.   This call may need to be made sooner, rather than later, if you have minor children.  Don’t let unsolicited strangers into your life to discuss financial matters during this time, if ever.

Here is a brief checklist of other financial matters you will need to attend to:

  • Obtain at least 10 originals of the death certificate. You will need to give them to financial institutions and to insurance companies, to access joint accounts or those titled as payable on death to you, the beneficiary.
  • Make a list of important bills, and a schedule of paying them.  Share them if necessary with whoever is helping you administer your spouse’s estate.
  • Notify mortgage companies and banks.
  • Close credit cards issued in the name of your deceased spouse.
  • Cancel the driver’s license of your deceased spouse.  Identify theft problems may arise if the license is not cancelled.
  • Notify the nearby Social Security office, to either stop benefits already being paid or to qualify for increased personal benefits and a one time payment of $255 to the survivor.
  • Cancel Medicare payments for the deceased spouse.
  • Notify the employer, if your spouse was working. You may qualify for death benefits.
  • Stop health insurance payments for the deceased spouse.
  • Notify life insurance companies.
  • Terminate auto coverage in name of deceased spouse. You may also choose to sell the extra car.
  • Finally, send thank you notes to well wishers.  And take care of yourself.  Be kind to yourself during this time.

Within a year after your loss, you will need to file a last tax return for your spouse or a marital return reporting his or her income for the portion of the year he or she was still alive.  You should also engage in some financial planning to carefully review finances and decisions for the future.

Use your financial professionals as buffers for the people who will surely approach you during this transition to propose possibly unwise decisions.  These may include choices to pay off or to sell your home; to lend money to relatives or children; to purchase expensive new investment products; or to relocate out of state.

In the case of my friend, her careful work with a financial advisor allowed her to fund an Ivy League education for her daughter 16 years later.  We were all very proud.

How A Roth ‘Fixes’ the Cracked Nest Egg

For higher income earners, conversions of nondeductible contributions in IRAs and employer 401K plans can be a ticket to a Roth.

If like many people you took compounded losses in 2008, you may be still working toward recovery. And wondering if you will ever be able to retire.

That place in the sun? It’s for someone else, you may think. I would suggest revising this attitude.  “Lean In.” Hard times and slow recoveries just create more incentive to be creative.

Roth IRAs might be one strategy to consider, if your nest egg is still too small to consider full retirement in the next 5 to 10 years, or longer. Such an account might also help those who already broken open their IRAs in the lean years, and who want to reconstruct them now.

Financial planners such as myself would look at the relative age of a person and his or her earning potential in the remaining years before retirement, in assessing whether a Roth account makes sense. Income limitations or participation in employer retirement plans should not be a deterrent.

Higher earners blocked from direct contributions to a Roth account can use the “backdoor” approach afforded by conversions of traditional IRAS to Roths. Conversions are not subject to income limitations as are direct contribution methods.

To know whether your income exceeds the limitations set by the IRS for direct contributions, visit the Internal Revenue website at http://www.irs.gov, and search for Roth income limitations. These limitations change yearly, but generally start at $127,000 for a single person and $188,000 for married filing jointly. See http://www.irs.gov/publications/p590/ch02.html#en_US_2013_publink1000230977 for more information.

At age 70-1/2, there are no distributions necessary from Roth IRA accounts, unlike from traditional IRA accounts. And withdrawals are completely tax free after age 59-1/2, assuming the Roth account has been in existence for at least 5 years. For withdrawal rules before age 59-1/2, please see thehttp://www.irs.gov website.

Having tax free income in retirement can benefit people who under-saved for their needs. They can also benefit people who will enter higher tax brackets because of pension or trust income. Not having the income tax to pay may be equivalent to a boost in Roth portfolio yield equal to your tax bracket, as an example, anywhere from 10 percent to 35 %.  There is no gains tax, either.

When you start to draw from retirement accounts, consider delaying taking from the Roth IRA as long as possible, so that it continues to grow tax free. However, should you need to manage your taxation rates, you might instead take some income from the Roth IRA rather than a traditional IRA to avoid slipping into the next tax bracket. And paying more tax.

You can also time the withdrawals from the Roth IRA for the year’s a pension may be kicking in, for you or a spouse. In this way you don’t further increase your taxable income.

Finally, rebalance the Roth IRA account, just as you would allocate investments in other accounts. It’s easy for investments to get out of whack, so annual rebalancing is a must. In the early years of accumulation in a Roth, you may have chosen high growth stocks, because the gains can accumulate without any tax. When you take income, you may need to divest some of these, to start focusing on investments that pay interest and dividends.

How ‘Good’ Ideas Sometimes Lead to Bad Investments

Mental shortcuts for decision-making sometimes
trip us when analysis is warranted

Policy statements, plans and strategies can help keep investors on target.

