Thursday, December 15, 2011

The Good Old Days?

Jim Parker,
Vice President
DFA Australia Limited


“The hardest arithmetic for human beings to master,” wrote the great American working man’s philosopher Eric Hoffer, “is that which enables us to count our blessings.”

It’s a piece of wisdom worth recalling after another year that has tested the nerve of many investors and prompted questions about what current generations have done to deserve to live in such a tempestuous stage of history.

As the year winds down (if that’s the word for it!), financial markets are gripped by uncertainty over developments in the Eurozone crisis. Each day brings fresh headlines that send investors scrambling from virtual despair to tentative optimism.

While not seeking to downplay the very real anxiety generated by these events, particularly in relation to their effects on investment portfolios, it’s worth reflecting critically on our often second-hand memories of the “good old days.”


Nearly 100 years ago, Europe was engulfed by a war that destroyed two centuries-old empires, redrew the map of the continent, and left more than 15 million people dead and another 20 million wounded. The economic effects were significant, with widespread rationing in many countries, labor shortages, and massive government borrowing.

Just as the Great War was ending, the world was struck by a deadly pandemic—the Spanish flu, which, by conservative estimates, killed some 50 million people. About a third of the world’s population was infected over a two-year period.

A little over a decade after the Great War and the pandemic, the Great Depression cut a swath through the global economy. Industrial production collapsed, international trade broke down, unemployment tripled or quadrupled in some cases, and deflation made already groaning debt burdens even larger.

In the meantime, resentment was growing in Germany over its Great War reparations to the Allied powers. Berlin resorted to printing money to pay its debts, which in turn led to hyperinflation. At one point, one US dollar converted to 4 trillion marks.

In a new militaristic and nationalist climate, fascist regimes arose in Germany, Italy, and Spain. Under Hitler, Germany defied international treaties and began annexing surrounding regions in Austria and Czechoslovakia before finally attacking Poland in 1939.

This led to the Second World War, a conflict that engulfed almost the entire globe while Japan pushed its imperial ambitions in Asia, and Germany sought to conquer Europe. More than 50 million died in the ensuing conflict, including a holocaust of six million Jews. The war ended with the invasion of Berlin by Russian and western forces, while Japan surrendered only after the US dropped nuclear bombs on two cities, killing a quarter of a million civilians.

In economic terms, the war’s impact was profound. Most of Europe’s infrastructure was destroyed, millions of people were left homeless, much of the UK’s urban areas were devastated, labor shortages were rife, and rationing was prevalent.

While the thirty-five years after World War II were seen as a golden age in comparison, the geopolitical situation remained fraught as the nuclear armed superpowers, the Soviet Union and the US, eyed each other. The breakdown of the old European empires and growing east-west tensions led the US and its allies into wars in Korea and Vietnam.

The cost of the Vietnam and cold wars created enormous pressures concerning balance of payments and inflation for the US and led in 1971 to the end of the post-WWII Bretton Woods system of international monetary management. The US dollar came off the gold standard, and the world gradually moved to a system of floating exchange rates.

In the mid-1970s, the depreciation of the value of the US dollar and the breakdown of the monetary system com-bined with war in the Middle East to encourage major oil producers to quadruple oil prices. Stock markets collapsed and stagflation—a combination of rising inflation alongside rising unemployment—gripped many countries.

While the 1980s and 1990s were a relative oasis of calm—aided by the end of the cold war—there still was no short¬age of bad news, including the Balkan wars, the Rwandan genocide, and recessions in the early part of both decades.

In the past decade, there have been the tragedies of 9/11; the 2004 Asian tsunami; the 2011 Japanese earthquake, tsunami, and nuclear crisis; and now, the financial crisis sparked by irresponsible lending, complex derivatives, and excessive leverage.


So from this potted history, it seems fairly clear that tragedy and uncertainty will always be with us. But the important point to take away from it is that previous generations have stared down and overcome far greater obstacles than we face today. And while it is easy to focus on the bad news, we mustn’t overlook the good either.

Alongside the wars, depressions, and natural disasters of the past century, there were some notable achievements for humanity---like women’s suffrage, the development of antibiotics, civil rights, economic liberalization, the spread of prosperity and democracy, space travel, advances in our understanding of the natural world, and enormous advances in telecommunication. (Oh, and the Beatles.)

Today, while the US and Europe are gripped by tough economic times, much of the developing world is thriving. Populous nations such as China and India are emerging as prosperous nations with large middle classes. And smaller, poorer economies are making advances too.

The United Nations in the year 2000 adopted a Millennium Declaration that set specific targets for ending extreme poverty, reducing child mortality, and raising education and environmental standards by 2015. In East Asia, the majority of twenty-one targets have already been met or are expected to be met by the deadline. In Africa, about half the targets are on track, including those for poverty and hunger.

Alongside these gains, new communications technology is improving our understanding of different cultures and increasing tolerance across borders while providing new avenues for the spread of ideas in education, health care, technology, and business.

Through forums such as the G20 and APEC, international cooperation is increasing in the field of trade, addressing climate change, and lifting the ability of the developing world to more fully participate in the global economy.

