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Giving Thanks for Thanksgiving Day Dinner Costs in 2019

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Dear World … and ME-P Readers,

A PRE-Thanksgiving Day Tribute for 2019

The Rational Optimist

Matt Ridley, a journalist referring to himself as the rational optimist, recently focused on all the reasons we are luckier than those who lived before us.

Here are some of the highlights of his research (click here to see his article in its entirety):

  • The average person on the planet earns roughly three times as much as he or she did 50 years ago, adjusted for inflation. If anything, this understates the improvement in living standards because it fails to take into account many of the incredible improvements in the things you can buy with that money. However rich you were in 1964 you had no computer, no mobile phone, no budget airline, no Prozac, no search engine, no gluten-free food. The world economy is still growing every year at a furious lick — faster than Britain grew during the industrial revolution. 
  • As for inequality, the world as a whole is getting rapidly more equal in income, because people in poor countries are getting richer at a more rapid pace than people in rich countries. That has now been true for two decades, but it has accelerated since the great recession. The GDP per capita of Mozambique is 60 percent higher than it was in 2008; that of Italy is 6 percent lower. A country like Mozambique has been out of the headlines recently – is back in  – and now you know why: things are mostly going right/wrong there. 
  • The amount of food available per head has gone up steadily on every continent, despite a doubling of the population. Famine is now very rare. 
  • The death rate from malaria is down by nearly 30 percent since the start of the century. HIV-related deaths are falling. Measles, yellow fever, diphtheria, cholera, typhoid, typhus — they killed our ancestors in droves, but they are now rare diseases. 
  • We think we are getting ever more selfish, but it is not true. We give more of our earnings to charity than our grandparents did.  
  • Violent crimes of almost all kinds are on the decline — murder, rape, theft, domestic violence. So are capital and corporal punishment and animal cruelty. We are less prejudiced about gender, homosexuality and race. Paedophilia is no more prevalent, just hushed up less.Morgan Housel, columnist at Motley Fool, also recently wrote a column titled “50 Reasons We’re Living Through the Greatest Period in World History.” Mr. Housel notes that we tend to ignore progress, which is the really important news because it happens slowly, but we obsess over trivial news because it happens all day long.

Here are some of my favorite thoughts from the article (click here to view the entire piece).

***

Love Life

***

The Motley Fool

  • In 1900, 1% of American women giving birth died in labor. Today, the five-year mortality rate for localized breast cancer is 1.2%. Being pregnant 100 years ago was almost as dangerous as having breast cancer is today.
  • U.S. life expectancy at birth was 39 years in 1800, 49 years in 1900, 68 years in 1950, and 79 years today. The average newborn today can expect to live an entire generation longer than his great-grandparents could. The average American now retires at age 62. Enjoy your golden years — your ancestors didn’t get any of them. 
  • Infant mortality in America has dropped from 58 per 1,000 births in 1933 to less than six per 1,000 births in 2010, according to the World Health Organization. In 1952, 38,000 people contracted polio in America alone, according to the Centers for Disease Control. In 2012, there were fewer than 300 reported cases of polio in the entire world. The death rate from strokes has declined by 75% since the 1960s, according to the National Institutes of Health. Death from heart attacks has plunged too.
  • According to the Federal Reserve, the number of lifetime years spent in leisure — retirement plus time off during your working years — rose from 11 years in 1870 to 35 years by 1990. Given the rise in life expectancy, it’s probably close to 40 years today. Which is amazing: The average American spends nearly half his life in leisure. If you had told this to the average American 100 years ago, that person would have considered you wealthy beyond imagination.
  • Worldwide deaths from battle have plunged from 300 per 100,000 people during World War II, to the low teens during the 1970s, to less than 10 in the 1980s, to fewer than one in the 21st century, according to Harvard professor Steven Pinker. “War really is going out of style,” he says. 
  • According to the Census Bureau, only one in 10 American homes had air conditioning in 1960. That rose to 49% in 1973, and 89% today — the 11% that don’t are mostly in cold climates. Simple improvements like this have changed our lives in immeasurable ways. 
  • In 1900, African Americans had an illiteracy rate of nearly 45%, according to the Census Bureau. Today, it’s statistically close to zero. In 1940, less than 5% of the adult population held a bachelor’s degree or higher. By 2012, more than 30% did, according to the Census Bureau. 
  • The average American work week has declined from 66 hours in 1850, to 51 hours in 1909, to 34.8 hours today, according to the Federal Reserve. Enjoy your weekend. 
  • More than 40% of adults smoked in 1965, according to the Centers for Disease Control. By 2011, 19% did.
  •  The percentage of Americans age 65 and older who live in poverty has dropped from nearly 30% in 1966 to less than 10% by 2010. For the elderly, the war on poverty has pretty much been won. 
  • If you think Americans aren’t prepared for retirement today, you should have seen what it was like a century ago. In 1900, 65% of men over age 65 were still in the labor force. By 2010, that figure was down to 22%. The entire concept of retirement is unique to the past few decades. Half a century ago, most Americans worked until they died. 
  • No one has died from a new nuclear weapon attack since 1945. If you went back to 1950 and asked the world’s smartest political scientists, they would have told you the odds of seeing that happen would be close to 0%. You don’t have to be very imaginative to think that the most important news story of the past 70 years is what didn’t happen. Congratulations, world.
  • You need an annual income of $34,000 a year to be in the richest 1% of the world, according to World Bank economist Branko Milanovic’s 2010 book “The Haves and the Have-Nots.” To be in the top half of the globe you need to earn just $1,225 a year. For the top 20%, it’s $5,000 per year. Enter the top 10% with $12,000 a year. To be included in the top 0.1% requires an annual income of $70,000. America’s poorest are some of the world’s richest.
  • Only 4% of humans get to live in America. Odds are you’re one of them. We’ve got it made. Be thankful.

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WHO / WHAT Are the Best Predictors of Stock Market Performance?

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Lon Jefferies

By Lon Jefferies MBA CFP®

WHO Are the Best Predictors of Stock Market Performance?

Every day CNBC airs dozens of “financial professionals” making market forecasts. Similarly, every financial publication has multiple pieces regarding the future of the stock market. With so much information, how is it possible to determine who is worth listening to and what information to incorporate into your investment strategy?

Dropping Names

Without dropping any names, I’d suggest that the more confident a market pundit is about his or her prediction, the more you should question their advice.

People who make strong, unwavering forecasts are interesting to watch and appear as intelligent, appealing leaders whose advice is worth following. Meanwhile, people who frequently say phrases such as “it depends,” “maybe,” or even “I don’t know” don’t seem to be adding much value and don’t appear to be any more knowledgeable than the average investor. Yet, I’d suggest you tune out the stanch forecaster pounding his fist on the table as he speaks and rather listen closely to the individual who is less willing to make firm predictions.

Stock market performance

Stock market performance is clearly not a result of any singular factor such as whether or not companies will generate more profits than expected. If this was the case, making market predictions would be easy – one could simply guess the answer to be yes or no and have a 50% chance of being correct. Rather, hitting profit targets is only point A on a long list of factors impacting stock market performance.

Point B may be whether or not the Federal Reserve will raise interest rates during their next meeting. Again, our market forecaster could guess yes or no to this question and have a 50% chance of being correct. However, when considering both factors A and B, now our market forecaster has to be right twice on two issues where there is only a 50% probability of being correct on each. Simple math tells us there is only a 25% chance that this will occur (50% x 50% = 25%).

Point C may be whether the republicans or the democrats win the 2016 election. Again, there is a 50% chance of either possibility. Now there are three factors in play, each with a 50% probability, so the probability that the market pundit will get all three factors correct is 12.5% (50% x 50% x 50% = 12.5%).

Point D may be whether the US dollars strengthens or weakens when compared to other currencies. Again, there is a 50% chance of getting this right, so when we consider all four factors, there is now a 6.25% chance of getting it right (50% x 50% x 50% x 50% = 6.25%).

The equation

There are hundreds of factors that go into this equation. Will Greece have another economic crisis? Will the price of oil go up or down? Will a war breakout with Russia? This is exactly why forecasting market performance is so difficult!

For this reason, the people who make the best forecasters are people who say phrases such as “perhaps,” “however,” and “on the other hand” a lot. Doing so illustrates that the individual has looked at the situation from a lot of different perspectives and realizes that everything may not go according to plan. These types of people also tend to admit when they are wrong more willingly and update their analysis utilizing the latest information available, even if the new information doesn’t reflect what they previously anticipated. Their thought process is likely: “I got point A wrong, so I need to adjust my thinking on point B, which will have an impact on point C, so how does this change my perspective on point D.” We’ll call this a point-A-to-point-B-to-point-C-to-point-D mentality.

By comparison, the forecaster who makes the strong prediction while staring into the camera likely utilizes more of a point-A-to-point-D mentality. They are less likely to admit that there are more factors affecting market performance than can be managed, and less likely to incorporate new information that doesn’t coincide with his previous prediction when making forward-looking forecasts. Their thought process is likely: “I may have gotten point A wrong, but that doesn’t matter. All that matters is point D and I believe I got that right when making my prediction.” This approach is obviously less logic-based than the approach taken by the forecaster who knows there are too many factors to enable an individual to make a confident prediction.

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idea

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Assessment

While people who make confident predictions regarding market performance are entertaining to watch and provide advice that is simple to follow (he said buy, so I’ll buy), their advice is not likely to be any more accurate than other market pundits. In fact, if they are unwilling to admit when they get any potential factor concerning market performance wrong, their advice may be more damaging then useful.  By comparison, market forecasters who utilize phrases such as “however,” “it is hard to say,” and “I’m not sure” provide advice that may come off as unhelpful or impossible to follow, but it is these people who provide logic-based nuggets of information that are likely to benefit your investment portfolio.

ABOUT

Lon Jefferies, a Certified Financial Planner™ (CFP), is a fee-only financial advisor and trusted fiduciary at Net Worth Advisory Group in Salt Lake City, Utah. He is dedicated to providing comprehensive financial planning and investment management on a fee-only basis.

Conclusion

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

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[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

***

A [Physician] Investor’s Worst Enemy?

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Fear of Missing Out

By Lon Jefferies CFP MBA

Lon JefferiesFear of missing out (FOMO) is an increasingly powerful emotion in our daily lives – so much so that FOMO was officially added to the Oxford English Dictionary in 2013.

DEFINITION

Have you ever looked at your Facebook feed and been jealous of someone’s picture from a beautiful viewpoint, or enviable of a friend’s photo of an expensive dinner with a strategically placed bottle of fancy wine in the background?

That is FOMO – the fear that at any given moment someone is doing something more appealing than what we are doing at the time.

Part of Life

A fear of missing out has always been part of life, but it has become more prevalent with the emergence of social media. Personally, I can’t help but check my Twitter feed every hour or so to make sure that I’m not missing out on an article published by one of my favorite financial writers. Yet, social media has increased the power of FOMO more than I realized.

Example

I have absolutely zero interest in horse racing – frankly, I dislike the sport. However, due to all the hype on Facebook and Twitter, I couldn’t help but watch the Belmont Stakes out of fear of missing American Pharaoh become the first Triple Crown winner of my lifetime.

