Vision Wealth Planning, LLC
Timely Topics - June 2016
What to do in a Go Nowhere Market?
Vision Wealth Planning, LLC
Mark Smith, CPA, CFP®, ChFC®
President
4860 Cox Road, Suite 200
Glen Allen, VA 23060
Phone (804) 368-0854
Cell (804) 514-5046
[email protected]
www.vwplanning.com
I hope you find one or more of
these topics helpful.
Best Regards,
~Mark
In mid-2014, we made the statement that we
are likely entering into a period of low returns. It
was becoming apparent that portfolio returns
did not have much up side. The last two years
have proven the statement to be accurate.
Avoid Reaching for Yield
One of the strongest temptations in periods
such as this is to reach too far for yield. This
can happen in more than one way. First, an
investor may focus too much on higher dividend
paying stocks, over-weighting the portfolio with
more stock risk than is prudent. Dividend
paying stocks go down in bear markets with
other stocks, they don't get a free pass. Also
remember the following about dividends:
They don't add extra value to the investment.
Dividends are simply a return of value to the
shareholder; value that could have been
retained to further grow the company.
Dividends are not guaranteed. They can be
increased, decreased or eliminated. The last
decade is a good example of this fact.
To read more on how to better understand
dividends, click here.
Another way of reaching too far for yield is
putting too much into long-term bonds,
high-yield bonds and/or bond alternatives.
While these may offer higher yield than
shorter-term/higher quality bonds, the risk of
principal loss is much greater.
June 2016
What to do in a Go Nowhere Market?
Investor, Know Thyself: How Your Biases Can
Affect Investment Decisions
Finding and Claiming Forgotten Funds
I have matured U.S. savings bonds. Are they
still earning interest and, if not, can I roll them
over to another savings bond?
If this view is correct, then it makes little sense
to remain at normal levels of risk in portfolios
for two reasons:
First, (and these numbers are just for example)
if you expect a return of 8% for a given level of
risk, does it make sense to take the same of
amount of risk for an expected return of 4%?
We think not.
Second, if we expect lower returns over the
next several years, then it becomes more
important to find sources of return WITHOUT
increasing the risk profile of portfolios. The
primary way of doing this is to take some risk
off the table (which has been done), wait for
markets to go down and then build back risk
positions. In other words, a market correction
would give us more wealth building opportunity
than just staying the course at normal risk
levels.
How is this working?
In the short-term, it has caused
under-performance relative to benchmarks.
This is normal. If we are under-weight risk
assets and they continue to produce low,
positive returns, then by definition our
strategies will return less. Since its impossible
to perfectly time market peaks, this is a reality
of de-risking. In short, we are looking to win
over an entire market cycle, not at every point
during the cycle, so this requires patience.
What if the view is wrong?
This possibility is readily acknowledged by the
Don't misunderstand, dividend paying stocks
investment team. While there has been little
and higher yielding bonds are certainly valuable evidence of a broadly strengthening market, it
role-players in portfolios. They offer beneficial
is possible the market could renew its move up.
risk/return characteristics when combined with There are contingency rules in place to build
other investment types. The point is that too
back risk positions should the market show
much exposure in these areas can create more such evidence.
risk exposure than is wise.
So the answer to the original question is: avoid
What is being done in client portfolios?
making the mistake of reaching too far for
The view governing our primary investment
return and taking too much risk by following a
strategies believes that (1) returns are likely to disciplined strategy. No strategy is perfect, but
remain low and (2) there is a reasonable risk of not having or following a carefully constructed
a stock market downturn given current
plan is even less so.
valuations and many other factors.
Page 1 of 4
See disclaimer on final page
Investor, Know Thyself: How Your Biases Can Affect Investment
Decisions
In psychology, "heuristics"
refers to the mental
decision-making short-cuts
that individuals develop
over time based on past
experiences. While
heuristics can be helpful in
avoiding unnecessary
deliberation, they can also
lead to misleading biases
that can derail even the
most well-thought-out
financial plan.
