The Changing Nature Of Work

In his book, “The End of Jobs,” author Taylor Pearson says that the type of work that is being rewarded presently is complex and chaotic work. Whereas in times past, complicated work, which requires the “application of expert knowledge,” was rewarded in the marketplace, this is no longer the case.

As Pearson says:

“Times have changed. It’s now less valuable than ever to understand how to follow directions and implement best practices. It’s the work of understanding and operating in the complex and chaotic systems–entrepreneurship–that’s increasingly in demand.”

Organic Growth

Image 1 for 4-14-14As you follow the economy over the next year, a key component to look for in earnings reports will be top-line, or revenue, growth. The reason this is important is that over the last several years, the market has been able to enjoy growth largely due to the Fed policy of Quantitative Easing. This policy has put cheap money into the system, and allowed corporations to take on huge amounts of cheap debt, while at the same time lowering the discount rate for those corporations and providing a somewhat artificial stimulus for stock price appreciation.

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Although this has boosted the market, and allowed consumers to feel wealthier because of investment appreciation, time will tell whether this strategy will truly boost consumer spending, which will be reflected in revenue growth. If we do see year-to-year growth in the top-line, it will support the fact that the economy is able to support itself organically, rather than relying on the Fed for stimulus.

Is The Market Rigged?

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In a recent episode of 60 minutes, author Michael Lewis argued that the stock market is rigged. His argument was that High Frequency Traders (HFTs), who use computer algorithms and complex trading systems to buy and sell extremely high volumes of shares, are effectually robbing ordinary investors and anyone else who participates in the market.

What Is High Frequency Trading?

High Frequency Trading is:

A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.

High-frequency trading became most popular when exchanges began to offer incentives for companies to add liquidity to the market. For instance, the New York Stock Exchange has a group of liquidity providers called supplemental liquidityy providers (SLPs), which attempt to add competition and liquidity for existing quotes on the exchange. As an incentive to the firm, the NYSE pays a fee or rebate for providing said liquidity. As of 2009, the SLP rebate was $0.0015. Multiply that by millions of transactions per day and you can see where part of the profits for high frequency trading comes from.

The SLP was introduced following the collapse of Lehman Brothers in 2008, when liquidity was a major concern for investors.

How Can HFT Hurt Investors?

High Frequency Traders can hurt investors by, in effect, front-running buy and sell orders. When an order is taken, High Frequency Traders purchase the shares faster than you as the investor can, then sell them back at a small profit. Although the amount of profit made on each individual share may be minimal, when many shares are involved, these all add up to huge profits.

What To Do To Combat High Frequency Trading

First, to combat the effects of High Frequency Trading, become and remain a long-term investor. Day trading is a gamble not worth taking, and unless you are in on the high-frequency-trading-game, it is highly likely that you will lose at this pursuit. However, when you invest for the long-term, and have the patience and discipline to see your financial plan through to the end, you give yourself a great chance to be successful and make handsome profits.

Additionally, and on a more technical side, you can place limit orders on every share purchase. This is done by naming the top price you want to pay, per share, for a stock. This will allow the trader to not go above that price when making the purchase. For example, say a stock is trading somewhere in the neighborhood of $10.20/share. You can put a limit order of $10.25 on that stock, so that it will not be purchased above that price. As the stock price fluctuates throughout the day, it is likely that your order will be filled at the $10.25 price where your limit was set. This tactic will set your price, so that High Frequency Traders are not able to take advantage of you as the share price fluctuates throughout the day.

Stock Market Tennis Match

Best-Performing Assets Of 2014

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This chart says it all! One of the best-performing assets so far in 2014 is food. As the chart above shows, foodstuff is up 19% so far this year. This is largely the result of weather conditions over the past year, with severe winter weather in the East and a drought in California being the major contributors. If your wallet has been especially squeezed recently, this could be the reason why.

According to the U.S. Agriculture Department, consumers may want to get used to the squeeze, as record-high food prices are here to stay, at least for a while.

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Rethinking Retirement

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Over the years, I’ve thought a lot about the idea of retirement. When I was in my early 20’s, I accepted the traditional American notion of it, basically without question. However, as I have grown older, and have personally witnessed the change and uncertainty that life brings, I have changed my thinking considerably.

The fact is, the idea of retirement is a fairly new one when considered in the context of human history. Before the early 1900’s, there was really no thought of “retirement” as we think of it today. The idea really took hold in 1935, with the passage of the Social Security Act. However, at that time, life expectancy was 62, while the age picked for retirement by the new law was 65, leaving few people living long enough to enjoy retirement bliss.

Now, things have changed considerably. With improved health care, people are living longer. However, although many of these people have ostensibly worked all their lives to save for retirement, many of them do not have a large enough nest egg stashed away to last the thirty or forty years they plan to live in retirement. This has led to a greater number of people re-entering the workforce after age 65. (Please see the images below.)

