Friday, December 13, 2013

Dancing on the Ceiling

Jim Parker
Outside the Flags
Vice President














Investors have grown weary with the periodic debt showdowns in Washington, each one miraculously resolved at the 11th hour. Some are asking whether they should wait in a safe harbor until “certainty” returns.

In the fourth such showdown between the White House and Congress over public funding in less than three years, the US federal government was shut down for 16 days in October and hundreds of thousands of federal workers were furloughed.

Congress finally came to a deal just one day before the US borrowing authority was due to lapse. The agreement prevented a potential default on US debt. But it provided only another temporary fix, funding the government until January 15, 2014, and raising the debt ceiling only until February 7.

Most people around the world are rightly worried about what the political controversy  means for their long-term investments and ability to fund their own retirements.

The answer is that uncertainty is part and parcel of investing. You can never eliminate it simply because no one can ever be sure about the future. Tying your investments to an opinion about the outcome of the US fiscal situation or the euro zone or any other flash point in the news is a recipe for madness.

One advisor in recent weeks had to fend off a client asking whether it made sense to switch a significant proportion of his retirement fund to cash until the situation in Washington “settled down.” The downside was slightly lower returns, but this was protection against a potential catastrophe.

The advisor responded by saying that maybe this was a good idea, but would one month be enough? Perhaps the client could wait a year or so. That might be sufficient time for the situation to be resolved. But what if it weren't?

Perhaps, he said, a better idea might be to examine more closely the crises of recent decades and the long-term impact they might have made on his portfolio—such as the oil crisis of 1973, Japan’s bust in the early 1990s, the Asian currency crisis of the late ’90s, the tech wreck in 2000, and so on.


Without wanting to downplay the real pain that these crises caused—in both financial and human terms—the advisor asked his client what, in retrospect, he could have done to spare himself their worst effects. Beyond, of course, diversifying his portfolio, rebalancing occasionally, and keeping his own long-term needs in mind.

What if he had “waited out” the aftermath of the 1987 Black Monday crash? When would he have gotten back into the market? Was there an obvious re-entry point when Thailand, Indonesia, and South Korea came off their currency pegs in 1997-98? What expertise did he (or his advisor) have that would have gotten that timing right?

Back to the present. While newspapers wrote thousands of words and TV stations aired hours of coverage about the latest debt ceiling showdown, many equity markets around the world have reached record or at least multi-year highs.

This is not to assume smooth sailing in the future. But, as investors, we need to acknowledge that living with short-term uncertainty is the price we pay for the premium we receive by putting our long-term capital at risk.

Crises will come and crises will go, as we have seen. Politics is, by definition, about the conflict between different ideas and values. Each of us can have an opinion about likely outcomes. But we can do ourselves a disservice if we base our investment decisions purely on forecasts about politics, economics, or anything else.

Keeping your investment feet grounded in your own life circumstances and needs is preferable to dancing on somebody else’s ceiling.

S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2013, all rights reserved.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.






Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.
All expressions 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 be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 
©2013 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Monday, November 25, 2013

Office Holiday Hours



The Pathways Advisory Group, Inc. office will
be closed for the following holidays:

Thursday, November 28, 2013

Friday, November 29, 2013

Tuesday, December 24, 2013

Wednesday, December 25, 2013

Wednesday, January 1, 2014 

Monday, January 20, 2014

Monday, February 17, 2014

Friday, April 18, 2014

Monday, May 26, 2014

Friday, July 4, 2014


In case of emergency, please contact Schwab directly at 1 (800) 515-2157.

Happy Holidays!

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Friday, November 22, 2013

Weather Forecasting


Pathways Advisory Group, Inc.
Jeff Karst, CFP®













We receive many magazine subscriptions – some of which I don’t want.  The ones that typically go straight to the trash are the ones with forecasting or stock-picking.  As you probably know, we don’t believe that anyone can accurately predict the future or consistently buy the right stocks to beat the market.  For more information on our Investment Philosophy, please click here.

I received a magazine a couple months ago that really caught my attention.  The cover was devoted to an economist’s predictions about various markets.  The eye-catching thing is that it was portrayed like a weather forecast.  I know weather forecasting has become fairly credible but there’s still a stigma that the weatherman is wrong - a lot.