Rising levels of education and health, and workforce participation also mean the foundations are being built for a healthier and peaceful global economy, dependent not on debt, fancy derivatives, and fast profits but on sustain-able, long-term wealth building.

Anxiety over recent market developments is completely understandable, and it is quite human to feel concerned about events in Europe. But amid all the bad news, it is also clear that the world is changing in positive ways that provide plenty of cause for hope and, at the very least, gratitude for what we already have. These are ideas to keep in mind when we scan the news and long for the “good old days.”

This material may refer to resident trusts offered by DFA Australia Limited. These resident trusts are only available in Australia. Nothing in this material is an offer of solicitation to invest in these resident trusts or any other financial products or securities. All figures in this material are in Australian dollars unless otherwise stated.

Dimensional Fund Advisors LP (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission.

All expressional of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to b construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

©2011 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Tuesday, November 15, 2011

Investment vs Investor Returns

The stock market has been quite volatile lately. We’ve seen many days of big swings in both directions. The past quarter was very negative while October provided a big positive. Every news event spreads quickly and seems to affect the market. The media doesn’t help.

Volatility scares investors. If you jump out now, when do you get back in? Once the smoke clears? What signs do you look for? Most of the time, you’ll get back in too late (or at least later than you should have). Hindsight is always 20/20. Foresight is very problematic.

Some investors try to shift from here to there. Sell your “dogs” and load up on the recent winners? It makes sense to switch to the better performing fund, right? Don’t forget the disclaimer on every investment advertisement; “Past performance does not guarantee future returns”.

Unfortunately, timing and investment shifting is how many people invest. Dalbar (a research company) conducted a study on investor behavior. They studied the twenty year period from 1990 through 2009. The average US equity mutual fund had an annualized return of 8.8%. The average investor in those mutual funds earned an annualized return of only 3.2%. Why the huge difference? Unsuccessful market timing. Investors try to time the market and/or move from one mutual fund to another based on recent returns. They usually get it wrong.

Carl Richards, CFP® (a financial planner in Salt Lake City, UT) affectionately calls this the “Behavior Gap”:We can’t control the markets. We can diversify, remain disciplined (control ourselves) and achieve what is rightfully ours: “investment returns”.

Tuesday, October 11, 2011

It's a girl!

Pathways Advisory Group, Inc.
David L. Williamson, CFP®

We are proud to announce the birth of David's granddaughter, Naima Avery Doyle, born to Megan and Eamonn Doyle. She was born on September 28, 2011 at 5:46 PM; she weighed in at 9 lbs 2 oz and was 21 inches long. Congratulations to the family on the birth of their baby girl!

Tuesday, October 4, 2011

It's a girl!

Pathways Advisory Group, Inc.
Michelle Carter, CFP®

We are proud to announce the birth of Katelyn Marie Carter, born to Michelle and Ryan Carter. She was born on October 3, 2011 at 5:13 PM; she weighed in at 6 lbs 11 oz and was 19 1/4 inches long. Katelyn and her proud parents are doing well. Congratulations to them both on the birth of their baby girl!

Wednesday, September 28, 2011

Public Awareness Campaign

What is Financial Planning? Who is qualified to provide Financial Planning? The answer varies within our industry. Unfortunately, it varies too much. Jeff's recent newsletter article touched on the requirements of what we believe to be the most important designation for a Financial Planner, the CERTIFIED FINANCIAL PLANNER™ certification. You may have seen the following public awareness commercial put together by the CERTIFIED FINANCIAL PLANNER™ board (that is, if you still watch commercials).

Let us know what you think of the commercial. It seems like the only thing missing is oncoming traffic...

Wednesday, September 21, 2011

Are Market Declines Normal?

There has been a lot of media attention about the decline in the stock market since July. Earlier this year, the S&P 500 peaked at 1363.61 on April 29. The low this year (so far) was on August 8 when the S&P 500 hit 1119.46 resulting in an intra-year decline of 17.9%. Many say this is reminiscent of 2008. Perhaps, it’s really just reminiscent of any other year. Nobody knows for sure.

The average intra-year decline (1980-2010) for the S&P 500 (excluding dividends) is 14.3%. In 1980, for example, the intra-year decline was 17%, but for the year the Index was up 26%. (We are not predicting that the market will be up for the year, just pointing out that intra-year declines are surprisingly common, even in good years.)

Click picture to enlarge.

Equity markets are volatile. The pain of a 10% drop is deeper than the joy of a 10% rise. We must maintain a long-term outlook. For more perspective see last week's blog about Market Behavior. If all else fails, a little humor may help:

Wednesday, September 14, 2011

Market Behavior

Investing in equities can be difficult. We invest for the long-term but live day to day. It always feels different when volatility and uncertainty take over. Anxious? A little perspective may help. Here are a few principles (and charts) to remember:

#1 – You don’t have to “outsmart” markets to be a successful investor. The following chart shows the average return and duration of bear (down) markets and bull (up) markets within Large US Stocks (S&P 500). Investors will always experience both (bear and bull) markets, but, in general, bull markets last longer and are more profound than bear markets. This creates a successful investment experience for the disciplined investor.