Traditional economic models are based on a
ignore warning signals.
simple premise: people make rational financial 5. Confirmation bias is the tendency to latch
decisions that are designed to maximize their
onto, and assign more authority to, opinions
economic benefits. In reality, however, most
that agree with your own. For example, you
humans don't make decisions based on a
might give more credence to an analyst
sterile analysis of the pros and cons. While
report that favors a stock you recently
most of us do think carefully about financial
purchased, in spite of several other reports
decisions, it is nearly impossible to completely
indicating a neutral or negative outlook.
disconnect from our "gut feelings," that nagging
6. The bandwagon effect, also known as herd
intuition that seems to have been deeply
behavior, happens when decisions are
implanted in the recesses of our brain.
made simply because "everyone else is
Over the past few decades, another school of
doing it." For an example of this, one might
thought has emerged that examines how
look no further than a fairly recent and
human psychological factors influence
much-hyped social media company's initial
economic and financial decisions. This
public offering (IPO). Many a discouraged
field--known as behavioral economics, or in the
investor jumped at that IPO only to sell at a
investing arena, behavioral finance--has
significant loss a few months later. (Some of
identified several biases that can unnerve even
these investors may have also suffered from
the most stoic investor. Understanding these
overconfidence bias.)
biases may help you avoid questionable calls in
7. Recency bias refers to the fact that recent
the heat of the financial moment.
events can have a stronger influence on
Sound familiar?
your decisions than other, more distant
events. For example, if you were severely
Following is a brief summary of some common
burned by the market downturn in 2008, you
biases influencing even the most experienced
may have been hesitant about continuing or
investors. Can you relate to any of these?
increasing your investments once the
1. Anchoring refers to the tendency to
markets settled down. Conversely, if you
become attached to something, even when it
were encouraged by the stock market's
may not make sense. Examples include a
subsequent bull run, you may have
piece of furniture that has outlived its
increased the money you put into equities,
usefulness, a home or car that one can no
hoping to take advantage of any further
longer afford, or a piece of information that is
gains. Consider that neither of these
believed to be true, but is in fact, false. In
perspectives may be entirely rational given
investing, it can refer to the tendency to
that investment decisions should be based
either hold an investment too long or place
on your individual goals, time horizon, and
too much reliance on a certain piece of data
risk tolerance.
or information.
8. A negativity bias indicates the tendency to
2. Loss-aversion bias is the term used to
give more importance to negative news than
describe the tendency to fear losses more
positive news, which can cause you to be
than celebrate equivalent gains. For
more risk-averse than appropriate for your
example, you may experience joy at the
situation.
thought of finding yourself $5,000 richer, but
the thought of losing $5,000 might provoke a An objective view can help
far greater fear. Similar to anchoring, loss
The human brain has evolved over millennia
aversion could cause you to hold onto a
into a complex decision-making tool, allowing
losing investment too long, with the fear of
us to retrieve past experiences and process
turning a paper loss into a real loss.
information so quickly that we can respond
almost instantaneously to perceived threats and
3. Endowment bias is also similar to
opportunities. However, when it comes to your
loss-aversion bias and anchoring in that it
finances, these gut feelings may not be your
encourages investors to "endow" a greater
strongest ally, and in fact may work against
value in what they currently own over other
you. Before jumping to any conclusions about
possibilities. You may presume the
your finances, consider what biases may be at
investments in your portfolio are of higher
work beneath your conscious radar. It might
quality than other available alternatives,
also help to consider the opinions of an
simply because you own them.
objective third party, such as a qualified
4. Overconfidence is simply having so much
financial professional, who could help identify
confidence in your own ability to select
any biases that may be clouding your judgment.
investments for your portfolio that you might
Page 2 of 4, see disclaimer on final page
Finding and Claiming Forgotten Funds
As a child, you may have dreamed about
finding buried treasure, but you probably
realized at an early age that it was unlikely you
would discover a chest full of pirate booty.
However, the possibility that you have
unclaimed funds or other assets waiting for you
is not a fantasy.
Do you have a tax refund
waiting for you?