FOMO is frequently a counter-productive emotion, leading to jealousy of others, dissatisfaction with our own lives, and bad decision-making processes. Nowhere is the negative impact of FOMO more apparent than in some individuals’ investment strategy. For years, no one has enjoyed going to the neighborhood BBQ only to have to listen to their next door neighbor brag about how his portfolio has outperformed the S&P 500 index over the last six months. Not only is listening to the boasting annoying, it makes us discontent with the return our own portfolio has achieved and makes us wonder if we should adapt a different strategy (i.e. take more risk right after the market achieved a new all-time high).

Social media has expanded the impact of FOMO on investment strategies. For the last year, the internet has ensured we are aware that large cap indexes like the S&P 500, Dow Jones Industrial Average, and NASDAQ are at all-time highs and achieving appealing returns, and we wonder why our more diversified portfolio isn’t behaving in a similar fashion. It is hard to be content with our diversified strategy when every media outlet is constantly reminding us how we are missing out on the stellar performance that could be obtained if only we had a non-diversified portfolio that invested only in the asset category that is currently in the middle of a hot streak.

When it comes to investing, FOMO is significantly impacted by recency bias. Our fear of missing out becomes more and more intense after the market has just experienced an uptick. If we take a couple of steps back, it is clear why we maintain a diversified portfolio – it provides the most appealing tradeoff between maximizing returns and minimizing risk.

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FOMA
                                

Fear Of Missing Out

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Yet, it is hard to remind ourselves of this when it seems like everyone around us is taking advantage of the latest market trends and we are missing out.

Of course, changing our portfolio to try and take advantage of a run that has already taken place would be foolish, as we would be selling assets with prices that have remained flat and may now be undervalued relative to the market in order to buy assets that have recently experience significant growth and are likely now expensive. These are the type of decisions that FOMO can cause and we would be wise to avoid this type of thinking.

A Re-Do?

We have been in this position before. In the late 1990s, people wanted to abandon their diversified portfolio and put a heavy focus on the technology stocks that were making all their neighbors rich. In the mid 2000s, everyone wanted to borrow as much money as possible and utilize the funds to buy and flip real estate.

In the early 2010s, everyone was wondering if they should sell their stocks before a double-dip recession began and use the resulting funds to buy gold. In each of these scenarios we were hearing individual stories of others who had implemented these strategies and were doing better than we were.

Of course, with the benefit of hindsight, we can see that changing our long-term investment strategy due to a fear of missing out on what was working for others over a short time period would have been a drastic mistake in each of these circumstances. After the market has done well, recency bias and FOMO causes investors to be more afraid of missing a bull market than of suffering large losses.

However, in these times, we need to remember that we chose a diversified investment strategy because it provides us with the highest probability of obtaining our financial goals while exposing us to the least amount of volatility possible.

Assessment

When the media and our acquaintances insist on informing us how we would have been better off placing heavy bets on the asset categories that have recently done well, we would be well served to remember that a diversified portfolio strategy will almost certainly provide us with the best chance to achieve long-term investment success. 

Conclusion

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The Stock Market Has Been Flat For Six Months

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This is Great News!

By Lon Jefferies MBA CFP® http://www.NetWorthAdvice.com

Lon JefferiesInvestors have experienced a very uneventful 2015.

In fact, for seven months the Dow Jones Industrial Average was at essentially the same value.* This lack of fluctuation has been even more pronounced over the last two months. As of the market close on May 14th, 2015, the S&P 500 has closed between 2,040 and 2,120 for 71 days in a row.

Further, for nearly a full month, the DOW hasn’t experienced a 1-month high OR low and traded within a 2% range the entire time (always between -1% and 1%).** This was the longest streak in over 100 years!

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one-month-return

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Believe it or not, this may be the best pattern possible for the U.S. stock market.

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Trendline Image

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History tells us that the market is likely to increase in value over time. If we were to plot the market’s value from the time the market first opened to the current day, a chart of those two points would illustrate a return as such:

Trendline Image

However, we all know that the market doesn’t provide a consistent return. On individual trading days, the market can either increase or decrease in value, and the range of potential gains or losses is wide. Over extended periods of time, the market’s actual value may be above or below the expected trend line. In fact, the market’s actual historical return may look more like:

Historical vs Trendline

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Historical vs Trendline

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Anyone who is familiar with Net Worth Advisory Group is likely aware that we are not the type to make market predictions. We have no idea whether the market is near a temporary top or is still experiencing the upward trend after hitting the bottom of an S curve in 2008. However, let’s assume the market has reached the top of an S curve and is currently above the trend line that would represent consistent growth (similar to the illustration above).

If that is the case, there are two ways the market could get back in line with the trend line representing consistent long-term growth. The first and most obvious way this could happen is for actual market performance to curve downwards towards the trend line. This would represent a market correction or even crash.

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crash

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The second, and perhaps less obvious way that actual returns could become aligned with the long-term trend line is for time to allow the trend line to catch up to the actual returns we have experienced since 2008.

In this scenario, the market doesn’t slump but remains stable while time enables price-to-earnings ratios, valuations, and the economy a chance to catch up.

Time Catch Up

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Time Catch Up

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Very few investors enjoy or take advantage of a market correction. In fact, most investors lose control of their emotions when the market experiences a drastic downturn, and do exactly the opposite of what they should do: they sell at market lows – hardly a profitable investment strategy.

Consequently, if we are to avoid an over-heated market, it is likely better for most investors if the market realigns itself with the long-term growth rate by remaining flat for awhile and allowing the trend line time to catch up.

Allow me to reemphasize that I am not predicting that the market is in fact at a temporary high and above where it should be. I have no idea what the market will do tomorrow, over the next month, or over the next year. That is why I’m a believer in having a well diversified portfolio that represents your risk tolerance and you stick to it through thick and thin.

However, let’s look at the other side of the coin and assume the market is still at the bottom of an S curve, below the long-term trend line, and needs to experience further growth in order to catch up. Even in this scenario, an extended period of flat market performance is hardly a bad thing – it would simply make the potential upside needed to get back to market norms all the larger.

Market Under Valued

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Market Under Valued

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Assessment

It turns out that an extended period of flat market performance may very well be a positive for investors in any environment, regardless of whether the market is currently over or under-valued.

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How Your 2013 Federal Tax Dollars Were Spent

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A Spreadsheet Breakdown

By Lon Jefferies MBA CFP

Lon JeffriesClick here for a calculator that shows you how the tax you paid in 2013 was spent.

Simply input the amount you paid in federal income tax in 2013 and you’ll see a breakdown of how your money was utilized.

  1. What would you cut in the budget?
  2. What areas would you spend more, or less, on?

 

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The Superior Retirement Account – Will that be Traditional or Roth?

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Weighing the Costs

Lon Jeffries[By Lon Jefferies MBA CFP®]

As an informed investor and reader of this ME-P, you’re likely familiar with the difference between a traditional IRA/401(k) and a Roth IRA/401(k).

While the traditional account enables you to postpone taxes on both the income invested and its growth until the funds are withdrawn, a Roth account does not provide an initial tax benefit but investment growth is tax free. So which is better?

Let’s answer the question with some simple math. Suppose an investor in the 25 percent federal tax bracket invests $1,000 of pre-tax income, obtains an 8 percent annual return over the next 10 years, and is still in the 25 percent tax bracket in the future. Would this investor profit more investing in a traditional or a Roth account?

As the chart below illustrates, the investor in this scenario would end up with the exact same amount in either a traditional or a Roth account.

So does the decision to invest in a traditional or Roth retirement account not matter? Not so fast.

Constant Tax Rate
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,619

Lower Tax Bracket in Future

Let’s assume our investor will have a reduced income when she retires in 10 years, causing her to be in the 15 percent tax bracket in the future. Perhaps the worker is in her prime earning years and will have less income during retirement. In this scenario, due to the up-front 25 percent tax bill, investing the funds in a Roth would lead to the same after-tax value of $1,619. But investing the funds in a traditional account would allow the full $1,000 to experience growth for 10 years, with a reduced future tax bill of 15 percent, leaving $1,835 of after-tax value in the account. This investor would benefit from delaying taxes into the future when she would be in a lower tax bracket.

Lower Tax Rate in the Future
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (15%) $324 $0
After-Tax Value in 10 Years

$1,835

$1,619

Higher Tax Bracket in Future

On the other hand, if the investor was in the 15 percent tax bracket this year but expected to be in the 25 percent bracket during retirement (potentially a young employee expecting his earnings to rise), paying taxes now at 15 percent would allow $850 to be invested, which after 10 years of 8 percent growth would be worth $1,835 tax free.

Higher Tax Rate in the Future
Traditional Roth
Initial Tax Bill (15%) $0 $150
Invested Amount (after-tax) $1,000 $850
Future Investment Value $2,159 $1,835
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,835

Roth Advantages

What if you expect to pay a comparable tax rate both now and in the future? A Roth account offers several advantages in this scenario.

First, as taxes have already been paid on a Roth account, the government doesn’t require investors to take required minimum distributions (RMDs) from these accounts, whereas RMDs are required from traditional retirement accounts beginning at age 70½. Without RMDs, Roth accounts can grow tax free for the investor’s entire lifespan.

Additionally, upon death, Roth accounts pass to an investor’s heirs without any tax liability, while those who inherit a traditional retirement account must pay taxes on the assets.

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IRA

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Second, money withdrawn from a traditional retirement account before the investor is 59½ may be subject to a 10 percent penalty. Yet contributed funds to a Roth account (but not the growth on the contributed funds) can be withdrawn at any time without penalty. While withdrawing funds before retirement isn’t advisable, the added liquidity of the Roth account can prove useful in emergencies.

Finally, even if your income is expected to remain constant, investing in a Roth account allows you to lock in your taxes at today’s rate as opposed to taking the risk that national tax rates might be raised in the future.

If you’re unsure how your future tax bracket will compare to your current rate, diversify. Nothing prevents you from having both a traditional and a Roth retirement account. This not only allows you to hedge your bets, but puts you in a position during retirement to take distributions from your tax-deferred account in low-income years and from the tax-free account in years when you are in a high tax bracket.

Assessment

http://www.utahbusiness.com/articles/view/weighing_the_costs/?pg=1

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Why You Should [Still] Know Your Marginal Tax Rate?

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And … Other Financial Planning Topics of Import

Lon JefferiesBy Lon Jefferies MBA CFP®

In 2014, the federal tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. For a taxpayer who is married and files jointly, regardless of how much the household makes, the first $18,150 of income after accounting for deductions and exemptions will only be taxed at the 10% rate.

Similarly, any income the household makes that is more than $18,150 but less than $73,800 is taxed at the 15% rate. At that point, the next $75,050 is taxed at 25%, and so on.

Consequently, not all income a household makes during the course of the year is taxed at the same rate. A marginal tax bracket is the tax rate that applies to the last dollar the household made.

It is crucial for all taxpayers to know their marginal tax rate. This information can help a client identify which type of investment accounts fits their situation best, how to structure an investment portfolio, and how to determine the value of certain deductions when filing their tax return.

