Finance Is Not a Sport

Photo by My Army Reserve

I love college football season. The pageantry, energy, and traditions are, in my opinion, unrivaled in the world of sports. The 12th Man at Texas A&M, calling the Hogs at Arkansas, Auburn’s War Eagle, tailgating in “The Grove” at Ole Miss, and the Michigan band playing “The Victors” over and over and over and over are just a few examples of what makes the experience so enjoyable.

But science has started to explain why that may be. Watching your favorite team win can increase your testosterone level according to some studies. Some people see their dopamine levels increase when their team does well, which literally increases the feeling of pleasure. Other hormones such as adrenaline, cortisol, and oxytocin have also been shown from endocrinology to increase in sports fans.

This may help explain why my family leaves me alone on Saturdays to watch my favorite team in solitude. I am not truly alone as inevitably up to a dozen college friends will engage in a group text or chat with the season seemingly riding on each play.

Just this last weekend, I received messages that alternately suggested the coach of my favorite team is grossly over rated and should be fired to being a genius deserving of a raise, all in the span of a couple of hours from the same person. Referees were accused of being biased until they were celebrated for making the right call. 

While my family may disagree while I’m screaming at the TV, it is the thrill ride of vicariously experiencing the ups and downs of my team that make watching sports so enjoyable. Unfortunately, mainly due to the proliferation of media into all areas of life, investing has taken on a similar dynamic.

It wasn’t that long ago that financial news and information were delivered in much less timely and dynamic ways. Closing stock prices were found in the back of the business pages of the newspaper. If you wanted an actual quote, if you didn’t work on Wall Street in New York, you either called your broker or went to his office.

On those days that the Dow Jones Industrial Average (DJIA) reached a milestone, such as breaking 1,000 for the first time in 1972, it may have warranted a small headline, below the fold, in major newspapers. During precipitous declines, like Black Monday in 1987 when the DJIA fell 22.61% (508 points to 1,738.74), Dan Rather led his 5:30 PM broadcast with the bad news, but then turned the page to other items such as the American response to an Iranian missile attack on US tanker in the Persian Gulf.

Compare that to today, when you can get real time quotes of virtually any stock in any market around the clock. Turn on the business channel in the morning and immediately see what the futures markets are doing. A headline this morning, for example, “BREAKING: Dow futures fall 150 points as Street digests jobs.”

Is that really any different of a feeling than if your team just fumbled the opening kickoff? If we do have a big selloff, rest assured that there will be at least 4 talking head “experts” on screen at once all trying to talk over one another to deliver us the play by play. All that is missing is a few hundred screaming fans with cleverly written signs in the background.

Much like in sports, you can follow social media for instant analysis, commentary, and even advice on what to buy or sell. You can even play “fantasy” by opening simulated trading accounts with any number of online ventures and compete against other “investors”.

As entertainment, it can be argued whether our addiction to sports as a society is a net positive. When it comes to our investments, allowing our emotions to get the best of us makes about as much sense as deciding to forfeit the game in the 1st quarter because the ball didn’t bounce our way.

Whether your plan is a risk averse approach designed to control the clock with a bruising ground game and strong defense or a wide open passing attack that is primarily worried about outscoring the opponent, successful teams typically have success by staying the course.

Investing is a 4 quarter game that rewards those that keep their cool when the momentum swings to the other team. Understanding the tendencies of the opponent, such as stocks tend to outperform bonds over time, help us keep perspective and stick with our game plan.

It’s a long season, do yourself a favor and watch more football and less CNBC. 

Tax Tales and 6 Tips for Not Getting Bit

Photo by philhearing 

One of the most overused idioms in the investment world is “Don’t let the tax tail wag the investment dog.” Tired as the expression may be, its persistence is grounded in the great lengths people go to avoid paying taxes. Maybe a different take should be how to make the inevitable tax bite as gentle as possible.

I have always been amazed by the impact of taxes on individual investor’s decision making. Many times, the results are negative. One such example was a 45 year old single dad that had seen his options in his company stock, a software company, quintuple in 1999. He suddenly found himself with enough money to send his three kids to college, pay off his mortgage, and even retire if he wanted. The only problem was that he didn’t want to sell at that time and pay taxes on his gains.

I was helping him with his planning in early 2000, and he agreed that he should cash in some of his profits to diversify but he wanted to wait until early 2001 so he could delay the tax hit. The stock dropped about 75% before the New Year rolled around, and ultimately 99% from its high by the time he was ready to sell. Not only did he avoid paying all those taxes, last I heard he is still working to pay off those mortgages and student loans to this day.

