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Investment Newsletter for the end of January, 2017

Posted on February 6, 2017 by Daniel DollingerMay 2, 2017

The market was essentially sidewise or slightly up this month. Everybody was up a bit.

My topic today is taxes and more particularly how they relate to investments. The goal, obviously, of investing is to increase your income, make your income last as long as possible, increase your wealth, etc. Profit is not the critical measure. Profit after tax is. What matters is what you are left with.

Your income is taxed at either long-term capital gains rates or much more expensive ordinary rates. Wages, interest, rents, retirement distributions, annuity distributions, short-term capital gains, and business profits are taxed at the higher rate. Long-term capital gains are the profits of investments held for more than one year. The rate of tax is far less, approximately half.

I deal with two basic kinds of accounts, retirement accounts and personal accounts. Retirement accounts are IRA’s, 401k’s, SEP, annuities, simples, etc. (ignoring Roth’s for the moment). They are tax deferred. You are taxed when you withdraw the money from the accounts. Despite what the annuity people will sometimes say, they are not tax free. Capital gain issues are ignored. For tax purposes, dividends and interest are ignored. Whether it is long or short does not matter. The only thing that matters is when it comes out and it is all ordinary when it comes out. It was a deduction when it was put in. Most of us, myself included, have much of our investments in this form. We want the deduction now. We want to reduce our tax now. The cost of this decision is that we pay more tax later.

Personal accounts are your savings, proceeds from real estate sales, inheritances, gifts, etc. When you create these accounts or add money to these accounts, there is no tax deduction. Once these accounts are funded, trading (buying and selling) starts happening. There are interest and dividends. All these have tax repercussions. It does not matter what and when you take money out of the account. The transactions are taxed on your personal tax return. Interest income is ordinary (high rate). Dividends are generally long-term capital gain (low rate). Trading profits are split into two piles. If the security being sold was held less than one year, then it is short term. More than one year, then it is long term. It does not matter if it was reinvested. You are still taxed on it.

Some brokers and investors like to trade often. They think they can outmaneuver the market. I think the strategy is bogus. Besides the obvious high commissions and poor logic, all the profits are short term (high rate). Taxes eat much of the supposed advantage. If positions were held over one year, taxes would be about half.

Two additional wrinkles are loss limitations and wash sale limitations. Losses are limited to $3,000 per year (net). You cannot use more than that amount to shelter income. The difference carries forward to offset future income. I once had a tax account for someone with over $200,000 in capital loss carry overs. He was taking them at his maximum $3,000 per year and he was already 75 years old. The wash sale rule is more complicated. Essentially, no loss is recognized if the same position is purchased back within 30 days.

Taxes and investments must be looked at together. As both a long-term CPA and CFP, I know both. Call me if you have any questions.

Faithfully Yours

Dan

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. Please contact me if you want me to write about a particular topic. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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What is Arbitrage?

Posted on January 30, 2017 by Daniel DollingerMay 2, 2017

Definition

Arbitrage is taking advantage of price differences between identical assets in multiple markets. Those multiple markets could be different in identity or different temporally.

Example 1

You are at a garage sale and you see a lamp that costs 10 dollars. You know that lamp could be sold on craigslist for 15 dollars. So you buy the lamp, resell it online and you have a 5-dollar profit. You just engaged in arbitrage with markets of different identities.

Example 2

You are at the mall and you see a dress that costs 100 dollars. You know that dress is going to featured in a celebrity fashion show in 6 months and it then will be worth 500 dollars. So you buy the dress, resell it in 6 months and you have a 400-dollar profit. You just engaged in arbitrage with markets that are different temporally.

Example 3

Within the stock market, there are multiple stock exchanges (marketplaces) where a particular stock is put up for sale. Sometimes there are price differences between the listings. Stock x might be 10 dollars per share on the New York stock exchange, but 10.01 dollars on the London stock exchange. Arbitragers will buy stock x on the New York stock exchange and sell it immediately on the London stock exchange. They earn a one cent profit per share. Their efforts get rid of the difference. Buying stock x on the New York exchange makes the price of the stock there go up. Selling the stock on the London exchange makes the price of the stock go down. Eventually the stock prices are equal. The application is that price differences very quickly disappear.

