A new year brings a fresh opportunity to read the bible all the way through.

Posted via email from Frisco Financial Planning LLC

Here’s an article highlighting historical top marginal income tax rates (varying from 7% to 94%) and the historical “implicit” tax rate based on municipal and treasury bond yield spreads.

There are some informative graphs and a strong case is made for high tax bracket investors holding municipal bonds.

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This recent article highlights how fund companies’ expense ratios have increased as asset levels have decreased. That might be okay if rising asset values worked in your favor, but the history of the fund industry indicates no benefit of economies of scale are passed on to the investor. Unless of course you are savvy enough to invest in index funds through certain low cost providers.

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Paul Volcker, the acclaimed Federal Reserve Chairman who helped tame the runaway inflation during the Reagan administration is an outspoken advocate of legislation separating commercial banking and investment banking. A good argument can be made that excessive risk-taking and a “too big to fail” mentality stems, at least in part, from lack of separation of these two functions since the Glass-Steagall Act was rescinded. So why is no one in Washington listening?

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Here’s just one more example of our ridiculously complicated income tax system. Many taxpayers inadvertently claim the Hope tax credit in more years than they are eligible, causing potential tax liability, penalties & interest, and the necessity of filing amended returns.

Enough is enough, the time has come for a serious discussion about replacing the income tax with a consumption-based tax.

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Learn about the Fair Tax…

The Social Security Administration recently announced that there will be no COLA (cost of living adjustment) for social security recipients in 2010.

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You get what you pay for. Here’s some advice from the folks at “The Motley Fool,” who predicted the Dow would go to 5,000. The article is dated March 2, 2009, exactly one week before the recent market bottom. Pay particular attention to all of the “doomsday” reader comments at the bottom. The market always turns when fear (or greed) is the greatest.

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“Past performance is no indication of future results.” That disclaimer is required by law on all brokerage firm statements. How about this one: “Fund fees are an indication of future performance.” To state what should be obvious, the higher the fees, the lower the expected performance.

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Investing is an activity that can be characterized as simple but not easy. One of the most difficult parts of investing is hanging in there when things get tough. If you aren’t in the market during the good times, you will never make up for being in the market during the bad times.

Unfortunately, a “wait and see” attitude has harmed many investors since the market bottomed-out in March.

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In 2010, the Feds are offering high income taxpayers an opportunity to convert a traditional IRA to a Roth IRA (regardless of income). They’ve even sweetened the pot with a deferral of the tax owed on the conversion (over two years, 2011-2012).

So, should you convert? It depends on a number of factors and the decision typically isn’t cut and dried.

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There’s been much in the financial press lately declaring “buy and hold” and “diversification” dead.

The problem with that premise is that although diversification is no silver bullet, it works much better than all of its ineffective alternatives.

“Most NBA players aren’t very effective at guarding LeBron James, but that doesn’t mean you could dominate him if you were to step onto the same court.”

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Several fascinating studies from the world of golf and blackjack confirm what behavioral psychologists have long known about investors:

The fear of loss tends to outweigh the desire for gain.

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Human nature causes people to look for (and convince themselves that they have found) patterns in everything. The financial markets are no different.

One such popular “pattern” is the abysmal historical performance of the stock market during the month of September.

But before you ascribe statistical relevance to any investment “pattern,” ask yourself two questions:

1) Is there any reason why this pattern should exist? and

2) If it truly is a pattern (rather than an anomaly), why has it persisted? (ie, why hasn’t everyone exploited it away?)

Now that September 2009 is behind us, you should be glad you ignored it.

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Do you remember when everyone seemed to be quitting their jobs so they could devote more time to their new-found day-trading skills?

Well, here we go again. History has a tendency to repeat itself and this time around it is likely to end even worse since currency trading usually employs massive leverage (ie, up to 100 times as much of “other people’s money” as your own), and unlike stocks, currencies have no built-in long-term upward directional bias.

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Many annuity salespeople are using the economic collapse as an opportunity to play on people’s fears by offering a “guaranteed” stock market return with no downside.

Sadly, if it sounds too good to be true, it probably is. The implicit rate of return on these products after the high sales charges, mortality costs, and “put option” premiums are typically in the same neighborhood as an “ultra-conservative” investment.

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Because of the current deflationary environment, the Feds may cut the employee deferral limit to $16,000 in 2010.

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John McAfee, known for his virus-prevention software and for inventing “instant messaging” has lost almost all of his fortune due to the stock market and real estate meltdown.

He’s gained much more than he’s lost though: “I feel a sense of freedom,” he said. “People think that it’s a joy to own things. But it really isn’t.”

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Just for Fun

Financial definitions you won’t find in the dictionary:

1. Cashtration: The act of buying a house, which renders the subject financially impotent for an indefinite period of time.
2. Intaxication: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with.
3. Profit: an archaic word no longer in use.
4. Bear Market: a 6 to 18 month period when the kids get no allowance and the wife gets no jewelry.

Quotable

“I don’t think that I will ever make a serious mistake in the stock market for the rest of my life.”

–Joe Granville, who in the late eighties, after correctly predicting the crash of 1987 was grossing $6 million per year for his market timing newsletter advice.

“The Granville Market Letter is at the bottom of the rankings for performance over the past 25 years, having produced average losses of more than 20% per year on an annualized basis.”

–Mark Hulbert, Hulbert Financial Digest, March 2005

From God’s Word

“Take care and be on your guard against all covetousness, for one’s life does not consist in the abundance of his possessions.”

– Luke 12:15

I recently met Jason Price, a Crown money map coach and Christian money blogger who lives right here in Frisco, Texas.

If you are a Christian who wants to apply biblical principles to your finances, and you are struggling with debt or budgeting issues, Jason (and other money map coaches like him) are available for one-on-one coaching sessions at no charge.

Also, make sure you check out his blog, One Money Design.

Alan Blinder, former Vice Chairman of the Federal Reserve Board says the economy has hit bottom but cautions it will be a long way back to prosperity.

Take his prediction for what it is, merely a guess, but the interesting take away is this: the market has quickly and quietly risen nearly 50% (on the S&P 500) since the market bottom on March 9th and it did so while the news (and the fear) was the worst.

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Few pundits are calling for a V-shaped economic recovery; most think we are entering a period of very slow growth. Tim Bond of Barclays Global, thinks otherwise, though, and makes a pretty convincing argument.

The point? Your investment plan should reflect an unknowable future.

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Commission-compensated financial advisors will soon be a relic of the past in the UK.

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Wall Street sure does have a high opinion of itself. Not long after the financial meltdown, the industry is reverting to its old ways.

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Here’s a fun trip in the wayback machine: in March of 2007, technology columnist John Dvorak had some critical comments about the soon to be released iphone such as:

“its phone, even if immediately successful, will be passé within 3 months” and “If it’s smart it will call the iPhone a ‘reference design’ and pass it to some suckers to build with someone else’s marketing budget. Then it can wash its hands of any marketplace failures.”

There’s clearly an investment-related lesson here…

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