Archive for December, 2009

I am looking forward to joining my friend, Kim Kiyosaki, and others, as a speaker, at the First Annual Rich Woman International Forum, January 29 – 31, in Scottsdale, Arizona.

My talk will focus on using paper assets to manage risk and create lasting financial success, which I define as the ability to support a reasonable lifestyle, indefinitely into the future, without work or worry.

You can get more information about the Rich Woman International Forum at richwoman.com.

If you belong to or work for an organization that hires professional speakers, I would appreciate a referral. For more information on my keynote speeches, please see KimSnider.com.

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: Speaking at Rich Woman International Forum

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I strongly recommend an excellent article to you, from the Psy-Fi blog, a regular on my daily reading list. The title of the article is B.F Skinner’s Stockmarket Slot Machines: Win Big, Win Rarely, Win Never.

I often refer, in the investment courses I teach, to B.F Skinner, intermittent variable reinforcement and how the stock market creates superstitions much like those created in Skinner’s birds.

This article gives a wonderful account of how operant conditioning not only works to keep gamblers feeding coins into slot machines, but also gamblers feeding coins into the stock market.

Slot machines work on the same principle. The machines are programmed to ensure that the operator always wins a fixed proportion of the take so the aim of the supplier is make sure people push as many coins into it as possible, because that maximises revenue. Paying out the winnings as a continual stream of small payments, in turns out, is less good at keeping people sticking money in than the occasional big payment accompanied by flashing lights and noisy sirens. This is variable operant conditioning in operation.

It also does an excellent job of explaining a question I am asked frequently. Say, you have some guru promising ridiculously unrealistic performance from an investment. That guru trots out a number of people who claim to have achieved the outsized returns promised.

Are the people lying? Likely the answer is no. So, if they got the promised returns, why are you unlikely to achieve the same result? And finally, what does Skinner’s stock market slot machine tell us about why so many people will willingly leap into the trap?

Read the whole article for the answers.

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: Stock Market Slot Machine

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As always, wonderful article from the Psy-Fi blog. If you don’t read this blog religiously, you are really missing out:

Investment Forecasts: Known Unknowns

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: Items of Interest for the Family CFO – December 29, 2009

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You know you are getting old when you find yourself constantly saying, “Back in my day …”

Well, back in my day, you didn’t attend college classes online. But the world has come a long way since I was in college and these days attending courses online is part of the normal college routine. As a result, some of the best material from college courses is available online at no charge.

If you have an iPhone, iTouch or iPod, there is iTunes U, part of the iTunes Stores, which Apple says is, “possibly the world’s greatest collection of free educational media available to students, teachers, and lifelong learners.” There are over 200,000 audio and video files in ITunes U and schools and universities are publishing more every day.

The amazing thing is that you can literally get a world class education, for free, if you were so inclined, on iTunes! If you need some help getting started, there is a great series of lectures from Robert Shiller of Yale in iTunesU. Search iTunesU for Robert Shiller and you will find them.

Along similar lines, onlineclasses.org published a list of 50 Free Ivy-League Lectures on the Economy. These are lectures from Princeton, Yale, Harvard, Cornell, Wharton … free! What a country! What a gift!

If you find any of them particularly good, or particularly bad, let me know. Also, what other tools and resources do you like for keeping the software between your ears updated? Let us know in the comments.

(50 Ivy-League Lectures via The Big Picture)

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: Using that iPhone or iPod to Upgrade the Software Between Your Ears

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Can you believe it? 2009 is almost over! The older I get, the faster they go!

I thought I would put together a quick note to remind you of some helpful, year-end tasks you may want to consider:

1. Rebalance investment accounts – this is something few people do but I highly recommend. This involves bringing your investment accounts back in line with your model asset allocation.

Of course, that assumes you have a model asset allocation to begin with!If you need help with the mechanics of rebalancing, you can find a complete guide in Module #6 of our free, 401(k) course. The logic is the same in all accounts or across accounts.