Application

If you believe a stock with be worth twice as much in a month. You would want to buy as much of the stock as possible. However, you are unlikely to be the only person who thinks that. That temporal arbitrage opportunity would likely be eliminated by other people (with their high-speed computers) long before you have the opportunity to do anything yourself. The price of the stock would rise to that future expected value before you get there and thus you don’t have any opportunity to make profit. My point is no matter how strongly you believe that you can beat the market, I can almost guarantee you that you can’t. There are a lot of people within the stock market. Any profit-making idea that you have has likely already been taken advantage of. So instead of trying to pick stocks and time the market, simply be patient and stick to the plan. In the end, you’ll be better off.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What is a Heuristic?

Posted on January 23, 2017 by Daniel DollingerMay 2, 2017

Definition

Heuristics are mental short cuts. They are ways that we can speed up the decision-making process. Rather than consider all the data, which is time consuming and difficult, someone takes some of the data and makes assumptions in regards to the rest of the information. The person than makes a decision based on those assumptions.

Example

You’re trying to decide what toothpaste to buy. The time-consuming way to make that decision is to check out all the reviews for them online, read studies concerning their effectiveness, etc. A possible heuristic is simply buying the most expensive brand. We know from an earlier post that price is a measurement of demand (assuming equal supply). If more people want to buy it, maybe they have a good reason to.

Problem

The assumptions can be wrong and thus lead to bad conclusions. If you see a person covered in tattoos and piercings, you might assume their dangerous. That assumption might be completely false. They could be a sweet and harmless individual. Your heuristic (tattooed people with piercing are dangerous) would have lead you to the wrong conclusion and thus the wrong course of action.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What is Marginal Value?

Posted on January 16, 2017 by Daniel DollingerMay 2, 2017

Introduction

Marginal value is marginal benefit minus marginal cost. It is simply how much benefit you get per each additional unit of measure (marginal benefit) minus how much it costs you per each additional unit of measure (marginal cost).

Example

Let’s say that you’re the owner of a company that produces widgets. Each widget is sold for 10 dollars (marginal benefit) and it costs you 5 dollars to make (marginal cost). Marginal value is thus 5 dollars per unit.

Application

Marginal cost and marginal benefit tells us the value of performing a particular action at any given moment of time. It allows us to predict behavior.

Example of Application: How Many Hours Do People Work?

When people work, they evaluate two things. They consider the marginal benefit of their time and the marginal cost of their time. As long as the amount of benefit they get from an additional work of work (money, job satisfaction, etc.) is higher than the opportunity cost of working that hour (they could be spending time with family, they could be sleeping, etc.), they will continue to work. Money is of decreasing marginal benefit as each additional dollar is less valuable from a purchasing power perspective and from the perspective of the necessity of purchase. It is from a worker’s personal perceptions of the marginal benefits and marginal costs that we get how long a worker will work.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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How to Calculate Future Value and Present Value of an Appreciating Asset

Posted on January 9, 2017 by Daniel DollingerMay 2, 2017

Introduction

In an earlier post, I defined what future value and what present value is. In this post, I’m going to go through some of the mathematics of how you can calculate those values.

How to Calculate Future Value

The future value of an appreciating asset is the current value multiplied by (1+the annual growth rate)^{number of years}. For example, let’s say we have an asset that is currently worth one hundred dollars. The growth rate is 5% per year. In one year, the future value would be 100 * (1+.05) or 105 dollars. To calculate the value in 2 years you would multiply that 105 by another (1+.05) to get 110.25 dollars. Thus future value is always the current value multiplied by (1+growth rate per year)^{number of years}. So in 100 years the value of the asset would be 100 * 1.05¹⁰⁰ or 13,150.13 dollars.

How to Calculate Present Value

To calculate present value, you simply run the future value equation in reverse. We know future value is always the current value multiplied by (1+growth rate per year)^{number of years}. If we know the future value, the annual growth rate, and the number of years, we can algebraically solve the equation to find out the current value. For example: let’s say an asset is worth 500 dollars in 30 years. The asset appreciates at 10 percent per year. To find the current value you would plug those numbers into the above equation. 500 = Current Value * 1.1³⁰. Current value is thus 28.65 dollars. The equation (rearranged) is current value = future value / ((1+annual growth rate)^{number of years}).

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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Investment Newsletter for the end of December, 2016

Posted on January 3, 2017 by Daniel DollingerMay 2, 2017

Introduction

Everyone’s’ portfolio gains were extraordinarily fat this month and quarter. For the quarter, the Dow was up 7.94%. Small cap was up even more at 8.43%. With only a few exceptions, every one of you has a blend of fixed and equity. The fixed is to reduce risk. On a risk adjusted basis, your portfolios beat all stock indexes. For the two clients who are 100% in equities, your profits even make me feel green with jealousy.

