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What is Inflation?

Posted on August 1, 2016 by Daniel DollingerMay 2, 2017

Quick Definition

Over time things gets more expensive. A dollar today can buy less stuff than a dollar 30 years ago, and it can buy more stuff than a dollar 30 years from now. Inflation means the purchasing power of a dollar is decreasing over time.

Reason

There are multiple proposed explanations for why inflation happens. The most generally accepted definition is currently the monetary definition. That states inflation occurs when the money supply (the amount of currency in the economy) goes up faster than the number of products sold in an economy. For example: Say there is 4 units of product being sold and there is 4 dollars within the economy. Each unit therefore costs on average 1 dollar. If the number of units double to 8 units and the amount of money triples to 12 dollars, than each unit on average costs 1.5 dollars. Deflation (which can occur, but it is very rare) happens when the opposite happens (the number of products being sold goes up faster than the money supply).

Why inflation matters

Inflation erodes the buying power of the currency you possess. The money you have in your wallet or purse gets continually less valuable every second that passes. The money you have in your bank gets continually less valuable as well (bank interest is not large enough to counteract inflation). Money that is invested has a chance of keeping up with or growing faster than inflation. Money that is not invested is a guaranteed loss.

Illustrative Story

Imagine keeping water in a tank that has a hole in the bottom. Even though no one is using that water, eventually all of it will leak away. The water is your money, and the tank is your bank account/wallet. For example: Say you have 1 dollar in your wallet and the inflation rate is 2% per year. In one year that dollar will effectively be worth only 98 cents. In another year it will only be worth 96.04 cents and so forth.

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. If you want me to write about a particular topic, please contact me. 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 explanation make sense? Do you agree or disagree with what I said?

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What is Opportunity Cost?

Posted on July 29, 2016 by Daniel DollingerMay 2, 2017

Definition

Opportunity Cost is the value of the best alternative choice that you decide to forego.

Example 1

You are trying to decide whether or not to wake up early tomorrow to go for a run or to sleep in. Let’s say you decide to go for a run. The opportunity cost is sleeping in. By getting up to run you are giving up the opportunity of sleeping in.

Example 2

Now let’s say it is a situation with more than 2 choices. In addition to running and sleeping in, you have the option of going to a party. You don’t want to go, so you are very unlikely to. Going to the party is not your opportunity cost because you probably were not going to do that anyway. Opportunity cost only refers to the second best choice that you could have taken.

More Examples

If you buy stock A with $2000; you can’t use that $2000 to buy stock B. If you buy stock A with $2000; you can’t use that $2000 to renovate your house. Whatever choices you make in your life, you are giving up any alternative choices you could have made.

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

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Quick Definitions (Taxes, Depreciation, Deductions, Tax Credits)

Posted on July 27, 2016 by Daniel DollingerMay 2, 2017

What are Taxes?

Think of the government as a giant company. By living in the country, we are in essence agreeing to buy all of the goods and services that the company (the government) provides. The taxes are the payment. The same way as going to the store and spending 5 dollars to buy a sandwich, the taxes you spend are your payment for all actions of the government.

What is Depreciation?

All objects (property, equipment, etc.) have effectively a life span. Eventually an object will break and become unusable. Occasionally there is some value to the raw materials so that object can be sold for scrap. Usually at this point it isn’t worth anything, so its value is zero. However, in real life, it is not always completely known how long an object will last. If someone takes very good of their car, it might last many hundreds of thousands of miles. If someone treats their car badly it might last only 10,000 miles. So the government has to arbitrarily assign a useful life to various objects within your business. Over time that object (on paper) will decrease in value, which can be used to offset your income and thus reduce income taxes.

It is a paper loss because that object due to maintenance, quality craftsmanship etc. might not actually be any less valuable. For example: you bought a piece of equipment that will survive (according to the government) 10 years. Brand new the equipment is worth $10,000. So the equipment (according to the financial statements) gets less valuable by $1000 each year. So if you earned $100,000 in income, you can offset that $100,000 with your $1000 “loss”. So you would only pay taxes on $99,000.

What are Deductions?

With income tax you are taxed on the money you earn. The more money you earn, the more money you pay. Deductions are a way you can offset your income. It reduces the amount of income you earned for the year. Thus you pay less tax. You are allowed to deduct business expenses, which means any income you use on business is income you don’t have to pay tax on. For example: A person earns $100,000 and spends $30,000 on business expenses. They would only be taxed on $70,000.

Before anyone start scheming ways to reduce their taxes, they should know that these deductible business expenses to be eligible have to be ordinary and necessary to the operation of your business. For example: you can deduct the cost of your stationary, but you can’t deduct the parking fines you got for incorrectly parking the company car. The IRS will come down on you like a hammer if you try to abuse the system, and they are pretty good at finding things out. In addition to ordinary and necessary business expenses, you are allowed to deduct loan interest and a few other things. You can find out all things that are allowed to be deducted by talking to your accountant.