If you don’t know what an appropriate asset allocation is for your situation, then I would recommend one of two KiM-B-A courses: Introduction to Investments and/or Step-by-Step Retirement Planning. Asset allocation is covered, among other things, in both.

Finally, if you need some individual guidance on the topic, we now offer fee-only financial planning services. We charge a reasonable hourly rate and would be happy to sit own and work through any questions you might have. Just call our office at 888-6-SNIDER (888-676-3447) or 214-220-0055 to schedule a meeting.

2. Drain Flexible Spending Accounts – Flexible Spending Accounts are use-it-or-lose it accounts. Any money unspent at the end of year is forfeited. If your employer offers FSAs and you have unspent funds, consider stocking up on prescriptions or making a quick appointment at the eye doctor to spend the remainder of your account. The expense must be incurred on or before December 31 to qualify for this year’s funds.

3. Register for two KiM-B-A courses and your spouse attends free – to celebrate the launch of the KiM-B-A program, we did two things: we made the introductory pricing purposefully low (hint! hint!) and we offered you the opportunity to have your spouse attend with you at no additional cost provided you registered for at least two KiM-B-A courses prior to December 31 and attend both prior to March 31.

There are six courses in the KiM-B-A program including Introduction to Investments, Step-by-Step Retirement Planning, Investing for Retirement, How to Take Advantage of the New IRA to Roth Conversion Law, The Role of Insurance in Your Retirement Plan; and Estate Planning Basics. Each course may be taken on its own or mixed and matched with others to meet your needs.

Register before December 31 and enter the source code REINDEER to take advantage of this special pricing.

4. Review your life/financial plan – I am a big advocate of life planning. I think your financial plan is the result of a bigger life plan. I talk at some length in my book, How to Be the Family CFO, about how I created my own life plan many years ago and how instrumental it was in getting me out of the mess I was in and building a life I loved.

I always like to take some time at the first of every year to review and update my plans. If you would like some ideas about how to get started creating a life plan, have a look at chapter 4 in my book. If you need some help creating a financial plan, let me suggest either the Step-by-Step Retirement Planning course in the KiM-B-A program or our fee-only financial planning services. If planning has never been your thing, we would be happy to help.

5. Tax loss harvesting – Tax loss harvesting is selling assets that have declined in value and using the losses to offset capital gains, either this year or in future years. This is only applicable to taxable accounts, not tax-deferred accounts such as IRAs, and may or may not be appropriate given the specifics of your situation.

If you have investable assets that may be candidates for tax loss harvesting, hopefully you have already discussed the situation with your tax or financial professional. If not, you need to get moving because those assets must be sold by December 31 to count the losses in the 2009 tax year.

We sent out detailed instructions for tax-loss harvesting in Snider Method accounts to our consulting clients. If you need any help, please be sure and give us a call.

6. Max out retirement plan contributions – if you haven’t contributed the maximum amount to tax-advantaged retirement accounts, you still have a little bit of time left. Contribution limits for 2009 are as follows:

ACCOUNT TYPE

AGE 49 & BELOW

AGE 50 & ABOVE

IRAs (Roth and Traditional) $5,000 $6,000
401(K) and 403(b) $16,500 $22,000
SIMPLE IRA $11,500 $14,000
SEP IRA $49,000*

Remember, you can’t invest what you don’t save and the most advantageous way to save money for retirement is almost always in tax-advantaged retirement accounts.

7. Grand-father your Snider Advisors consulting services – I have sent multiple emails, beginning September 17, 2009, to existing clients, explaining the changes we were making to our consulting service levels. Snider Method alumni who are not currently consulting clients have until December 31, 2009 to lock in the original consulting service terms.

If you are a Snider Method Workshop alumni who is not currently a consulting client and are unsure about the pros and cons of grandfathering, give us a call at 888-676-3447 or 214-220-0055 and we would be happy to talk it over with you. If you just need to sign-up for consulting before the December 31 deadline, you can do that in the My Services section of MySnider.com.