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I recently read an article on the Forbes website written by Carolyn McClanahan that I believe gives great advice related to the idea of retirement. In the article, McClanahan gives two pieces of advice regarding retirement thinking: 1) Create a great life now; 2) Prepare for the uncertainty of the future.

The first point here is very important, I believe, because it can create a greater sense of happiness for people. Why spend the great majority of your life doing something you hate just to save for an uncertain future. If you do not love your work, then change, and do something that you do love, even if this means less money in the short-term. Doing this will most likely allow you to live and even earn longer, but enjoy the process as well.

The second point is equally important, because it takes into consideration the reality of life. The fact is, the only thing certain about the future is uncertainty, and this should be fully realized as part of the financial planning process. Learn to balance your “needs” versus your “wants.” This will allow you to save more toward an uncertain future. Additionally, it will point you toward personal growth and a balanced life, as you realize that the pursuit of material things alone does not lead to balance and fulfillment. However, a life filled with experiences with the people you care most about, while at the same time having your needs met, does lead to a balanced and fulfilled life.

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Enjoy Life By Living In The Moment

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In these posts, we have talked almost exclusively about investments. Of course that is understandable and expected, since this is a financial planning website. However, today’s post will be a bit different. Here is a short piece from an article I found on an estate planning website recently. The article is called Living In The Moment:

Ralph Waldo Emerson once said, “With the past, I have nothing to do; nor with the future. I live now.” Great words of advice, but they can be difficult to follow. With the overwhelming number of day-to-day distractions we face, it can feel impossible to simply enjoy the present without worrying.

One way to start living in the moment is to avoid multitasking. By dedicating yourself to one task at a time, you can focus on the present, which lets you fully enjoy your time and clarity. Attempting to do too many things at once leads to mediocre results—and you may find yourself enjoying none of them as much as you could. Consider setting aside your to-do list occasionally so you can simply “be” instead of trying to always “do.”

Take an occasional time-out. Stop whatever you’re doing or thinking about and pause. Meditate. Say a prayer. Take a brief walk. Take a few deep breaths. Count your blessings and re- flect on all the positive aspects in your life. Get off the treadmill of stress just for a moment. When you step back on, you will feel recharged and more able to focus on the present moment.

Enjoy new experiences. Take a class, join a group, or go somewhere you have never been. Trying something new will naturally allow you to push distractions aside and pay close attention to what you are doing—and enjoying—right now.

Life is filled with thousands of moments, and once a moment is gone it can never be recaptured. Make it a priority to let everything else go and truly enjoy as many of those moments as you possibly can.

Which Way Is The Market Headed?

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The above picture demonstrates how some market participants feel as they try to navigate the choppy waters of an unpredictable stock market. Both amateur investors and seasoned pros alike spend countless hours trying to make sense of it all, and with good reason. If you think about it, none of us are truly immune to the rises and falls of the market or the economy in general, as all of our futures (at least financially) are inextricably linked to the system in which we live, move, and have our being.

In my study recently, I came across an essay by a guy by the name of Chris Brightman. In this essay, Brightman covers the issue of corporate profits, which are at historic highs relative to both GDP and GNP. (Please see the chart below: Corporate Profits vs. Nominal GDP.) Brightman’s prediction is that moving forward, because things always revert back to the average, the market will falter, as corporations face political pressure to increase spending on labor, thereby decreasing their ability to put profits back into the corporation in the form of capital spending. (Please see the chart below: Corporate Profits vs. GDP vs. Labor Income.)

Profits vs Nominal GDP

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However, columnist Sam Ro takes a contrarian viewpoint in a recent article in Business Insider called “Here’s What The Bears Get Dead Wrong About This Controversial Corporate Profits Chart.” In Ro’s view, the issue of corporate profits to GDP has been minimized in recent years as a result of the international exposure of corporations. Many corporations today accrue profits through their global constituents, and these numbers may not even enter the GDP equation. Ro ends his column by concluding that profit “margins are on a secular upswing thanks to increasing overseas exposure among other things.”

In closing, it is essential regarding your financial health to come to the realization that no one can accurately predict short-term movements in the stock market. The wisest and most profitable strategy is to choose a globally diversified portfolio of investments and then maintain discipline by staying the course for the long-term. Of course, the portfolio needs to be monitored and re-balanced regularly throughout the course of life, and you should certainly work with your financial adviser to accomplish this.


Tax Time!

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Well, it is that time of year when most folks are not only dealing with the last remnants of winter (hopefully!) and eagerly hoping for Spring, but also coping with the all-too-familiar obligation that comes every year, no matter what, in April: taxes. However, this time of year is certainly not all bad, as it may possibly offer an opportunity for some to put some of that tax refund to good use, in the form of an Individual Retirement Account (IRA).