Did the editors understand the irony (at least to passive investors)?  Or perhaps they just thought it was catchy?  In any case, I found it amusing enough to stay tuned to see how the “weather” turned out.

There were several predictions.  However, the two that I pondered about were the US and Emerging Markets.  Emerging markets was on the left (the bad side) as dense fog.  The US was on the right (the good side) with increasing sunshine.

At the time I received the magazine (August 30) the US markets (as measured by the S&P 500 Index) were up 14.5% from the beginning of the year.  Emerging markets (as measured by iShares MSCI Emerging Markets Index) were down 14.3% for the year.

It could be coincidental that the economist’s predictions matched the recent performance but the most intriguing is what has happened since then.  Emerging Markets shot up about 13% while the US is up about 10%.  If you had taken his advice (and sold Emerging Markets) you would have missed out on the big upswing.

Don’t rely on predictions or (weather) forecasting.  A well-diversified portfolio built on academic principles is your best umbrella.

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Friday, October 25, 2013

Money Savvy Kids™


Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®













It turns out, thanks in part to incomplete descriptions from some of you, that I underestimated fatherhood.  It’s much harder than it looks.  And it’s a fairly long term commitment (yikes – it’s only been four and ½ years) with many difficult decisions.  Memo to veteran parents - please hold back the laughter and play along.  One difficult decision facing all parents is teaching kids about money.  

Whether we like it or not, our kids learn financial habits from us - so teaching them isn’t necessarily a choice.  Money doesn’t grow on trees - check.  Money is earned not given – check.  But do they really need to break open the piggy bank (at the age of three) to pay for that busted switch controlling the windshield wiper blades (yes – this is a specific example – you owe us three hundred and forty seven dollars for that one buddy!!!)? Probably not.  I’m not sure what the right balance (between teaching them about money and allowing them to be kids) is, but I do know one question I never want to hear: “Dad, can I move back in with you guys while I figure things out?” Who’s laughing now veteran parents?

What’s the point of all of this?  I want to share a website with you all: www.moneysavvygeneration.com.  Michelle Carter, CFP®, suggested the site to me years ago.  You may find something of interest for the kid/teen in your life.  The site covers the topic (kids and money) from many angles (parenting, education, etc.) and offers some creative products for kids of all ages.  Including a clever little piggybank for young children that introduces an element of choice to each deposit (spend, save, donate or invest).

Check it out!  A little money savvy can go a long way…

Money Savvy Kids is a registered trademark of Money Savvy Generation.

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Friday, September 13, 2013

The Broccoli and Pizza Portfolio

Jim Parker
Outside the Flags
Vice President














For some of us, it’s hard to give up on the idea that investing should be exciting. Picking stocks can be fun, after all, and there’s nothing like getting your timing right and bragging about it later with friends. But it’s important to separate the concepts of speculation and investing.

For all the accumulated wisdom about asset allocation, risk, diversification, and discipline, some people seem bound to see investing as an end in itself rather than a means to an end.

For these folks, picking stocks is a hobby. They follow the gurus and soak up the financial media. Despite evidence to the contrary, they’re convinced they can build a consistently winning strategy by exploiting perceived mistakes in market prices.

Part of the reason is the human tendency toward overconfidence. For instance, we all like to think of ourselves as above-average drivers, when that’s simply not possible. Likewise in investing, many of us believe we have powers of foresight not evident in the wider population.

A Duke University study of corporate executives published in 2010 found a dismal record of prediction among a group you might think would do well. Indeed, of 11,600 forecasts for the S&P 500 over nine years, the survey found executives’ estimates of future returns and actual outcomes were negatively correlated. (This is a technical way of saying the executives were hopeless forecasters).

Research also suggests the tendency to trade a lot and make confident forecasts about stocks has a gender bias. Whether it’s a testosterone-driven instinct among men to boast or something else, study after study shows men find it harder to accept that they are unlikely to “beat” the market.

For these red-meat eaters, an investment approach that advocates working with the market, diversifying around risks related to an expected return, trading efficiently, exercising discipline, and watching fees and taxes is going to sound like the financial equivalent of a broccoli and walnut salad: healthy but boring.