8. Set up systematic RMDs for 2010 – If you are over the age of 70 1/2, you must take Required Minimum Distributions (RMD) from tax-deferred retirement accounts. Uncle Sam wants (needs) his money.

The required distribution for 2010 is based on December 31, 2009 account values. So once you know the account value, you can set up periodic withdrawals to meet the required annual distribution. For some people, this is more manageable than one big distribution at year end. Use this calculator to figure your required distribution for 2010. As always, let us know if we can help.

9. Change/update passwords – I had a wake-up call on this issue not very long ago – my Facebook account was hacked. (By the way, if you are on FaceBook, friend me.) No damage was done but it was a little embarrassing. I used the same password on many sites and it was way too easy to guess.

I quickly created a password algorithm and set out to change all of my passwords. Best practice is to do this at least a couple times a year. If nothing else, the new year is a good reminder to do it if you haven’t.

In case you are thinking you have too many passwords to make each one difficult and unique, I hear you. At last count, we have 452. But here are three tips that make passwords very manageable for Jim and I.

1. We use an incredible web site called PassPack to store/share all of our passwords and other important information. Besides being secure as Fort Knox, it has a lot of really handy features. Jim and I couldn’t manage without it.

2. I have a unique, easy to remember but hard to crack password for every site. The way I do it is with a password algorithm. For more on password algorithms, see this Lifehacker article.

3. And this is the hard one, you have to go through and periodically, systematically, change all your passwords. What better time than now? Create a new algorithm and change them all. Just rip the band-aid off fast. And just so you know, this is much easier once you have them stored in one place, like PassPack. You just tick them off the list one at a time.

If you need help, my assistant is available for a small nominal fee. (Just kidding!)

10. Consider converting some IRA money to Roth – Effective January 1, 2010, there will no longer be an income limit on converting traditional IRAs to Roth IRAs. This is a boon for higher income individuals who were previously shut out of the benefits of Roth IRAs.

Not only that, but the law is offering a one-time opportunity to spread the tax due on a 2010 Roth conversion over two tax years – 2011 an 2012. Finally, it is a pretty low-risk transaction because you have the ability to change your mind later in the year, by doing a recharacterization, if for example, asset values declined sharply later this year.

Tax law is not for the faint of heart and these conversions can have significant tax implications so it should not be done without a thorough understanding of the rules and the implications.

That being said, we believe most advisors have missed the crux of the issue (as usual). Many people are churning our calculators and break-even analyses to try to determine whether to convert and how much. We don’t think it has anything to do with a break-even or what you think future tax rates will do.

The fact is, you can’t know those things, so as usual, it is pointless to try to make a decision based on your crystal ball. We think the right approach is to think in terms of a tax diversification strategy. That way, no matter what happens in the future, you preserve flexibility and benefits.

If you have money in an IRA or a 401(k) type plan that you know you will be rolling out to an IRA this year, let me suggest two resources for you. We have created a special half-day course, IRA to Roth Conversion: New rules and strategies for 2010, to teach you everything you need to know about maximizing the opportunity presented by this tax law change.

If you don’t have a CPA as a trusted advisor, we can recommend one. And of course, we also offer fee-only financial planning if you prefer a one-to-one sit down approach. Just give us a call at 888-6-SNIDER (888-676-3447) or 214-220-0055 and tell us how we can help.

As you know, my doggedly persistent pursuit since 1997 has been logical, thoughtful, clear-headed, effective strategies for managing the risks of job loss, illness and disability, bear markets and funding thirty years of retirement, for myself and my family.

Since 1999, when I first began teaching the Snider Method to friends, our extended family has grown quite a bit. There are now some 9000+ of you! But the mission hasn’t changed. It remains to explore, develop and share sensible financial strategies with the people I care about.

