‘Tis the Season: Our Annual Review of Market Predictions Vs. Reality


This is my favorite time of year. Christmas has always been a very special time for me. I have many happy memories of the holiday. These memories go all the way back to when I was a child, they extend through the years when my children were young, and they continue all the way through my Christmas present, when my wife and I celebrate the warmth of the season with extended family and friends.

There’s another reason that this is my favorite time of year. The end of the year is the time when the investment gurus make their predictions for how the economy and the financial markets will perform in the new year. The investment strategy that we use at our firm is based on the belief that no one, even the best and brightest minds in the investment world, can accurately and reliably predict the markets. So, for many years now, I have kept track of those end-of-the-year predictions, and then I look forward to this time of year, when I can compare the predictions with the results.

The year that is about to end, 2017, has been one to remember in the financial markets. The global stock markets have had a remarkable year. It seemed like the news media were reporting on new records in the Dow, the S&P 500, and the Nasdaq almost every day. As of this writing, which is a week before the year ends, the Dow has gained 28% for the year. The S&P 500 is up 22%. The international markets have also been strong. The EAFE Index, which includes Europe, Australia, and the Far East, has gained over 23%, and the emerging markets index, which includes China, India, Turkey, and Latin America, has enjoyed a gain of 34%. On the bond side of the financial markets, it was a bit more subdued, with the US Aggregate Bond Index returning just under 3% for the year.

So, how did our investment gurus do? Once again, they validated our strategy of not trying to play the guessing game with our clients’ money. Here’s an abbreviated report card on how the highest-compensated, best-educated minds in the financial world fared with their predictions:


Vanguard’s Chief Global Economist called for global equities to gain 5–7% for the year. He got the direction right but only missed by 15–20%. He was better with his bond prediction. He called for a 2.25% yield on the 10-Year U.S. Treasury note. It currently sits just below 2.5%. He called for growth in the U.S. economy of 3% for the year and was close. GDP for the third quarter of the year was 3.3%.

Ameriprise’s Chief Market Strategist predicted a return on the S&P 500 of 4.5%. The index actually gained 22%, as noted above.

State Street Global Advisors’ Chief Investment Strategist made three predictions and wasn’t close on any of them. His guess of a 3% gain for U.S. large-company stocks missed the mark. The Large Company index showed a gain of 23%. He was cautious toward international stocks and underweighted his recommendation in Europe and Asia. That index gained 23%, so he didn’t do his clients any favors.

Robert W. Baird, an international investment management firm, predicted that the S&P 500 could reach 2,400. I guess we have to give it to them on this one. The index blasted through 2,400 before the end of May and currently sits just below 2,700.

Byron Wien, the Vice Chairman of Blackstone, one of the world’s largest investment firms, predicted that the S&P 500 “could” top 2,500; that the yield on the 10-year bond would approach 4%; and that oil would stay below $60 per barrel. He underestimated the S&P 500 and missed the yield on the 10-year bond by a mile, but he nailed the oil prediction. Oil prices have stayed below $60 all year and currently sit at $58/barrel.


Bob Doll, the well-known Chief Equity Strategist of Neveen Asset Management, didn’t get either of his major calls right. He predicted that the yield on the 10-year Treasury note would be 3%. As mentioned earlier, it has stayed below 2.5%. Mr. Doll also predicted an end-of-year reading on the S&P 500 of 2,350, a gain of 5%. The index, currently at 2,684, gained 22%.

Nicholas Atkeson and Andrew Houghton, co-founders of US Capital Wealth Management, had the best call among the analysts making their predictions. They predicted that the S&P 500 would gain 12% for the year. That’s the best guess of anyone, but they still missed their mark by almost 50%.

Once again, the financial markets have proven that they are unpredictable by nature. When even the best and the brightest can’t get it right, who can? We don’t think anyone can. A better plan is to follow a diversified, disciplined, low-cost investment strategy. We can help you with that.

But as the year comes to an end, the investment gurus, undaunted by their dismal performances, have already started coming out with their predictions for 2018. But don’t worry, I’m tracking them and will look forward to sharing their results with you again next year.

In the meantime, we wish you and your family all the warmth that is the holiday season and hope that you have a happy and prosperous new year!

Should You Invest in a Bit of Bitcoin?


Even if you pay only scant attention to the financial media, you’ve probably heard a lot lately about the newest investment craze: bitcoin. The meteoric rise of the cryptocurrency over the last year has the talking heads on the financial channels falling all over themselves trying to get you to watch their latest analysis. In fact, as I am writing this, I learned that it’s “Bitcoin Week” on CNBC. One of their headline shows will take a deep daily dive into the phenomenon that is bitcoin.

Bitcoin started the year at a price of less than $1,000. As of this writing, it is trading at more than $17,000! That’s a gain of 1,600% for the year! The volatility of the trading in bitcoin is also startling. Just five days ago, it was around $11,000, and later in the week touched a new high of $19,000. One day last week, it rallied to more than $16,800 after starting the day around $14,000. The price (notice I didn’t say value) has routinely been fluctuating $800–$1,000 hourly.

So, what exactly is bitcoin? It’s the first, and most popular, amongst a number of similar “cryptocurrencies.” In very basic terms, it is a digital currency. It is created and held electronically in a digital wallet. It can be used to buy goods and services electronically, much like shopping online. The main difference between bitcoin and the currencies we are used to (dollars, yen, euros, etc.) is that bitcoin is decentralized, meaning it is not controlled by a single institution or government. That means that there is no central bank controlling bitcoin the way that governments now control their respective currencies. That lack of regulation can be looked at as a benefit, or a potential problem.


It is a technology that I believe will eventually change the way our monetary system works. But I don’t think we’re there yet—or even very close. Most people still haven’t heard of it, despite the wall-to-wall media coverage. Few businesses are accepting it as payment, and very few people own any. In fact, one of the problems is the “Bitcoin Whale,” the moniker given to the small group of people controlling a large amount of the currency. It is estimated that fewer than 1,000 people (in the world) control up to 40% of the available bitcoin.

Right now, bitcoin seems to be more of a speculative investment vehicle. That could change, but for now there are “analysts” who believe it is a farce and will ultimately fall apart, losing all of its value. In fact, a Duke law professor just penned an opinion piece for The Wall Street Journal, “Hooray for Bitcoin (but Don’t Buy It),” taking the position that, for several reasons, the price will go to zero.  And there are others who believe it will ultimately become worth $1 million per bitcoin, including McAfee Software founder John McAfee, who made a rather interesting bet that it would hit $500,000 within three years. You’ll have to look that one up yourself!

All the speculation and attention have led to a lot of people allowing the emotion of greed to take over their investment decision-making process. One of the first rules of investing is that you should never invest in something that you don’t understand. There was an article in The Wall Street Journal last week that discussed how most people who are jumping on the bandwagon and buying bitcoin don’t even understand the basics of what it is. They are simply afraid of missing out on “the next big thing.” It reminds me of the dot-com bubble in the late 1990s and the real estate bubble of 2005–2007. Both of those bubbles eventually burst and caused a lot of pain for a lot of people. Maybe that will happen with bitcoin. Maybe not.


For now, trading in bitcoin is not investing—it is speculating. There is nothing wrong with a little speculation now and then as long as you understand the risks you are taking and you can afford to lose the money you’ve “invested.” But for me, I’d rather go to Las Vegas for any speculation I care to indulge in. At least in Vegas, we can get free drinks.

P.S. As I was getting ready to post this article, there was a report out that Jay Clayton, Chairman of the Securities and Exchange Commission, Wall Street’s top regulator, raised alarms about bitcoin trading and its unregulated nature. He warned that the cryptocurrency market is “burning with risk for retail investors.”

The Only Thing We Have to Fear Is (the Lack of) Fear Itself


This has been a pretty good year to be an investor. The Dow Jones Industrial Average just passed through the 24,000 level for the first time ever. The S&P 500, a broader measure of “the market,” finished higher in November, making it 13 months in a row of gains, also a record. Both indices are more than 20% higher than where they started the year. It seems that every day, the headline on CNBC says, “Markets Hit New Record High.” In fact, we are in a bull market that is now 8 1/2 years old, the second longest in history.

That’s good, right? As an investment manager, we think it’s great for our clients to see gains in their portfolio each month. But as an investment manager with more than a few years of experience, we also think it’s a little bit scary. Market aren’t supposed to go straight up all the time.