(Click the graphs to enlarge)

Further, this trend persists in Small US Stocks (Russell 2000)…

And Foreign Developed Markets (EAFE Index)…

#2 – You have to stay in your “seat” to be a successful investor. Markets move too fast and unpredictably. Unless you have a “crystal ball”, you should stay in your “seat” (invested). The following chart shows that $1,000 invested in Large US Stocks (S&P 500) in 1970 grew to $49,614 by December 31st 2010 (despite multiple bear markets). However, the same $1,000 only grew to $11,889 if monies were out of the market for the 25 best single days.

You would have to time it perfectly wrong to miss the best 25 days (unrealistic we know) but you get the point. Returns often come in quick surges and missing out can be devastating.

Patience and discipline are rewarded...

Tuesday, September 6, 2011


Pathways Advisory Group, Inc.
Michelle Carter, CFP®

Waiting… Patience… Delayed gratification…

These are concepts we discuss quite often in meetings.

Sometimes, you will hear us say we are looking out for the person you will be financially in 10, 20, or 30 years from now. Perhaps there is something exciting you wish to have, do, or buy *right now*, but doing so might jeopardize the security of the “future you”. In these situations, having a conversation is important, weighing the risks and the benefits to come to a conclusion or compromise. And sometimes the compromise is simply waiting.

Most of you practice these concepts daily, as you diligently invest money into your retirement plan. You choose to set aside a portion of your income to use at a later date, giving up something now for future benefits. What is exciting to me is to see this persistence rewarded as I watch many of my retired clients pursuing travel and other goals, or simply enjoying the security they have put in place for themselves.

Our patience can be tested quite strongly when we invest in the market. We watch our investments struggle during down times and wonder if we have the stamina to bypass the gratification that might come from pulling out of the turmoil, in return for the positive investment experience that is there when we take a long-term perspective. This is a difficult test for sure.

Waiting… Patience… Delayed gratification…

These are not just financial lessons. These are life’s lessons. We learned them from our parents or other people in our lives. We teach them to the next generation. And (many times) life teaches these lessons to us.

At the end of this month, my husband and I will finally hold our first child in our arms. Due to unexplained infertility, waiting for this day was a lesson in patience eight years in the making. Never have I grown so much as when I was forced to wait, taught to have patience and found my deepest desire delayed, with no idea how or if it would ever be achieved.

This experience has taught me about life, and I keep those lessons with me in everything I do. I know each and every person has had a similar life event that changed them for the better and taught them something invaluable they will carry with them forever.

Waiting… Patience… Delayed gratification…

The beauty of these concepts is, although they are everywhere and not always welcome, the reward at the end is always sweeter, simply because of the struggle it took to get there. This is true in many areas of life, whether it be health, family, career or, yes… even 401(k)s.

Everywhere in nature we are taught the lessons of patience and waiting. We want things a long time before we get them, and the fact that we wanted them a long time makes them all the more precious when they come. -JFS

I will be out of the office on Maternity Leave beginning sometime in late September and I look forward to returning approximately eight weeks later. David will be here in my absence to handle any urgent client issues, and I am reachable by phone if needed.

Wednesday, August 17, 2011

Annuities as an Investment

Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

Every so often clients ask about annuities. We always review the policy to understand how it works, then discuss the advantages and disadvantages. Most of the time (ok, almost always), the client decides not to purchase the annuity. Why did they consider purchase in the first place? Many times you get invited to a nice dinner to listen to a sales pitch (that usually sounds great).

Annuities come in two basic forms: fixed and variable. (There is a third called Indexed Annuity but I won’t get into that here. Stay tuned for a newsletter article from Dustin about Indexed Annuities.) Each type of annuity can have different riders that add to the “benefit” of the annuity but at an additional cost.

Fixed Annuity
A fixed annuity is called such because it has a fixed interest or payment amount. I think of these as extremely long-term CDs. You get about the same rate as a regular long-term CD. However, there is usually a “teaser” interest rate that resets to the minimum policy interest rate after a few years.

The Sales Pitch: You get a monthly payment for the rest of your life. It’s GUARANTEED to never go down.

The Problem: Inflation will make the payment effectively less each year. An annuity started today will have less than 1/3 of its purchasing power in 30 years. Will your grocery bill be cut in a third over the next thirty years?

Variable Annuity
A variable annuity has underlying investments. Usually you choose between a few different mutual funds that the insurance company provides. Typically you’ll see riders to add a guarantee to the annuity.

The Sales Pitch: Our product will allow you to participate in market returns. If the market goes down, you can purchase a rider to GUARANTEE your income (for a measly .5%).

The Problem: Variable annuities typically have high internal fees, as much as 3%. These high fees are a drag on your performance. That does not include the expense ratio of the underlying mutual funds. The rider guarantee typically adds a fixed income amount (basically turns it into a fixed annuity). The insurance company benefits from these riders because of the long holding period requirement. Annuities can have surrender charges as high as 20% to withdraw your money in the first 10 years.