Roth or Traditional Retirement Accounts

Contributions to traditional retirement accounts like IRAs and 401(k)s allow taxpayers to avoid recognizing income earned during the tax year and push the need to acknowledge the revenue into a future year. This is valuable because many people are in a higher tax bracket during their working years than they are during retirement. For instance, for a person who is currently in the 25% marginal tax bracket, it may be advantageous to delay recognizing the income until the investor retires and has less income, causing him to be in only the 15% marginal tax bracket. Doing this would enable the taxpayer to pay taxes at only 15% as opposed to 25%.

Alternatively, a Roth IRA or Roth 401(k) allows an investor to pay taxes on contributed income during the year it was earned but the money then grows tax-free. Consequently, a Roth retirement account is great for someone who believes they may be in a higher marginal tax bracket in the future. For example, a young employee in the early stages of his career who is in the 15% tax bracket but believes he may be in the 25% or 28% bracket in the future would benefit from paying all taxes on the income at his current rate of 15% and then getting tax-free investment growth. This would prevent the investor from having to pay the higher future tax rate of 25% or 28% on the invested dollars.

Knowing your marginal tax bracket can help you determine if you would favor paying taxes on your invested dollars at your current tax rate or if you believe you may benefit from pushing the need to recognize the income into a future tax year. This is a critical decision when planning for retirement and it can’t accurately be made without knowing your marginal tax rate.

Capital Gains Rate

A long term capital gains tax rate is the rate that applies to the growth of any asset held for longer than a year that is not within a tax-advantaged account. If you buy stock outside a tax-advantaged account, or purchase investment property, any growth in the value of the investment will be taxed as capital gains when sold.

An investor’s capital gains tax rate is determined by the investor’s marginal tax rate. For most taxpayers the long term capital gains tax rate is 15%. However, if a taxpayer is in the 10% or 15% marginal tax bracket, the long term capital gains tax rate is an amazing 0%! Additionally, many taxpayers in either the 35% or 39.6% tax bracket may end up paying capital gains at a rate of 20%.

Clearly, knowing your marginal tax bracket will help you analyze the appeal of making investments outside of tax-advantaged accounts. People who qualify for the 0% capital gains tax should actively search for ways to take advantage of this benefit.

Additionally, knowing your marginal tax rate can help you determine the best time to recognize long-term capital gains. If your marginal tax rate will be 25% in 2014 — leading to a capital gains tax rate of 15% — but you believe your marginal rate will be 15% in 2015 — leading to a capital gains tax rate of 0% — it would save you money and lower your tax bill to defer recognizing long-term capitals gains until next year.

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FP

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Annuities

Annuities are promoted as a way for invested dollars to obtain tax-deferred growth. However, when money is withdrawn from an annuity it is taxed at the investor’s marginal tax rate as opposed to his long term capital gains tax rate. Knowing your marginal tax bracket can help determine whether an annuity adds any value to your portfolio, or whether it could actually be detrimental.

Suppose an investor is in the 15% marginal tax bracket. If this person invests in an annuity, he will avoid paying taxes on any of the investment’s growth until the funds are withdrawn from the annuity. However, at that point the investment’s growth will be taxed at the taxpayer’s marginal income tax bracket of 15%. Alternatively, if this same investor utilized a taxable investment account rather than an annuity, the investment’s growth would be taxed at the investor’s capital gains tax rate of 0% when sold. In this case, investing in an annuity actually created a tax bill for this investor!

Clearly, knowing your marginal tax rate and your resulting capital gains tax rate can help you determine the best type of investment accounts for your personal situation.

Itemized Deductions

The value of your itemized deductions is essentially determined by your marginal tax bracket. For a simplified example, consider a taxpayer who could generate an additional $10,000 of deductions. Doing so would mean the individual would pay taxes on $10,000 of income less than he would without the deduction. If the individual is in the 15% tax bracket, generating the deduction would lower the person’s tax bill by $1,500 dollars ($10,000 x 15%). However, if the individual is in the 25% tax bracket, the same deduction would lower the person’s tax bill by $2,500 ($10,000 x 25%).

Consequently, knowing your marginal tax bracket can help determine when large itemized deductions should be taken. If you would like to donate funds to your favorite charitable institution, knowing which year you will be in the highest marginal tax bracket can help you determine the best time to make the contribution.

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FA

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Marginal Tax Rates Change

Many people’s income is relatively constant year-after-year. For these people, there may not be much fluctuation in their marginal tax bracket. However, any time you have a significant increase or decrease in income recognized during a year, your marginal tax rate may change. Whenever possible, it is best to anticipate how your current marginal tax rate might compare to your future marginal tax rate.This is another strong factor that can impact all the key financial decisions effected by your marginal tax rate.

Conclusion

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Understanding Average [Physician] Investor Results

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On the failure of the average investors to keep up with investment markets

[By Lon Jefferies MBA CFP® http://www.NetWorthAdvice.com]

The following chart was recently published by Bob Doll at Nuveen Investments:

investor-results

Epic Failure

Doll attributes the failure of the average investor to keep up with investment markets (or even inflation, for that matter) to market timing and emotionally driven decisions to move into and out of the market.

The Data

How long has it been supposedly common knowledge that investors are better off choosing an investment strategy that represents their risk tolerance and sticking to it both in the good times and bad? Still, this data illustrates that investors are terrible at sticking to their strategy when markets stall, and still have an overwhelming urge to buy after the market has already done well and sell shortly after a market drop (i.e. buy high and sell low).

A Financial Plan

Again, having a defined, documented investment strategy can help you avoid the types of behavior that cause other investors to significantly under-perform the market. This is where having a written financial plan can be invaluable.

Assessment

Of course, working with a financial advisor with a history of executing a steady, buy-and-hold approach can provide important support in avoiding detrimental behaviors during the rough times.

Conclusion

Are doctors different than the average investor noted in this essay?

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How Obama’s 2015 Proposed Budget Impacts Retirement Accounts

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Fore Warned is Fore Armed!

By Lon Jefferies MBA CFP®

Lon Jeffries

President Obama recently unveiled his proposed budget for 2015. Included in the proposal were the following potential changes to investor retirement accounts:

Apply Required Minimum Distribution Rule To Roth IRAs

There are currently two main reasons to invest in a Roth IRA – to pay taxes at your current rate in anticipation of being in a higher tax bracket in the future, and to invest in an account that does not require minimum distributions when the investor reaches age 70½. However, President Obama’s 2015 budget calls for Roth accounts to be subject to the same RMD requirements as other retirement accounts.

This change would make Roth IRA accounts much less appealing for a good portion of the investment community. Additionally, if enacted, the rule would dramatically reduce the benefit for many individuals to convert their traditional retirement accounts to Roth accounts. Lastly, this rule would essentially betray all investors who already converted their accounts to Roths by taking away a benefit they were counting on.

Eliminate Stretch IRA

Non-spouse beneficiaries of retirement accounts currently have the option of either withdrawing the funds from the inherited retirement account within five years of the original IRA owner’s death or stretching IRA distributions over their expected lifetime. Stretching distributions is considered favorable because it allows the investor to spread the tax liability from the income over their lifetime and continue taking advantage of the tax-deferral provided by the retirement account. However, Obama’s proposal would eliminate non-spouse beneficiaries’ ability to stretch distributions over a period of more than five years.

If implemented, this change would have severe tax implications on people inheriting a retirement account and drastically reduce the value of tax-deferred accounts as estate planning tools.

Cap on Tax Benefit for Retirement Account Contributions

Currently, investors obtain a full tax-deferral benefit on all contributions to retirement accounts. Under Obama’s proposal, the maximum tax benefit that would be allowed on retirement contributions would be 28%. Consequently, an investor in the 39.6% tax bracket would only be able to deduct 28% and would still need to pay taxes at 11.6% (39.6% – 28%) on all contributions made.

Eliminate RMDs For Retirement Accounts Less Than $100k

Currently, investors over the age of 70½ must begin taking taxable distributions from their retirement accounts in the form of required minimum distributions (RMDs). Under Obama’s proposal, individuals whose retirement accounts have a total value of less than $100k would no longer be subject to required minimum distribution rules. This would enable retirees with less in their retirement accounts to take greater advantage of the tax-deferral benefit an IRA provides.

Retirement

Retirement Account Value Capping New Contributions

Under the new proposal, once an individuals’ retirement account value grew to a certain cap, no further contributions would be allowed. This cap would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $210,000 starting when the investor turns 62. Currently, this formula would indicate a cap of $3.2 million. This cap would be adjusted for inflation.

Proposal, Not Law…

Keep in mind that these potential changes are currently just proposals and are not certain to be implemented into law. In fact, with the exception of RMDs for Roth accounts, all of these suggested adjustments were proposed by Obama last year and none were approved by congress. Consequently, history suggests that Obama may have a hard time getting these changes implemented. Still, examining the proposals provides some insight into the direction President Obama would like to proceed.

Conclusion

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Who Gets Government Aid thru the HIEs?

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The Premium Assistance Tax Credit

By Lon Jefferies MBA CFP®

Lon JeffriesThe Premium Assistance Tax Credit (PATC) is designed to help “lower” income individuals and families pay for health insurance plans purchased through the new health care exchange program.

However, more people may qualify for government assistance when purchasing health care through the exchange than may realize.

Terms and Definitions

The program defines “lower” income as households that earn less than 400% of the Federal Poverty Level (FPL), which is based on the number of individuals in the home. In 2013, the FPL for a single individual was $11,490.

Similarly, the FPL for a household of two people was $15,510 and the FPL for a home of four individuals was $23,550. Consequently, at least some premium assistance credit is available for individuals earning less than $45,960, couples earning less than $62,040, and a household of four earning less than $94,200. (Click here for more information on the Federal Poverty Level for households of various size.)

It’s important to note that for the purposes of the assistance program, income is defined as modified adjusted gross income. This means that a taxpayer’s adjusted gross income will include all Social Security benefits received (whether it was taxable or not), and all bond interest (tax-exempt or not). This factor will reduce a person’s eligibility for aid if he begins receiving Social Security before age 65 (at which point he qualifies for Medicare and can no longer participate in the health care exchange).

A Reverse Calculation

The amount of aid the government will provide is essentially calculated in reverse – the maximum amount that an individual or family can owe is calculated, and the government will pay the remaining premium. This table shows the Premium Assistance Tax Credit thresholds based on income relative to the Federal Poverty Level:

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Income Relative To FPL: Premiums Limited To:
Up to 133% of FPL 2% of household income
133% to 150% of FPL 3% to 4% of income
150% to 200% of FPL 4% to 6.3% of income
200% to 250% of FPL 6.3% to 8.05% of income
250% to 300% of FPL 8.05% to 9.5% of income
300% to 400% of FPL 9.5% of income

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Example:

For example, assume John is a single 62-year-old living in Utah and making $30,000 per year. (Again, remember that when calculating the PATC, it really doesn’t matter whether John’s $30,000 of income is from employment, a Social Security benefit, or a combination of the two.) John’s income is 261% of the FPL amount for singles [($30,000/$11,490) * 100], so this puts his threshold between 8.05% and 9.5% of his income. His exact threshold is 11/50ths of the way between 250% and 300% of the FPL, so his maximum premium is 11/50th of the way between 8.05% and 9.5%, which means his maximum premium is 8.37% of his $30,000 income, or $2,511 per year ($210 per month). This is the most John will need to pay for an adequate health insurance plan.

telehealth

What is Adequate Health Insurance?