The economy is doing fairly well and is starting to show some signs of stronger growth. Unemployment is low, which means more people are working and spending money, which helps to spur the economy. Corporate earnings have been pretty good, and the holiday retail season seems to have started off well. And it looks like we might actually see a tax cut package passed by Congress, which whether you agree with it or not, is big news considering the dysfunction that is Washington, D.C. Investors seem to be in a good mood and are embracing the pro-corporate policies of President Trump.


So, what’s the problem? Last week, a headline in The New York Times read “Markets Pass Another Milestone, as Investors Remain Fearless.” That’s the problem. Investors seem to be fearless. A healthy dose of fear is good for investors. I’m not talking about an irrational fear that paralyzes. I’m referring to a healthy fear that keeps investors focused. It’s the type of fear that makes you evaluate your decisions. A lack of fear leads to “irrational exuberance,” when investors buy indiscriminately, not paying attention to the fundamentals of their investment decisions.

Actually, there is some fear in a market like this. It’s the fear of missing out. Others might call it greed. One of Warren Buffett’s famous quotes about investing is “Be fearful when others are greedy and be greedy when others are fearful.”

So, while it is certainly OK to enjoy the gains that we’ve been experiencing, we should also be preparing for the time when real fear returns to the markets. We do that by making sure that our portfolio is properly diversified. We should also rebalance regularly so that we are able to capture the gains we have enjoyed and to maintain the proper risk level in our portfolio.


In 1932, when President Franklin D. Roosevelt delivered his first inaugural address, our country was struggling. We had not recovered from the market crash of 1929, assets values had fallen dramatically, taxes had risen, and the citizenry’s ability to pay those taxes had fallen. The country was facing tough economic times. In his inaugural speech, FDR tried to reassure the country by suggesting that “The only thing we have to fear is fear itself.”

In today’s markets, the main thing that we have to fear is the lack of fear itself.

12 Most Common Investment Mistakes


Not long ago, I read the results of a survey that the Chartered Financial Analysts Institute had sent to its members. The organization was interested in learning about the most common mistakes made by individual investors. What they learned wasn’t all that surprising but should be reviewed by anyone with an investment account. After a year like we’ve had in 2017, where markets only seem to go up, it’s especially important. Like the rising tide that lifts all boats, a rising market can cover up mistakes that can hurt when we finally see a return to more normal markets.

Here are the top 12 mistakes listed in the results of their survey. Let’s see how many of these you might be making.

No strategy. This is like going on a trip without planning where you are going. Sometimes it works out and you'll have a good experience, but most of the time you'll end up getting lost. Getting lost with your investments is not a good thing. You should consider developing an Investment Policy Statement (IPS) that considers your time horizon, risk tolerance, goals, liquidity, and cash flow needs. An IPS is like a GPS for your investments.

Buying individual stocks instead of creating a diversified portfolio. Investing in individual stocks is riskier than owning a diversified mutual fund. There are thousands of individual stocks that you can invest in—and that's just in the U.S. How do you pick the right ones? A better plan is to own a diversified portfolio covering the major asset classes.

Investing in stocks instead of companies. Too often, investors buy a stock without understanding the fundamental outlook of the company. Is the company profitable? Is management solid? Is there a solid and viable business plan? Buying a stock in a company just because you like their product or service is a sure way to lose money.


Buying high. This all-too-common mistake is caused by "chasing performance"—buying an investment because it has done well recently. There are lots of examples of this one: The dot-com mania at the end of 1999 and the housing market in 2004 and 2005 are a couple of good examples. Too often, people see an investment move higher (think Bitcoin) and buy because they are afraid of missing the boat—usually just before the boat sinks.

Selling low. This can be just as costly as buying high. Usually this occurs when we see a drop in the value of an investment. Fear of “losing it all” kicks in and results in selling the investment just before it starts to recover.

Rapid turnover of investments. Trading too often reinforces a focus on short-term performance over long-term fundamentals. It also cuts into returns by increasing transaction costs and, possibly, tax consequences.

Acting on tips. You might think you have an inside scoop because of something you saw on CNBC, read in a financial magazine, or heard from a friend. Do you really think you have an edge over the professional investors? If you've heard it, so have a lot of others.

Paying too much in fees and commissions. Unfortunately, most people don’t know what investment-related expenses they are paying. And the big Wall Street firms don’t make it easy to find out. You need to become fully informed on transaction costs, management fees, and other costs that may apply to your investments.


Too much focus on tax avoidance. While taxes should always be a consideration in an investment decision, they shouldn’t be the main driver. Holding on to assets simply to avoid taxes can lead to poor investing decisions.

Unrealistic expectations. Investors who are willing to take risks to achieve above-average returns are usually the ones who will be most disappointed by a sudden market rout. Instead, stay focused on the long term and try to set reasonable return expectations.

Neglect. Many investors take a head-in-the-sand approach when it comes to their investments. They don’t understand all the intricacies of managing a portfolio, so they don’t try. It’s important to know what you don't know—and if you don't know, hire a professional. And if you think it's too expensive to hire a professional, wait until you put your future in the hands of an amateur!

Not understanding risk tolerance. In the investment world, it’s all about risk and reward. The more risk you have in your portfolio, the greater the potential return—and loss. Know your limits. Do not wait until the panic of a market drop to decide that you've been taking on too much risk.

So, how many of the 12 apply to you?

You Could Learn a Lot from My Friend Marge


I lost a client last week, and like other times when I have lost a client, I learned something very important. My friend Marge didn't leave our firm for another advisor—she passed away. It's hard to think about death being a blessing, but in her case, it might have been.

You see, Marge suffered from Alzheimer's disease for many years. Not that long ago, she was a vibrant and dynamic lady. She was active in her church and other social circles. She was a competitor on the tennis court and was a proud mom, grandmother, and great-grandmother. The mean and nasty disease that is Alzheimer's slowly took her away. First it took her away from the tennis court. Then it took her away from her friends and her church. Finally, and most painfully, it took her away from her family. Marge was physically strong and healthy, but her mind slowly and steadily grew weaker, taking her personality and memories away. She spent the last seven or eight years confined to a nursing home, a lonely and expensive way to spend the last years of her life.

What did I learn from a lady who spent the last several years in a nursing home, unable to communicate? I didn't realize the lesson until my wife and I attended her funeral service last weekend. She taught me that it's never too early to plan for the end of life. We are all going to pass away someday. We don't know when it's going to happen, and hopefully it will come after we've lived a long and full life. But whenever it comes, it's easier for everyone if we do some planning about how we want the final chapter of our story to play out.


Marge had done her end-of-life planning long before she became sick. She had spent time thinking about whether she wanted to be buried or cremated. She thought about the memorial service she wanted, down to the songs and biblical passages she wanted as part of the service. She put her wishes in writing and made sure that her daughter knew about them. Not only did her planning allow for her wishes to be carried out the way she wanted, but it allowed the family to prepare for the service without the additional emotional burden of trying to guess what Mom would have wanted.

We all have physical, emotional, and spiritual needs. Thinking about, and planning for, our own funeral is not easy or fun. But if we do, we can allow our friends and family to focus on celebrating our life and our memories when the time comes. And planning is the only way to make sure that what we want to happen, actually happens.

Here are a few ideas that can make the process easier:

  • First, make sure your estate documents are up to date. Make sure your will is current. It is the document that will identify the loved one who will oversee wrapping up your estate. They will distribute your property according to your wishes. While you are making sure that your will is up to date, it's a good time to make sure you have named a power of attorney and a health care surrogate. This will be the person (or people) whom you trust to make financial and health care decisions on your behalf in case you are unable to.

  • Burial or cremation? Many of us have strong beliefs about which we prefer. Both choices come with several other decisions for you to consider. If you prefer burial, do you want in-ground or mausoleum? What type of casket would you like? If you want to be cremated, what do you want to happen with your remains?

  • Traditional funeral or celebration of life? This will often depend on your religious beliefs. My friend Marge had a traditional Catholic funeral service. I would prefer a gathering of friends with some music that I have chosen for the occasion and maybe a few folks sharing memories. What about you?

  • The funeral industry likes to promote prepaid services to ease the burden on your loved ones. I'm not a big proponent of these arrangements because your plans might change between the time you prepay and the time you pass away. I think it's often better to earmark some of your financial assets to cover the costs when the time comes.


The other benefit of doing your own planning is to minimize any family conflicts. It is almost inevitable that, without a plan in place, some family dynamics will make the process more costly and emotional than it will already be.