What are Tax Credits?

Tax credits are a direct offset to taxes paid. For example: if you owed $1000 in taxes, and you got a $100 tax credit, you would then only owe $900 dollars in taxes. Most tax credits that you are eligible for depend on your total amount of income. Some depend on disability, whether or not you’re conducting research, etc.

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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E-Book Update

Posted on July 25, 2016 by Daniel DollingerMay 2, 2017

Update

I added a new definition to the e-book and fixed a few typos. Download it for free here.

Intention

My intention with the e-book was always to increase knowledge in other people and provide information that I think they will find useful. If I can create a better dialogue for other people, that is something that I appreciate greatly.

Just out of a sense of honesty, I will admit that I would love if people became interested in me as a CPA and CFP after reading my e-book. I would love if people decided to hire me based on the things they read. Another intention I have is to become better and expand my personal body of knowledge, so I would appreciate any comments on the e-book (good or bad).

Future

I will continue to update the e-book with definitions and other small sections in the future. I also plan on writing other e-books in the future if there is demand. These e-books will expand upon the concepts introduced in the first e-book. If anyone has any other topics that they really want me to write about, please contact me.

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

Questions for the comments

To anyone who read my e-book, what did you think of it? To anyone who hasn’t downloaded it, what can I do to make it more appealing to you?

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What is a Financial Statement?

Posted on July 22, 2016 by Daniel DollingerMay 2, 2017

Overview

A financial statement is a report that presents the financial facts about a company. There are 3 main types. Those types are a balance sheet, an income statement, and a statement of cash flows. You can also prepare financial statements about a person.

Balance Sheet

A balance sheet reports the financial situation of a company at a particular moment of time. As of this date what does the company own and what do they owe. For example: Company A has $500,000 in cash and $100,000 in equipment. They have $600,000 in assets. The company owes $400,000 to the bank (they took out a loan). That $400,000 loan is a liability. The difference between assets and liabilities is equity, which in this case is $200,000 (600,000 – 400,000). Equity is essentially what a company owns that is not owed to somebody else.

Income Statement

An income statement reports for a time period (a year, a quarter, etc.) how much money is coming in and how much money is going out. For example: company A sold $600,000 worth of widgets to their customers. That is their revenue. They spent $400,000 on salaries, equipment, marketing, etc. The company has income of $100,000.

Statement of Cash Flows

A statement of cash flows reports for a time period (a year, a month, etc.) the amount of cash that comes in and goes out of a company. For example: company A brought in $500,000 of cash and spent $400,000 of cash. The statement also tracks the sources of the cash inflow and what the cash is being spent on.

Difference Between Cash Flow and Income

The difference between cash inflow and revenue is that revenue include accounts receivable, which is when a product has been sold but the seller has not yet received cash for it. Cash inflow only accounts for cash received. The difference between cash outflow and expenses is that expenses include accounts payable, which is when a product has been bought but the buyer hasn’t yet paid any cash for it. Cash outflow only accounts for cash paid.

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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How Do Brokerage Houses Make Money?

Posted on July 20, 2016 by Daniel DollingerSeptember 6, 2016

In Short

There are 2 main ways that a brokerage house makes money. Those ways are through commissions and interest on cash balances.

Commissions

This type is what most people automatically think of when it comes to this topic. Every time a stock, ETF, mutual fund, or any other security is bought or sold, a commission is paid to the brokerage house. Depending on the particular brokerage house that commission could be a few pennies or hundreds of dollars. The commission costs of the broker you use should be fully disclosed on their website.

Interest on Cash Balances

When you have a brokerage account open, any cash that is within the account doesn’t just sit there. It earns the account owner (you) interest, and it earns the brokerage house a higher rate of interest. Very similarly to a bank, they’ll loan that money out (usually in the form of margin accounts) and the difference between the interest they pay and the interest they receive is their profit. Information on both types of interest can be found on the brokerage house’s website. The interest they earn can be found by looking at how much they charge on margin accounts.

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 Risk?

Posted on July 18, 2016 by Daniel DollingerJuly 28, 2016

In Short

Risk is the possibility that at a particular moment in time, you won’t have enough money to pay for whatever you need to pay for.

Fluctuation is Noise

The market fluctuates up and down like a roller coaster. The magnitude of the fluctuation is called risk. Most of these movements mean nothing. They are statistical noise. Think of a drunk standing at a light pole and staggering about. This graphic example is the random walk theory. Short term movements are noise.

Over Time Fluctuation Vanishes

Now step back a bit and look at the movements over a month. The little gyrations are gone. There is still a lot of random jerking about, however. A bad or good return for a month, does not mean much but means more than it does for a day. A year means more than a month. Ten years means more than a year and so on.