Surely the point of investing is to try hard and, Don Quixote-like, to charge at those market windmills? Are
we not men?

There are a couple of ways of confronting this mindset. One is to hope for a change in human nature and persuade each would-be master of the universe to separate his urge for ego gratification from his need to build wealth patiently and efficiently.

This is not impossible, of course. But one suspects it would take some time and would require a lot of face saving.

A second approach is to separate the investment nest egg from the play money. If someone really wants to speculate, he can be allowed to do that with the proviso that long-term retirement money be invested the boring way.

This way, the investor can buy some (expensive) entertainment and accumulate a few war stories to share
at his next golf game without compromising the asset allocation painstakingly designed for him and his family.

It’s understandable that investing is a kind of a hobby for some people. After all, this is what keeps much of the financial services industry and media in business.

But in separating the concepts of speculation and investing, you can still enjoy the occasional treat while maintaining a balanced diet.

Call it the broccoli and pizza portfolio.

S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2013, all rights reserved.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

 





Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.
All expressions 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 be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 
©2013 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Monday, September 9, 2013

It's a girl!

Pathways Advisory Group, Inc.
Katie Nelson













We are proud to announce the birth of Paige Brooklyn Nelson, born to Katie and Kyle Nelson. She was born on September 6, 2013 at 10:33 PM; she weighed in at 7 lbs 1 oz and was 20.25 inches long. She and her proud parents are doing well. Congratulations to them on the birth of their baby girl!


Friday, August 30, 2013

Long-Term Care Insurance


Pathways Advisory Group, Inc.
Jeff Karst, CFP®













The landscape for Long-Term Care (LTC) Insurance has changed a lot the past few years.  Policies with a lifetime benefit are no longer available.  And insurance companies appear to be phasing-out the ones that still exist.

Most companies are working to raise their LTC rates.  Increases must be approved by State Insurance Commissioners.  But medical costs and long-term care costs have risen dramatically.  Most insurance companies under-estimated the current and potential future liabilities.  Genworth is one company that recently announced to its employees and affiliates that LTC rates would rise (up to 35%) on existing contracts.

An example of what you might see:  Policy premiums increase by 35%, but if you are willing to reduce your lifetime benefit to a limited duration (i.e. 5 years) your premiums will stay the same.

Many people will take the reduced benefit period in order to stave off paying subtantially higher premiums. This will indirectly phase-out the lifetime benefit on most contracts.  I’m not advocating for or against taking the reduced premium.  Just warning that, if you have a LTC policy, this might be coming your way.

We are not insurance agents.  We encourage you to speak to your agent about any changes or questions specific to your policy.  If you would like to discuss LTC options in general and how it affects your financial plan, please let us know.

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Wednesday, August 28, 2013

It's a girl!


Pathways Advisory Group. Inc.
Michelle Carter, CFP®













We are proud to announce the birth of Brooklyn Jean Carter, born to Michelle and Ryan Carter. She was born on August 22, 2013 at 1:06 AM; she weighed in at 8 lbs 11 oz and was 20.5 inches long. She and her proud parents and big sister are doing well. Congratulations to them on the birth of their second baby girl!

































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Thursday, August 8, 2013

Talents


Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®













I just returned from a wedding in Crescent City, California.  Actually, more accurately, from the wedding of the century in Crescent City California!!! 500+ people on a horse ranch that dressed up to something out of Sunset Magazine. But, what I enjoyed the most was the experience, from a different perspective...  

Although I spent most of my time chasing after a three year old (Bryce) and a four year old (Emilie), I enjoyed many brief conversations.  I watched old friends and their families.  They worked, they visited and they played.  But it was different this time.  Most of my memories of this community are teenage memories – i.e. clueless!!  It looks different now…

What struck me was how well this community fits together.  How these families grow up together.  No need to lock your car door in this town.  I enjoyed meeting these families all over again.  And re-learning what they do for a living.  And, in a number of cases, observing their talents.  Much talent was on display.  