We are coming to the end of 2017. I challenge you to make a goal to have an end-of-life plan in place before we ring in the new year. It will make you a bit uncomfortable for a little while, but the peace of mind it will bring you afterward will be well worth it.

Can You Afford to Buy Long-Term Care Insurance? Can You Afford Not To?

Long-term care is one of those subject matters that no one wants to think about, let alone talk about. It’s a lot like talking or thinking about death; we don’t like to do that either, even though we all know that we’re going to die someday. Despite this certainty, I read this morning that 64% of adults don’t have a will. Many of those without a will say that it’s because they don’t like thinking about death. But just because we don’t like to think about it doesn’t mean it isn’t going to happen.

When it comes to long-term health care, we don’t want to think that we may need it someday. We want to think that we will live to a ripe old age, go to sleep one night perfectly healthy, in no pain, and simply not wake up the next morning. That’s how I want to leave this world. Unfortunately, we know that only the very few lucky ones get to do that. We’ve all seen grandparents, parents, friends, or other family members go through painful and extended illnesses at the end of their life. Once again, just because we don’t want to think about it doesn’t mean it isn’t going to happen.

Facing the fact that we may need long-term health care is one thing. How we plan for it is quite another—and maybe more difficult. If we face a serious illness that renders us unable to perform the basic activities of daily living (ADLs), we will need assistance, and it’s best to plan for it ahead of time.

Depending on the seriousness of our health issues, we have several options for making sure we get the help we need. We can have an unpaid family member or friend help us with some of the basic levels of care. We can have a nurse or home health care aide come to our house and help. There are a variety of adult day care services that can provide care during the day, and there are many types of long-term care facilities.

When I discuss long-term care planning with clients, almost every one of them says that they want to be able to stay in their home for as long as possible. And the U.S. Department of Health and Human Services website LongTermCare.gov reports that most people can live at home for many years with help from unpaid family and friends. In my family, Mom lived with my brother and his family for a year or so until they were no longer able to provide the level of care she needed.

When our health issues require skilled home care or full-time care in a facility, those services must be paid for somehow. Medicare provides only limited coverage for long-term care expenses. Medicaid will pay for most long-term care services, but to qualify, you must have income and assets below a certain level. That leaves long-term care insurance or savings as the only options for a large number of people.

So, should we buy long-term care insurance? That’s a good question, and one that is getting more and more difficult to answer. The best answer for you depends on your unique situation. As a fee-only advisor, I don’t sell long-term care insurance, but I can provide advice to my clients who are trying to decide on whether to buy it, or to accept the risk and self-insure.

Why is the answer to a relatively simple question becoming so difficult? Because of the changing nature of the health care industry and the long-term care insurance industry. First, some facts: In Florida, where I live, the Florida Health Care Association reports that the average daily cost for a private room in a nursing home is $256, or nearly $93,000 annually. A semiprivate room averages $223, or about $81,000 for a year. They also say that the average length of stay in a facility is 386 days. I’ve heard estimates (mostly from folks selling long-term care insurance) that the average stay is two or three years. That length of stay, at those prices, can obviously diminish your assets pretty quickly. And health care costs continue to go up.

So, we should buy insurance, right? I’m not sure. The insurance industry is trying to come to grips with long-term care. People are living longer, and health care costs are going up—a double whammy to the insurance companies. So, they are having trouble pricing the insurance at a level where it remains affordable but allows them to make a profit. Many of the larger, well-known companies have bailed out of the business, opting not to sell a long-term care product any longer.

My wife and I have long-term care insurance. But last year, to maintain the same level of benefits in our plan that we purchased a few years ago, our premiums would have risen 40%. I just read that many of the major companies are filing requests for additional premium increases of up to 50% again this year. It’s a lot to pay for a product that we hope we will never need.

Unfortunately, I can’t answer the question for you. I can lay out the facts, and make sure that you consider the various factors that go into the decision and that you understand all the moving parts of a long-term care policy. But ultimately, you will have to weigh all the information and apply it to your very personal situation to make a decision that’s best for you. Let me know if we can help.

The Tax Cuts and Jobs Act and What It Might Mean to You

This week will mark a year since the election of President Trump. Since then, much of the buzz around his agenda has been about the possibility of tax reform. Last week we finally got a look at the proposal. Keep in mind that, at this point, it is simply a proposal. No laws have been changed. All we have is a plan from the Republicans in the House. Now we’ll start the process of congressional compromise (or lack thereof) and see how the plan takes shape and if it becomes law.

The purpose of this post is to highlight the major parts of the proposed plan and to point out some potential planning opportunities. It’s important to keep in mind that a lot can change between now and the time the plan becomes law, if it does. Major provisions of the Tax Cuts and Jobs Act could be changed, some could be abandoned, and some could be added. Also, we don’t know yet if the law will go into effect for 2018 or if there will be provisions that we’ll need to address on our 2017 returns. And of course, it might not pass at all.

We should note that this is the first significant proposal for tax reform in 30 years and that any major tax reform will have some folks who lose a deduction or tax credit and will not be happy about it. It’s also important to note that this post will cover only the provisions that will affect most taxpayers on an individual basis. For example, one of the most-talked-about provisions of the bill is the reduction of the corporate tax rate from nearly 35% to 20%. We will not address that provision in this post.

With all those disclaimers out of the way, let’s look at some of the key parts of the proposal.

For individual taxpayers, one of the main provisions of the bill is a near doubling of the standard exemption, from $6,400 to $12,000 for an individual and $24,000 for a married couple filing jointly. If this provision becomes law, it will mean that more income will be tax-free, and estimates are that more than 30 million of us will no longer have to itemize deductions. However, the change does come with a cost. The $4,050 personal exemption goes away. So, a family with a lot of kids could end up worse off, although the increase in the child tax credit from $1,000 to $1,600 will help.

Currently, we have seven tax brackets. The proposed plan squeezes the brackets down to four: 12%, 25%, 35%, and 39.6%. I’ve heard the effects of this provision described as “tax bracket bingo.” Some will be better off; some will be worse off. How you are specifically affected will depend on the level of income and filing status.

To simplify the tax law, several tax credits are going away. They include the credit for the elderly and the disabled, the adoption credit, and the credit for electric vehicles.

Divorce settlements may get a bit more complicated—and contentious. Currently, if your ex-spouse pays you alimony, you have to report it as income, and your ex gets to deduct it from their income. The new law would make the income tax-free to the recipient, and the deduction for the paying spouse would go away. This would go into effect for any divorce decree executed after the end of this year. So, if divorce is in your future and alimony is an issue, you will want to see how this affects you.

Homeownership and the related tax consequences may undergo some major changes. The interest paid on a mortgage on a second home will no longer be deductible, and the deductibility of a mortgage on a primary residence will be limited to $500,000 of debt. Currently, that deduction is available on mortgages up to $1 million. Also, the capital gains treatment of your personal residence may be affected. Under current law, you are able to exclude capital gains up to $250,000 for a single taxpayer, and $500,000 for a married couple, if you lived in your home for two of the last five years before the sale. That will change under the new bill to five of the last eight years. Also, the exemption will phase out for singles who earn more than $250,000 and couples who earn more than $500,000.

The new bill allows parents to use $10,000 a year from a 529 plan to pay for private elementary and high school costs. Currently, the tax-free benefit is only available for college costs.

Another proposal in the bill is to eliminate the deduction for medical expenses. Under current law, those expenses must total more than 10% of your adjusted gross income (AGI). Because of that limitation, very few people can deduct medical expenses.

There are many other parts of the proposed bill that are too specific to address in this post. We simply wanted to point out the ones that could affect the most people. Provisions like the repeal of the alternative minimum tax and the doubling and future repeal of the estate tax and generation-skipping tax are important but do not affect most of us. If you would like to discuss how the proposed changes might affect your personal situation, don’t hesitate to reach out.

Don’t Be a Lone Ranger

One of my favorite television shows when I was a kid was “The Lone Ranger.” Yes, it was on a black-and-white television! “The Lone Ranger” was also popular on the radio, in comic books, and in several movies. I even had a chance to meet him once at a county fair.

The Lone Ranger was a tough and smart guy who was part of a group of six Texas Rangers who went after bad guys. He became known as the Lone Ranger when the other five Rangers were killed in an ambush after being betrayed by a guide. In fact, the Lone Ranger barely survived the attack. An Indian came across the scene, found him, and nursed him back to health. We came to know the Indian as Tonto, the Lone Ranger’s loyal and trusted friend and advisor. The Lone Ranger couldn’t have accomplished all that he did by himself. He needed Tonto.