For some, annuities may be a perfect investment. They don’t mind the high fees and the relative stability gives them peace of mind. Some policies are certainly better than others. My problem is the way they are sold. The advantages are inflated and the disadvantages are mostly ignored, making annuities sound like the perfect investment. Like my Pape always used to say, “If it sounds too good to be true” well, you know the rest.

Friday, July 29, 2011

Crisis Du’ Jour

There is much anxiety regarding the fight over the country’s debt ceiling. Both sides seem to be sticking to their guns, while encouraging the other side to compromise. Right now, it looks like a staring contest. The first to blink loses. The market feels the tension: rising despite negativity one day, and coming back down the next.

The biggest question on an investor’s mind might be, “What do we do now, if anything?”

Our answer might sound a little familiar…. Nothing.

No one knows where this crisis might lead. Perhaps no deal is reached, our country defaults and the market takes a dive. Perhaps compromise is made in the 11th hour, causing the market to react positively and soar. Perhaps something else occurs.

There is uncertainty, that’s for certain. But to make investment decisions based on uncertainty is to speculate, and speculating is dangerous. Luckily, we don’t have to. We can have long-term investment success by choosing an allocation that is in line with our risk tolerance and sticking with that allocation through the ups, downs and in-betweens.

There will always be a new crisis to worry about. Some will be quick and painless; others will hurt and require time to heal. Which direction this one goes remains to be seen. How wonderful it would be to predict and reliably time the market. Alas, Mr. Market does not permit this. So in the meantime, the mantra is to ‘stay in your seat’. It is the most prudent way to capture a positive long-term investment experience. Sometimes, a decade worth of gains occur in a short time period. Know that you own thousands and thousands of stocks in good companies. Each day, their values bounce around. But being in the market ensures that you take full advantage of their ultimate rise.

Having said all that, we understand the anxiety that is out there right now. Should you want to talk further in person about this issue, please call.

Friday, July 1, 2011

Independence Day

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

What is our place in the changing world? We remain the largest economy in the world¹ but other economies are growing fast. We face challenges and uncertainty. We face tough decisions. The history of this nation suggests we are up for the challenge. If you haven’t already watched the History Channel series, America The Story of Us, please do. It’s quite a story…

What technology will influence the direction of the next twenty years? What role will this country play? Where will we make the greatest advances? Healthcare? Technology? Transportation? Energy? It will be interesting. Just consider how far we have come the past 150 years…

Barbed wire transformed prairies and the American dream. Mass production of steel led to vertical cities. The steamboat, railroad and telegraph allowed American commerce to spread. Thomas Edison’s work brought light and power to the masses. Advances in medicine improved life expectancies and quality of life. The cotton gin and automobile assembly lines changed the capacity of industry. Automobiles led to interstate highways and suburbs. Dams, canals and aqueducts provided for a housing boom and expansion of the west. Television, computers and cell phones changed our daily lives. Air travel shrunk the country. The internet shrunk the world. Every generation has brought new ideas. Every generation has improved upon the previous. In each case, an idea and the technology to make it happen have been the driving force.

Are we out of ideas? Have we tapped all resources? Is there no more room to improve? I suspect the next 20 years will be much like the last 150. I suspect this nation will play a role. I suspect Life, Liberty and the Pursuit of Happiness will have something to do with it...

Happy 4th of July.

¹ 2010 World Market Capitalization Chart (below) and GDP Top 15 Rankings.

Monday, June 27, 2011

Unclaimed Property

During John Chiang’s recent visit, he mentioned a government website which lists California residents who may have unclaimed assets. More information can be found HERE. You can check the database HERE to see if you might be on their list.

Tuesday, June 21, 2011

ETF: Exchange Traded Fund or Every Trader’s Fantasy

Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

Newspapers, magazines, and TV are overflowing with advertisements for ETFs (exchange-traded funds). You might think that ETFs are new. Not so. The first ETF started in 1993 but the industry has grown a lot the last few years.
What is an ETF?
An ETF is a basket of securities similar to a mutual fund with many distinct differences. A mutual fund begins by collecting money from investors to buy securities. An ETF starts at a large company that already owns the securities. The securities are packaged together into an ETF. Some say that an ETF is like a stock since it trades like one but this is not true. The ETF company owns the securities and you own the ETF. This makes ETFs more of a derivative instrument. The value of the ETF is derived from the underlying securities.
Mutual funds must be purchased directly from the mutual fund company. Once the ETFs are provided to the market, they are sold on an exchange similar to a stock. They may be purchased or sold throughout the day at the market price. Mutual funds can only be purchased or sold at the end of the day once the NAV (Net Asset Value) is determined. Since the ETF price is determined by supply and demand, you rarely purchase at the NAV. This is an added risk with ETFs. Just ask the unlucky investors who sold ETF shares during the Flash Crash.
Pros for ETFs
ETFs are not actively managed and therefore have very low expense ratios (similar to an index mutual fund). Low expense ratios leave more return for the actual investor…. you. ETFs are tax efficient. The ETF never has to sell shares to accommodate liquidation like a mutual fund. There will be little if any capital gain distributions from an ETF.
Active traders love ETFs. ETF orders are exactly the same as an order for a stock. You can use stop and limit orders depending on what price you want to buy or sell at. ETFs can even be sold short (betting that the price will fall). There are even options available for ETFs. (So it’s a derivative of a derivative?....Sounds complicated.) ETFs facilitate the gambling addiction of the active trader while allowing some risk diversification.
Cons for ETFs
ETFs trade like a stock which means every time you buy and sell you pay a commission. There are some low cost brokers out there so this could be minimal. You could purchase at a premium to the NAV (paying more than its worth).
Only whole shares of ETFs can be purchased. Mutual funds allow you to purchase dollar amounts and receive fractional shares. Both ETFs and mutual funds pay dividends. With a mutual fund you can have your dividends reinvested. You simply buy more fractional shares of the mutual fund. When an ETF pays a dividend, it must pay to cash. There is no reinvestment of dividends. You would be required to place another buy order.
Some mutual fund companies have automatic investing programs. The mutual fund company can take $50 from your checking account after each payday and automatically invest for you. This is not available for ETFs. You are required to place each trade.
ETFs are very popular right now because they provide low cost diversification (with the ability to buy and sell throughout the day) and inexpensive access to sector investing. For the long-term investor, we feel mutual funds remain a better alternative.

