Do new highs in the market mean it’s time to sell?

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U.S. stock market indexes have been reaching new all-time highs repeatedly since last year’s Presidential election. Does this mean investors should be worried that the market is hitting a “top” and that prices are about to slump? In a word, no: New highs in the markets do not tell us anything about what comes next, say researchers at Dimensional Fund Advisors. In fact, much of the time stock prices continue to go higher even after the Standard & Poor’s 500 Stocks Index hits record levels, DFA research shows. Looking at returns on the S&P 500 Index from 1926 through 2016, DFA found that the market was higher 80.5 percent of the time a year after hitting a new monthly record high. That was an even better positive performance than just looking at the market’s 12-month performance after any index level, when it gained in value 74.7% of the time. “Looking at this data,...

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How to Streamline Your Tax Records

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Are you still scrambling to put together your 2016 tax records so that you can get your taxes done? Now may be the time to systematize your tax record-keeping, while the pain is still fresh in your mind. Although we think electronic recordkeeping is the way to go and will discuss how below, let’s look at a simple folder system for those who prefer paper records. Get yourself nine manila folders and some type of larger file to hold them together. Label the large file “2017 Taxes” and label the manila folders this way: Pay: Put your pay stubs and/or 1099 earnings statements here, and, once you get them, all W-2 Forms. Interest and Investments: This is where you will file interest, dividends, and capital gains statements from your bank, brokerage account, mutual fund account, and any other savings or investment account that is not a tax-deferred retirement account. Retirement Distributions: All records related to...

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Stock picking doesn’t work, but vested players keep on promoting it

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A recent article in Barron’s, a weekly investment publication, concludes that technology and regulatory reform have made active investing obsolete. Active investing, for those not into market lingo, means the constant search for stocks or industry sectors that will beat the market. The article is no surprise (academic researchers have long concluded that active managers can’t beat the market), but its appearance in Barron’s is unusual, given that the old-line weekly concentrates on stories about individual stocks or investment sectors. But it acknowledges what has long been an open secret: since the turn of the century, there have been no five-year periods when active investment managers have beaten market indexes. “Active investment managers” in this sense are the thousands of mutual fund managers who run stock and bond portfolios. The article notes that Standard & Poor’s, which began comparing the results of its indexes to active management results at the turn of the...

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Best Social Security advice: Delay, delay, delay

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Most workers should delay their Social Security benefits as long as possible – even past full retirement age. Why? Social Security acts like a guaranteed inflation-protected annuity. By delaying your benefit to as close to age 70 as possible, you will start out with a larger payment that will last not only for your lifetime, but for the life of your spouse (assuming your benefit is bigger than your spouse’s benefit). Each year you delay taking benefits between ages 62 and 70 your benefit grows by 8%. A benefit worth $18,000 if begun at age 62 can instead turn into a benefit worth $31,680 if delayed until age 70. The bigger benefit becomes very important later in life. You may outlive your savings, but you cannot outlive your Social Security benefit. And it is possible that you will outlive your savings: half of all women age 65 today will live beyond age...

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Your annual risk checkup

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Sometimes we don’t like to think about all the terrible things that might happen to us and our dependents, but one thing is true: it’s better to think about it now before the worst occurs. We believe everyone should go through an annual risk assessment to make sure they have all the bases covered. It’s worth thinking about what has changed in your life over the past year and what may change going forward. Once you have done that, you can discuss whether you are adequately protected from major risks with your financial advisor or insurance professional. Here are some general risks to consider: Risks to income – Who depends on your income? Are there new children or spouses that need protection in the event your income ceases due to death or disability? What about potential job loss or salary reduction: do you need to prepare a larger emergency fund? Risks to physical...

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‘January Barometer’ predicts, well… January

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Stock market professionals have long clung to the belief that the market’s performance in January is a good indicator of how the entire year will go. Unfortunately, recent research by the Hulbert Financial Digest shows that this is probably less than true. The so-called January Barometer was first publicized many years ago by Yale Hirsch’s Stock Trader’s Almanac. Hirsch claimed statistics showed that stock market annual performance has been similar to January performance over 86% of the time since 1950. Anyone relying on the January Barometer last year, however, was in for a big disappointment: stocks plunged beginning on the first trading day of 2016 through February, only to pick up by year’s end, with the Standard & Poor’s 500 Index registering a 12% gain with dividends reinvested. Hulbert looked at Hirsch’s statistics and decided they were “inflated.” The Almanac made allowances for “flat” years, when it said the stock market moved less...

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The past is easy to predict

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“He who sees the past as surprise-free is bound to have a future full of surprises,” wrote the late cognitive psychologist Amos Tversky. Tversky did ground-breaking research with Nobel-prize winner Daniel Kahneman into the cognitive errors that bedevil decision-makers, especially investors. Tversky argued that our tendency to construct neat, after-the-fact narratives of why something happened obscures just how random and unpredictable the world really is. Our habit of constructing false order out of random events in the past sets us up for disappointment: It makes us think we should be able to predict the future. When we cannot do so, we attribute our failure to lack of skill or intelligence, rather than acknowledging how uncertain things are, says author Michael Lewis in his new book, “The Undoing Project: A Friendship That Changed Our Minds,” (New York: W.W. Norton & Co., 2017), which recounts the long partnership of Kahneman and Tversky. Tversky made a...

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Today’s News Headlines Don’t Explain the Markets

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On an almost daily basis the causes of movements in the investment markets are attributed to recent news events. A terrorist attack “causes” overseas stocks to fall. A presidential election pushes domestic stocks up. An innovative new product announced by a leading technology company results in a tech stock rally. Unfortunately, these single-causation explanations are probably partly or mostly false. The values of investments rise and fall over time due to a plethora of long-term trends including the levels of corporate profits, inflation, employment activity, fluctuating currency markets and their effects on global trade, changes in consumer habits, etc. Yet we continue to look for the quick answer, and the easiest place to find it is in today’s headlines. Why? This behavior is readily identified by researchers in cognitive psychology: We unconsciously attribute causative powers to whatever is foremost in our minds and to those things that have captured our attention. Robert Cialdini, a...

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Don’t Fall For Stock Stories

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We love stories.  Our brains have evolved to “make sense” of things, to assign reason and narrative to facts and events in order to understand them. Experiments conducted by behavioral psychologists have shown that when presented with some facts and a competing story, we will usually go with the story, even if it conflicts with the facts. This all-too-human tendency can be dangerous when investing in the stock market. It is often the “story stocks” that investors are drawn to: the stocks of companies with exciting new products, with histories of big sales and profit increases, and reputations as industry leaders. Typically these are the characteristics of “growth stocks,” and investors seem to be willing to pay premium prices in order to own them. There is another class of investments, “value stocks,” which often seem to get little respect from investors. Typically their stories are not exciting, or even downright scary. They include...

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Strategies for managing college expense payments

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Paying college tuition and expense bills should involve advance planning and a strategy that deals with all available resources, says New York’s 529 College Savings Program and a new research paper published by Vanguard. “It’s important for parents and students to understand how their spending decisions will affect their broader financial situation and to plan strategically,” says the Vanguard report. For instance, the choice of where to take money to pay for this year’s college bill can affect the student’s eligibility for financial aid in future years. Also, tax credits and liabilities will be determined by the source of money used to pay a tuition bill. Vanguard recommends spending down student assets during the early years of college, and delaying using money that will be counted as income and count negatively against future college aid. For instance, in the early years of college money from a parent’s or dependent student’s 529 plan should be...

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