So, what do the Lone Ranger and Tonto have to do with personal financial planning? The memory of one of my childhood heroes came to mind after I received a phone call the other day from a friend of mine. He recently made a terrible financial mistake and wanted my advice on how to fix it. This friend is a smart and successful professional. Like a lot of other smart people, he manages his own investment portfolio and does his own financial planning. He is confident in his abilities and is a do-it-yourself type who has never felt the need to pay an advisor to help him. He recently learned that maybe it’s a good idea to have a Tonto. Here’s the story ...

My friend and his wife—let’s call them Ozzie and Harriett—have done very well financially. One of their goals was to have Harriett retire early. This year, they felt they could make it happen, so she retired in January at age 52. Ozzie could support their lifestyle on his income, and they had done a good job in saving for this day. Harriett had accumulated a significant amount of wealth in her company’s employee stock ownership plan (ESOP) and also had built up a substantial 401(k) account.

So, what’s the problem?

Ozzie knew that at her age, Harriett could not access the funds in her 401(k) without paying the 10% early withdrawal penalty. Apparently, he did not know that the same rule applied to her ESOP. In an effort to diversify the ESOP, they processed a complete distribution of the employee stock plan. She received a check for over $450,000 and promptly deposited it into their savings account for safekeeping. They knew that she could later roll it over to an IRA account, which would maintain the tax-deferred status that is an important benefit of an employer retirement plan. What they didn’t consider was that the IRS rules require that you process the rollover within 60 days. It is now the end of October, well past the 60 days. They are looking at an increase in their taxable income of $450,000 for the year PLUS the 10% early withdrawal penalty! That means they will pay income taxes of $225,000 on the money she took from her plan. Taxes and penalties will take more than half of their distribution! That’s a pretty costly mistake.

I am not sure that there is a solution to their problem. I have advised them to hire a tax attorney to explore potential solutions. Hiring a high-end tax attorney to represent you in front of the IRS is not an inexpensive endeavor. If they had been working with a good advisor—a Tonto, so to speak—they would have been advised of the potential tax problem before it became a problem.

A good advisor will guide you through the major life transitions that you go through, like retirement. They will work as your advocate, making sure that you avoid making that big mistake.

Do you have a Tonto in your life? If not, you probably should. The world is a complicated place, especially the financial world. As smart as we may be, we can’t possibly know everything about everything. We get in trouble when we make decisions on important matters without knowing all there is to know about the subject matter. The Lone Ranger and Tonto worked together well. Tonto gave his friend the Indian name Kemo Sabe, which he said means “trusted scout.” Appropriate, don’t you think?

Does Your Asset Allocation Include All of Your Assets?

When most investors think about asset allocation, or diversifying their portfolio, they think of spreading their money around in stocks, bonds, real estate, commodities, etc. And that is mostly correct.

Very few portfolios take into consideration what might be your biggest asset. If you are still working, your ability to get up and go to work each day is often overlooked. If you have a steady job, with good job security, you can think of your employment income the way you would think of interest or dividends from a bond. In effect, you can treat it as part of the fixed-income side of your overall portfolio. If your employment situation isn't so certain, you can think of your paycheck as more like a stock, subject to increased volatility. This is called human capital. Is your job more like a stock or a bond?

You can use your financial capital to balance the mix of your human capital. Your financial capital consists of your investment assets. Stocks, bonds, annuities, rental property, and the equity in your home are examples.

When you are young and getting started in the working world, you typically have a lot of human capital and less financial capital. So, you can generally afford to take more risks with your IRAs, 401(k)s, and other investment accounts. As you get older, you have less and less human capital. When you retire, your human capital is gone. Since you will now be relying on various sources of retirement income, you have less ability to take risks. So, it becomes important to consider lowering the risk profile of your financial capital. However, make sure to consider your guaranteed streams of income such as Social Security and pensions, which can also be treated like a fixed-income asset.

Most investors follow the rule of thumb that, as they get older, they gradually reduce the risk in their investment portfolio. This is done by reducing their exposure to stocks and increasing their exposure to bonds. If you consider your human capital in your overall allocation, you can probably afford to take a little more risk on the investment side of your portfolio—as long as you still have human capital to work with.

Something else you might want to think about as you allocate your assets: Some recent studies suggest that slightly increasing your exposure to stocks as you enter your retirement years can increase your odds of having a successful financial life—one where you have more money than breath. And isn't that the ultimate goal?

Now, of course, these are general thoughts and my opinion. How it might work in your case will obviously depend on your situation. But it just makes sense that if you are going to make the effort to allocate your assets, you should consider all of your assets.

Time Flies When the Markets Rally

I don’t want to alarm you, but in case you haven’t noticed, there are only about 75 more days until Christmas, which means about 74 more shopping days! As they say, time seems to pass more quickly every year, and this year is certainly no exception. It’s hard to believe that we just ended the third quarter of 2017.

The end of a quarter means that we get the quarterly scorecards that show us how our investments are doing. As someone in the investment management business, I certainly find these scorecards interesting, even though I know that over the long term, what happened in the last three months really doesn’t mean much. But that doesn’t stop us from wanting to know. So, in this week’s post, we’ll take a look at the markets and how they’ve done so far in 2017.

It seems like all that we’ve heard from the business news shows this year is that “stocks had another positive day, setting a new all-time record.” Despite all that is going on in the world, the markets keep going up. Nothing seems to be able to stop them. We’ve had the experts predicting that interest rates would rise for several years, and now the Fed has a plan to trim its balance sheet. It hasn’t hurt the markets. The political nastiness, uncertainty, and lack of legislative progress on policy issues like health care or tax reform haven’t hurt the markets. The geopolitical threat that is North Korea hasn’t hurt the markets.

If things don’t change in the final months of the year, 2017 might be remembered as the year when the stock market sleepwalked its way to new highs. It’s not just the lack of a big sell-off that is surprising; it’s also the lack of volatility. So far this year, the S&P 500 has registered a daily move of 1% in either direction only eight times. The last time we’ve seen so few moves of any significance was 1972.

Maybe it’s just a great reminder that the markets always defy expectations. “The experts” called for a sell-off if Donald Trump were elected last year. As is usually the case, the markets did the opposite of what the experts predicted: They rallied. The markets also rallied after the experts predicted that there would be a sell-off if the President’s political agenda failed to materialize. So far, the attempts at health care and tax reform have been disasters. The experts expected a sell-off; we got a rally. They keep talking about and predicting the upcoming sell-off; we keep rallying.

There are good reasons for the rally in stocks. The gross domestic product for the U.S. grew 3.1% in the second quarter, the strongest growth in two years. The earnings of the companies that make up the S&P 500 have grown more than 10% in each of the first two quarters and are expected to show good numbers for the third quarter. And, despite their threats to end the programs, the central banks around the world have maintained easy monetary policies, which make stocks look more attractive.

While we can certainly enjoy the continued growth in our investment accounts, we can’t fall into the trap that things will continue this way forever. We will eventually get the 10% correction that is normal (and healthy), and we will eventually get a major sell-off, caused by some unknown future shock. That’s just the way markets work.

So, enjoy the ride while it lasts, and make sure that your portfolio stays in balance. “Portfolio drift” can leave you overexposed to a particular asset class and make the pain of the downturn, when it eventually does appear, even more painful.

Now for that third quarter scorecard:

  • U.S. stocks gained 4.57% in the quarter, and have a total return of 13.91% year-to-date.

  • International developed stocks gained 5.62% for the quarter, and enjoy a gain of 19.96% so far this year.

  • Emerging markets stocks, last year’s worst-performing asset class, lead the way this year, up 7.89% for the quarter and 27.78% for the year.

  • Global real estate was slightly higher, gaining 1.13% for the quarter and 4.86% year-to-date.

  • Bonds were flat, as they have been for a while. For the quarter, S. bonds gained 0.85% and global bonds were up 0.70%. For the year, they are up 3.14% and 6.25% respectively.

It’s important to remember that we have no way of forecasting which asset class is going to outperform or underperform. If you’ve been to my office, you know that the crystal ball on my table, while pretty, is not functional. The best way to win at the investing game is to diversify your portfolio by asset class, control costs, and stay disciplined over the years. Don’t let the emotions of fear or greed affect your investment decisions. Not easy, but oh so important!

