Bitcoin buyers should prepare for disappointment


I’ve sometimes fantasized that every investor should have a mental version of the robot from the 1960s television series “Lost in Space,” so that when the investor gets a bright idea the robot can wave its arms and yell “Danger Will Robinson, Danger!” That robot is frantic today but few are listening. Instead, they are pouring money into bitcoin, the now-famous crypto-currency whose incredible gain in value may prove to be one of the biggest financial follies of the last 100 years. In case you don’t read through to the end of this story, let’s make the point up-front:  Bitcoin’s meteoric rise this year has all the hallmarks of the classic speculative bubble that could burst and wipe out lots of individual buyers. Investors are suddenly interested in bitcoin AFTER it has gained over 1,700% since the beginning of the year. Where were they in January? I don’t believe this is an extreme...

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Nobel economics prize recognizes the financial impact of irrational behavior


We may think we are making a considered, sober decision when buying a stock, taking out a home mortgage, or deciding how much to save for a future purchase. It’s not necessarily so, according to voluminous research in the burgeoning field of behavioral economics. This year the Nobel Prize committee decided to honor the work of one of the pioneers of the field, Richard H. Thaler of the University of Chicago. Previously it had awarded the same prize to Daniel Kahneman of Princeton University. Both economists have made it their life work to explain how human beings are generally irrational decision-makers. The rest of us should pay attention to their research before making our next big financial decision. Thaler was recognized for developing the theory of “mental accounting,” which argues that we try to simplify decision-making by creating separate accounts in our minds, which allows us to focus on the narrow impact...

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Tax Reform: An Example Comparison


On Thursday, the GOP announced details of their tax reform proposal.  The proposal provides additional details on the tax package they intend to implement.  And for the first time they released the actual brackets for each tax rate, which is incredibly important when trying to figure out if you will be better off under the new plan or not.  Let’s dive in to a comparison for one family. John and Mary Smith are both working, age 58 and have no children.  John is earning $75,000/year and contributing $10,000/year to his 401k.  Mary is earning $105,000/year and maxing out her 401k ($24,000/year).  For simple rounding purposes, let’s say they pay $9,400/year in New York state income taxes, $4,000/year in property taxes and $6,000/year in mortgage interest. Here is how it shakes out under the current tax structure and under the proposed tax structure: As you can see, the width of each tax bracket is...

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Trump rally has plenty of precedent


The stock market has been on a roll this year, breaking record after record. President Trump recently tweeted that the media  should report on the “virtually unprecedented” rally in the market since he took office. Although the Trump rally has seen nice, healthy gains so far, it is well behind some other presidential stock market rallies, reports Bloomberg News. In fact, it is only the seventh-best presidential stock market rally, and is dwarfed by previous rallies under four Democratic and two Republican administrations. As of mid-October the market had gone up by 19% under Trump, as measured by growth in the Standard & Poor’s 500 Stock Index, Bloomberg says. However, the market jumped by 41% during the 11 months following the election of Franklin Delano Roosevelt to his first term in 1932. Roosevelt saw another 28% rally in his fourth term beginning in 1944. The second-best performance was 38% in Bill Clinton’s second...

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Your 529 Has Company: Other ways to fund a child’s education


Saving for college is important if you want to assist your children in furthering their education. 529 plans are well known and commonly discussed but we rarely hear about other ways to save for a child's education. This is where the Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) become relevant. This draft legislation has been around for decades and most states have enacted it, thereby creating what are often nicknamed UGMA and UTMA accounts. What are the basic rules of UGMA and UTMA accounts? UGMA/UTMA accounts allow you to save for a child’s expenses. These accounts can be used for college tuition, or they can cover a wide array of other expenses. This is a benefit UTMA/UGMA accounts have over 529 plans. For instance, UTMA/UGMA account assets can be used to buy a child a car while a 529 plan cannot.  These accounts can be set...

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Social Security benefits rise by most in three years


Social Security recipients have a rare surprise to look forward to in 2018: a 2% increase in benefits, the Social Security Administration announced this month. It will be the biggest increase in benefits since 2011, when those collecting Social Security benefits saw a 3.6% increase. Benefit hikes are tied to changes in a measure of prices for food, housing, clothing, transportation, energy, medical care, recreation, and education. The increase of about $27 a month will boost the average retired worker’s benefit to $1,404, Social Security said. That will be a welcome change compared to the last two years: benefits were unchanged in 2016 and went up by just 0.3% this year. Increases in Social Security benefits have been relatively modest since U.S. consumer inflation was tamed in the mid-1980s. Before that there were several double-digit increases, with the biggest being a 14.3% jump in benefits in 1980. Social Security said another change will affect...

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Most stocks don’t even beat Treasury Bills


Stocks outperform bonds over the long-term, right? Isn’t that the message every investing article has been drilling into us for many years? The answer is, yes, it’s true, but only in the aggregate: most individual stocks have not beaten the low, short-term interest rates offered on U.S. Treasury Bills. The stock market has done better than T-Bills over the years, but that’s only because a handful of stocks have had disproportionately spectacular returns, found a study by a professor at Arizona State University. “The entire net gain in the U.S. stock market since 1926 is attributable to the best-performing 4 percent of stocks, as the other 96 percent collectively matched one-month Treasury Bills,” wrote Hendrik Bessembinder, a finance professor in the W. P. Carey School of Business. Unfortunately, some investors draw the wrong conclusion from this research. They argue Bessembinder’s findings suggest that investors should actively search for the few stocks that will...

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What’s the “skinny” on tax reform?

tax reform

On Wednesday, the GOP announced details of their tax reform proposal.  The proposal provides insight into changes that are being discussed but still leaves many questions unanswered.  Let’s go over some of the big points.   1. Reduction in tax brackets and tax rates This is a big change as it reduces the number of brackets from seven down to three and lowers the top bracket to 35%.  Congressional committees working on the reforms left room to add a fourth bracket at a higher rate, but that remains to be seen. The skinny: It depends on how wide each bracket extends, but this will likely lower taxes for many people.   2. Doubling the standard deduction to $12,000 for single filers and $24,000 for married couples There will absolutely be winners and losers created from this change.  The itemized deductions calculation would simply be mortgage interest and charitable contributions, which for many people will not result in...

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Home Equity Loan or 401k Loan? Both Have Risks


HELOC: A home equity line of credit (HELOC) is generally used to fund home improvements or for home-related emergencies. You can open a home equity line of credit and use it for as long as the draw period lasts, this is typically 5 to 10 years. The draw period is the time during which you can borrow from the HELOC. After the draw period, the repayment period begins, this typically lasts 20 years. The credit limit is based on the amount of equity that you have in the home, typically up to 85% of the value minus the amount you owe. This line of credit will often have a more favorable interest rate because it is backed with your home as collateral. HELOC’s usually have adjustable interest rates which fluctuate with the prime rate. Interest on your HELOC may be tax deductible, just like your mortgage interest. Some HELOC’s will have associated...

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