Each year, millions of dollars in
tax refunds go unclaimed. In
March 2016, the IRS
announced that it was holding
$950 million in unclaimed
refunds as a result of taxpayers
failing to file a federal income
tax return for 2012. (Source:
IR-2016-38, March 10, 2016)
You may have missed out on a
potential tax refund because
you earned income and had
taxes withheld but weren't
required to file a tax return, or if
you were eligible for refundable
tax credits (where the amount
of the credit you qualify for
exceeds the amount of tax you
owe). Even if you did file a tax
return, your refund may have
been undeliverable if your
address was incorrect.
For more information on finding
and claiming missing federal
income tax refunds, visit
irs.gov.
According to the National Association of
Unclaimed Property Administrators (NAUPA),
$41.7 billion is waiting to be returned by state
unclaimed property programs. So how do you
find what is owed to you, even if it's not a
fortune?
State unclaimed property programs
Every state has an unclaimed property program
that requires companies and financial
institutions to turn account assets over to the
state if they have lost contact with the rightful
owner for one year or longer (such as when the
account has been inactive). It then becomes
the state's responsibility to locate the owner.
State-held property generally can be claimed in
perpetuity by original owners and heirs.
For state programs, unclaimed property might
include the following:
•
•
•
•
•
•
•
•
Financial accounts
Stocks
Uncashed dividend or payroll checks
Utility deposits
Insurance payments and policies
Trust distributions
Mineral royalty payments
Contents of safe-deposit boxes
To see whether you have unclaimed assets,
you may have to search your state's database
and the databases of states where you formerly
lived or worked. It's possible that funds or
assets are still waiting for you even if you
moved away years ago. Fortunately, most
states participate in a national database that
you can search for free at MissingMoney.com.
Federal unclaimed property programs
The federal government also tracks unclaimed
property, including:
•
•
•
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Tax refunds
Pension funds
Funds from failed banks and credit unions
Funds owed investors from U.S. SEC
enforcement cases
• Refunds from FHA-insured mortgages
• Unredeemed savings bonds that are no
longer earning interest
Unlike states, the federal government does not
have a central website for finding unclaimed
money or assets, so you'll need to check a
number of sources, including one of the biggest
sources of unclaimed funds--the IRS--at irs.gov.
To find out more about other federal programs
that may hold unclaimed property, visit the
NAUPA website, unclaimed.org.
Submitting a claim
To claim property, follow the instructions given,
which will vary by the type of asset and where
the property is held. You'll need to verify
ownership, typically by providing information
about yourself (such as your Social Security
number and proof of address), and submit a
claim form either online or by mail.
What if the listed property owner is deceased?
A claim may be made by a survivor and will be
payable according to state or federal law. For
life insurance, you may need the full name and
Social Security number of the deceased
individual, a copy of the death certificate, and in
some cases proof that you were the named
beneficiary.
Be careful
Private companies may be paid to locate
rightful owners and/or offer to help rightful
owners obtain property for a fee, but legitimate
companies will ask you to pay only after you
receive your property. State laws limit fees
Finding "lost" life insurance policies might take companies charge, so check with your state
some legwork. Life insurance companies that
before you sign any agreement. However, in
can't locate a beneficiary must generally turn
most cases you should be able to find the same
over benefits from an individual policy to state
property for free by checking state or federal
unclaimed property programs, but might not do databases. Carefully check out anyone who
so if the company does not know that the policy contacts you, because some scammers will
owner has passed away. If you believe that a
claim to have property or represent that they
family member owned life insurance but can't
are from a government agency in order to
find the physical policy, you may need to look
obtain other information about you or your
for evidence of it by searching personal records finances. For more information about protecting
and files (assuming you have the authority to
yourself, visit the Federal Trade Commission's
do so) or by contacting the policy owner's
consumer information site, consumer.ftc.gov.
insurance agent, attorney, or other financial
professionals.
Page 3 of 4, see disclaimer on final page
Vision Wealth Planning,
LLC
Mark Smith, CPA, CFP®, ChFC®
President
4860 Cox Road, Suite 200
Glen Allen, VA 23060
Phone (804) 368-0854
Cell (804) 514-5046
[email protected]
www.vwplanning.com
IMPORTANT DISCLOSURES
Vision Wealth Planning, LLC and
Broadridge Investor Communication
Solutions, Inc. do not provide
investment, tax, or legal advice
through general communications
such as this. The information
presented here is not specific to any
individual's personal circumstances.