Returns above based upon the following:

  • U.S. stocks: Russell 3000 Index

  • International developed stocks: MSCI World ex-USA Index

  • Emerging markets stocks: MSCI Emerging Markets Index

  • Global real estate: S&P Global REIT Index

  • U.S. bonds: Barclays US Aggregate Bond Index

  • Global bonds: Citi WGBI ex-USA 1-30 years

Mark Your Calendar: Medicare Open Enrollment Is Almost Here

You can’t tell it by looking at the calendar, unless you know what you are looking for, but we are getting ready to head into one of the most important times of the year. No, I’m not talking about the holiday season, although I’m sure we will be hearing Christmas songs sometime soon. It’s a particularly important time of year if you, or a loved one, are covered by Medicare. It’s the Medicare open enrollment period, the time when Medicare beneficiaries can make changes to their plan and pick one that works best for them. In effect, each year you get a “do-over” on choosing your plan. The open enrollment period starts on October 15 and ends on December 7.

Open enrollment is a big deal, but unfortunately, most people don’t take advantage of it. Make sure that you do not let December 7 slip by without at least reviewing your Medicare options. Don’t assume that the plan that was best for you in 2017 will be the best for you in 2018. Plans change every year, and the open enrollment period is your chance to trade in your old plan for one that fits you better.

Are you satisfied with your current Medicare plan? Has it changed? Have premiums or out-of-pocket costs gone up? Has your health changed? Do you anticipate any change in medical care or treatment? Is the drug coverage you have still appropriate? These are all important questions to ask yourself because during open enrollment, you can switch from Original Medicare to a Medicare Advantage plan, or from a Medicare Advantage plan to Original Medicare; you can change from one Medicare Advantage plan to another; you can enroll in a Medicare prescription drug plan (Part D) or switch from one Part D plan to another.

Speaking of prescription drug coverage, one of the big changes that occur every year is a plan’s formulary, the plan’s list of medicines that are covered and how they are covered. Drug makers can raise or lower their prices, which will have an effect on your plan. Maybe a cheaper, generic version of a drug you need has become available. A plan’s formulary is one of the things you must review when evaluating Part D coverages. What good is a plan if it doesn’t cover the drugs you need?

So, where do you start? First, you should receive a notice from your current plan about any changes that will occur in 2018. They are required to send the notice to you for review. And while it’s a bit of a long document, it’s not difficult to work through if you know what you are looking for. Here are some of the things you should be reviewing: monthly premiums—and any change from last year; deductibles—they generally change a bit each year, and some plans will absorb some of the cost increases; copays and coinsurance—and any changes in amounts or requirements; drug tiers—to see if any drugs that you take moving from one pricing tier to another; out-of-pocket-maximums—you may have two caps to review, one for health coverage and one for drug coverage; provider networks—to see if your doctor and hospital choices have changed; drug formularies—for the reasons mentioned above.

There are also two sites I would recommend that you spend a little time on. The first is Medicare.gov, which can help answer a lot of your questions. The second is Medicare Plan Finder, which will help you get specific information on the plans that are available to you.

Open enrollment is also important because it gives you, as a consumer, a big say in what plans are offered. The best plans available are rewarded with new business as consumers exercise their right to choose. The plans that consumers don’t like will have to either change or disappear. But while open enrollment is good in theory, most people typically stay with what they have, even despite evidence that they would be much better off by changing to another plan.

Don’t be most people. By spending a few hours each year reviewing the changes in your plan, and the other plans that are out there, you can become a savvy Medicare shopper. Many articles have been written about what health care costs will be in your retirement years. Here is one way that you can work to control those costs.

The Equifax Hack: What You Should Do Now

Maybe you were distracted. There’s been a lot going on. With two major hurricanes hitting the U.S., threats of nuclear war from North Korea, the continuing dysfunction that is Washington, D.C., and the start of a new football season, you could have missed the details on what is possibly the biggest story ever related to your personal financial future. While that might sound like hype, it is most definitely not. This news could have an effect for the rest of your life.

I’m referring to the news out this week that Equifax, one of the three major credit-reporting agencies, was hacked. On September 7, the company reported that hackers had “exploited a vulnerability” and gained access to the personal information of 143 million Americans. It is one of the largest breaches ever and, considering the data they were after, maybe the most important. The hackers were able to get names, dates of birth, Social Security numbers, addresses, previous addresses, credit card numbers, and in some cases, driver’s license numbers. In other words, they were able to get everything they needed to completely steal your identity and credit rating.

This story has lots of different angles that would be worth exploring. For example, Equifax reported that the breach took place from mid-May until July. The company learned about the hack on July 29. Why did it take until September 7 to inform the public? Another angle would be to learn more about the reports that several directors of the company sold their stock holdings in the company before the announcement. After the announcement, the stock price cratered. Hmm, maybe the SEC can look into that one? There was also an outcry regarding the company’s “fix” for the problem. They offered a year of credit monitoring at no charge. That’s kind of like closing the proverbial barn door after the horse has already bolted. Or we could discuss how, at first, the company required that you sign away your rights to sue for damages if you took them up on their “free” credit-monitoring offer. Due to the public outcry, they have since changed their policy on that issue.

All of these are good topics, but for now, I think it’s more important to discuss what you should do to protect yourself. I’ve posted before about the importance of your credit score, What Is Your Most Valuable Asset? Your credit score can have an effect on everything from getting a job, to securing a mortgage for a home, to the interest rates you pay on your credit cards. You need to do everything you can to help prevent the thieves from using your data to enrich themselves at your expense.

Equifax set up a website so that you can check to see if you are among the millions of people who have had their information compromised. My advice? I wouldn’t waste my time with it. If 143 million people were affected, that’s close to half of the U.S. population. Chances are that you are one of them. My wife and I went through the process, and we were both on the list. Then you are given the opportunity to enroll in their credit-monitoring program. My advice is the same: I wouldn’t bother with it. It’s a confusing website that requires you to input your date of birth and Social Security number. It’s not very comforting to be asked to enter that information when it’s that same information that has been compromised. It has a scam feel to it. It is legitimate, but it just doesn’t feel right.

Now, about that credit-monitoring offer. Although it’s better than nothing, it’s not much better. Credit-monitoring services alert you when someone has gained access to your personal info. That’s too late. A better idea is to make sure they don’t get it in the first place.

That’s why I strongly recommend freezing your credit. I’ve also written about this in the past, “It’s Summertime! A Perfect Time for a (Credit) Freeze!” A freeze on your credit is the only way to completely protect yourself. Once you place a freeze on your credit with the three major credit agencies, a thief can have your name, date of birth, Social Security number, etc., and still not be able to open a credit account while impersonating you. In fact, with your credit frozen, even you won’t be able to! When you need to have your files accessed for a legitimate credit need, you simply “thaw” the account. Each state has different rules regarding a credit freeze, and costs vary from free to $30 ($10/agency). In Florida, it will cost you $30 to put the freeze in place. This website, http://clark.com/personal-finance-credit/credit-freeze-and-thaw-guide/, provides step-by-step details on how to get it done.

Other steps you should take to protect your credit and identity include monitoring your bank, credit card, and investment account statements for unusual activity, and checking your credit report at www.annualcreditreport.com. It’s free to check each of the three agencies once a year. I have a reminder to myself to check one every four months, so I am able to check it three times per year instead of just once.

You’ve worked hard to build your credit profile, and your personal identity is very valuable. Don’t let Equifax’s ineptitude do damage to either.

Some Guidelines for Donating to Hurricane Harvey Victims

A natural disaster like Hurricane Harvey, which wreaked havoc on Texas last week, brings out the best in people. In the wake of one of the worst storms ever, we saw many examples of neighbors coming together to help other neighbors. We also saw volunteers come from across the country to do what they could to help those who were victimized by the storm. Donations of cash and other essentials also poured in to help.

Unfortunately, a natural disaster like Hurricane Harvey also brings out the worst in people. Scamsters see a natural disaster as a chance to cash in, an opportunity to profit from the misfortune of others. Their scams take many shapes and will certainly target those affected by the storm—but will mostly target those of us who want to help. This article is meant to highlight some of the things we need to watch for to make sure that our aid ends up where it is intended.

The IRS issued a warning this week reminding people to be cautious about making donations to organizations that say they are helping the victims in Texas. The warning pointed out that the fraudulent schemes may come from a variety of places, including telephone, social media, email, or even in-person solicitations.