For most people, there are two types of IRA’s to consider, the Traditional and the Roth. These two retirement vehicles are alike in some ways but different in others. Please take a look at the following chart from the IRS for a basic understanding of how the two accounts work:


Features Traditional IRA Roth IRA
Who can contribute? You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts (see 2012 and 2013limits).
Are my contributions deductible? You can deduct your contributions if you qualify. Your contributions aren’t deductible.
How much can I contribute? The most you can contribute to all of your traditional and Roth IRAs is the smaller of:

  • for 2012, $5,000, or $6,000 if you’re age 50 or older by the end of the year ($5,500 or $6,500 for 2013); or
  • your taxable compensation for the year.
What is the deadline to make contributions? Your tax return filing deadline (not including extensions). For example, you have until April 15, 2013, to make your 2012 contribution.
When can I withdraw money? You can withdraw money anytime.
Do I have to take required minimum distributions? You must start taking distributions by April 1 following the year in which you turn age 70½ and by December 31 of later years. Not required if you are the original owner.
Are my withdrawals and distributions taxable? Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. None if it’s a qualified distribution (or a withdrawal that is a qualified distribution). Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.


The contribution limits to a Traditional or Roth IRA in 2014 are $5,500. However, People over the age of 50 can contribute another $1,000 to that amount as a “catch up” measure, bringing the total contribution limit for those folks to $6,500.

The great benefit with an IRA is that the money deposited is able to grow tax-deferred, which can allow for greater compounding over time than if it were taxed as it would be in a taxable account. The following chart is from First Investors, and shows how this can be a benefit to the investor over time:

This chart below compares a deductible Traditional IRA investment of $3,000 made at the beginning of each year with an annual non-deductible investment of $3,000 made into a taxable investment account at the beginning of each year. For both accounts, assume a hypothetical growth rate of 8 percent and a 28 percent federal tax rate.

Comparison of Traditional IRA to an annual taxable investment

More about the assumptions:

  • Your actual tax rate on the withdrawal of gains from a tax-deferred account could be more or less than 28%, depending upon the applicable tax rates that are then in effect, and whether you make your withdrawal in a lump sum or over time. Your effective tax rate on gains from a taxable account could also be more or less than 28%, depending upon your adjusted gross income and the nature of the gains. Currently, qualifying dividend income and long-term gains form a taxable account are taxed at an individual’s capital gains rate, which is 15% or lower. Capital gains taxation is not available for gains taken from a tax-deferred account. The differences between the tax-deferred and taxable returns shown in the example would therefore be smaller if (a) your effective federal tax rate on the gains from a taxable account were lower than 28% or (b) your federal tax rate on a withdrawal from a tax-deferred account were greater than 28%.
  • The hypothetical 8% investment return is compounded annually and assumes reinvestment of dividends and capital gains
  • The value of the Traditional IRA after a lump sum withdrawal taxed at 28% is $33,794 if taken after 10 years, $106,753 if taken after 20 years, and $264,267 if taken after 30 years.

So, as you consider what to do with discretionary funds during this time of the year, do consider investing some of it, possibly into an IRA. If you require help in understanding the investment maze, consult a financial professional, as a good one may prove invaluable in helping you put money to use for the long-term.



Are You A Saver?

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Chances are, if you live in America, you have experienced the endless barrage of marketing tactics designed to entice you to buy some material good. It really seems that there is just no end to the list of items that “we just have to have.” It is for this reason, and others, that the personal savings rate of Americans has dropped significantly over the last several decades. The following chart shows data collected by the St. Louis Fed for the personal savings rate from 1959 – 2012:

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Unfortunately, the savings rate did not improve in 2013, coming in at a paltry 4.48%. Since the personal savings rate is calculated by dividing personal savings by disposable income, these figures and the reality they represent are certainly alarming, as they indicate that people are hardly saving at all. This should be disconcerting for some, as they enter their retirement years with little to show for their efforts during their working years.

On one financial site recently, columnist Dayana Yochim wrote an article regarding retail tricks that make people overspend. A couple of the marketing tactics that she uses as examples include the “buy now or regret later” tactic. This is used by retailers like Costco, as well as others, when the store constantly changes out some of their items, so that consumers are more tempted to buy an item when they see it, rather than run the risk that the item will be unavailable the next time they visit the store.

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Another marketing tactic to lure consumers into buying more than they need is the “more is better and cheaper” tactic. This tactic ostensibly offers discounts for purchasing in bulk or volume. However, when people overspend by purchasing more than they need, but then do not use some or all of the goods, it is wasteful first of all, but also takes money out of the consumer’s pocket that could have instead been put into savings, potentially earning money in perpetuity.

Another issue that should be considered in a discussion of personal savings is that savers can presently earn very little on their savings. This is because interest rates are currently very low, so personal savings vehicles like savings accounts, money market accounts, and cd’s pay minimally on money parked in them. This creates a disincentive for people in terms of saving, because why should someone save money if they can’t earn money on that savings.

So, what is the answer to our personal savings dilemma? Well, one thing is personal discipline. Rather than continually putting disposable income into non-income-producing material goods, instead put that money into investments that will produce an income for years to come. To solve the low interest conundrum, put extra money into equity assets that grow over time, rather than interest-rate-based accounts, where depositors are paid very little (at least for now) to park money there.

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