Should ‘We The People’ Worry?

October 27, 2016

In this starkly divided political season, the clients I talk to every day seem to be unanimous. Regardless of party registration, they all believe that if the opposite party wins, […]

The Meaning of Brexit: It’s Complicated

August 1, 2016

Every summer, I commute back and forth to the beach, whittling the hours away listening to financial radio shows. In fact, I play a game, and I invite everyone to […]

The Meaning of Brexit: It’s Complicated

July 27, 2016

Every summer, I commute back and forth to the beach, whittling the hours away listening to financial radio shows. In …

Like Marriage, Financial Planning Is a Team Sport

June 29, 2016

This month, it is hard to walk down Georgetown’s cobblestone streets and not run into a blushing bride or a handsome groom. That’s why we call June wedding season. Over […]

Like Marriage, Financial Planning Is a Team Sport

June 22, 2016

This month, it is hard to walk down Georgetown’s cobblestone streets and not run into a blushing bride or …

April 18: Lucky Day for Scammers?

March 24, 2016

Just imagine robbing a bank on the one day that millions of people have made a deposit amounting to billions of dollars.

April 18, or Tax Day 2016, is that one day this year for a certain type of scammer. A particularly pernicious form of fraud, tax-related identity theft is when someone uses sensitive personal information (such as your Social Security number) and files a fraudulent tax return in your name to collect a refund.

According to recent statistics, scammers filed more than five million returns in 2013 using stolen information, costing the IRS $5.8 billion in fraudulent refunds. Most victims don’t realize that anything is amiss until they file, only to be notified that a return has already been filed in their name.

I’ve experienced this firsthand. Last year, someone filed a fake tax return under my Social Security number. At first glance, I was hoping someone was generous enough to pay my taxes for me — my lucky day!

But by no fault of my own, the outcome is much more cumbersome. I can no longer file a tax return electronically. I had to actually, physically, go down to the IRS office just to get a copy of my transcript to refinance my mortgage.

My identity, like that of millions of Americans, was compromised by scammers seeking to defraud Uncle Sam. And there are plenty of scammers out there. Recent reports indicate that more than 900,000 people received phone calls, seemingly from the IRS, asking them to verify their bank account number for their refund or demanding payment. Nearly 4,550 victims have collectively paid over $23 million as a result of this scam.

Scammers have made Tax Day go from unpleasant to nightmarish. Now, not only do we have to write a check, but we also have to worry about who else, besides the government, could be reaching into our wallets.

To decrease the chances that you too will be scammed, follow these simple steps:

• The federal government will never call you demanding payment on taxes owed. (They are far more likely to send a guy in a nice leather jacket with a set of handcuffs.) Never give your personal information, including your Social Security number and date of birth, to anyone over the phone.

• Get a shredding machine and make sure that your devices — laptops, cellphones, etc. — have encryption tools to protect your account numbers and other personal information.

• Seek out a financial professional who can properly calculate what you owe in taxes and suggest ways to reduce your payment and avoid a large refund, which can attract scammers.

Don’t let April 18 get you down. Remember: Tax Freedom Day — the day when the average American stops earning money to pay taxes and starts earning money for him- or herself — is right around the corner, on April 24.

*John E. Girouard, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.*

The Big Short and the Long Haul

February 18, 2016

If you are anything like the hordes of people rushing to see this year’s Oscar-nominated movies, then you have seen, or at least heard of, “The Big Short.” But unlike other blockbusters, this movie is more than mere entertainment; it is a timely lesson for many investors, who are once again watching the stock market take a tumble.

As I have written many times, investors are only human — which means they are funny creatures that tend to have short memories and act impulsively. Academics call it the “cycle of emotion” or, even better, the “14 stages of trading psychology”: Optimism, Excitement, Thrill, Euphoria, Anxiety, Denial, Fear, Desperation, Panic, Capitulation, Despondency, Depression, Hope and Relief.

Unless you are extremely indifferent or have never put money into a stock, bond or bank account, you’ve most likely found yourself going through these stages.