What is deemed an adequate health insurance plan? The next relevant figure in the calculation involves determining the cost of the second least expensive Silver plan in the state. This can be determined by obtaining a quote at www.healthcare.gov. Assuming John lives in Salt Lake County, the second least expensive Silver plan available to him cost $5,100 per year ($425 per month). Whether or not John decides to purchase this exact policy, the $5,100 annual cost of the plan is significant.

Since the second least expensive Silver plan available to John cost $5,100, but the most John will be required to pay is $2,511 per year (8.37% of his income), the PATC program will cover the cost difference of $2,589. This amount will be the tax credit available to John for purchasing any health insurance policy through the exchange.

However, this does not mean that John is required to actually purchase and utilize the second least expensive Silver plan available to him. If John is so inclined, he can purchase a less expensive policy and he will still receive the $2,589 tax credit determined to be available to him.

Nevertheless, since the policy is less expensive, John would need to cover less of the cost of the inferior policy out of his own pocket. Similarly, John could also purchase a more expensive policy, but his tax credit would still be $2,589 and he would need to cover the additional cost of the superior policy with his own money.

Assessment

People are still familiarizing themselves with the options available within the health care exchange. Many will be surprised by their eligibility for assistance, and the amount of government aid available. Determining whether you qualify for a Premium Assistance Tax Credit will help you evaluate the attractiveness of the program.

More: Understanding Basics of the Health Insurance Exchanges [HIEs]

Conclusion

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How Have Bonds Responded to Higher Interest Rates?

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A Survey of Economists

By Lon Jefferies MBA CFP™

Lon JeffriesRecently, I pondered the possibility of interest rates rising and the impact it might have on bonds. The article was motivated by a Wall Street Journal survey of 50 top economists who forecasted the yield on the 10-year Treasury bond to rise to 3.47% by the end of 2014.

As you may know, the investment return of existing bonds tends to move inversely to interest rates. Consequently, there has been significant concern that bond values are due for a considerable drop, and investors have constantly questioned whether they should reduce their exposure to fixed-income investments.

The Forecast Results

So how has the economists’ forecast panned out through January? The 10-year Treasury bond began the year at 3.03%, but ended January at 2.65% — a significant decline.

As a result, bonds have generally increased in value. For instance, the iShares Investment Grade Corporate Bond ETF (LQD) is up 1.88% since the New Year, while the iShares Barclays 7-10 Year Treasury Bond (IEF) is up 3.06%. Even the SPDR Barclays International Treasury Bond ETF (BWX) is up .45% in 2014.

Why?

What has caused this unexpected result?

First, the historical inaccuracy of interest rate forecasts is well documented. A study by the University of North Carolina found economists predict future rates far less accurately than a random coin flip would fare as a predictor. Rising interest rates have been a general expectation since shortly after the market crash of 2008. Remember all the people who refinanced their homes away from an adjustable-rate mortgage to a fixed mortgage from 2010-2011 out of fear of rising rates? That rate hike still hasn’t come.

But, more important than the unpredictable nature of interest rates is the way bond performance has historically been related to the stock market’s performance.

In difficult market environments, the investment returns of stocks and bonds tend to have an inverse relationship. In fact, the S&P 500 (a broad measure of the U.S. stock market) has decreased in value during a calendar year five times since 1990 (1990, 2000, 2001, 2002, 2008). In all five instances, the value of U.S. Government Bonds (as measured by the Barclays Long-Term Government Bond Index) has increased (6.29%, 20.28%, 4.34%, 16.99%, and 22.69%, respectively).

RISK

Performance of Equities

How have risky stocks performed in 2014? The S&P 500 is down -3.46%, the Dow Jones Developed Market ex-U.S. market index (a measure of international stock performance) is down -3.64%, and the iShares MSCI Emerging Markets Index is down -8.63%.

It appears investors have fled stocks in a declining market and sought solace in the fixed income benefit that bonds provide, in-step with historic behavioral norms. Of course, higher demand for bonds means higher values. This last month has been a nice reminder of the stability bonds can add to a portfolio in a time of declining stock prices.

Assessment

While it is reasonable to expect interest rates to rise by some measure over the long-term, it would clearly be a mistake to dramatically shift your asset allocation away from bonds if they were determined to be a part of an investment portfolio that matches your risk tolerance.

January 2014 illustrated that bonds tend to increase in value and add benefit to a portfolio during market pullbacks, regardless of what interest rates are doing. In fact, bonds’ historical inverse relationship with stocks may be a larger determinate of performance than interest rate expectations.

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Conclusion

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Learn the “Right” Investing Lessons from 2013

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Understanding the Recency Effect

Lon JeffriesBy Lon Jefferies MBA CFP® www.NetWorthAdvice.com

The year 2013 was viewed as a very positive one by most investors; especially physician-investors.

The S&P 500 index (measuring large cap U.S. stocks) was up 32.39% for the year.

However, the reality is most other asset categories didn’t come close to keeping up with the pace set by U.S. equities.

For instance:

  • Foreign Stocks (IEFA): 22.46%
  • Emerging Markets (IEMG): -2.77%
  • Real Estate (IYR): 1.16%
  • US Government Bonds (IEF): -6.09%
  • US TIPS (TIP): -8.49%
  • Corporate Bonds (LQD): -2.00%
  • International Bonds (IGOV): -1.37%
  • Emerging Market Bonds (LEMB): -6.73%
  • Commodities (DJP): -11.12%
  • Gold (GLD): -28.33%

In Hindsight

In retrospect, the way to maximize your gain last year would have been to hold a completely undiversified portfolio consisting of nothing but U.S. stocks. The danger going forward is to learn the wrong lesson from 2013. Investors always have the temptation to fall prey to the Recency Effect, continuing and exaggerating the behaviors that worked in the recent past believing the environment we’ve just been through will be permanent.

The Long-Term Benefits of Diversification

Many will abandon their investment strategy because it didn’t give them the absolute best result last year, failing to recognize the long-term benefit of diversification. I’d argue that a better perspective is to remind yourself that the definition of diversification is that you always dislike a portion of your portfolio.

Always Laggards

Even in the most widely prosperous market environment, a truly diversified portfolio will have an element or two that lags the market. In fact, if at any time a portion of your portfolio isn’t generating negative returns, you should be concerned about a lack of diversification in your investment strategy.

Allocate Assets Now

Now is an ideal time to review your asset allocation and remind yourself why we diversify. Modifying your allocation with a focus on what happened in 2013 would be similar to guessing a coin flip will land on tails because it did on the previous flip.

Stock Market

Assessment

The correct lesson to take from 2013 is that over time, a well-diversified portfolio is capable of producing sufficient returns to help you reach your investment goals while minimizing risk.

Conclusion

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The Impact of Rising Interest Rates on Bonds

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On Interest and Exchange Rates

Lon JeffriesBy Lon Jefferies MBA CFP® www.NetWorthAdvice.com

An interest rate hike has been widely anticipated for some time. According to an October survey of 50 top economists conducted by the Wall Street Journal, the yield on the 10-year Treasury was forecasted to rise nearly one percentage point to 3.47% by the end of 2014.

What impact would such a rise have on your investment or retirement portfolio?

The Impact

Christopher Philips, a senior analyst in Vanguard’s Investment Strategy Group, points out the historical inaccuracy of such forecasts.

For instance, a similar survey conducted in 2010 had economists predicting a 4.24% 10-year Treasury yield by the end of the year, an increase from 3.61% at the time of the forecast. In actuality, rates declines to 3.30% at year-end. The inaccuracy of these forecasts is well documented.

In fact, as Allen Roth mentioned in the December issue of Financial Planning Magazine, a 2005 study by the University of North Carolina titled “Professional Forecasts of Interest Rates and Exchange Rates” found economists predict future rates far less accurately than a random coin flip would fare as a predictor.

Clearly, we can’t be confident what interest rates will do in 2014, but what if economists are finally correct and rates rise? How damaging would an interest rate increase be for bonds? If interest rates rise one percentage point next year, the intermediate aggregate bond index is expected to lose -2.8% — far from catastrophic. Of course, such potential risk is notably minimal when compared to the downside of owning stocks (remember the -36.93% loss endured by the S&P 500 in 2008?).

Historical Performance

It is also interesting to study how bonds have historically performed in periods of rising interest rates. Craig Israelsen, a BYU professor, recently documented how bonds performed during the two most recent periods of rate increases. Israelsen points out that although the federal discount rate rose from 5.46% to 13.42% from 1977 through 1981, the intermediate government/credit index had a 5.63% annualized return during that period. The next period of rising interest rates was from 2002 through 2006, when the federal discount rate had a fivefold increase: from 1.17% to 5.96%. During this period, the intermediate government/credit index obtained a 4.53% annual return. Clearly, even in an environment of rising interest rates, bond performance was surprisingly strong.

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Most importantly, investors should never forget the value bonds add to a portfolio as a diversifier to stocks. Frequently, the performance of stocks and bonds are inversely related.

For instance, when the stock market suffered during the tech bubble crash of 2000-2002, the Barclays Long-Term Government Bond Index rose 20.28%, 4.34%, and 16.99% in those years, respectively.

Current Indices

More recently, when the S&P 500 lost -36.93% in 2008, the Long-Term Government Bond Index rose 22.69% during the year. This diversification benefit may prove useful when stocks ultimately cool off from the extended hot streak they have experienced since 2009.

In 2013, the Aggregate Bond Index decreased in value by -1.98%. Given the occasional negative correlation in performance between stocks and bonds, is it really surprising that bonds didn’t produce a positive return given the incredible year stocks had (S&P 500 up over 32%)? Additionally, held within a diversified portfolio, isn’t the -1.98% return produced by bonds during the recent equity surge a small price to pay for the additional security they are likely to provide when markets reverse?

Assessment

It doesn’t seem prudent to avoid bonds entirely during periods of expected interest rate increases.

  1. First, forecasts of rising rates are far from certain.
  2. Second, even if interest rates rise bonds are still likely to be far less risky than stocks.
  3. Third, rising interest rates don’t necessarily mean declining bond values are a certainty – in fact, bonds performed quite well during the past two periods of rate increases.
  4. Finally, bonds are a vitally important part of a diversified portfolio, and owning uncorrelated and negatively correlated assets will be critical when equities ultimately lose their momentum.

Conclusion

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Nine Psychological Reasons We Do Dumb Things

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Yep – Even the Smart Folks!

By Lon Jefferies MBA CMP® CFP®

Dr. David Edward Marcinko MBA MEd CMP®

Lon Jeffries

In the Business Insider, Mandi Woodruff describes nine mental blocks that cause smart people to do dumb things. Review the list and itemize the factors that have negatively impacted your finances.

