“Nobody Knows Nothing”

A few years ago Ally Bank ran a commercial with the noble prize winning economist Thomas Sargent. In the commercial he is on a regally-decorated stage being interviewed. The interviewer asks him whether he knows what interest rates will be in two years. His response is a simple, unemotional “no.” At which point a woman enters the stage and says “if he can’t no one can.” [embed]https://youtu.be/Khn1ZqysON0[/embed] This commercial is making the point that when it comes to predicting financial markets “nobody knows nothing.”  If any year proves this, it is 2020. Who would have thought that COVID-19 would have shut down the economy, resulting in a 30% decline in the US stock market? Who could have predicted its subsequent rebound to new highs a few months later? Then there was the fear of the election and its effect on the markets, still, things moved in a positive direction. The election reminded me...

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Retirement Planning is Psycho- Logical

The theme of Rory Sutherland’s wonderful book "Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life" is that the logical answer is not always the best answer.  This certainly holds true in the field of financial planning. We live in a world that has created an idea that science and logic will lead to optimal outcomes. Sutherland disagrees: "If we allow the world to be run by logical people, we will only discover logical things. But in real life, most things aren’t logical –they are psycho-logical. There are often two reasons behind people’s behavior: the ostensibly logical reason, and the real reason." We have been conditioned to believe that so much in life can be efficiently managed by applying the correct algorithm – including managing a retirement plan. This is the marketing strategy of many Wall Street firms. It cannot be further from the truth. Logic does...

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IRS MAKES IMPORTANT UPDATES TO RMD RULES

On Tuesday, June 23rd the IRS released Notice 2020-51, which updated and expanded CARES Act relief for Required Minimum Distributions (RMDs) on tax-deferred IRAs, 401(k)s, and 403(b) accounts for 2020. An RMD is the amount the IRS mandates people age 70 ½ (born before July 1, 1949) or age 72 (born after June 30, 1949) take out of their tax-deferred accounts in order to pay tax on those savings. The two most important points of this update are: Anyone who has taken their RMD at any time in 2020 can return it to their IRA or other tax deferred account. The original legislation limited returns to RMDs taken between February 1 and May 15. Now, retirees who took their RMD (or partial RMD) in January of 2020 or after May 15, 2020 can return that RMD. The deadline to return RMDs has been extended to August 31, 2020 from the original deadline...

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Investing During a Pandemic: A Tale of Two Investors

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” ― Charles Dickens The above quote is the first sentence of the Charles Dickens masterpiece:  A Tale of Two Cities.  There may not be a better quote to describe the volatility of the stock market and the emotional toll on investors. We know from studies of investor behavior that many tend to buy stocks during the spring of hope, and sell during the winter of despair. They buy high and sell low which results in poor long term returns. This is a natural, emotional response. When markets go down, the fight or flight part...

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Investing Is Like Poker, Not Chess

Investing is like Chess, not Poker.

The former World Series of Poker champion, and now corporate consultant, Annie Duke, has written a wonderful book on decision making titled “Thinking in Bets, Making Smarter Decisions When You Don’t Have All The Facts.” The book opens with a story that many football fans have said is the worst play call in Super Bowl history. For those that may not remember, the Seattle Seahawks were down by 4 points with 26 seconds left in the game with the ball on the one-yard line. The head coach of the Seattle Seahawks, Pete Carroll, called a pass play instead of handing off the ball to one of the best running backs in the NFL. The pass was intercepted and the New England Patriots won the Super Bowl. When the details of the situation are clearly discussed in the book -- the number of downs and time outs left, along with the fact that not one of the sixty-six passes attempted from the one-yard line...

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