But what “The Big Short” teaches us in bright Hollywood colors is that from 1937 to 2007 Wall Street only operated with Optimism, Excitement and Thrill.

What is investing, anyways? It is what the founders of capitalism understood perfectly: how to use someone else’s money to make money for everyone else. In fact, one definition of capitalism is “increasing cooperation amongst strangers.”

The turning point came in 1981, with the first conversion of a Wall Street partnership (Salomon Brothers) into a public company. In a partnership, the partners typically take controlled risks with their money. But when these firms went public the game changed. They were no longer making decisions with their money, it was someone else’s — and the more risks they took, the more money they made. If they bet wrong, they lost someone else’s money, not the partners’.

But if you watched the movie (or have watched the markets in the past couple weeks), you should understand what I hope the average investor will finally realize: there is a difference between saving and investing. One may seem boring and slow, but should be the bedrock of any financial plan. The other is gambling; someone else is placing the bets for you and taking a portion of your winnings if you hit the jackpot.

Once you have enough financial security, then you can jump on the roller coaster of investing. Just make sure you can stay on until you reach the end of the ride and can disembark safely.

As a Certified Financial Planner and fiduciary, I look at all financial products based on their purpose and how they can help my clients build wealth and financial security for their families. But in my industry it is all about Wall Street versus insurance companies.

Perhaps asset allocation needs to expand beyond Wall Street products and the average investor’s only other asset, his or her home. Rather than let your emotions get the best of you, perhaps it’s time we all learned how to manage our cash the way the banks do. After all, they don’t take risks with their money, only ours.

John E. Girouard, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Tax Time — It’s Either You or Your Uncle

January 11, 2016

Did you know that if you pay $10,000 in taxes this year it could easily amount to over $26,000 in wealth over 25 years?

Far too often I see clients who unnecessarily give away money, both in taxes and lost earnings that could have earned them a sizeable rate of return over their lifetimes — and a sizeable fortune for many investors.

As the end of the year approaches, now is the last chance for many to reduce their 2015 tax burden. Unfortunately, many investors focus on getting a one- or two-percent higher return on their portfolio or perfecting the target price on their stock while leaving the 20 to 30 percent of what they can control on the table for their accountant to handle.

We all know we can’t control the markets, interest rates, the economy or numerous other life events that can wreak havoc on our portfolios. But what we can control is how many of our hard-earned dollars we give away each year to Uncle Sam — and our ability to control this typically diminishes as we age.

There are many lists and articles out there extolling the top five things you can do to reduce taxes by year-end, such as maximizing retirement contributions, paying January’s mortgage payment in December, bunching medical deductions in one year and tax-loss harvesting. But here are a few other suggestions that may be new to you.

• If you have inherited a Roth IRA or an IRA and you don’t take a required minimum distribution like those individuals over 70, you will be subject to a 50-percent penalty.

• Medical expense deductions have risen to 10 percent of your adjusted gross income versus 7.5 percent for certain income groups (other than retirees).

• If you are a military family, you are eligible to put your Servicemembers Group Life Insurance benefits in a Roth IRA.

• If you have lost a family member who was receiving a federal government pension, your unrecovered after-tax contributions are deductible in the year of death. This is a huge benefit commonly overlooked, especially in our community.

• If you have made a statement of charitable intent or a promised future gift, consider setting up a charitable gift fund in a high-income year, even though the gift can be made over time.

• Finally, beware of the hidden tax inside your mutual funds. In a volatile year like 2015, many investors will see their portfolio lose value, then wake up April 15 to a surprise: a tax liability.

“The hardest thing to understand is the income tax,” said Albert Einstein. About this, and so many other things, he was right. So this holiday season, take a few minutes to seek out the help of a professional — or go online and look up “overlooked tax mistakes.” Because once it’s gone, it’s gone.

Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

The Retirement Trap

October 26, 2015

Traditionally, we are taught to work hard, save hard, pay off our mortgage, contribute the maximum to retirement accounts and plan on downsizing. Plus, word on the street is that you will be in a lower tax bracket when you retire (which under every tax code I know only means you have reduced your lifestyle).