The investment industry is keenly aware of people’s aversion to being bitten by the tax dog. All you have to do is see the $35.6 billion in variable annuity sales in the second quarter of this year.[1] If you’re not familiar with variable annuities that is likely because you haven’t encountered an annuity salesperson, as virtually all of these products are sold versus bought. In other words, you went shopping for a mutual fund and walked out with an annuity. The pitch sounds great, grow your money tax-deferred like your retirement account with no limit to your contributions.

The catch? Most investors will never come out ahead versus investing in low-turnover stock index funds.[2] If you wonder why they are sold in such great numbers, all you need to do is follow the commissions paid to the salespeople who market them. If you want to see a salesperson squirm, have them show you what they stand to make if you buy their annuity versus an ETF or index fund that invest similarly to the underlying funds being recommended.

Fortunately, just as fear of taxes can provide negative influences on your decision making, so too can they provide incentives to make the right choices. Here are my six tips for putting a leash on Uncle Sam.

1.       Maximize your work retirement accounts. This isn’t the most innovative recommendation, but I consistently see folks not taking full advantage of their retirement accounts. One recent example was a self-employed client that had a SEP IRA but that instead could use a Self Employed 401k to take advantage of catch up provisions after age 50 (an extra $6,000 in 2015).

For 2015, the maximum contribution for a 401(k), 403(b), or governmental 457(b) is $18,000; $24,000 if you are > age 50, or maybe more in some circumstances. Every dollar invested is pre-tax or grows tax-free if you have a Roth option. If your plan offers a match, not only are you getting the benefit of pre-tax investments, but you’re getting free money (subject to your companies vesting rules).

2.       Contribute to an IRA, even if it’s not deductible. Most folks I talk to think that contributing to a non-deductible IRA isn’t worth the hassle. In 2015, you can put up to $5,500 per person ($6,500 if you’re > age 50) into these accounts to grow tax-deferred without the costs associated with variable annuities. If you qualify for the tax-deduction or a tax-free Roth IRA contribution or conversion, even better.

3.       Pay down debt. With rates on savings well under 1%, the volatility in stock markets, and the lack of liquidity in real estate or private equity, paying off that credit card, automobile loan, or even your mortgage can be an attractive "investment". The savings are like a tax free guaranteed return equal to the interest rate you are paying.

If you’re thinking that giving up the mortgage interest tax deduction is unattractive, think of it like this. Where else would you pay $1 to “save” .40 cents?  A tax deduction for a necessary expense is nice, but it doesn’t make much sense to spend more to save less. If you can’t afford to pay off a mortgage, consider refinancing to a shorter duration loan while interest rates are at all-time lows. 

4.       Choose a high-deductible health care plan (HDHP) paired with a Health Savings Account (HSA). You may take on more out-of-pocket health care costs potentially, but you will typically see lower insurance premiums as one of the benefits. Best of all, for 2015 you can put up to $6,650 ($7,650 if you’re > age 55) into an HSA not only pre-tax, but pre-FICA if it is part of your employer’s cafeteria plan. If you don’t spend it all during the year, it continues to grow tax-free for your future medical out of pocket medical expenses.

5.       Use a 529 College Saving Plan for college savings. These are offered through state sponsored plans, some of which may provide a state income tax break. The biggest benefit, however, is that the growth of the investments is tax free if used for the beneficiary’s qualified higher education expenses paid —tuition, fees, books, supplies, equipment, and room and board. There are fees on these plans, but several are very low cost. A good place to research the different choices and learn more is www.savingforcollege.com.

6.       Harvest some losses. If you have taxable investments that are worth less than you bought them for, selling them can result in losses that can be used to offset gains on others. If you don’t have gains to offset, you can also deduct up to $3,000 per year “above the line” on your tax return. There are potential limitations, such as the “wash sale rule” to be aware of, so you are probably best off to discuss with your tax advisor before implementing this strategy.

 If you are still worried about taxes, you can always take one other piece of advice from Texas A&M football coach Kevin Sumlin, “If you’re scared of that, get a dog.”[3]

[1] http://myirionline.org/docs/default-source/news-releases/iri-issues-second-quarter-2015-annuity-sales-report-%28pdf%29.pdf?sfvrsn=0

[2] http://www.forbes.com/sites/feeonlyplanner/2012/07/02/9-reasons-you-need-to-avoid-variable-annuities/

[3] http://www.dallasnews.com/sports/college-sports/texas-aggies/20120618-texas-am-s-kevin-sumlin-says-aggie-fans-eager-for-sec-road-games-will-have-a-different-answer-for-me-next-year.ece