People are good at different things and we put our talents to work in many different ways.  It’s what makes the world work.  It’s what makes our economic system so powerful.  This wedding, in this small town on the California/Oregon border, was an awesome example of this phenomenon - the sum is indeed greater than the parts.

The wedding was a jigsaw puzzle of many talents.  Giant tents were constructed.  A dance floor was created in a round pen (used for training horses).  Food stations were organized around the barn.  600 cupcakes were prepared and consumed.  Beer wagons were visited.  Yes, that was a talent for some.  A “rookie” officiated the ceremony.  Good job Dad!  Beautiful pictures were taken.  Good job Michelle!  A horse and his trainer escorted the bride and groom to the ceremony in a carriage.  Good job bro!  And, a surprise “flash-mob” broke out during the reception.  You should have seen me practicing the night before – not exactly one of my talents!  But, by far the greatest talent on display, the amazing carriage attached to that amazing horse.  It was the work of a man I hardly knew as a teenager, the bride’s grandpa Roger.  His work is on display all over the ranch.  He is gifted and wonderfully modest.

Pictures are better than words – everything below is constructed out of horseshoes.

Just married…












Mom and foal…













Our little cowboy…













It was a great time.  And I was grateful to be a part of it.   Congratulations Matt and Deja!

Dustin J. Smith, CFP®
A formerly “clueless” teenager from Crescent City, California…

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Monday, July 22, 2013

Pathways Job Opening

Pathways Advisory Group, Inc.











We are hiring! We are looking for a Financial Paraplanner to join the team.  If you know anyone that might be a good fit for the position, please pass the following posting along.  Thank you!

Click Here: Pathways Job Posting

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Friday, July 19, 2013

Missed the Rally


Pathways Advisory Group, Inc.
Michelle Carter, CFP®













Recently, a Washington Post article was featured in our local Fresno Bee.  The author addresses those who have  Missed the Rally in the stock market since its low in 2009.  What should you do now?  With all the financial noise out there, it is rare that we happen upon an article full of sound advice, such as this one.  We would like to share it with you…

Read the Article Here

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Friday, May 31, 2013

You Have to Be in Gold

Weston Wellington
Down to the Wire
Vice President














All of us could benefit by examining our inclination to invest with our hearts rather than our heads—especially when it comes to gold.

“We are living in a world of money printing. … That is why I have to recommend gold again. ... Once gold surpasses $1,800 an ounce, it will run to the low-to-mid $2,000s.” Quotation attributed to Felix Zuelauf, Zuelauf Asset Management. “Here’s What’s Cooking for 2013,” Barron’s, January 21, 2013.

“Investors can choose between artificially priced financial assets or real assets like oil and gold, or to be really safe, cash. … My first recommendation is GLD – the SPDR Gold Trust.” Quotation attributed to Bill Gross, PIMCO. “Stirring Things Up,” Barron’s, February 2, 2013.

“I am recommending gold, as I have done for many years. I will continue to do so until the gold price hits the blow-off stage, which is nowhere in sight. … The environment for gold couldn’t be better. … Gold could go to $5,000 or even $10,000.” Quotation attributed to Fred Hickey, The High-Tech Strategist. “Stirring Things Up,” Barron’s, February 2, 2013.

Each January, a group of prominent investment professionals gather in New York as members of the Barron’s Roundtable to trade quips, stock ideas, and the outlook for markets and economic trends worldwide. Barron’s—a weekly financial newspaper with a small but devoted following of professional and do-it-yourself investors—publishes a transcript of their remarks over three successive issues. The quotations above are excerpts from this year’s panel discussion, and to the best of our knowledge they represent the only occasion that three of the nine participants have highlighted gold-related investments among their choices for capital appreciation during the year ahead.

Although the year is far from over, it’s off to a rough start for gold enthusiasts. A sharp selloff in mid-April sent bullion prices to $1,395 on April 15, down 15.7% for the year to date and 26.4% below the peak of $1,895 reached in early September 2011. (Prices are based on the London afternoon fix.) For the 10-year period ending March 31, 2013, gold enthusiasts have a more positive story to tell: The annualized return for gold spot prices was 16.83%, compared to annualized total returns of 8.53% for the S&P 500 Index, 10.19% for the MSCI EAFE Index, 17.41% for the MSCI Emerging Markets Index, and 2.34% for the S&P Goldman Sachs Commodity Index.  