Friday, June 17, 2011

John Chiang Visits Fresno State

Pathways Advisory Group, Inc.
Michelle Carter, CFP®

On May 25th, the local members of the Financial Planning Association, citizens of Fresno, various media outlets, and several of our clients gathered to hear the California State Controller speak at Fresno State. The session included a brief welcome from Fresno State President John Welty, followed by an hour long question and answer session with John Chiang.

He began with various statistics; the last date that California was ‘in the black’ was July 12, 2007. This means next month will mark four years we have been in deficit. The last recession began five months later, in December 2007. The major causes? I think we all know by now… real estate, construction and, of course, real estate finance.

During the recession, California watched its unemployment rate soar from 5.9% to 12.5%. At the time of John Chiang’s visit we were down to about 11.9%.

We are seven quarters out of the recession, and growth has begun to occur… somewhat. According to John Chiang, the growth has been asymmetrical. While agriculture and technology seem to be doing well, real estate and other areas are still struggling. John believes two areas will indicate recovery: commodity prices and a combination of consumer confidence, spending, and savings rates.

California is still struggling. Our credit rating is an A-. We are still in debt. Our biggest expenses (K-12 education, health care, social services and prisons) are increasing while our biggest revenue sources (personal, sales and corporate taxes) are low, relative to where we were prior to the recession. There is no state bankruptcy program meaning we need to find a solution somewhere.

The big debate is whether to cut spending or raise taxes (or both). It seemed like John treaded lightly on that topic. One issue he really touched on was making California more business friendly. He had a few ideas, but his ideal plan would be to eliminate corporate tax credits and drop the corporate tax rate. His thought was this would equal out revenue-wise, but make the state appear to be more business friendly, as people tend to pay more attention to the actual rates than to credits offered.

It was an interesting hour of conversation. Some things made sense, some made you raise an eyebrow, but all of it was thought-provoking. It would be fascinating to sit down and have dinner with the Controller, and really get insight into the craziness that is Sacramento. A big thank you to the clients who attended the event with us. We hope the experience was interesting for you as well.

Friday, June 10, 2011

Great Quotes

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

Some great quotes this week about the Economy and Gold:

Economy: “I believe with 100% certainty that we as Americans are in the early stages of a crisis that will shake the very foundation of our nation” - Porter Stansberry, End of America Presentation. Never start an hour long discussion about the economy with “I believe with 100% certainty”. It doesn’t exist in Economics.

Just ask Alan Greenspan, with my favorite quote of the week: “No economist knows for sure exactly where the economy is going. We pretend…. but it aint so.” – Alan Greenspan, CNBC Interview. The interview covered a wide range of topics (employment, housing, debt levels, education and the eurozone). It was very interesting… although I suppose some of you would rather watch paint dry…

Gold: The marketing strategies for gold are priceless. David’s favorite radio gold commercial of the week: “There has never been a better time to buy gold.” Really? What about last month, last year, three years ago, five years ago and ten years ago? I can think of a few better times…

Or, my final quote of the week from Nick Murray, Investment Advisor, Author and Columnist: “There is one universal truth of which the genuine investor is unshakably certain: here on Planet Earth, price and value are inversely correlated.” Or put another way, value does not come when you buy high, it comes when you buy low. He was referring to a gold advertisement that referenced a ten year run up in gold as a reason to buy.

We live in interesting times. Have a great weekend.

Thursday, May 26, 2011

Tax Form 5498

Have you received a tax form in the mail recently? If not, then disregard this post. If, however, you did receive a 2010 IRS Tax Form 5498 recently, do not panic. Form 5498 is generated by investment custodians every May for Traditional or Roth IRAs with activity during the previous tax year and usually does not lead to an amended tax filing. Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498. Contribution information is typically requested on an accountant's questionnaire. Rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2011. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

Tuesday, May 10, 2011

Client Adventures

What does retirement mean to you? What will it look like? What will you do? A blog post last May focused on these questions. The post encouraged contemplation without too many pre-conceived limitations. We often encourage clients to come up with their own definition of retirement. To ponder life today. To ponder life tomorrow. To choose the “special balance” that works for you. There is much to consider. It is, after all, just money without purpose.