Many-do it-yourself investors wonder why they often end up buying high and selling low. It’s probably not for lack of intelligence. Bad judgments can arise if investors are not introspective about their real motivations for selecting a time to buy or sell, or any specific investment.

Psychologists have identified a number of common biases guiding the investment decisions of less experienced investors.   If you are wondering whether the latest crisis in world events should guide a specific buy or sell decision, take a look at this list and reflect first what other motivations may be prompting you.

Reasoned investing usually does best within the framework of a plan or investment policy statement. Then the investor can calibrate individual choices to fit with the overall strategy and timeline for accomplishing specific goals. Need help? I am happy to talk.

Most Common Behavioral Biases in Investors

Ambiguity Aversion Dislike of ambiguity, masked as risk aversion, drives decisions.
Anchoring and Adjustment Latching on to a specific price and make subsequent investing decisions based on that, for example, “I will sell (or buy) abc stock when it reaches a certain price.”
Availability Estimating the probability of an outcome based on how prevalent or familiar that outcome appears in their own lives.
Cognitive Dissonance This happens when newly-acquired information conflicts with a person’s understanding or beliefs. Investors with this tendency often go to great lengths to rationalize their investment decisions.
Confirmation Holding perceptions and emphasize ideas that confirm their beliefs, while devaluing information that contradicts their beliefs.
Conservatism Clinging to prior views of forecasts and resists new information.
Endowment Endowing assets that one owns with higher value and sets a higher minimum selling price for those assets than what one would be willing to pay for the same or corresponding assets.
Framing Responding to various situations differently based on the context in which the choice is presented or framed.
Hindsight Perceiving an event to have been predictable, even if it was not.
Illusion of Control Believing  one can control or at least influence outcomes when, in fact, one cannot.
Mental Accounting Tendency to evaluate economic outcomes based on the origin of the money (e.g., work, inheritance, bonus, etc.) rather than on a holistic view of the assets.
Optimism Overly optimistic about the markets, the economy and the potential for positive performance of their investments.
Overconfidence An unwarranted faith in one’s intuitive reasoning, judgments and cognitive reasoning as well as an overestimation of their own predictive abilities and the precision of the information on which they base their decisions.
Recency Recalling and emphasizing recent events and observations more prominently than those that occurred in the near or distant past.
Regret Aversion Avoiding decisive action because of the fear that whatever course is taken will prove less than optimal.
Representativeness Perceiving probabilities and odds that reinforce their own pre-existing ideas even when they are statistically invalid.
Self-Attribution Crediting one’s successes to one’s own talent or foresight, while blaming failures on outside influences, such as bad luck.
Self-Control The human tendency to consume today at the expense of saving for tomorrow.
Status Quo Predisposition to elect whatever option ratifies or extends the existing condition.



With Credit to: D. Hirschleifer, 2001, Investor Psychology and Asset Pricing, Journal of Finance, V. 56.

Financial Health Is More Than A Credit Score

Couples should examine ratios for cash, working capital and net worth

Few of my clients may realize that the Federal Reserve Bank tracks year to year changes in household balance sheets. That is, our nation’s top bank wants to know spending vs. savings patterns as these trends relate to national consumption.

What is interesting about this research is to learn that for many households, the cars parked on the family driveway may represent more value than the sum of family retirement accounts. Households are paying down more debt, but are still saving on average a measly three to four percent of annual earnings.

Anyone who has ever tried to finance a car, or buy a home, is familiar with credit scores. Issued by private companies, these scores are an aggregate measure of creditworthiness taking into account current household income, existing household debt, and repayment patterns for debt incurred.

As a financial planner, I go beyond credit scores to “grade” my client’s finances using still other financial ratios. These may include measures of current liquidity of cash flow, and a balance sheet of current assets and liabilities. We identify any unfunded future liabilities as well as those that are already incurred.

Lenders may look at these additional ratios when they are shown in the form of a personal financial statement of cash flow and net worth. For instance, savings balances are a good indicator of the level of liquidity a household may have in the event of an emergency, such as the loss of a job.

“Banks certainly look at credit scores when qualifying borrowers, but they also consider and analyze income and outstanding credit ,” said Stacie Strassberg, Senior Mortgage Advisor, First Cal Mortgage, San Rafael.  “Other considerations are ratios for total ‘Debt to Income’; for liquid assets; and for the ‘Loan to Value’ of the subject property.”

However, the usefulness of these types of measures goes beyond simple lending considerations. Anyone wanting to build up financial security for retirement should go beyond the balance sheet a mortgage lender may want for decisions today.