In that vein, if I can help in any way, please don’t hesitate to ask. I can always be reached by email at kim@kimsnider.com and by phone at 214-446-8540. That is my direct number – it rings on my desk and forwards to my cell phone after hours. If I can’t answer right away, I promise I will get back to you.

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: 10 Items for Your Year-End To-Do List

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A study, by three neuroscientists, at Emory University, finds that when given expert advice, the decision-making part of our brain shuts down. That’s not a big deal if the advice we are receiving is good. But what if it isn’t?

In the study, the results of which were published in March 2009, the scientists used functional MRI to monitor the brain activity of 24 college students while they made decisions about swapping a guaranteed payment for a chance at a higher lottery payout. Sometimes the students made the decision on their own. At other times, they received written advice from Charles Noussair, an Emory University economist who advises the U.S. Federal Reserve.

Maybe not completely surprising, the advice given by Noussair was followed by the students, even when it was bad. For example, at times, his advice was to accept the tiny guaranteed payout rather than playing a lottery with great odds of winning and a high payout. And they did!

But perhaps more interesting was what was going on in the brain. It wasn’t that the students ignored their own internal thought process when being given supposed expert advice.

When making decisions on their own, without any expert advice, students showed activity in their anterior cingulate cortex and dorsolateral prefrontal cortex — brain regions associated with making decisions and calculating probabilities. When given advice from Noussair, activity in those regions flat lined.

The implications are troubling, especially when coupled with the documented unreliability of experts. Take, for example, the track record of wine critics, political pundits and mutual fund managers.

In a study done over four years, of wine critics, where judges were given the same wine three different times, each time from the same bottle,  their ratings typically varied widely.

How about political prognosticators?

Philip Tetlock at UC Berkeley picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends” and began asking them to make predictions about future events. He had a long list of pertinent questions. Would George Bush be re-elected? Would there be a peaceful end to apartheid in South Africa? Would Quebec secede from Canada? Would the dot-com bubble burst? In each case, the pundits were asked to rate the probability of several possible outcomes. Tetlock then interrogated the pundits about their thought process, so that he could better understand how they made up their minds. By the end of the study, Tetlock had quantified 82,361 different predictions.

After Tetlock tallied up the data, the predictive failures of the pundits became obvious. Although they were paid for their keen insights into world affairs, they tended to perform worse than random chance. Most of Tetlock’s questions had three possible answers; the pundits, on average, selected the right answer less than 33 percent of the time. In other words, a dart-throwing chimp would have beaten the vast majority of professionals. Tetlock also found that the most famous pundits in Tetlock’s study tended to be the least accurate, consistently churning out overblown and overconfident forecasts. Eminence was a handicap.

And of course, we know that the majority of actively managed mutual funds underperform the market itself in any given year and that the ones that do vary from year to year.

If you would like an informative read, I highly recommend a book called The Fortune Sellers: The Big Business of Buying and Selling Predictions, by William Sherden. He looks at seven different areas of forecasting: meteorology, economics, investments, technology assessment, demography, futurology, and organizational planning. He describes each field, examines its track record, and concludes that none can make accurate forecasts.

The danger with so-called expert advice is that it causes our own decision-making apparatus to shut down and it is often wrong. So what is the answer?

I have always believed the answer is to emphasize education over advice. Teach people how to be their own expert advisor. Teach the basis for making sound decisions. And failing that, teach them how to be really good at picking who they accept advice from!

SOURCES:

Engelmann JB, Capra CM, Noussair C, Berns GS (2009) Expert Financial Advice Neurobiologically “Offloads” Financial Decision-Making under Risk. PLoS ONE 4(3): e4957. doi:10.1371/journal.pone.0004957

Lehrer, Jonah (2009) Expertise. The Frontal Cortex.

Eugene Fama and Kenneth French (2009) Luck versus Skill in Mutual Fund Performance. Fama/French Forum.

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: The Danger of “Expert Advice” – Financial or Otherwise

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