What does this have to do with the title “Client Adventures”? Many of you have considered these questions. Many of you have come up with your own definition of retirement. Some of you have even shared your stories with us through our “Client Adventures”. We have recently altered our website to highlight these “Client Adventures” from our Newsletter. We love these stories. We love these adventures. We love these pictures. It is these stories that remind us why we do what we do.

To surf these stories click on the following link to our website: Click on “Client Adventures” and enjoy. Thank you for sharing these experiences with all of us. And keep them coming...

Do you have a client adventure you would like to share? If so email Tiffany at

Thursday, May 5, 2011


Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

With investment portfolios, we always discuss diversification (a key component to reducing risk). Diversification comes from investing in US, foreign, and emerging markets. Within those areas we invest in large, small, value, and market (growth) stocks. By diversifying among these areas, we can build (what we believe are) excellent portfolios. There is another aspect of diversification that we have begun to discuss: tax diversification.
When investing, we have the option to use three basic types of “tax” accounts. First, is a taxable account (Personal, Community Property, or Trust account). Here, you pay taxes in the year that you realize a gain or receive a dividend. Currently, long-term capital gains and qualified dividends are taxed at a maximum 15% rate. Ordinary dividends and short-term capital gains are taxed at your ordinary rate (maximum of 35%). You pay taxes each year even if you don’t withdraw money from the account. This is the “Pay As You Go” method.
The second type of account is a tax-deferred account such as a Traditional deductible IRA or 401(k). These accounts provide a tax deduction now for the amount that is deposited. If you contribute $10,000 to your 401(k), then your taxable income is reduced by $10,000. The money then grows on a tax-deferred basis. You will pay ordinary income tax on the amount withdrawn. This is the “Save Taxes Now, But Pay Later” approach.
My favorite option is a tax-free Roth IRA. The money contributed to a Roth is already taxed. You don’t pay any tax on earnings as it grows within the Roth IRA and qualified withdrawals are tax-free. The downside of these accounts is not everyone is eligible to contribute and there is a maximum amount that can be contributed each year. This is the “Already Paid And Pay Nothing Later” method.
Choosing among these “tax” options is not always easy. There are several questions to ask yourself. Would I rather be taxed now or in the future? What will my tax bracket be when I retire? Will Congress change the tax bracket levels in the future? What are the consequences if the 15% rate (for long-term capital gains and qualified dividends) goes away? Sometimes the best answer is to diversify among all three. No one knows what taxes will look like in the future. Any prediction would be purely speculative. Tax diversification is a way to mitigate the risk of an unknown tax future.

Friday, March 4, 2011

Golf Tips: Keep It Simple

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

This one’s for the golfers out there…

I have been away from the game of golf a long time, but I learned a few things over the years. My favorite pupil, Mr. David Williamson, inspired me to share a few tips with the golfers out there. He has a moderate-to-strong case of the “golf bug”. Three Shots to Save Your Game, How to Hit it Long, How to Shave Ten Strokes off Your Game, How to Break 80…. If he brings just one more article into my office - I am going to….. Blog about it!!

What is the biggest mistake golfers make? The grip? The swing path? Ball position? Posture? Equipment? None of the above – it’s TMI, Too Much (conflicting) Information! If you want a better golf experience, keep it simple and have fun!

Select One teacher: A good teacher can diagnose your tendencies. You can’t see yourself swing. With one teacher, the message will be consistent. There will be an abundance of magazine articles and tips from other golfers to sidetrack you. Don’t let them. (Are you listening, David?)

Select One drill: A good teacher will determine your most counterproductive tendency and the desired correction. You can work together to determine the best drill; a drill that translates your teacher’s desired correction into something you can feel (without watching yourself swing). Drill repetition creates muscle memory.

Select One swing thought: A drill creates muscle memory. Muscle memory transfers the desired correction to the golf course, without thinking. On the golf course, limit yourself to one swing thought and have fun!

If you “keep it simple” you will hit many more solid golf shots. Solid golf shots, good company, and beautiful scenery make for a great day. A few beers may or may not help.

Fairways and Streams…

In my experience, a reasonable swing path (especially the downswing) plus solid impact make the biggest difference. The question is, what drill works for you? For an explanation of the “swing path”:

Although the “short game” is not mentioned, keeping it simple works for the “short game” as well.…

Wednesday, March 2, 2011

2011 IRS e-file Refund Cycle Chart

For those of you expecting a tax refund and have filed your taxes using e-file, the IRS has posted a chart showing when you can expect your refund to arrive. Click here to view this chart.

Monday, February 14, 2011

What's "New" about a New Normal?

Pathways Advisory Group, Inc.
Michelle Carter, CFP®

After the recent bear market, stocks will never be the same again.

This is the "New Normal".

Talk about a catch phrase.