The Factors

  • Anchoring happens when we place too much emphasis on the first piece of information we receive regarding a given subject. For instance, when shopping for a wedding ring a salesman might tell us to spend three months’ salary. After hearing this, we may feel like we are doing something wrong if we stray from this advice, even though the guideline provided may cause us to spend more than we can afford.
  • Myopia (or nearsightedness) makes it hard for us to imagine what our lives might be like in the future. For example, because we are young, healthy, and in our prime earning years now, it may be hard for us to picture what life will be like when our health depletes and we know longer have the earnings necessary to support our standard of living. This short-sightedness makes it hard to save adequately when we are young, when saving does the most good.
  • Gambler’s fallacy occurs when we subconsciously believe we can use past events to predict the future. It is common for the hottest sector during one calendar year to attract the most investors the following year. Of course, just because an investment did well last year doesn’t mean it will continue to do well this year. In fact, it is more likely to lag the market.
  • Avoidance is simply procrastination. Even though you may only have the opportunity to adjust your health care plan through your employer once per year, researching alternative health plans is too much work and too boring for us to get around to it. Consequently, we stick with a plan that may not be best for us.
  • Confirmation bias causes us to place more emphasis on information that supports the opinion we already have. Consequently, we tend to ignore or downplay opinions that don’t mirror our own, leading us to make uninformed decisions.

NOTE: A recent interesting example of the confirmation bias is the case of David Rosenberg, who is one of the most well-known perpetual bears on Wall Street. In October, Mr. Rosenberg’s analysis forced him to warm to the current investment environment. His fans and followers, rather than appreciating his research and ability to adjust to new information, criticized him for changing his opinion.

As it turned out Mr. Rosenberg had fans not because of his expert analysis, but because he added intellectual heft to his followers pessimism and quasi-political desire for the system to collapse. Their view was that things were in permanent decline and his analysis, charts, and voice added respectability to their pre-existing bias. Mr. Rosenberg has now lost his fan base not because he was wrong for the last four years, but because he changed his mind.

head

  • Loss aversion affected many investors during the crash of 2008. During the crash, many people decided they couldn’t afford to lose more and sold their investments. Of course, this caused the investors to sell at market troughs and miss the quick, dramatic recovery.
  • Overconfident investing happens when we believe we can out-smart other investors via market timing or through quick, frequent trading. Data convincingly shows that people who trade most often underperform the market by a significant margin over time.
  • Mental accounting takes place when we assign different values to money depending on where we get it from. For instance, even though we may have an aggressive saving goal for the year, it is likely easier for us to save money that we worked for than money that was given to us as a gift.
  • Herd mentality makes it very hard for humans to not take action when everyone around us does. For example, we may hear stories of people making significant profits buying, fixing up, and flipping homes and have the desire to get in on the action, even though we have no experience in real estate.

Assessment

The good news is that being aware of these tendencies can help us avoid mistakes. We’ll never be perfect, but avoiding detrimental decisions based on mental prejudices can give us an advantage in our financial and retirement planning efforts.

Conclusion

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How to Transition into Medicare?

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The Timing, Costs, and Factors to Know

By Lon Jefferies MBA CFP® http://www.NewWorthAdvice.com

Lon JeffriesDid you know that the choices you make during your first year of Medicare eligibility will have long-term financial consequences? Yes, it is true!

And unfortunately, most people and even medical professionals have to make these decisions at a time when they are only beginning to familiarize themselves with a complex program.

The Rules

If you don’t follow Medicare’s enrollment rules, you may pay lifelong penalties for coverage. You have a seven-month window to enroll in Medicare as you turn 65. This window begins three months before the month of your birthday, includes the month of your birthday, and continues for the following three months.

The Parts

Part A

In most cases, you should sign up for Medicare Part A, which covers hospital stays, when you turn 65, even if you have other health insurance coverage. There is no cost for this coverage as long as you have 40 quarters of work in which you paid FICA taxes.

However, be aware that you are not allowed to contribute to a health savings account (HSA) if you are receiving benefits from Medicare. Thus, you may want to defer beginning Part A to continue building up your HSA balance to help offset future healthcare costs not covered by Medicare.

Part B

Medicare Part B covers services and supplies that are needed to diagnose or treat medical conditions, and health care to prevent illness. The standard monthly premium for Part B in 2013 is $104.90, but individuals with a modified adjusted gross income (MAGI) more than $85,000 and couples with a MAGI more than $170,000 pay more.

The premium ranges from $146.90 to $335.70 for those with incomes above the thresholds. If you have group health insurance through your own or a spouse’s employer, you may want to delay beginning Part B.

However, for this to be done without penalty, be sure to enroll in Part B coverage within eight months of the time your employment ceases. Otherwise, for every 12-month period that you could have been enrolled in Medicare Part B but were not, you will pay a 10 percent penalty on your Part B premium for life.

Part D

Medicare Part D covers prescription drugs. This coverage is usually purchased at the same time as Part B.  Part D monthly premiums vary by plan. However, higher-income beneficiaries (singles with a MAGI over $85,000 and couples with a MAGI over $170,000) pay from $11.60 to $66.60 more each month.

There is also a late enrollment penalty for Part D that is one percent of the “national base beneficiary premium” ($31.17 in 2013) multiplied by the number of full months you went without drug coverage.

Part C

Note that Medicare Part C is not a separate benefit. Part C, sometimes referred to as a Medicare Advantage Plan [MAP], is the portion of Medicare that allows private health insurance companies to provide Medicare benefits.

Part C is an alternative method for obtaining the same coverage that Part A and Part B provide, but do so through private insurance providers with different rules, costs and coverage restrictions. You can also get Part D as part of the benefits package if you choose. Although significant research is required, determining whether Part C is a viable option for you is simply a matter of considering your health, the medical services you use regularly, your prescription drug medications, and your budget.

medicare

Assessment

Medicare is a complex program. Enrolling on time and making informed decisions about coverage can save you thousands of dollars each year during retirement.

Conclusion

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On Setting Your Household Budget [ugh!]

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Trim Daily Expenditures or Don’t Sweat the Small Stuff?

By Lon Jefferies MBA CFP® http://www.NewWorthAdvice.com

Lon JefferiesHow often do you see articles containing money saving tips? Make dinner at home more often and eat out less, rent movies rather than going out, bring lunch to work rather than visit a restaurant, take advantage of coupons, and brew your coffee rather than driving-through Starbucks.

Do Advice Tips Work?

Are these tips worthwhile? If we spare the $8 expense of a lunch five days per week, 50 weeks per year, we could save $2,000 – nothing to scoff at!

However, what’s the cost of these savings? Eating at our desk everyday removes our ability to get outside and away from our work for that important hour, and prevents us from spending time, talking to, and laughing with friends. Is there a better way?

The DOL Report

According to a new study released by the Department of Labor, the average U.S household earns $65,132 per year before taxes, and spends an average of $50,631 on annual expenditures (excluding taxes and savings). Of that spending, $20,093, or 39.7%, goes towards housing expenses.

Additionally, $11,211, another 22.1%, goes towards transportation and automobiles. Combined, those elements make up 61.8% of the average household’s spending!

By comparison, only $10,835, or 21.4%, of our spending goes toward food, apparel and services, and entertainment combined. If we are going to explore ways to reduce spending, shouldn’t we start with the elements that are costing us the most?

Example:

For instance, most financial professionals say only 28% of our gross income should be committed to housing costs. Of the average $65,132 gross income, 28% would mean reducing our housing spending from $20,093 to $18,236, saving us $1,857 per year.

Assuming a 250-day work year, this savings could allow us to spend nearly $7.50 per day on lunch, enjoying our friends, and taking a break from the office.

More dramatically, reducing our mortgage payment by $500 per month, saving us $6,000 per year, pays for a whole lot of dinner and movie date nights.

Similarly, assume we spend $4 per day enjoying our morning coffee at Starbucks with friends five times a week, for 50 weeks a year. Annually this would cost us $1,000. Now suppose we purchase a nice used automobile for $15,000 rather than a new car for $25,000. This saves us $10,000 or 10 years worth of coffee breaks with friends (plus interest!).

Prioritize

Of course, everyone has different priorities. I suggest spending your money on what you are passionate about. For the occasional car fanatic, perhaps spending more on a car that makes you happy each day is preferable to other spending options.

Likewise, if homes happen to be your hot spot, heavy spending in this area makes sense.

Different Doctors?

However, I’d suggest that for most people, the experience of constantly eating with friends or spending a night out with your spouse is more likely to bring happiness than the possession of an expensive home or car. After all, would you rather eat out with friends or clip coupons alone in a large kitchen?

But, are doctors any different?

Budgets

Assessment

Consequently, reducing large expenses like a home mortgage or car loan may be the most effective way to stay within your budget and maintain your level of happiness – especially for docs!

Conclusion

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On Target Date Retirement Funds for Physicians

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What You Haven’t Considered

By Lon Jefferies MBA CFP® http://www.NewWorthAdvice.com

Lon JefferiesAn increasing number of physician investors are utilizing target-date funds in their investment accounts and employer retirement plans.

In theory, an individual should select a target-date fund that matches their estimated year of retirement, such as the Vanguard Target Retirement 2015, or Fidelity Freedom 2020 fund. The philosophy of these funds is that as one ages, the proportion of stocks in their portfolio should decline, while their exposure to less volatile fixed-income positions increases.

My Concerns

While I agree with the concept that investors should continually make their portfolios less aggressive as they age, there are two concerns I have about utilizing these funds.

First and most obviously, an appropriate asset allocation for an individual physician investor as they enter retirement is dependent on their risk tolerance and is best not left to generalizations. At retirement, an aggressive doctor may be comfortable holding a portfolio that is 70 percent stocks while a more conservative investor may not be able to tolerate the volatility that accompanies a portfolio that has any more than 40 percent exposure to equities.

Of course, assuming these two investors retired around the same time, a target-date fund would place both in a one-size-fits-all asset mix.

Next, and perhaps less obvious but equally important is the fact that an asset allocation is better designed around when the investor will need the money as opposed to when they will retire.

Case Examples:

Consider two hospital employees who are retiring in 2015, and consequently, are invested in the Fidelity Freedom 2015 target-date fund (which is quite conservative – only 45 percent stocks and a 55 percent mix of bonds and cash). One of these employees will be taking an early retirement at age 59 and won’t be allowed to draw a Social Security benefit for at least three years.

As a result, this individual will need to draw a large amount of funds from his retirement account in order to pay for the first several years of retirement. The worst thing that could happen to a retiree is to endure a market crash shortly after leaving the workforce and suffers an excessive loss right as the funds are needed.

In such a case, the physician investor wouldn’t have time to wait for the market to recover and would be forced to sell at a loss. If money will need to be withdrawn sooner rather than later, sound financial planning says it should be invested in a conservative portfolio that is likely to limit loss, potentially similar to the 45 percent stock and 55 percent bond mix that the Fidelity Freedom 2015 fund provides.

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Financial

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Another Case Example:

Now consider that the second hospital employee invested in the Fidelity Freedom 2015 fund is age 67, will immediately be receiving a full Social Security benefit when he retires, and has a healthy pension from his employer. With two significant sources of income immediately upon leaving the workforce, this employee may not need to withdraw meaningful assets from his investment portfolio during the early years of his retirement.

Now, with a longer investment time frame before funds will be withdrawn, a more assertive portfolio is likely appropriate for this investor as he can afford to endure a full market cycle of pullbacks and advances while attempting to achieve superior gains.