Doing a little research is the key to making sure that criminals don’t hijack your acts of kindness. If you plan to donate online, you should take the same precautions that you do to avoid online fraud in normal situations. Stay away from suspicious websites. Often, the criminals will create websites with a similar name to a legitimate, recognized organization. After Hurricane Katrina hit in 2005, the FBI said that 4,600 websites soliciting donations for relief were set up. Most of them were fraudulent. The IRS provides an online tool, the Exempt Organizations Select Check, that allows you to check the legitimacy of an organization and its ability to receive tax-deductible contributions.

It’s also important to take precautions when dealing with unsolicited emails and phone calls. A couple of good rules are to never click on an unknown link in an email, and don’t answer calls from numbers you don’t recognize. Also, be careful about any GoFundMe campaigns, and always make your contribution by check or credit card, paid directly to the charity. The U.S. Justice Department also released a warning this week about post-Harvey fraudulent charitable schemes. It is recommended reading for anyone considering a donation.

If you are planning to make a donation, there are many reputable organizations that can help. The American Red Cross and United Way are a couple of the most well-known. Businesses are contributing in a big way, most of them funneling their contributions through the Red Cross. There are also some organizations that will enhance your donations. Walmart and the Walmart Foundation announced that they would provide a two-for-one match of customer donations up to $20 million in cash and product. TD Ameritrade Institutional, the firm that we use to custody our client investment portfolios, also announced a donation-matching program in which donations will go directly to the Red Cross. There are others, but these are a couple of examples of how you can donate and be confident that your donations will end up where they are most needed.

As I finished writing this post, we in Florida are watching Hurricane Irma very closely. It has the potential to be another massively destructive storm. If you are in Florida, please prepare for the worst and hope for the best. Above all else, be safe!

Don’t Recognize the Number? Don’t Answer the Call!

One of the first steps of the financial planning process is to make sure that you have properly protected your assets. Usually, we are talking about making sure that you have the appropriate insurance coverages in place. You buy life insurance to protect your loved ones if you pass away; you buy health insurance to protect against large medical bills; you buy disability insurance to provide income if you become sick or are in an accident; and you buy auto, homeowners, and boat insurance to protect your property against fire, theft, and accidents.

But what about protecting your personal information? The bad guys are getting more and more creative with their schemes, and they are most often targeting some of our most vulnerable citizens—the elderly. They know that moms, dads, aunts, and uncles usually have more assets and tend to be a little less tech-savvy. That combination makes them easier and more lucrative targets. If the crooks can get access to information like your date of birth, Social Security number, or credit card information, they can have a field day—at your expense.

The best way to avoid becoming a victim is to always be on the defensive. Unfortunately, in the world we live in today, your default position should be to not trust anyone you don’t know. And you even have to be careful around those you do know. We’ve all heard the stories about people being defrauded by family members, friends, and people they know from the club or from church. If they are close to you, it’s easier for them to get what they need.

My wife and I were recently visiting with my aunt, who is a few years into her 70s. We took her out to breakfast and were enjoying getting caught up on family stuff. Twice during our breakfast, her phone rang. Both times, she commented that she didn’t recognize the number, but then she answered the calls anyway! Both were for some type of solicitation, and she hung up. It’s good that she cut the calls short, but many of today’s scams don’t need you to stay on the phone for them to work. Some of the calls are simply designed to record your voice. The bad guys can then edit the recordings so that it appears to be you when they are authorizing charges in your name.

Some other common phone scams include:

  • Calls from the IRS, Social Security, or Medicare. By using the name of these respected, or feared, government agencies, the criminals are trying to get you to provide your personal information. It’s important to know that these government agencies will never call and ask you to provide information.

  • Calls from a bank’s “Security Department.” In this scam, they tell you that they are investigating a rogue bank employee and they could use your help catching them in their crime. They ask you to go to the bank and make a withdrawal. Then a bank “officer” meets you, takes the funds you have withdrawn, and promises to put it right back into your account. We know how that plays out.

  • Grandma gets a call telling her that her grandchild has been in an accident and that they need money. An even nastier version of this scam is when they tell the grandparent that the child has been kidnapped.

  • Fake charity scams. These often occur after a natural disaster, so we might see an increase in this scam since Hurricane Harvey hit Texas over the weekend. The scamsters call and ask you to make a donation to help the victims of the disaster. We all want to help when a disaster hits—we just have to be careful. A good idea is to initiate any donation you care to make via the charity’s website.

There are many other scams, but they are all versions of the same trick. The criminal gets you on the phone and tries to separate you from your money or your personal information. The good news is that there is a simple way to avoid falling victim to these crimes. If you follow one simple rule, you will greatly reduce your chances of being scammed. If you don’t recognize the number calling you, don’t answer! If it is a legitimate call, the caller will leave you a message, and you can call them back.

But the bad guys are even making it difficult to follow that one simple rule. Technology is now available that allows them to make the incoming call look like it’s coming from your area. It’s a lot more tempting to answer a call when it looks like it’s coming from your town. So, as difficult as it may be, you can limit your chances of being scammed by only answering calls that come from numbers you absolutely know. As I suggested to my aunt: “Don’t answer that call!”

Don’t Chase the Hot Dot—How We Invest, Part Three

It’s so obvious that you may not have even noticed it. It’s the paragraph that is part of the paperwork for every investment account that you open with an advisor, brokerage firm, bank, or insurance company. It makes so much sense that you acknowledge it and move on, barely giving it a thought. It’s obviously important because sometimes it’s in ALL CAPS. I’m referring to the part of the contract that says, “Past performance is not a guarantee of future results.”

We inherently understand this and know that it’s true. We know that the markets change every year. We know that last year’s best-performing investment may be this year’s laggard. Some years, stocks provide a better return than bonds; sometimes bonds do better than stocks. Large company stocks can outperform one year, and small company stocks lead the way the next. International stocks are this year’s star and next year’s dud.

We know that investments work this way, yet when it comes to managing our portfolio, lots of folks seem to come up with a bad case of amnesia. When selecting investments, too many of us make the decision on whether to add an investment to our portfolio by looking at the recent performance. This seems to be the case whether it’s a stock, a mutual fund, an exchange-traded fund (ETF), or another type of investment vehicle. If it has done well recently, we’ll add it to our portfolio mix. If it hasn’t done well, we tend to avoid it.

This behavior is known in the industry as “Chasing the hot dot.” We know that last year’s winners are often this year’s losers, but many of us seem unable to transfer this knowledge to action when selecting our investments. I see this most often when people are choosing the investment mix for their 401(k) plans at work. They’ll look at the menu of funds available to them in the plan and choose the ones that have the best performance numbers over the last six months or a year. This is not how to choose your investments.

I have a chart I like to use when explaining our investment strategy to clients. I call it my “Skittles chart” because it’s very colorful. It assigns a bright color to all the asset classes that we use when building our model portfolios. For example, U.S. stocks might be a shade of blue, international stocks might be yellow, emerging markets might be red, and short-term bonds might be green. The chart then ranks the asset classes based upon their performance each year. The result is a quilt-like pattern of bright colors, reflecting how each asset class has done each year relative to the others.

When discussing the chart, I’ll point to 2007, which shows that emerging markets were the top-performing asset class, returning 39.4% for the year. I’ll explain that many people would look at that return and make the decision to add it to their portfolio because it was doing so well. Of course, in 2008, emerging markets were the worst-performing asset class, losing 53.3%. The poor investor who bought the fund at the beginning of the year gets to the next year and says, “Well, that didn’t work out.” So, the fund is sold. And of course, in 2009 emerging markets returned to the top of the performance list with a gain of over 78%. So now the investor, who bought when the price was high after 2007 and sold when it was at a low in 2008, has another chance to buy high. Buying high and selling low is not how to win at the investing game.

A better approach is to make sure your portfolio is diversified across the major asset classes. If you owned emerging markets in 2007 and you enjoyed a 39% gain, you would rebalance your portfolio and sell a bit of it (but not all) when the price was high. Then, after the asset class lost 53% in 2008, you would rebalance again and buy when the price was low. Buying low, selling high—that’s how you are supposed to invest.

When it comes to building your portfolio, just remember that funds that have outperformed in the past do not always keep on winning. Past performance provides little insight about how that fund will perform in the future. That’s why that paragraph is in every investment agreement. It’s so obvious.

Which Type of Medicare Advantage Plan Is Best for You?