Here are some of the simpler calculations you can do on your own, to take stock of where you and your family may be with regard to your financial goals. If you are sorting through the tax records for the 2013 filing, it’s a good time to analyze the data at hand.

Cash Flow – A measure of household liquidity and ability to sustain itself in emergencies

Sum current income, from salaries, dividends and interest payments, and divide by payments on accounts, whether these may be mortgage payments, or those for credit cards or taxes.

A positive balance indicates money available for working capital and savings. Ideally, this figure should represent about 20 percent of cash coming in, but varies somewhat depending on whether you are saving pre tax or post tax.

For your quick ratio, you would divide current assets by current liabilities, ignoring your home and mortgage. These are considered long term assets and liabilities. Other long term assets should also be ignored, such as business interests, when measuring your current liquidity. The quick ratio assesses how much cash you could raise in a short period of time when faced with an emergency.

Net Worth – What you are building toward

Use a personal finance template to create separate columns, one for all assets, including cash, marketable securities, business or equity in real estate interests. Separate the business ownership and family home and real estate into a separate block for long term assets. Although cars are part of net worth you may choose not to include them for this exercise. They are use assets rather than assets purchased as investments.

The other column would cover all liabilities, encompassing balances on all debts and taxes payable. Separate short term debt from long term debt. Long term debt for instance would be that incurred for a mortgage, payable over many years, not just one year. If you are making payments on your cars, include those. But be sure to count the cars as assets in this case.

When subtracting all liabilities from all assets, ideally you get a positive number.

Debt to income ratios – Controlling current outflows

If you are managing your debt well you should fall into these parameters.

Your payments to own your primary residence should be calculated by summing annual payments for principal, interest, taxes and insurance and dividing by gross household income. The percentage should not top 28%.

Your payments for all debt including that for your home should not top 36% of gross income.

Your payments to service consumer debt should not top 20% of net income.

Savings rates – What is your time horizon?

For people unsure of whether they are saving sufficient money toward goals, I suggest figuring the sum of money necessary by a specific date to fund a goal. If you assume no market return or inflation, then you would divide that sum of money by the number of years remaining until the date needed. The resulting figure would be the amount necessary as an annual savings to fund the goal.

In reality, there is inflation and most people do opt for some market return, to help lower the amount necessary to fund a longer term goal. To calculate the effect of inflation-adjusted return there is a formula you would use to adjust the needed savings rate. The amount is further adjusted with a present value analysis of the value of future dollars. There are online calculators that help you, however, achieve higher accuracy in these calculations than may be possible with a simple calculator approach.

In my financial planning, I use sophisticated software algorithms to predict ranges of outcomes over longer periods, so my clients know how much to save. They also know what to safely expect for their savings programs.


Avoiding Losses to Scams – Don’t Take the Bait

Prudence Pays for the Wary

dollarAs we start the New Year, it’s important to take stock of your personal financial security. I encourage my clients to change log on passwords frequently and review with family members some basic rules for transactions, especially when using the Internet.

If you are skeptical about the need to take these precautions, consider visiting several websites to inform yourself of current scams. Unfortunately, hoodwinkers continue to find new new victims.
One website tracking the latest scams is scambusters.org, which publishes an annual survey of the top scams of any one year. The site also forecasts which scams are likely to become the biggest problems in the year to come.

Investors should also log on to www.sec.gov, the website of the federal Securities and exchange Commission website, to view the list of scams inventoried there. See http://www.sec.gov/investor/pubs/cyberfraud.htm.  The Securities and Exchange Commission also publishes investor alerts for the latest scams, at www.investor.gov.

Scams and frauds can zero out retirement assets accrued over a lifetime. Fraudsters often target unsuspecting elderly, or homebound people. However no one is necessarily safe. The cons can also take in ordinary people. Here is a list of a few of the scams I have witnessed among friends and acquaintances this year.

1)     Craigslist.com ads. Cons see an ad advertising a vehicle or a house to rent, then impersonate the actual owner to solicit a prepayment or deposit by PayPal, GreenDot.com, or Western Union. The thieves run their own versions of the ads to solicit unsuspecting takers and may ask for half the price or rent of the original ad.

2)     Dating and sweetheart scams. A lonely woman seeks out male companions using Internet dating services. A gentleman courts her with frequent exchanges of emails then asks for money to come visit, from another state or country. The money is sent but the person disappears. Worse yet, the man or woman courting the other party adopts a false persona, and meets the victim in a house or community where the person in fact does not normally live.

3)     Computer malware. Beware of advertisements for software upgrades, to enhance computer performance. Some of the supposed fixes actually freeze up the computer until users pay for an unlocking key. Then the software patch installs tracking software to capture financial transactions allowing eventual account theft. Anti-virus software may not catch the intruder software if it self-installs in white disk space. If in doubt, have your computer technician service your computer; safety is worth the fee.