Assessment

Hopefully this example illustrates the importance of considering other potential income sources and the timing of your expenses during retirement rather than simply treating target-date funds as your entire asset base. While the theory of target-date funds is sound, other factors should be considered before utilizing them as a significant portion of your investment nest egg.

Conclusion

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Is a Stock Market Correction Imminent?

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Destined for a significant pullback; or not!

By Lon Jefferies MBA CFP® http://www.NewWorthAdvice.com

Lon JefferiesThe market has allowed itself a well-deserved “cool down” period during the month of August. The S&P 500 was down 3.13% while the Dow Jones Industrial Average was down 4.45% for the month.

After Running of the Bulls

After the roaring bull market we’ve enjoyed since April 2009, it is natural for investors to question whether this is a turning point and the market is destined for a significant pullback.

Currently, it is valuable to remind ourselves that even through the woes of August, the S&P 500 is only down 4.5% from its recent all-time high.

Wall Street Writes

Additionally, it is useful to define some terms, as Josh Brown, one of my favorite Wall Street writers, recently did:

Percentage    Drop: Defined    As: Feels    Like:
less than   5% Pause “whatever”
5% to 10% Dip Refreshing
10%+ Correction Nerve-wracking
20%+ Bear Market Panic
50%+ Crash Can’t Get   Out of Bed

The Market Pause

You may have heard the word correction in the financial media lately. With a market pause still under 5%, it’s probably a bit early to start talking about a correction. Still, let’s assume we are headed for an actual correction, or a loss of 10% to 20%.

Expectations

What should we expect? Here are some interesting numbers that Mr. Brown accumulated:

  • Since the end of World War II (1945), there have been 27 corrections of 10% or more. Only 12 of these corrections evolved into bear markets (a loss of 20%+). The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 trading days to play out.
  • On average, the market has endured a correction every 20 months. Of course, the corrections aren’t evenly spaced out — 25% of the corrections occurred during the 1970′s, and another 20% occurred during the secular bear market of 2000-2010. However, from 1982 through 2000, there was just four corrections of 10% or more. This is relevant as it illustrates that bull markets can run for a long time without a lot of drama.
  • Since the stock market’s bottom in March of 2009, there have been two corrections. In the spring of 2010 the S&P 500 lost 16% over 69 trading days. In the summer of 2011, the S&P 500 dropped a hair over 20% before snapping back. Technically, this qualified as a bear market, which would mean the current rally is only two years old as opposed to almost five years old if dated from March of 2009.
  • The market pulled back 9.9% during 60 days in the summer of 2012. While not quite a correction, this dip set up one of the greatest rallies of all time.
  • There have been 58 bull market rallies (defined as market advances of 20% or more) in the post-war period, and they have run for an average of 221 trading days and resulted in an average gain of 32%. Comparatively, when measured by both length and magnitude, the current bull market is overdue for a correction and has been for awhile.

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Stock_Market

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Financial Action Plan

So what should you do assuming we are heading for a correction?

First, it is critical to remind yourself that if you are following sound financial planning principals, you already have an investment portfolio that matches your risk tolerance and investment time horizon.

Remember that just because the market loses 10% doesn’t mean your portfolio will lose 10%. In fact, if you scaled back the assertiveness of your portfolio as you transitioned into retirement and your portfolio is only 60% stocks, your portfolio would likely only be down approximately 6%.

Second, in the instance of an investor with a portfolio that is 60% equities, recall that you selected such a portfolio because you deemed a 6% loss to be acceptable. In fact, if due diligence was completed when you selected an asset allocation, you were aware that the largest loss a 60% stock, 40% bond portfolio suffered during the last 44 years was -19.35% (2008).

Additionally, you were aware that such a loss could (and likely would) happen again and you determined that was acceptable.

Grinding Teeth

Thus, for medical professionals and other investors who have done their planning, the best thing to do in the event of a market correction is grit your teeth and do very little!

For those doctors who haven’t planned in advance, now would be an ideal time to do your homework and create a portfolio that matches your situation and behavior patterns.

Assessment

Once you’ve done your planning, all you need to do is remember what Josh Brown calls the ABCs of investing: Always Be Cool.

Conclusion

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Twelve Steps of Financial Independence for Doctors

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A Basic Guide

By Lon Jefferies  MBA CFP® CMP®

Lon JeffriesWant to get your finances in order? Consider this comprehensive 12-step guide to address each element of your personal financial situation. In most cases, you should not address a step until all previous steps are satisfied.

1. 401(k) 403(b) Match: Without exception, if your employer matches 401(k) contributions, you should maximize whatever they’re offering. If it’s a dollar-for-dollar match, that’s an instant 100 percent return! Even the 50 percent return of a two-for-one match is irresistible.

2. Consumer Debt: Pay off your credit cards and all other unsecured loans, prioritizing the debts with the highest interest rates. Credit cards frequently charge rates as high as 30 percent. Paying off a card with 30 percent APR is comparable to getting a 30 percent investment return. Not completing this step will hamper your entire financial plan.

3. Cash Flow: You can’t develop wealth if you spend more than you make. Construct and follow a written budget to ensure you are living within your means. Your budget should include saving at least 10 percent of your gross income for retirement. Constantly compare actual spending with your budget and hold yourself accountable! Mint.com is an excellent free tool for this step.

4. Emergency Reserve: Develop a liquid savings account consisting of enough money to cover three to six months of expenses. These funds should only be utilized in crisis such as a job loss or medical emergency.

5. Life Insurance: If you have dependent children, you likely need life insurance. Cost-efficient coverage can frequently be obtained via your employer. To calculate the amount of coverage to purchase, first determine how much money your survivors would need to maintain a comfortable lifestyle, and then subtract any income they will generate as well as any savings you’ve accumulated. Alternatively, if you don’t have children in your household and your spouse is self-sufficient, you may not need life insurance coverage.

6. Disability Insurance: Getting hurt can completely derail your financial planning. A loss of income halts your savings and likely leads to increased debt. Obtain enough disability coverage to bridge the gap between earnings and expenses in the event of an injury. Coverage can frequently be purchased through your employer.

7. Estate Planning: Obtain a power of attorney, medical directive and living will. These documents allow you to designate the person you would like to make decisions for you if you become incapacitated. They also specify your preferences regarding life-prolonging medical treatments. Ensure both primary and contingent beneficiaries are assigned to your retirement accounts. Finally, develop a will or trust to ensure all other assets are distributed as you desire when you die.

8. Retirement Contributions: With risk exposures covered, it’s time to return to retirement planning efforts. Again, a 401(k) is an attractive retirement vehicle because it frequently offers an employer match and allows large annual contributions ($18,500 or $25,000 for individuals over age 50). If your employer doesn’t offer a 401(k), you can still contribute up to $6,500 (or $7,000 if over age 50) to an IRA. IRA contributions can be made on behalf of both spouses, even if only one is employed.

9. Traditional or Roth: The type of account that is best for you depends on when you want to pay taxes. A traditional retirement account allows an immediate tax deduction, the investments grow tax deferred, and the money isn’t taxed until the funds are withdrawn from the account. Alternatively, taxes are paid on Roth contributions immediately, but both contributions and growth are completely tax free when withdrawn during retirement. Put simply: will you be in a higher tax bracket now or when you withdraw the funds?

10. Asset Allocation: The most important investment decision you can make is how much of your portfolio will be invested in stocks versus bonds. A higher proportion of stocks leads to increased risk, but the potential for greater returns. The more time you have until the funds are needed, the more risk you can usually afford to take. Consequently, you should reduce the proportion of stocks in your portfolio as you approach retirement in order to minimize your risk factor. Identify an asset allocation that is aggressive enough to accomplish your investment goals while exposing you to an acceptable level of risk.

11. Get Caught Up: According to a recent Fidelity study, your nest egg should be one times your salary by age 35, three times your salary by 45, five times your salary by 55 and seven times your salary by 67.

12. Education Planning: Only after your retirement savings is where it should be can you focus on your children’s college education. At this point, explore a Utah Educational Savings Plan 529 (uesp.org) or a Coverdell Education Savings Account, both of which offer tax advantages if used for schooling.

Assessment

Does this mean you don’t need a financial advisor? Of course not! A qualified, comprehensive financial planner can add value, address shortcomings, and answer questions in each of these areas. Once you have completed each of these steps, you can be confident you have your financial ducks in a row.

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healthcare-business

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

How Volatile Is the Stock Market Today?

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And … Is it Dangerous?

By Lon Jefferies CFP® MBA www.NetWorthAdvice.com

Lon JefferiesBased on conversations with physician and clients, I’d suggest that most investors view the market of the new millennium as more volatile and fragile than it’s been in the past.

JUNE 4, 2013

DOW 15,253.7 +138.1
NASDAQ 3,465.49 +9.58
S&P 1,640.61 +9.87

New concerns that could affect a portfolio are seemingly always coming to light – think of the near-financial collapse of the U.S. economy during the last recession, the U.S. debt downgrade, the potential bailout crises in Europe and the possible devaluation of the euro, domestic unemployment concerns, and the perennial concern about the inflation/deflation of the dollar.

Add to this the idea that the world has become a more unstable place and the reality that supercomputers make thousands of trades every second.

How Valid Are the Concerns?

To determine the validity of these perceptions, Allan Roth analyzed the performance of the Wilshire 5000 (an index of the market value of all stocks actively traded in the United States) since 1980 in the May edition of Financial Planning Magazine. Surprisingly, Mr. Roth found that market swings of more than 30% weren’t much more common during the past 10 years than they were from 1980-2002. In fact, on a monthly basis, market swings of more than 10% actually occur less these days than in the past.

On a daily basis, the mean standard deviation of returns (a measure of volatility) over the entire 32-year period was 1.01%. In other words, during 68% of trading days, the index increased or decreased by less than 1.01%. Further, on 95% of trading days the index went up or down by no more than 2.02% (or two standard deviations). While daily standard deviation hit a record in 2008 of more than 2.5%, last year actually had lower volatility than the overall average. Consequently, while volatility hit a high in 2008, it has been at a very normal level since.

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Stock_Market

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Why the Perceptions?

So why do investors perceive more uncertainty in today’s environment? Mr. Roth mentions a few hypotheses:

  • Magnitude Effect – To suffer a 2.5% decrease in 1972, the S&P 500 would have needed to decrease by 2.54 points. To endure a 2.5% decrease today, the index would need to decrease by 41.25 points. Although both represent the same investment loss, we perceive the double digit point swing as larger and more dramatic.
  • Availability Bias – Humans overestimate the probability of events associated with memorable or vivid occurrences. Memorable events are further magnified by excessive coverage in the media.  Because the market crash of 2008 was so remarkable, investors tend to overestimate the probability of a similar crash and underestimate the probability of market appreciation, which historical data says is significantly more likely.
  • Access to Information – Jason Zweig, a columnist for the Wall Street Journal, says “today between websites, Facebook, Twitter, the TV and smart phones, an investor couldn’t escape knowing about a big move in the stock market if he or she tried. Whatever you pay attention to, while you are attending to it, will always seem more significant than it really is.”
  • Simple Fear and Pessimism – Meir Statman, a finance professor at Santa Clara University, suggests “people who think the U.S. is in decline view investing as riskier now than in the past, when they believe the country was better off, and no amount of data showing actual volatility would change their minds.” Similarly, Daniel Kahneman, a Nobel laureate and Princeton professor suggests “people always think the present is more volatile than the past. Because we know that historic crises have resolved themselves, we may simply remember the past as being less volatile than we viewed it at the time.”