What to do about health care is one of the major decisions that everyone faces when getting close to retirement. A lot of people delay retirement until they reach age 65 because they don’t want to lose their employer-sponsored health plan. Even if they are financially able to retire, they will often continue to work until they are eligible for Medicare. With the uncertainty that is the state of our health care system right now, it’s hard to blame them.

But what do you do once you turn 65 years old and are eligible for Medicare? In the first part of this series on Medicare planning, I discussed the importance of timing your Medicare enrollment (Medicare Enrollment—Not As Easy As It Sounds). The second part of the series (Medicare—Which Path Is Right for You?) was a discussion on the differences between Original Medicare and Medicare Advantage. In this post, I will discuss the types of Medicare Advantage plans that are available.

As a refresher, Medicare Advantage plans are sold and administered by private insurance companies. Original Medicare is administered by the federal government. Medicare Advantage plans must provide, at a minimum, the same coverage as Original Medicare Parts A and B. The plans often include prescription drug coverage and additional coverages like vision and dental, and some come with other benefits, like a gym membership. With Original Medicare, you can visit almost any doctor in the country. With a Medicare Advantage plan, you generally get care from within the provider’s network of medical professionals. Most people choose Original Medicare, but about 30% of enrollees select Medicare Advantage.

For this post, I am going to assume you have decided that a Medicare Advantage plan would be the right path for you. If that’s the case, it’s important that you understand the types of plans you will choose from. The most common Medicare Advantage plans are health maintenance organizations (HMOs), preferred provider organizations (PPOs), and private fee-for-service (PFFS) plans. Lesser-known plans under the Medicare Advantage umbrella include special needs plans (SNPs) and medical savings account (MSA) plans. We’ll take a closer look at each type and highlight the differences.

Health maintenance organization: With this type of plan, you select a primary doctor from the insurer’s network, and that doctor manages your health care. If you need to see a specialist, you usually will need a referral from your primary doctor, and you are typically not covered for services provided outside of the network, although there are exceptions. The rules of this type of plan may be the most restrictive, but it will generally offer the lowest plan costs.

Preferred provider organization: Under a PPO, you generally can go to any doctor or hospital, but you will pay more if you use a provider outside of the insurer’s network. If you need to see a specialist, you generally won’t need a referral, but if you select a provider outside of network, you will pay more. This type of plan is more flexible, but it usually comes with a higher premium.

Private fee-for-service plan: This plan was once the fastest-growing type of Medicare Advantage plan. It was popular because you didn’t have to choose a primary care doctor and usually didn’t need a referral to see a specialist. You had to be careful with this plan, however, because not all Medicare providers accepted it. The popularity of this type of plan has declined because of some changes in the Medicare laws. It’s important to make sure you understand the details of how the plan works if you opt for it.

Special needs plan: As the name implies, this type of plan is available for Medicare enrollees who have some type of special need. The plan will offer custom benefits designed to meet the specific needs of the plan member. You could be eligible for this type of plan if you have a severe and/or chronic condition like diabetes, end-stage renal disease, chronic heart failure, or dementia. Living in a nursing home is another example of a condition that would be eligible for this type of plan.

Medicare savings account: This type of plan is not as popular as the other types of plans. It combines a high-deductible health plan with a bank account in your name. When you select this type of plan, Medicare will make deposits into your bank account that you can use to pay for medical expenses. This type of plan is really only appropriate for you if you don’t need a lot of care, because the amount deposited into your MSA is often less than the deductible.

As I wrote in the first part of this series on Medicare, getting the coverage that is best for you is not a simple process. You don’t just show up at age 65 and sign up. You need to make sure you understand your options and make the best choices based upon your individual needs. Don’t pick a plan because a friend or family member picked it. Make sure that it’s right for you.

It’s No Secret: A Health Savings Account Can Make a Big Difference

A health savings account is the best type of investment account available that most people don’t know anything about. It can be better than a 401(k), an IRA, and even a Roth IRA. Those accounts are good, but this one is even better.

Maybe it’s not well known because of its name? Maybe people think of it as some type of insurance policy? No matter the reason, if you qualify to have one, you would be wise to learn a little more about this little-known investment account. It can make a huge difference financially for you and your family, especially in your retirement years.

So, what is this account that can be so powerful? It’s a health savings account, better known by its abbreviation, HSA. While your 401(k) and IRA accounts can provide a reduction in your current taxes and do not incur taxes as they grow over the years, you will pay income tax on the distributions you take to fund your retirement years. The Roth IRA doesn’t give you a current reduction in taxes, but the distributions you take at retirement are tax-free. The health savings account gives you triple tax benefits. The contributions you make are tax-deductible, the account grows tax-free over the years, and if managed properly, the funds are tax-free when withdrawn.

A health savings account is designed to help you set aside money for health care expenses. But unfortunately, not everyone is eligible for an HSA. To qualify, you must be enrolled in a high-deductible health plan (HDHP). For 2017, an HDHP is defined as a health insurance plan with an annual deductible of at least $1,300 for an individual or $2,600 for a family. The plan must also limit out-of-pocket expenses like copays and deductibles to $6,550 for an individual or $13,100 for a family.

The amount you can contribute to an HSA is limited. For 2017, the maximum contribution allowed is $3,400 for an individual or $6,750 for family coverage. If you are over 55, you can make “catch up” contributions of $1,000. You can contribute monthly, or you can make a lump sum contribution for the previous year up until your tax return comes due—April 15 for most people. If you have health insurance through your employer, and the plan qualifies as an HDHP, you can make your contributions via payroll deduction. Many employers will even provide a matching contribution as an employee benefit. It’s important to note that you cannot make contributions once you hit age 65 and are enrolled in Medicare. Your contributions into the account can be invested in a wide range of investment vehicles, including mutual funds, ETFs, stocks, and bonds.

The most important thing to know about health savings accounts is that the distributions are tax-free only if you use the funds for qualified medical expenses. You can make those distributions for yourself, your spouse, or your dependents. If you take a distribution and do not use the funds for medical expenses, the amount of the distribution is considered taxable income and there is a 20% penalty tax. The penalty goes away once you reach age 65.

You can make distributions anytime you have qualified medical expenses to pay. However, one strategy that many folks use is to pay the day-to-day medical expenses out of pocket and allow their HSA to grow. For most people, medical expenses are a bigger part of the budget in their later years. This strategy allows you to accumulate tax-free dollars for those expenses.

Maybe one reason that HSAs are underappreciated is because of some misconceptions that surround them. A lot of folks confuse them with flexible spending accounts (FSAs). These are the accounts that many people contribute to through payroll deduction. You can use the funds to pay for qualified medical expenses through the year, but these funds are “use it or lose it.” In other words, you must use the funds by the end of the year, or you lose them. Funds in your HSA do not expire.

Another common misconception surrounding HSA accounts is that you can have one only through your employer. This is simply not true. If you have a qualifying HDHP, you are eligible to contribute as an individual.

There are some rules that you have to know and follow to take full advantage of this special tax-favored account. But if you are eligible, this little-known account can have a big impact on your financial future.

Should I Pay Off My Mortgage?

Picture this: Through your hard work and discipline, you have accumulated a relatively significant amount of savings outside of your retirement accounts. You have more than enough cash set aside in your emergency fund, which is your safety net, and you are thinking about whether you should use some of your excess savings to pay off the mortgage that is left on your home. So, should you?

Just like most financial questions, there is no easy answer. The right answer could be different for you than it is for your friends or family members. The best you can do is to try to understand the pros and cons of both sides of the issue so that you can make the best decision for you and your family. This article will attempt to help you understand the pros and cons of this tricky question.

In the financial planning community, there are two schools of thought on whether you should pay off your mortgage. Many advisors think that you should do everything you can to eliminate all debt, including your mortgage. Other advisors believe that there is a difference between good debt and bad debt and that a mortgage is considered good debt. (A couple of examples of bad debt would be credit cards and auto and boat loans.)

So, what are the benefits of paying off your mortgage? Obviously, there’s the fact that you will no longer have a monthly mortgage payment. Not having that monthly obligation will free up cash flow that you can use to pay for other things that are important to you. There’s also the peace of mind factor. There’s no way to put a value on the warm and fuzzy feeling that comes from laying your head on your pillow each night knowing that, no matter what happens in the financial world, you own your home and nobody can take it away. There are studies that say that the happiest and most successful retirees are the ones who own their homes free and clear.