Taking a somewhat longer view, for the 40-year period ending March 31, 2013, gold performed in line with many widely followed fixed income benchmarks, while lagging behind most equity indices. We find it ironic that the return on gold over the past four decades is essentially indistinguishable from five-year US Treasury notes, often scorned by gold advocates as “certificates of confiscation.”

Considering the volatility of gold prices, even a 40-year period is too short to provide conclusive evidence regarding gold’s expected return. And the issue is further clouded by shifts through time in the legality of gold ownership and its changing role in various monetary systems worldwide. In his book The Golden Constant, published in 1977, University of California, Berkeley Professor Roy Jastram examined the behavior of gold in England and America over a 400-year-plus period—and suggested that the long-run real return of gold was close to zero. Even with centuries of data to study, however, he couched his conclusions in cautious language.

When we last commented on gold in February 2012 (“Who Has the Midas Touch?”), the mysterious metal was changing hands at $1,770 per ounce. We directed readers’ attention to the Berkshire Hathaway 2011 annual report, which presented an engaging discussion by Chairman Warren Buffett on the long-term appeal of gold—or, in his view, the lack of it. Since that time, the role of gold in a portfolio has provoked vigorous debate in the investment community, with thoughtful, articulate, and successful investors lining up on both sides of the issue, including at least three billionaire hedge fund managers making the case for gold.

Some might argue that gold’s price behavior will never succumb to rational analysis. For those seeking to try, a recently updated paper by Claude Erb and Campbell Harvey offers a useful framework for discussion without necessarily resolving the debate. Along the way, it provides the reader with a few nuggets of historical interest, including a comparison of military pay between US Army captains of today and Roman centurions under Emperor Augustus. (Apparently, little has changed over 2,000 years.)

The authors cite a number of reasons advanced in support of gold ownership, including a hedge against inflation, a safe haven in times of stress, an alternative to assets with low real returns, and its “under-owned” status across investor portfolios. Although the inflation hedge argument is likely the most frequently cited attraction for gold investors, the authors find little evidence that gold has been an effective hedge against unexpected inflation. They go on to poke holes in the assertion that gold qualifies as a genuinely safe haven or presents an appealing alternative in a world characterized by low real yields.

The most interesting argument, they believe, is the claim that gold is under-owned in investor portfolios and that a small shift in investors’ allocation strategy could lead to a significant rise in the real price of gold. Putting aside for a moment the ambiguity of the “under-owned” statement (all the world’s gold is already owned by somebody), the authors suggest it is plausible that individuals or central banks could choose to have greater exposure to gold. If they are insensitive to prices, this choice could cause the real price of gold to rise, particularly if gold producers are unwilling or unable to increase production. (On that note, it’s also conceivable that a significant real price increase would encourage development of electrochemical extraction of the estimated 8 million tons of gold contained in the world’s oceans, dwarfing the existing gold supply.)

GOLD VS. BENCHMARKS, 1973–2013*
INDEX                    ANNUALIZED         GROWTH
                                   RETURN (%)            OF $1            
Dimensional Large
Cap Value Index     12.89                       $127.75

Dimensional US
Small Cap Index     12.67                       $117.96

S&P 500 Index     10.18                       $  48.30
MSCI EAFE
Index (gross div.)       9.05                       $  31.96

Barclays US
Credit Index               8.31                       $  24.33

S&P Goldman Sachs
Commodity Index       8.21                       $  23.51

Barclays US Gov't
Bond Index               7.85                       $  20.53

Five-Year US
Treasury Notes      7.69                      $  19.40

Gold Spot Price       7.63                       $  18.95

One-Month US
Treasury Bills               5.29                       $    7.86

Consumer Price
 Index                       4.30                        $    5.39
*40-year period ending March 31, 2013.