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Assessment

It’s likely beneficial for physicians and all investors to evaluate their behavior and determine if they exhibit any of these biases. History tells us that the most dominate factor leading to investment success is to keep your asset allocation steady. Being aware of tendencies that might encourage us to make rash investment decisions could save us a lot of stress during critical market movements.

Conclusion

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When did you last Review your Insurance Coverage – Doctor?

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Why shopping around periodically is a smart move

By Lon Jefferies, MBA CFP™  http://www.NetWorthAdvice.com

Lon JeffriesWhen is the last time you compared rates on your home and auto insurance policies – doctors and all ME-P readers? Unfortunately, a stellar safety record doesn’t always translate into lower insurance rates. Even if you think you have a good rate, shopping around periodically is smart.

A Reader’s Query

After attempting to follow my advice of maintaining an umbrella insurance policy, one of our ME-P readers contacted his insurer to add coverage. This reader was shocked when his insurer informed him that he didn’t qualify for an umbrella policy because he didn’t carry sufficient liability insurance on his auto policy. (Minimum auto liability insurance – frequently $500,000 – is required in order to purchase umbrella coverage.) Although this individual had owned his policy for eight years, he was unaware that the policy only provided $50,000 of liability coverage. This amount was clearly insufficient for an individual approaching retirement.

In addition to realizing that he was severely under-insured, this individual discovered he was also paying excessive premiums. For only $50,000 of auto liability coverage, this person was paying $914 per year. Moreover, the individual realized he was paying $351 per year for the $350,000 of liability coverage the individual had on his condo. Consequently, in total, this person was paying $1,265 per year for $50,000 of auto liability and $350,000 of home liability coverage.

Case Model

This individual then spoke with an independent insurance agent to increase auto liability coverage to an amount that enabled him to obtain an umbrella policy. This was critical, as it dramatically decreased the individual’s liability exposure, a risk an individual with accumulated assets clearly shouldn’t have. Even better, the individual was able to obtain dramatically improved rates on his policies. For a total of $1,207 (less than he was previously paying!), the individual was able to secure $1,000,000 of auto liability coverage, $350,000 of home liability, and an additional $1,000,000 umbrella policy.

policy insurance

Assessment

Clearly, it can be beneficial to occasionally review and compare rates on your insurance policies. People tend to believe that policies that have been owned for extended periods of time are efficiently priced, but it may be the opposite. If you haven’t verified that you are adequately insured and conducted a cost comparison recently, speak to an independent insurance agent and minimize your exposure with cost-effective policies.

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Conclusion

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Did You Survive the [Fleeting-Tweeting] “Flash-Crash” of 2013?

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The Day the Dow Jones Industrial Average Lost 150 Points

By Lon Jefferies, MBA CFP™  http://www.NetWorthAdvice.com

Lon JefferiesThe stock market just reached an all time high, crossing 15,000 for the first time.

But, within three minutes during last April 23, 2013, the Dow Jones Industrial Average lost nearly 150 points, and approximately $136 billion of market value was wiped out. The recovery was just as fast, and markets returned to having a profitable session (both the Dow and the S&P 500 were up over 1% for the day). The crash and recovery both happened so fast that many Americans, and physician-investors, weren’t even aware of the events.

So what happened?

On Tweeting

Believe it or not, the crash was caused by a tweet – a 140 character message posted on Twitter. The Associated Press Twitter account — which has nearly 2 million followers — was hacked and a false tweet of “Breaking: Two Explosions in the White House and Barack Obama is Injured” was posted. The message was quickly debunked by the President’s staff and markets corrected themselves. Both the crash and recovery took place in less than five minutes.

Lessons Learned

Several lessons were learned that day.

First, the power of social media is now undeniable. This was caused by a simple twelve-word lie on the internet. Further, information about the market collapse and recovery were widespread via Twitter and Facebook instantaneously, while the whole episode was over before television networks had a chance to report the events.

Second, it’s amazing how fragile our world is these days. News regarding terrorism has the potential to dramatically affect the market as well as other important aspects of our lives. It’s concerning how the world might respond if the President really was injured. (Interestingly, however, the market didn’t suffer after the Boston Marathon tragedy.)

Third, it is fascinating to examine how different asset categories responded in a time of perceived crisis. Investors build diversified portfolios hoping that when one asset category collapses, another asset class will rally. Some investors swear that gold will be the asset to own when the world struggles. Yet, when the market experienced a flash crash, gold did not rally but treasury bonds and the Japanese Yen did. Gold investors shouldn’t be as confident in their investment after this experience.

Finally, automated trading platforms have become more prevalent in the stock market. These tools execute mandatory, instant sell orders in defined market environments. When the crash occurred, algorithms read headlines and saw the initial market reaction and computers created automatic sell orders at what turned out to be the worst possible time. Traders utilizing automatic trading mechanisms with stop-loss orders suffered exaggerated losses, as they sold right after the market dip and didn’t participate in the recovery. This is a potential weakness of automatic trading that many didn’t recognize.

College Tuition Rising as Stocks are Dropping

Assessment

Why are many physician-investors unaware of this unusual market event? In reality, this drastic swing didn’t affect most investors hoping to improve their retirement. Individuals with a long-term investment strategy built around their risk tolerance don’t need to worry about these types of short-term market errors. At the end of the day, “buy-and-hold” investors had nothing to worry about and came out ahead. Perhaps we should be bragging via Twitter…

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Should You Own an Umbrella Insurance Policy?

Risk Reduction for Medical Professionals?

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By Lon Jefferies, MBA CFP™  www.NetWorthAdvice.com

Lon JeffriesAs a financial planner, a good portion of my job consists of identifying and dealing with potential risks and liabilities for which my clients are exposed. One of the most comprehensive, cost-effective tools for reducing risk exposure is an umbrella insurance policy. Quite simply, if you are reading this ME-P, the purchase of an umbrella policy would be a wise decision.

What is an Umbrella Policy?

An umbrella policy protects both your current and future assets against the cost of losing a lawsuit involving your car or real estate property. Such a policy is in addition to your auto and homeowners insurance.

For example, suppose your auto insurance pays $300k of medical expenses per accident, and you have a $1 million umbrella policy. If you are sued for $800k because of an auto accident, your auto insurance will pay the first $300k of damage. This also serves as the deductible on the umbrella policy, so the umbrella coverage would pay the remaining $500k of damages.

Additionally, umbrella policies cover legal expenses involved with a lawsuit. Even better, since it is the insurance company that will be paying any damages, they are likely to assign a strong (expensive) legal team to your case. Consequently, purchasing an umbrella policy is an indirect way of strengthening your legal defense team.

What Does an Umbrella Policy Cover?

An umbrella policy protects you in car accidents for which you are found to be at fault, as well as accidents that occur on your real estate property. Additionally, these policies protect you from personal injury lawsuits arising from slander, defamation, libel, malicious prosecution, mental anguish and more.  Even better, this coverage will protect you from accidents caused by your dependent children.

As you might imagine, certain factors increase your need for an umbrella policy. For instance, if you spend a lot of time in your car, or you own a swimming pool or a dog, the need for an umbrella policy rises.

Some people think they don’t need an umbrella policy simply because their low net worth doesn’t justify it. This is inaccurate because losing a lawsuit can result in the loss of both your current assets, and your future earnings. For this reason, I believe nearly everyone, especially medical professionals, should have an umbrella policy.

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policy insurance

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How Do I Purchase Coverage?

In most instances, an umbrella policy can be purchased through your current insurance providers. A $1 million policy usually costs approximately $200 per year, with additional coverage purchased in $1 million dollar increments and costing approximately $100 per year. At such a low cost while providing critical catastrophic coverage, there is no reason for you to not own such a policy.

Conclusion

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Are Doctors Protecting their Credit Standing?

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Avoiding Credit Errors

By Lon Jefferies, MBA CFP™  http://www.NetWorthAdvice.comLon Jefferies

A clean, accurate credit history is a critical piece of the personal finance puzzle for doctors and us all. Staying on top of your credit standing over time can mean big savings since credit scores often determine your access to loans, interest rates, and monthly payments. An error on the report of any of the three major credit agencies – Experian, Equifax, or TransUnion – could be catastrophic next time you apply for a loan.

The Services

There are multiple credit-monitoring services you can utilize that charge approximately $15 per month, but these fees likely aren’t necessary. You can order a free credit report from each of the three major credit agencies every year by visiting AnnualCreditReport.com.

Additionally, several services will send you updates from the credit bureaus at no cost. Credit Sesame will track data on your Experian report daily and instantly email you if anything suspicious pops up. There are over 35 triggers for alerts, including new accounts opened, late payments, credit inquires, and address changes. The website also provides a running credit score daily.

Credit Karma has a similar tool that provides free daily monitoring of your TransUnion report. This tool also provides valuable data such as how many lines of credit are evaluated on your credit report and your auto insurance score (used to determine your insurance premiums).

Again, both monitoring tools are free, don’t require a credit card, and take no longer than a couple minutes to sign up for.

stand-out

Assessment

Getting an instant heads-up that there’s been a change in your report could help you fix errors quickly, catch an identity theft at work, or get on top of a delinquent account. As a doctor, you’ve worked hard to establish your credit, so make sure you protect it.

Conclusion

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What Happens if the Stock Market Crashes – Doctor?

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There is No Investing Crystal Ball

Lon JeffriesBy Lon Jefferies, MBA CFP CMP™

As the Dow has risen greatly since March 9, 2009, some physicians and investors worry that the market is overheated and due for a severe pullback; as recently experienced very minor events have illustrated.

But, an opposing view is that the current price of the S&P 500 is comparable to its value in 1999, despite the fact that its earnings and dividends have doubled since that time, and suggesting the market has additional room to grow.

The Future is UnKnown

There is no crystal ball. What the stock market will do in the near future is anyone’s guess. As uncertainty is always a factor when investing, developing a portfolio that represents your risk tolerance and investment time horizon is critical.

Many physicians and investors realize they need to scale back the assertiveness of their portfolio as they approach retirement, but why is this important? The mechanics of an investment portfolio are very different for a portfolio in the distribution phase than for a portfolio still accumulating assets. If an investor is taking withdrawals from their account, it is much more difficult to recover from losses because distributions only serve to exacerbate the market decline.

crystalball2

Dr. Israelsen Speaks

As Craig Israelsen PhD points out in the February 2013 issue of Financial Planning Magazine with the following illustration, a portfolio enduring annual 5% withdrawals faces a much steeper climb back to break even after a loss than does an accumulation portfolio:

Clearly, the conclusion is if you are taking distributions from your account, or intend to do so soon, it is vitally important to avoid large losses. As it may be realistic for investors still accumulating assets to recover from a -20% loss by obtaining an average annualized return of 7.7% for three years, it is unlikely that a retiree taking distributions from his account will get the 16.5% annual return required for three years in order to recover from a similar loss.

Diversify

Protect yourself from unsustainable losses by maintaining adequate diversification within your portfolio. Bonds serve as a buffer against volatility and will likely decrease your loss during stock market corrections.