I have heard this phrase on financial television shows. I have read it in articles. I even attended a seminar entitled, "The New Normal".

Recently, I read this article by Bryan Harris of Dimensional Fund Advisors. He, too, was addressing the idea of a "new normal". Only there wasn't much new about it. Instead of considering this the "new normal", one could simply call it "old hat"...


What's "New" about a New Normal?

The 2008 global market crisis and the struggling economy have left many investors fatigued. Despite two years of strong equity returns, some investors have been slow to regain market confidence. Many are accepting the talk about a "new normal" in which stocks offer lower returns in the future.1
The concept of a new normal is anything but new. In fact, throughout modern history, periods of economic upheaval and market volatility have led people to assume that life had somehow changed and that new economic rules or an expanding government would limit growth. What they could not see was how markets naturally adapt to major social and economic shifts, leading to new wealth creation.
Let's look at other periods when investors had strong reasons to give up on stocks, and consider the parallels to today:
1932: The US stock market had just experienced four consecutive years of negative returns. A 1929 dollar invested in stocks was worth only 31 cents by the end of 1932. Hopes were sinking during the Great Depression, and many people felt as though the economy had permanently changed. Many investors left the market, and some would not return for a generation. Amidst what is considered the roughest economic time in US history, the markets looked ahead to recovery.

US Stock Market Performance after 1932*

5 Years10 Years20 Years
Annualized Return15.35%10.07%13.19%
Growth of $1$2.04$2.61$11.92

All stock market returns based on CRSP 1-10 index.2
*Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
1941: World War II was raging, and the US had just entered the conflict. The US stock market had experienced two consecutive years of negative performance, and the economy had shown signs of sliding back into depression. Although conversion to a wartime economy would revive industrial production and boost employment, investors struggled to see beyond the conflict. Many expected rationing, price controls, directed production, and other government measures to limit private sector performance.

US Stock Market Performance after 1941*

5 Years10 Years20 Years
Annualized Return18.63%16.67%16.29%
Growth of $1$2.35$4.67$20.47

1974: Investors had just experienced the worst two-year market decline since the early 1930s, and the economy was entering its second year of recession. The Middle East war had triggered the Arab oil embargo in late 1973, which drove crude oil prices to record levels and resulted in price controls and gas lines. Consumers feared that other shortages would develop. President Nixon had resigned from office in August over the Watergate scandal. Annual inflation in 1974 averaged 11%, and with mortgage rates at 10%, the housing market was experiencing its worst slump in decades. With prices and unemployment rising, consumer confidence was weak and many economists were predicting another depression.

US Stock Market Performance after 1974*

5 Years10 Years20 Years
Annualized Return17.29%15.92%14.89%
Growth of $1$2.22$4.38$16.07

1981: The stock market had delivered strong positive returns in five of the last seven calendar years, and the two negative years (1977 and 1981) were only moderately negative. Despite these results, investors were weary from stagflation, which was characterized by high annual inflation, anemic GDP growth, and unemployment, and from fears of another economic downturn. In late 1980, gold climbed to a record $873 per ounce—or $2,457 in 2010 dollars. (By comparison, spot gold reached $1,256 per ounce in 2010.) Memories of the 1973–74 bear market lingered. A 1979 BusinessWeek cover story titled "The Death of Equities" claimed inflation was destroying the stock market and that stocks were no longer a good long-term investment.

US Stock Market Performance after 1981*

5 Years10 Years20 Years
Annualized Return18.82%16.58%14.54%
Growth of $1$2.37$4.64$15.11

1987: On "Black Monday" (October 19, 1987), the Dow Jones Industrial Average plummeted 508 points, losing over 22% of its value during the worst single day in market history. The plunge marked the end of a five-year bull market. But in the wake of the crash, the market began a relatively steady climb and recovered within two years. The effects of the crash were mostly limited to the financial sector, but the event shook investor confidence and raised concerns that destabilized markets would increase the odds of recession.

US Stock Market Performance after 1987*

5 Years10 Years20 Years
Annualized Return16.16%17.75%11.89%
Growth of $1$2.11$5.12$9.46

2002: By the end of 2002, investors had experienced the stress of the dot-com crash in March 2000, the shock of the September 11 attacks, and the early stages of wars in Afghanistan and Iraq. Although October 9, 2002, would ultimately mark the market's low point, investors had endured three years of negative performance and an estimated $5 trillion in lost market value. A younger generation of investors had experienced its first taste of old-world risk in the "new economy."

US Stock Market Performance after 2002*

5 Years10 Years20 Years
Annualized Return13.84%
Growth of $1$1.91

2008–Today: The market slide that began in 2008 reversed in February 2009—gaining 83.3% from March 2009 through 2010. Despite two years of strong stock market returns, memories of the 2008 bear market and talk of the "lost decade" have led many investors to question stocks as a long-term investment. But earlier generations of investors faced similar worries—and today's headlines echo the past with stories about government spending, surging inflation, deflationary threats, rising oil prices, economic stagnation, high unemployment, and market volatility.
Of course, no one knows what the future holds, which brings the concept of "normal" into question. What exactly is the status quo in the markets?
The chart below shows the annual performance of the US market, as defined by CRSP deciles 1–10. Since 1926, there have been only four periods when the stock market had two or more consecutive years of negative returns. In addition, annual returns are rarely in line with the market's 9.67% long-term average (annualized). The most obvious normal may be that, over time, stocks offer expected returns reflecting the uncertainty and risk that investors must bear.
What's new about that?