The “gold is under-owned” argument has been advanced by a number of thoughtful investors, and only time will tell if such a shift in allocation strategy takes place with the consequences they expect. While acknowledging the bullish implications for gold prices under this scenario, the authors point out that gold prices relative to the current inflation rate are roughly double their long-run average since the inception of gold futures trading in 1975. They suggest $800 per ounce is a suitable target when applying this metric.  Which is more plausible—that prices will gravitate closer to their historical average or that a new world order is emerging that calls for a sharply different valuation approach? No one can be sure; hence, the title of their paper, “The Golden Dilemma.”

What should investors make of all this? In our view, long-run investment results for any individual reflect the combination of available capital market returns and the investor’s behavior and temperament. As Warren Buffett has observed, excitement and expenses are the enemy of every investor, and all of us could benefit by examining our inclination to invest with our hearts rather than our heads. The decision to own gold often  is motivated by an emotional response to current events, leading to abrupt shifts in asset allocation strategy and a failure  to achieve capital market rates of return there for the taking. If adopting a permanent 5% allocation to gold encourages  investors to maintain a buy-and-hold strategy for the remaining 95% of their portfolio, perhaps that is the most sensible solution for some. Many other investors undoubtedly will be just as content to stock their portfolios with securities offering interest and dividends—and let gold fulfill their innate human desire for rare and beautiful objects of adornment.

REFERENCES
Jastram, Roy W. The Golden Constant, John Wiley & Sons, 1977.

Erb, Claude B., and Campbell R. Harvey. “The Golden Dilemma.” http://sssrn.com/abstract=2078535.

Barclays data, formerly Lehman Brothers, provided by Barclays Bank PLC.

Stocks, Bonds, Bills and Inflation Yearbook. Chicago: Ibbotson Associates.

MSCI data copyright MSCI 2013, all rights reserved.

S&P data provided by Standard & Poor’s Index Services Group.

Dimensional Index data compiled by Dimensional.

London gold fix prices: London Bullion Market Association. Accessed April 24, 2013. www.lbma.org.uk.

Gold spot prices: Bloomberg returns from composite prices.

For more articles, visit Dimensional’s client site at my.dimensional.com/insight/thewire.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change in reaction to shifting market conditions.

S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2013, all rights reserved.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.






Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.
All expressions 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 be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 
©2012 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Tuesday, May 21, 2013

My Problem with the Morning News

Pathways Advisory Group, Inc.
Jeff Karst, CFP®













Each morning my wife and I watch the news as we get ready for work.  Towards the end, there is a segment on the stock market.  They always talk about what’s moving the market and highlight a specific stock or two.  What bothers me the most is when they say something like “Investors are concerned about new numbers coming from insert just about anything here.”  As an investor, I am not concerned about the daily ups and downs of the market.  You shouldn't be either.

Who is concerned about this stuff?  Traders and speculators.  There are the ones hoping to make a quick buck or beat the market.  Playing the market is not investing.

Investors shouldn't worry about lower or higher than expected numbers from XYZ company.  You can’t control what the market does each day.  You can control your savings/spending and keeping investment costs low.

If I asked the media, do you think they would say “Traders and Speculators” instead of “Investors”?  I doubt it.

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Thursday, May 9, 2013

Tax Form 5498



Pathways Advisory Group, Inc.











Have you received a tax form in the mail recently? If not, then disregard this post. If, however, you did receive a 2012 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 2013. 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.

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Wednesday, May 1, 2013

National Mortgage Settlement

Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®













February of last year the 49 state Attorney Generals, including California’s Attorney General, reached a settlement with the five major banks (Wells Fargo, Citibank, JP Morgan Chase/Washington Mutual, Bank of America/Countrywide and Ally Financial).  It made some headlines, but seemed to fly under the radar.  And, to this point, the “actual” benefits of the settlement have been difficult to quantify.

Was the settlement simply overshadowed by the relative success of the federally subsidized refinance program HARP 2.0?  Perhaps.  But the National Mortgage Settlement is a year old and remains mysterious.   Some argue that the banks have not complied.  Others believe transparency is the problem.  I don’t know which borrowers have been targeted but some qualified borrowers may still be eligible for settlement benefits.  And apparently some money is earmarked for the Central Valley.  The settlement description originally mentioned principal reductions, cash settlements, refinances and/or modifications.  It’s a long shot, but, if 1) you, or someone you know, have been searching for a refinance/restructure unsuccessfully and 2) the loan was owned/serviced by one of the five banks mentioned above, it may be worth an inquiry.  They may not be diligently searching for qualified borrowers!