Risk Vs. Reward

In general, the more risk (the more fluctuations) you endure, the higher the long term return of your portfolio will be. However, in the short term that portfolio might be down. It could be in continuous freefall for 2 years or more. The portfolio will probably go up in value over the long term (20 years) but that doesn’t help you in the short term. If you need that money to pay for something now then you’re in trouble. My 92 year old mother takes very little risk in the stock market because she doesn’t have the time to wait out a market collapse. If her portfolio drops 50% in a market meltdown, she doesn’t have 20 years for the portfolio to make up for that lost ground and to surge higher. She needs that money now. Risk depends on your point in life. For example, somebody who is still working can recover from an investment disaster better than a retired person. They have more years in front of them. Risk also depends on emotional tolerance. I know young people who emotionally can’t handle any risk and old people who want maximum risk.

Types of Risk

There are two basic kinds of risk. Individual stock risk are the weird good or bad things that happen to one company. A new product, a lawsuit, the Tesla autopilot malfunctioning, a cure for cancer from a drug company, etc. are examples. They cannot be profitably predicted. Remember all information is known and already reflected in the stock price. Market risk is the whole market going up and down. A mutual fund holds many stocks. Therefore, the individual stock risk is blended out. The weird good and the weird bad cancel. That’s a good thing. Even if a company is making a lot of money and is growing well, there is always the chance that a freak storm is going to destroy the factory and drive the company to bankruptcy. There is no way of predicting that; there is no reason to take that risk. Mutual funds do not cancel market risk. I use an allocation towards short term bonds together with rebalancing to reduce market risk.

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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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I Just Uploaded a free E-Book

Posted on July 15, 2016 by Daniel DollingerJuly 18, 2016

I wanted to let everyone know that I just uploaded a free e-book. To download a copy of “A Simple Overview of Financial Planning. Book 1: Market Overview”, please click this link or go to the menu on the top of the page.

The free e-book contains information about my beliefs in regards to investment management. It also contains information that I personally think is very valuable for everyone to know. Please read it through and contact me with any questions or comments. The table of contents is below:

Chapter 1: Talk in Plain Speech
Chapter 2: Your Financial Advisor Can’t Beat the Market
Chapter 3: Conflicts of Interest
Chapter 4: Means of Deceit
Chapter 5: Short Term Trading is a Bad Idea
Chapter 6: Tax Brackets
Chapter 7: Definitions

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Quick Definitions (What is a Commodity, What is a Stock Index, What is Market Capitalization?)

Posted on July 13, 2016 by Daniel DollingerJuly 28, 2016

What is a Commodity?

A commodity as it is defined in the financial markets is a physical good that is considered the same as all other goods of that same commodity classification. For example: cattle is a commodity. One cow is considered the same as any other cow. If you buy a cow, you just bought a commodity. Other examples of commodities would be oil, coffee beans, gold, etc.

What is a Stock Index?

A stock index is a large basket of stocks. A single number has been obtained by manipulating the prices of the individual stocks within that basket (usually a weighted average). For example: The S&P 500 is a stock index. It is composed of 500 large companies. Its price is a weighted average of the component prices. The Dow Jones Industrial Average (the Dow in common usage on every TV set and newspaper in the country) is an index made of 30 large companies.

What is Market Capitalization?

Market capitalization of a stock is the price per share multiplied by the total number of shares that are out there in the market. There are 4 main classifications of market capitalizations.

Microcap: $0.00 to $300 million

Small Cap: $300 million to $2 billion

Mid Cap: $2 billion to $10 billion

Large Cap: $10 billion and up

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Is it a Good Idea to Buy Stock in a Company You Work For?

Posted on July 11, 2016 by Daniel DollingerJuly 28, 2016

Short Answer

Buying stock in the company you work for is usually but not always a bad idea.

Emotional Objectivity

You have to evaluate the prospects/value of the company. If you work there, you will be sucked up in the emotion of your work environment. In short, you may not have a clear head.

Diversification

If the company has a 401k plan, they will often match your contributions with shares of their own stock. If so, you are already heavily allocated to their stock. Adding more would cause you to concentrate your risk. A best practices portfolio is diversified not concentrated.

Corporate Risk

Ten years ago, I completed a tax return for an old man. He worked his life as a utility lineman. He was part of the employee stock ownership plan and acquired a substantial amount of company stock. The utility company was then acquired by Enron, which was then widely considered to be one of the strongest firms in the USA. Capital losses can only be deducted to a network max of $3,000 per year. I had the privilege of telling an 80 year man that his $200,000 loss (a lifetime on a utility pole) could be deducted at $3,000 per year over the next 66 years.

Cost

On the positive side, there is often a 15% discount through the employee stock ownership plan. My father (of blessed memory) was a poor investor. But he always made a profit on his own company.

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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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