1. Adam Shell, "'New Normal' Argues for Investor Caution," USA Today, August, 16, 2010. The term "new normal" originally referred to a post-global financial crisis environment characterized by several years of sluggish economic growth, below-average equity returns in developed markets, high market volatility and risk, high unemployment, and a world in which the range of possible financial outcomes is wider than normal and wealth dynamics are moving from developed to emerging economies.
2. Returns for all periods of the CRSP 1–10 Index are annualized. Data provided by the Center for Research in Securities Prices, University of Chicago. Data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and NASDAQ equivalents since 1973). Additionally, includes US Treasury constant maturity indices.

Friday, January 28, 2011

Tax Uncertainty Resolved... For Now...

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

What is the Estate Tax? What will happen to Income and Capital Gains Tax rates? These questions were finally answered by The Tax Relief/Job Creation Act of 2010. Unfortunately, the uncertainty will return as the Act expires in two years.

Estate Tax: The Tax Relief/Job Creation Act of 2010 set the maximum estate tax rate at 35% with an exclusion of 5 million dollars. The Act also reinstates the cost basis “step-up” at death. The step-up (discussed in an October blog) refers to the forgiveness of capital gains on inherited assets. These provisions will expire (“sunset”) on December 31st, 2012.

Comments: Great news. The most interesting Estate Planning provision (included in the Act) however, is the “portability” provision. This provision appears to allow both spouses to use the exemption (5 million dollars each) without requiring an A/B Trust. Any unused portion of the exemption at the first death can later be added to the surviving spouse’s exemption amount. An A/B Trust has been used to split a joint estate into two trusts at the first death (Bypass Trust and Survivor Trust) to ensure at least a portion of each spouse’s exemption is utilized. The A/B Trust will still be utilized but the “portability” provision is likely to decrease the frequency of these traditional trust splits.

Income Taxes: The Tax Relief/Job Creation Act of 2010 extended all tax rates (10, 15, 25, 28, 33 and 35%) for two years. The Act included an Alternative Minimum Tax (AMT) “Patch”, reducing the number of anticipated taxpayers affected in 2010 and 2011. The Act also included a one-year (2011) cut in payroll taxes. The temporary payroll tax cut will come as a reduction in the 6.2% Social Security Tax to 4.2% for employees.

Comments: The Act has been characterized by some as a tax cut. However, current tax rates for all taxpayers were simply extended for two years. If you are hoping for a little cash flow relief, the payroll tax cut is a nice surprise.

Capital Gain/Dividend Taxes: The Tax Relief/Job Creation Act of 2010 extended tax rates (0% for low income taxpayers, 15% for all other taxpayers) for capital gains and qualified dividends. These rates will also expire December 31st 2012.

Comments: Great news.

The Act contains some additional tax provisions (mostly just extensions), unemployment provisions and business incentives. Although a two-year extension is not ideal, it is nice to finally have something to plan for…

The above explanations are summarized. Please confirm all specifics with your tax professional. For questions regarding the “portability” provision, please contact your Estate Planning Attorney.

Monday, January 24, 2011

Time Magazine

The following Time Magazine covers are referenced in the December 2010 newsletter article titled Nick Murray Interactive Article: Time After Time:

Wednesday, January 19, 2011

Budgets and Goldfish

Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

My wife and I sat down the other day to work on our budget. Since we are now paying for daycare (we have 7 month old twin girls) we needed to figure out where exactly the money would come from. As we went through the totals we were both surprised by the final number. (Actually, I only feigned surprise because I know where she spends all the money.) We both started to wonder how we spend so much. Not too long ago, we made about half of what we do today and yet at that time we didn’t spend like we do today. As our paychecks grew, so did our spending habits. You may wonder what this has to do with goldfish. Read on.

When you think of goldfish you think of a tiny little fish swimming in a small bowl, right? Did you know that goldfish can actually grow upwards of 18 inches long? The reason they don’t usually get this large is because their growth is stunted by being in a small bowl. If you have a large tank, they can easily grow up to 8-10 inches, but in a large pond, a goldfish can reach 18 inches. For a goldfish to get that big they have to live a very long time. The record age for a goldfish is 43 years.

My budget (like most people’s budget) was given a larger bowl each time we started to make more money. Every time one of us received a raise or bonus we thought “Hey we can buy a new TV” or “I think it’s time for a new washer and dryer”. It happens to everyone. If you are rewarded at work, you feel like you should reward yourself.

I am not implying that you shouldn’t reward yourself a little bit. The next time you receive a raise and you want a larger bowl, just go with the next size up instead of two sizes bigger. The extra money should be invested. If you can save a little bit extra now, you’ll be thanking yourself in thirty years. Oops!! Got to go. The cat just ate the goldfish!