Additionally, ensure your portfolio has sufficient exposure to various asset classes: large cap, mid cap, and small cap stocks; US, international, and emerging market stocks; government, corporate, international, and emerging market bonds. Investing in multiple asset categories will protect your portfolio from a catastrophic loss next time a bubble in a market sector pops.

chart

Assessment

Speak with a Certified Medical Planner™ or fiduciary and physician focused financial advisor to ensure your portfolio is assertive enough to meet your retirement goals while maintaining an acceptable level of risk. If you wait for the market to turn before taking action, it may be too late.

www.CertifiedMedicalPlanner.org

Conclusion

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***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Are Social Security Benefits Taxed?

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And … By How Much?
By Lon Jefferies, MBA CFP™  www.NetWorthAdvice.com

Lon JeffriesDoctor – Ever wondered if your Social Security benefit is subject to federal tax?

The answer depends on your annual household income.

The first step is to calculate your “provisional income,” which is a combination of all your taxable income plus half your Social Security benefit.

Then, comparing your provisional income to the following chart tells you how much of your Social Security benefit is taxed at various income levels.

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Social Security Tax

Assessment:

Conclusion

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Explaining the New Taxpayer Relief Act

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aka … The Fiscal Cliff Deal Wake-Up Call

By Lon Jefferies MBA CFP®

www.NetWorthAdvice.com

Lon JeffriesBelow is a brief summary of the major implications of the Taxpayer Relief Act that was passed by congress. The changes under the act are permanent and do not expire like the previous round of Bush tax cuts. Note, however, that laws can always be changed.

The Tax Increase That Will Impact Us All

As of December 31, 2012, the Payroll Tax Cut expired. The cut reduced the FICA tax rate by 2% in 2011 and 2012. Consequently, this Social Security tax rate will return to 6.2% for employees (as opposed to the 4.2% rate during the last two years). This tax will apply to any income below the Social Security Wage Base of $113,700.

Essentially, this change will cause an average taxpayer earning $50k per year to pay $1,000 more in federal taxes.

Income Tax Brackets

The top tax bracket will increase from 35% to 39.6% and will apply to individuals with taxable income in excess of $400k and married couples with incomes over $450k. No other changes were made to the federal income tax.

Income Tax Brackets

Taxpayers in the 10% or 15% or income tax bracket will continue paying 0% tax on long-term capital gains and dividends. A 15% capital gains and dividend tax will continue to apply to all other taxpayers not in the highest tax bracket (again, individuals with incomes above $400k and married couples with incomes above $450k). For taxpayers in the top tax bracket, the capital gains and dividend tax effectually rises to 23.8% – consisting of 20% for capital gains or dividends plus an additional 3.8% Medicare tax to boot.

Phaseout of Deductions and Exemptions

Total itemized deductions are reduced by 3% of any excess income over an established limit. That limit is adjusted gross income (AGI) of $250k for individuals and $300k for married couples. Personal exemptions are also phased out once AGI is above the same limits. The exemptions are reduced by 2% for each $2,500 of excess income over these limits.

Professional Wake Up Call

Estate Taxes

While the top estate tax rate has been increased from 35% to 40%, individuals will continue to pay no taxes on estates less than $5,120,000. This figure will continue to rise with inflation. Note: couples essentially get two of these exemptions, allowing them to pass $10,240,000 to heirs without paying estate taxes.

Alternative Minimum Tax

The new AMT exemption amount will be $50,600 for individuals and $78,750 for married couples. These figures will be adjusted annually for inflation. Speak to an account to determine how this impacts your tax return.

Bonus – Potential 401k to Roth 401k Conversions

If your employer offers Roth 401k accounts, you can now convert your traditional 401k investments to the Roth plan while still employed. This process will be similar to converting a traditional IRA to a Roth IRA and taxes will be due upon conversion. However, your employer isn’t required to offer a Roth 401k, so speak to your employer’s HR department to determine if this is an option. Further, speak with your financial planner for information on whether this is a strategy you should explore.

Conclusion

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

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Will Higher Taxes Damage Your Portfolio?

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Discussing Stock Market Performance

By Lon Jefferies CFP® MBA

Net Worth Advisory Group

Lon Jeffrieslon@networthadvice.com

www.networthadvice.com

Do higher taxes equate to negative stock market returns? Does anyone economic variable accurately predict stock market performance?

A number of our Net Worth Advisory Group physician and lay clients have indicated they are concerned about the impact higher taxes could have on the stock market. News organizations and campaign rhetoric create the impression that there is a cause and effect relationship between taxes (or whatever the hot discussion topic is) and stock market performance. Since 1926, the stock market has obtained positive returns during a calendar year 72% of the time.

Economic Variables

Here are the facts about how various economic variables have impacted investment returns:

  • PERSONAL INCOME TAXES: From 1926-2011 there were 20 years where personal income taxes (for incomes over $150,000, adjusted for inflation) increased over the previous year. The stock market went up 13 of those years, or 65% of the time.
  • CORPORATE TAXES: From 1926-2011 there were 11 years where corporate taxes increased over the previous year. The stock market went up 6 of those years, or 55% of the time.
  • LONG-TERM CAPITAL GAINS: From 1926-2011 there were 11 years where the long-term capital gains tax rate increased over the previous year. The stock market went up 9 of those years, or 82% of the time.
  • INTEREST RATES: From 1956-2011 there were 27 years where interest rates (measured by the Treasury Bill) increased over the previous year. The stock market went up 24 of those years, or 89% of the time.
  • INFLATION: From 1926-2011 there were 43 years where the inflation rate increased over the previous year. The stock market went up 33 of those years, or 77% of the time.
  • NATIONAL DEBT: From 1940-2011 there were 38 years where the national debt as a percentage of gross domestic product (GDP) increased over the previous year. The stock market went up 30 of those years, or 79% of the time.
  • DEFICITS SPENDING: From 1926-2011 there were 38 years where deficit spending increased over the previous year. The stock market went up 30 of those years, or 79% of the time.
  • COMPANY PROFITABILITY: From 1961-2011 there were 25 years where the earnings of S&P 500 companies increased over the previous year. The stock market went up 21 of those years, or 84% of the time.
  • COMPANY DIVIDENDS: From 1961-2011 there were 21 years where S&P 500 companies increased their dividends over the previous year. The stock market went up 17 of those years, or 81% of the time.
  • UNEMPLOYMENT: From 1948-2011 there were 20 years where the unemployment rate increased over the previous year. The stock market went up 9 of those years, or 45% of the time.

Investing and Taxes

Predictions?

As the data indicates, there is no single economic variable, positive or negative that consistently predicts stock market performance. The market may produce positive or negative returns in 2013, but it’s not likely to be because the personal income tax for high income families increased.

The Unemployment Figures

It’s worth noting that the only economic factor that led to a declining market more frequently than not is rising unemployment. While the unemployment rate remains at 7.8%, high by historical standards, it has been steadily decreasing since October of 2009 when it reached 10%.

Additionally, the only other individual indicator that seems to have even a marginally significant negative impact on stock market returns is an increase in the corporate tax rate; if President Obama can get Congress to agree with him, he would like to decrease that rate from 35% to 28% next year. Consequently, history indicates that neither rising unemployment nor increased corporate tax rates will apply in 2013 and should not hamper stock market returns.

Suggestions

History has taught us over and over again that time in the market is much more important than timing the market. It has also taught us that one of the biggest mistakes investors make is to say “these conditions have never existed before and this time is different.”

Need a recent example? Remember the general consensus investors reached about Europe near the beginning of the year? It may surprise you that Europe (as measured by the Vanguard MSCI Europe ETF) has returned over 17% year to date, significantly outpacing the growth of the S&P 500.

Assessment

I personally believe the best game plan for medical professionals is to develop a fundamentally sound diversified portfolio, only investing money you don’t anticipate spending for at least 10 years in stocks, and stay the course.

Conclusion

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Short Sale versus Mortgage Foreclosure

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A Third Option?

By Lon Jefferies, CFP® MBA

An increasing number of homeowners – even some doctors – owe more on their mortgage than their property is worth. If the borrower doesn’t want to continue making payments, he could explore executing a short sale of the property, or foreclosing on their loan.

So, I’ve summarized some thoughts below.

Short Sale

A short sale enables a property owner to sell their home at market value, and the bank forgives whatever part of the loan isn’t covered by the proceeds of the sale. Some experts believe a bank will not begin discussing a short sale on a property until the owner stops making payments. However, there are reports of individuals obtaining an offer for their home and then negotiating with their lender, and the bank approving the short sale in an attempt to minimize its loss and property management responsibilities. There are even stories of people who were able to buy a new home before finalizing the short sale of their previous home. Of course, purchasing a new home wouldn’t likely be possible immediately after completing a short sale after suffering such a hit to one’s credit.

Before executing a short sale it is critical for the owner to determine whether the property is located in a recourse or nonrecourse state. In a recourse state, a bank may sue a borrower for the difference between a home’s selling price and the amount the seller still owes on a mortgage. As a result of this policy, in a recourse state a property owner may end up filing for bankruptcy even after the short sale. Consequently, a property owner might be better off keeping the home and paying off the mortgage. By contrast, in a nonrecourse state a bank that agrees to a short sale cannot recoup its full loss by suing the property owner. Find out whether your state is a recourse or nonrecourse state here (Utah is a nonrecourse state).

As you might expect, there are potential tax implications to a short sale. Usually, debt forgiven by a lender counts as taxable income. However, for the tax years 2007 through 2012, the Mortgage Forgiveness Debt Relief Act exempts homeowners from up to $2 million in forgiven debt on their primary residence. Note that the law doesn’t apply to business property, rental property or second homes, or to debt that was refinanced to pay off credit cards or other consumer debt. Additionally, beware that this law is set to expire at the end of this year.

Foreclosure

As an alternative to a short sale, foreclosure is another way to dispense with a property. With a foreclosure, the homeowner stops making the mortgage payments and the bank reclaims the house and then resells it in hopes of covering or offsetting the defaulted loan. Foreclosure requires very little from the defaulting borrower. Be aware, however, that in a recourse state a bank can sue the former homeowner for the difference between the amount owed and the resale price. The deficit could even be more than that in a short sale because the home’s post-foreclosure selling price may be hurt by vandalism, theft, or deterioration that can occur when a home stands empty.

Foreclosure also wrecks a defaulting borrower’s credit, making it very difficult for that person to get another loan at a reasonable rate. Experts say that outside of bankruptcy, foreclosure is the worst thing you can have on your credit report. For this reason, for most people a foreclosure should truly be a last resort.

As you might imagine, with both short sale and foreclosure situations an attorney and a real estate agent who specializes in such situations can be helpful, particularly if they have strong connections with the banking community.

A Third (Superior) Option

Lastly, before exploring a short sale or a foreclosure, a borrower should always attempt to work with their lender to modify their mortgage. Negotiating a reduction in the interest rate or principal can help some homeowners hang on to their property. There is no penalty for requesting a loan modification, so it is likely an appealing route to try before considering a short sale or foreclosure. Pursuing a loan modification is simply a matter of talking to your bank and informing them that you can’t meet your payment obligations as they stand.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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