We aren’t alone. Our government is in the business of retirement planning as well — except it is smarter. The federal government holds all the cards, providing tax incentives for us to contribute to retirement plans, requiring us to hand over our money for someone else to use. We carry all the risk and pay all the penalties when we finally need to access our capital.

It makes sense. Our country was founded on Capitalism, defined as “increasing cooperation amongst strangers.”

Stocks: We give money to other people. They have our cash and we have all the risk.

Bonds: We loan money to other people. They have our cash and we have all the risk. The borrower, not the investor in these financial vehicles, can make the situation better. The lender/investor must live with the borrower’s decision.

Bank accounts: We give money to a bank. The bank has our cash and we have all the risk. But we get a consolation prize: a pittance in interest. Banks also charge us four times the amount when we need to get cash out of our homes, which for many is our only source of non-taxable money. Then, adding to the insanity, we again pay interest to the bank on our money.

Now, here is where people get tripped up.

What is your net worth? In the eyes of Wall Street, your net worth is quantified by how much money you have invested in financial products. But realistically, your net worth is a combination of human capital and investment capital.

Your human capital is your knowledge and experience, which give you the tools you need to wake up every day to generate income and take care of your family. But as we go through life, we take the one thing we own and control and transfer it into risk capital.

We retire, only to realize that everything we worked for is at risk. At a time when we desire safety and certainty, instead we are trapped in retirement accounts: 15-year loans that handcuff us to obligations that may cost twice as much to support coming from a retirement account.

In the 1970s and ’80s, our parents or grandparents retired when interest rates were 10 percent; a million dollars meant one day you could live on an income of $100,000 a year. But interest rates don’t stay in one place. Waking up to find interest rates at four percent, people could no longer afford to visit their children on holidays.

You have a retirement plan. But do you have a plan for managing your retirement?

When the Market Is Volatile, Drop Sails and Row

September 23, 2015

In October 2007, the stock market reached a high. During the 18-month decline that followed, ending in April 2009, the market lost more than 56.78 percent of its value (as measured by the S&P 500 index). This resulted in a housing crisis and a crippling 10-percent unemployment rate, the lowest level since early 1997. Then, from the bottom in 2009, the stock market recovered, rising more than 215 percent by April 2015.

Investors, feeling they had missed out, began to reenter the market, only to be blindsided when volatility came back with a vengeance. From July 2015 to the middle of August, the market experienced an 11.16-percent decline. On Aug. 24, the Dow shifted more than 4,890 points. As of September, that number was over 10,000 points. So, yes, market volatility is here and probably here for a while.

What’s an investor to do to weather the storm? Perhaps now is the time to think of passive versus active investing. Proponents of index investing simply focus on fees, but I believe there are other factors to consider.

Think of it in terms of sailing versus rowing. If you are sailing and the seas are calm with the wind at your back, the fastest way to get to your destination is to roll out the jib. Sailing is index investing; I agree it works best in a rising market. But when the seas get rough and the wind shifts, any smart sailor will drop his or her sails and begin rowing so as not to blow too far off — hence, active management.

Historically, active managers have lagged behind benchmarks during long and strong bull markets, when security selection makes less of a difference. However, they tend to add value and make up that lost ground when markets level off or suffer corrections. (Again, it’s like sailing versus rowing.)

The S&P 500 is a market-capitalization index, which means the largest companies contribute a larger percentage of the return as well as the risk. As the markets increase, so does the risk. In 2014, five companies represented 11 percent of the index return, despite the fact that none of those companies was among the top 10 stocks.

During the tech boom of the 1990s, technology represented 34.5 percent of the S&P 500. It fell to the bottom in 2002, representing only 12.3 percent of the index. Financial stocks represented 22.3 percent of the index in 2006 and 8.9 percent at the bottom in March of 2009.

Investing in the S&P 500 at the peak of a market cycle is like speeding up going into an intersection rather than slowing down. Therefore, rather than abandoning a good strategy and jumping out of the market during volatile times, perhaps a little tweaking and moving from passive index investing to more actively managed investing could be the solution — keeping you on track and keeping your portfolio from blowing off course.

John E. Girouard, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.