To the extent that this material
concerns tax matters, it is not
intended or written to be used, and
cannot be used, by a taxpayer for the
purpose of avoiding penalties that
may be imposed by law. Each
taxpayer should seek independent
advice from a tax professional based
on his or her individual
circumstances.
These materials are provided for
general information and educational
purposes based upon publicly
available information from sources
believed to be reliable—we cannot
assure the accuracy or completeness
of these materials. The information in
these materials may change at any
time and without notice.
I have matured U.S. savings bonds. Are they still
earning interest and, if not, can I roll them over to
another savings bond?
Once U.S savings bonds have
reached maturity, they stop
earning interest. Prior to 2004,
you could convert your Series E or EE savings
bonds for Series HH bonds. This would have
allowed you to continue earning tax-deferred
interest. However, after August 31, 2004, the
government discontinued the exchange of any
form of savings bonds for HH bonds, so that
option is no longer available.
Since matured savings bonds no longer earn
interest, there is no financial benefit to holding
on to them. If you have paper bonds, you can
cash them in at most financial institutions, such
as banks or credit unions. However, it's a good
idea to call a specific institution before going
there to be sure it will redeem your bonds. As
an alternative, you can mail them to the
Treasury Retail Securities Site, PO Box 214,
Minneapolis, MN 55480, where they will be
redeemed. If you have electronic bonds, log on
to treasurydirect.gov and follow the directions
there. The proceeds from your redeemed
bonds can be deposited directly into your
checking or savings account for a relatively
quick turnover.
Another important reason to redeem your
matured savings bonds may be because
savings bond interest earnings, which can be
deferred, are subject to federal income tax
when the bond matures or is otherwise
redeemed, whichever occurs first. So if you
haven't previously reported savings bond
interest earnings, you must do so when the
bond matures, even if you don't redeem the
bonds.
Using the money for higher education may
keep you from paying federal income tax on
your savings bond interest. The savings bond
education tax exclusion permits qualified
taxpayers to exclude from their gross income all
or part of the interest paid upon the redemption
of eligible Series EE and I bonds issued after
1989 when the bond owner pays qualified
higher-education expenses at an eligible
institution. However, there are very specific
requirements that must be met in order to
qualify, so consult with your tax professional.
What do I need to know about home sharing sites like
Airbnb?
Home sharing sites like Airbnb
are online services through
which someone offers to rent
their home or a portion of their
home. Airbnb listings are popular lodging
options for travelers on a budget as well as
property owners seeking extra income. But
before you decide to be a guest in someone's
home or open your door to strangers as the
host, there are some things to consider.
An Airbnb listing may be an affordable option if
you want to cut lodging costs, but it could mean
you have to do more research before your trip
than you might for more conventional
accommodations. Be specific when conducting
your initial search and narrow down locations
according to your budget, number of guests,
length of stay, and space requirements. This
will help you find a match that best suits your
needs. Check the ratings and reviews carefully
to determine whether the location and property
work for you. Think about researching
neighborhoods outside of reviews--you can't
always trust their accuracy, and you want to be
sure you're staying in a place that meets your
expectations.
Once you have a few viable options, contact
your prospective hosts with any questions you
might have.
During your search, be wary of scams. Make
sure you're booking via a legitimate Airbnb
service with verifications that you're dealing
with real hosts. By using caution and common
sense in the booking process, you might save
yourself some trouble down the road.
If you want to rent out your property as an
Airbnb host, the first thing you should do is
check with your landlord or homeowners
association (if applicable). It's important to know
any rules that might affect you. Next, consider
the costs of hosting. Can you afford to provide
clean linens, towels, and other amenities to
your guests? Are you able to keep up with
cleaning and maintenance of your property?
Are you prepared to pay possible hosting fees
to your booking service? Do you have
appropriate insurance coverage, or will you
need to purchase more?
Don't forget that renting out your property may
have tax consequences. Talk to a tax
professional to learn specific details.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016