The Danger of Greed

Please be warned about letting emotions take over your decisions. Greed is just as destructive to your portfolio as fear. It seems that everyone is making money right now. As a result, I have had several clients that want to increase their risk. “Let’s be more aggressive.” I have held them off. Eventually, there will be a correction. Maybe small, maybe big.

Remember the Fundamental Rules

The crowd is made up of idiots.
The crowd is usually late to the party.
The crowd listens to the talking heads on TV.
When the crowd rushes in, it’s greed.

The Length of the Real Estate Bubble

Obviously, I do not know how long this bubble will last. It could be a few months or a few years. But I do know, that people think it is easy to make money. It means they do not have a plan or they are not sticking to it. These are the people who lose money on the downturns and then cash out at the bottom out of fear.

Wall Street Journal Article

The Wall Street Journal just ran an article that some professional real estate investors are starting to leave the market. The reason: all the house flippers have arrived. All sorts of non-real estate people have arrived and are speculating on real estate. The professionals also think the crowd is made up of idiots. At least the professionals in the article are counting on it. Again, no one know when the downturn will happen.

Discipline

Discipline to a plan is the way the game is played. It certainly not very fun but it works. On the “Portfolio Comparative Performance Review” look at the far-right column labeled 4 YRS TOTAL (if you have been with me that long). Look at your time weighted return. That would be your average return per year over the last four years. Depending on how much risk you accepted, the return per year is anywhere from 3% to over 7%. That profit is higher than the stock market indexes. It is the result of sticking to the plan during greed and fear cycles. I have one client up over 9% per year. Over four years, he is up a total of 37%. Over the last four years, there were both downturns and upturns.

Tax Season

On a different note, tax season has begun. I actually had a tax return arrive yesterday (the morning of the 1^st) for preparation. I will always be available to you for financial or tax questions no matter how busy I am. Call me at work on week days. I work at home on the weekends. My number at work is 503-363-1550. Home is 503-570-8727. Cell is 503-780-9975.

Thank-you for your business and in many cases your friendship.

Dan

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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How to Make Money with Stocks

Posted on December 19, 2016 by Daniel DollingerMay 2, 2017

Introduction

There are 2 main ways (on the investor end) that people make money with stocks and I decided to list them out for you below. Those ways are via appreciation/depreciation or by dividends.

Appreciation/Depreciation

Whether it’s directly or indirectly (though options, mutual funds, etc.) this is the money you make when the price of the stock goes up or down. If you buy a stock at 2 dollars and sell it when it goes up to 3 dollars, then you made a dollar. If you sell short a stock when it’s 3 dollars and then buy it when it goes to 2 dollars, you made a dollar.

Advantage of Appreciation/Depreciation

The potential gain from this is very large. In the past, there have been stocks that have appreciated many-fold. If you had bought Microsoft when it had its first IPO, you would have had a lot of appreciation on that asset. You would have had a great return.

Disadvantages of Appreciation/Depreciation

The first disadvantage is that the potential movement of the asset value is very large, and that movement might move in the wrong direction. You could lose all your money.

The second disadvantage is that it is entirely speculative. No one can say with any degree of certainty how a stock is going to perform in the future. It is a guess, which can be and often is wrong.

Dividends

As a partial owner of a stock, you might receive dividends. Dividends are the payments made to you from the company that the stock is connected to. It is part of the profits that you are entitled to by being an owner. The company can choose either to pay you a dividend or reinvest the money back into the company.

Advantages of Dividends

Companies are very hesitant to lower their dividend as it is interpreted as a sign of weakness. So if they can afford to, they will keep paying their dividend. If the stock has a regular dividend, it does signify the company has some degree of financial stability and strength.

If the stock’s dividend is regular enough it can be valued the same way as a bond. Taking the present value of the cash flow is possible with a dividend stock but very difficult with a speculative stock. Also, just like a bond, a stable dividend stock can be considered a fixed income source.

Disadvantages of Dividends

The potential gains are severely limited in comparison to speculative stocks. The returns from a dividend are often small so it is not the path to quick wealth.

There are no requirements that companies have to pay a dividend. If the company starts to financially struggle, the company can cut the dividend.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What is Present Value/Future Value and the Real Value of Money?