Are there any cons of paying off your mortgage? The most obvious is the opportunity cost on the money you used to pay off your mortgage. Opportunity cost is the benefit you would have received if you had made a different decision. If you still had those funds, you would most likely have them invested. The return you could have earned on those funds is the opportunity cost of paying off your mortgage. And therein lies the rub. Because of the fluctuations in the investment world, you don’t know what kind of gains, or losses, you might get on those invested dollars.

What are the benefits of not paying off the mortgage? One answer is the opposite of the opportunity cost discussed in the previous paragraph. Depending upon the interest rate you are paying on your mortgage, you may be able to invest the funds and get a better return. In today’s low interest rate environment, that’s not a very high bar. If you have a mortgage in the 4% range and can get more than 4% on your investment portfolio, you are ahead of the game. Of course, most investments are not guaranteed. The way that I typically explain this concept is like this: If you have a 4% mortgage and you pay it off, you are, in effect, getting a 4% guaranteed return on those dollars. If you do not pay off the mortgage and invest instead, you will do better if your portfolio earns more than 4%, worse if it earns less or loses money.

Remember that mortgage interest is also a tax-deductible expense. So, if you are still able to itemize your deductions, you will pay a lower “net” interest rate on your mortgage. To illustrate, let’s assume you are in the 25% tax bracket and have a 4% mortgage. By deducting your mortgage from your taxable income, you are effectively paying a net rate of 3%. That’s pretty cheap money.

I fall into the camp that believes that, in most cases, a mortgage is good debt, especially in today’s interest rate environment. When interest rates finally move higher, I will undoubtedly re-evaluate my position. But for now, I consider the historically low interest rates we have available as incredibly cheap money.

Many of you know that my wife and I are building a new home. As we were going through the mortgage process to secure the funding for our home, we reviewed the 15- and 30-year options. Fifteen-year mortgages are at extremely low rates, but we opted for the slightly higher 30-year option because it gives us the flexibility to lock in a very low rate for a very long time. We can certainly make additional principal payments if we want, which could pay off the mortgage in 15 years, but having the 30-year option in place gives us flexibility on paying the mortgage down in a way that is comfortable for us over the years. In the meantime, we can keep our investment portfolio intact, hopefully growing our portfolio by more than the cost of our borrowed funds.

But it’s important to remember what I mentioned earlier. Just because it might be the right decision for me not to pay off my mortgage doesn’t mean that it’s necessarily the best option for you.

The Different Flavors of Risk

When we look at the performance of the investment markets so far in 2017, something seems to be missing. We know that it’s there. We can feel it. But we just haven’t seen it in a while. Our monthly and quarterly statements look pretty good, and most of the asset classes we own are doing well. So, what’s missing? We know that risk and reward are basic principles of investing. So far this year, we’ve seen reward, but risk seems to be missing.

When most people think about risk, they are thinking about market risk—the risk that their investments will lose value. Most of us still remember the harrowing years of the financial crisis that occurred a decade ago. We saw the U.S. stock markets drop more than 50% from 2007 to 2009. It was a long, painful decline, and it was a devastating example of market risk.

But risk comes in several flavors. While market risk is the boogeyman that seems to scare folks the most, it’s hardly the only risk we face as investors. One of the main reasons that we invest is to help offset inflation risk. When the prices of milk, eggs, and other living expenses go higher, it takes more money to maintain our standard of living. This flavor of risk is particularly dangerous for retirees. When you are no longer working and are living off your savings, inflation eats away at your purchasing power. The increasing costs of health care as we age are becoming a huge risk for a lot of people. What can we do? We can invest. If we can grow our investments more than the inflation rate that eats away at our purchasing power, we can stay ahead of the game. So, we end up taking on some market risk to help offset our inflation risk.

Longevity risk is the risk that we will outlive our savings. It’s another form of risk that is particularly dangerous for retirees. Thanks to the wonders of modern medicine and improvements in living conditions, we are living longer. This means that we are spending more money and putting more stress on our savings. Longevity risk is bad enough, but when it’s combined with inflation risk, it’s a double-whammy to retirees. Again, we try to mitigate these risks by taking on market risk. If we can grow our savings by investing wisely, we can help offset some of the risk of running out of money in our later years.

There are other risks that we face when investing. Concentration risk is the flavor of risk that comes from having too many of our investment eggs in one basket. If our portfolio is heavily concentrated in one type of investment, an individual stock, a bond, or even an asset class, we risk losing money if that investment does poorly. We can reduce this risk by diversifying our portfolio across many investments, industries, and countries.

Credit risk is the risk we take when we buy a bond or other type of fixed-income investment. When we buy a bond, we are basically lending our money to a company or a government. Credit risk comes from the chance that we don’t get paid back when the bond matures. Once again, this risk can be lessened by owning a diversified portfolio of bonds, or by owning a bond fund.

We can’t avoid risk, because it is everywhere in one form or another. The key to being successful financially is to balance the types of risk. That balance is different for everyone. We accept some of one type of risk to help offset another type. We all have different goals, and we all deal with the different types of risk in different ways. It’s important to find the balance that is right for each of us.

Medicare—Which Path Is Right for You?

Enrolling in Medicare is not a simple process. As you approach age 65, there are several decisions that need to be made. Making a wrong decision, based on your circumstances, can have a big impact on your finances and your health insurance coverage. In the first part of this series on Medicare (Medicare Enrollment—Not As Easy As It Sounds), I discussed the importance of the timing of your enrollment. In this article, I will try to help you understand the different paths that you must choose from when it’s time for you to enroll.

It’s important to understand that you have two paths to choose from when enrolling in Medicare. You can select either Original Medicare or Medicare Advantage. Both paths have advantages and disadvantages, and what might be the best path for you may not necessarily be the best path for friends or family members.

Original Medicare

The first step in choosing the right path is understanding the difference between the paths. Original Medicare is administered by the federal government and consists of a few different parts. Part A is the coverage that pays for expenses incurred during inpatient hospital visits and for those in a skilled nursing facility. It also pays for some expenses related to home health care and hospice services. Medicare Part B pays for medically necessary services, like lab tests and doctor visits, to diagnose and treat your health issues.

When you choose Original Medicare, you start with Parts A and B, and then you can add optional coverages. Part D is an optional coverage that pays for prescription drug expenses. The other optional coverage is a Medigap policy. Medigap policies are administered by private insurance companies and offer a variety of coverages for co-pays and deductibles. It is important to note that not all health care providers accept Medicare patients, but most do, so you can choose from a wide variety of doctors and specialists.

Medicare Advantage

Medicare Advantage plans offer an alternative path for Medicare enrollees. These plans are administered by private companies. They are required to offer the same coverages as Original Medicare, and they often offer more, like vision, dental, or hearing coverage. Most of them offer drug coverage. They work with a network of providers and therefore have more rules when it comes to getting a referral to a specialist. The premiums are typically significantly lower than Original Medicare, and some plans are offered with zero premium. But zero premium does not mean zero cost. There are out-of-pocket expenses, usually with each service provided under the plan.

Which Path Should You Pick?

So, which path should you choose? Like most financial questions, the answer is … it depends. If your doctor is not in a Medicare Advantage network, you’ll need to find a new doc or go with Original Medicare. If you plan to travel extensively, you might also want to consider Original Medicare because you are not limited to doctors within a network. If your health is good and you don’t incur a lot of medical expenses, a Medicare Advantage plan can probably save you some money.

Of course, that leads to the question that many ask: “Why not sign up for Medicare Advantage while healthy and switch to Original Medicare and a Medigap plan when we need more services?” That would be nice, but it doesn’t work that way. Once you’ve decided which path is right for you, it’s not easy to change. There are certain times each year when you can apply for a change, and there are some rules you have to follow.

It’s relatively easy to switch from Original Medicare to a Medicare Advantage plan. But if you want to go from a Medicare Advantage plan to Original Medicare, it can get complicated. After spending an amount of time in a Medicare Advantage plan, you can lose the guarantee to get a Medigap plan. The Medigap insurance companies can put you through medical underwriting. That means if you have a pre-existing chronic condition, you can be denied coverage. And having Original Medicare without a Medigap policy can become cost prohibitive, especially if you have a chronic condition.

Remember, I said it isn’t easy. But the key to making any decision is to gather as much information and knowledge about the subject as you can. You can then weigh the pros and cons of each choice as they apply to your situation. The Medicare website (www.Medicare.gov) is a great resource and can help make sure you are on the right path.