4)     Bogus reverse mortgage or investment scams. Thoroughly check out anyone with whom you do business, in the community. Consider using reputable people in the community first, rather than responding to Internet-based solicitations. There are just too many bogus websites offering non-existent newsletters or even products. Once the thieves have your payment or personal data, they may be able to use it for other frauds.

5)      Ponzi schemes with Bitcoins.  Usual red flags; unlicensed individuals, unregistered investment firms, secretive strategies and no minimum investor qualifications.  All victims welcome. See www.sec.gov for continuing updates.

There are rarely quick routes to wealth. If someone promises quick profits and the idea seems too good to be true, it probably is. Higher yields usually signal riskier investments. It is important to seek the guidance of a professional in designing portfolios for accumulation of nest eggs or withdrawal of benefits for a lifetime.

Finally, one last piece of advice. Be naturally suspicious of anyone asking for personal identification via email. Banks do not typically request personal information by email. Should you receive a phone call from someone at your bank, offer to call back, but call back through your branch. Ask for a transfer to the bank’s fraud unit if the reason for the call pertains to credit card misuse. Prevent theft of your document records by shredding all financial statements before disposal.

I am happy to help.

Sharing expenses during divorce

For outlays related to exclusive use assets, reimbursements may be possible with proper documentation

Couples seeking marital dissolution in California may hear their family law attorney talk about how to share expenses during the process. Divorcing couples usually each receive a spreadsheet to complete as a record of current household expenses and cash flow. Questions may arise about how to pay ongoing expenses for the spouse who earns less.

If the wife or husband is seeking a temporary support order, they may hear their attorneys mention ways to account for assets used exclusively by one spouse but jointly owned by both. In California cases, payments for such assets may be eligible for “Epstein credits,” referring to a landmark 1979 court case in which such an issue was judged.

sharingThe divorce attorney may inform you, the client, of your “right to reimbursement” or “credits” due you as the result of analysis of the marital cash flow statement.

Family law attorney Christina Sherman of San Rafael said basically, if the payments in question don’t directly benefit the payor, and are not made in lieu of the payor’s obligation to support the other spouse or the couple’s children, then the payor can request reimbursement upon separation of community debts and assets.

However, there is a caveat, she said. “People wanting reimbursement for overpayment of their obligations pending the divorce case must declare this intention to the court,” she said. “The court will admit the inventory and accounting of these obligations when reviewing requests for temporary support.

“If people delay this accounting they may not receive full credit due later, when the couple actually splits up their assets as part of the final divorce decree,” she added.

The issue of reimbursement owed to the community property pool arises most frequently over the exclusive use of houses. However, Epstein credits may also be sought for exclusive use of cars or other assets.

There are two other categories of credits that the payor may seek, in these circumstances. Given the confusion about defining eligible expenses, here is a brief explanation, courtesy of Sausalito CPA Keith Stoneking.

Epstein credits: One party uses earnings or separate funds to pay pre-existing community obligations. Refers to 1979 California case, “In the Marriage of Epstein,” 24 Cal. 3d 76.

Watts credits: One party has exclusive beneficial use of community property. Refers to 1985 California case, “In the Marriage of Watts”, 171 Cal. App. 3d 373-374.

Jeffries credits: One party has exclusive beneficial use of community property on which money is owed. The other party is making the payments and seeks reimbursements to the community for the payments made. Refers to 1991 California case, “In the Marriage of Jeffries”, 228 Cal. App. 3d 548, 552-553.

Although any divorcing couple may be interested in getting full credit where the parties see credit is due, CPA Stoneking advises caution about the cost. Couples may particularly wish to examine whether the value of the disputed credits outweighs the cost of hiring professionals to do the calculations. A certified divorce financial analyst can prepare calculations for straightforward Watts/Epstein/Jeffries credits.   However in the case of complex finances, or when a business is involved, couples may consider engaging a more expensive forensic accountant.

“The person wanting to claim one of the credits needs to look at the whole picture to determine if there is really a significant benefit.,” said Stoneking. “In fact the primary objective of the attorney and financial experts should be keeping the client informed of all the issues and where it is best to spend the money to maximize an equable division of property. ”

The Sausalito CPA defines forensic accounting as a detailed, expert examination of financial records to support an opinion that he/she may have to testify about or that will assist in the parties reaching a settlement.

 As a certified divorce financial analyst, I work with attorneys and their clients in inventorying marital assets and debts. The inventory documents can help form a complete dossier backing up your any credits to which you may be entitled. If you are the spouse in possession of an asset talk to your attorney before asserting any exclusive use of community property. You are not obliged to file claim against yourself.

I am happy to help.