Posted on December 12, 2016 by Daniel DollingerMay 2, 2017

What is Present Value/Future Value?

With any asset, it will get more or less valuable over time (due to appreciation/depreciation and/or cash flow). Present Value is the value of that asset today. If you put 1000 dollars into an investment account, the present value of that account will be 1000 dollars. Future value is the value of that asset after a given time period has passed. If that investment account has an annualized rate of return of 5%, and you want to know what the value would be in 10 years. The value in 10 years is future value. In this case that 1000-dollar present value would have a 1628.89-dollar 10-year future value.

What is the Real Value of money?

Money has no value in of itself. It is only valuable for what it can buy. If you have one dollar in your pocket and a candy bar costs one dollar than your real value of your money is one candy bar. If the cost of the candy bar decreases to 50 cents, your money’s real value is now 2 candy bars. Even though the nominal value of your cash didn’t increase, the purchasing power (real value) did. Real value is often used in connection with inflation. As inflation occurs, the real value of a dollar decreases. It can buy less stuff.

Relevance of Present Value/Future Value and Real Value

These concepts are used when calculating the investment returns on an asset over time and when comparing multiple assets with each other.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What is Price and what are Price Controls?

Posted on December 5, 2016 by Daniel DollingerMay 2, 2017

What is Price?

Price is how much it costs to purchase a good/service.

Importance of Price

Holding supply equal, price is a measurement of demand. The higher the demand, the higher the price is bid up. When the price increases, fewer people want to buy it. The only people willing to buy it at the elevated price are the people who want it the most. I.E. The person willing to pay 100 dollars for a pen wants it more than the person who is only willing to pay 50 cents for that same pen. Therefore, the price system will always direct goods/services towards the person who wants it the most. This is assuming that the potential purchasers’ income levels are not the limiting factor in purchasing decisions.

In the other direction, the lower the demand, the lower the price of the good/service. When the price decreases, more people want to buy it. I.E. If a watch is marked 25% off, more people will buy it because of the good deal. The price system therefore causes more people to have the product. In both directions, the effect of price is to cause supply to equal demand.

What are Price Controls?

Price controls are restrictions on the free movement of price. They can take the form of price floors or price ceilings.

What is a Price Floor?

A price floor is a minimum price that is allowed to be charged for a product. For example: the minimum wage is an example of a price floor.

Effect of a Price Floor

The effect of a price floor is to cause excess supply. By preventing price from falling past a certain number, supply will be held over demand. In the case of a minimum price for the cost of labor, fewer people will purchase labor.

What is a Price Ceiling?

A price floor is a maximum price that is allowed to be charged for a product. For example: President Nixon imposed a price ceiling on the cost of gasoline.

Effects of a Price Ceiling

The effect of a price ceiling is to cause excess demand. Another way of saying that is that it will cause supply shortages. By preventing price from rising past a certain number, demand will be held over supply. More people will want it than is available to provide. The price ceiling means that people can’t complete for the scarce good by bidding up the price. Thus the only way to compete is by spending time. As a result of President Nixon’s price ceiling on gasoline, there were massive lines at the gasoline pumps that lasted many hours. Many people who wanted gasoline couldn’t get it.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What is Skepticism?

Posted on November 28, 2016 by Daniel DollingerMay 2, 2017

What is Skepticism?

Skepticism is when someone doesn’t take an assertion at face value. Adherents demand a higher standard of proof. They don’t deny facts but demand evidence before they accept something as a fact.

What is the Application of Skepticism?

Every day on the news you hear claims in regards to the stock market. A particular bank had a bad quarter, so people think a recession is imminent. The weather was bad so the stock market is going to go down. The hiring of a new CEO will cause the company to go bankrupt. Don’t take these statements at face value. Before you freak out, remember these statements are opinions. They might be informed opinions but they’re opinions regardless. As many people have learned during their life, opinions can be wrong. You should take these statements with a grain of salt.

What is the Value of Skepticism to You?

The point I’m trying to make is to not panic. The movements of the stock market are very complicated and the effects of any particular action can usually not be accurately determined. Instead of listening to any of talking heads on TV, stick to your financial plan. Apply your skepticism to every prediction, and realize the prediction is probably wrong. Even if they’re right and the market drops, it will eventually recover. The effect of any event will be diversified out by history. Things will be ok.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

Learn About My Business