If interested in an inquiry, the following websites may be a starting point: Wells Fargo. Citibank.  JP Morgan Chase. Bank of America. Ally Financial. And this is the Official National Mortgage Settlement Website.

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Monday, April 8, 2013

Medicare 101… The Basics

Pathways Advisory Group, Inc.
Michelle Carter, CFP®













Lately, I have been noticing an increase in Medicare questions among clients.  While many situations are situation-specific and require individual research, I thought a brief overview of Medicare basics would be interesting to those about to embark on this healthcare journey.  What are the “Parts” of Medicare?  When do I enroll?  What if I am still working?  What is Medigap?

Part A:  Hospital Services.  Premium-free as long as you paid Medicare taxes through payroll for 10 years or more.  Also premium-free if you did not work for Medicare-covered employment, but your spouse did.  If either of you paid in for more than 7.5 years (but less than 10) there is a premium of $243/month (2013) or if you participated for less than 7.5 years, this carries a premium of $441.

Part B: Physician’s Services.  Monthly premium required of $104.90 for most people (2013).  Those with a higher income will pay more.  See the variations in premium by income level HERE.  It should be noted that adjustments in premium levels usually lag by about two years because of the delays in reporting income.  For example, if 2011 was a dramatically higher year in income, you may see your Medicare Part B premium adjust in 2013.

Part C: Medicare Advantage.  A Medicare Advantage Plan is offered through a private company.  I think of it as a ‘package deal’.  It provides Part A, Part B, often prescription drug coverage and some other benefits as well.  You are subject to enrollment periods, such as your initial enrollment period (see below).  The general enrollment period for Medicare Advantage is October 15th to December 7th.

Part D: Prescriptions.  Adds prescription drug coverage to regular Medicare, as well as some other types of Medicare cost plans.  A penalty can incur for late enrollment.

Initial Enrollment:  If you initiated your Social Security benefits early, your enrollment in both Parts A & B will be automatic at age 65.  You can decline Part B (although this should be done with caution – see below).

If you are not receiving Social Security benefits, you will need to sign up during your initial enrollment period.  This begins three months before the month you turn 65 and ends three months after your birthday month.  For example, if you turn 65 on April 15th, your initial enrollment period would begin January 1st and end July 31st, a seven-month time period.

General Enrollment:  If you miss your initial enrollment period, you will need to wait for general enrollment, which occurs each year from January 1st – March 31st, with coverage beginning on July 1st.  In the example above, this means waiting until the next calendar year to enroll.  You will also be subject to a 10% penalty for life for each 12-month time period you delayed enrollment in Part B (unless you are still working, see below).

Special Enrollment:  If you are still working at age 65 and your company has 20 or more employees, you can delay enrollment in Part B without penalty.  (You should still enroll in Part A since it’s free.)  At any time, you can drop your employer’s coverage and enroll in Part B.  However, once you stop working, you have 8 months to enroll penalty-free, your special enrollment period.  It should be noted that this exception does NOT apply for companies with less than 20 employees.  In this situation, Medicare automatically becomes your primary provider and you must enroll during your initial enrollment period.

Medigap:  If you are enrolled in both Part A and Part B, you are eligible to also purchase a Medigap plan.  This is supplemental coverage that pays for things Medicare does not, such as co-pays.  You must enroll within six months of enrolling in Part B coverage for guaranteed acceptance.  If you miss this Medigap enrollment period, you can be denied Medigap coverage or charged a higher premium because of pre-existing health conditions.

Resources:  The above information is summarized.  For more details, visit the official government Medicare website.  Another great resource is the Medicare Rights Center, which also has a telephone hotline (#800-333-4114).

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Thursday, March 7, 2013

2013 IRS Refund Chart

For those of you expecting a tax refund, you should be aware the IRS is not publishing a refund chart as they have in years past. The IRS does have a new tool you can use to determine the status of your refund on their website. Click here to check where your refund is.

Tuesday, February 26, 2013

It’s a New (Tax) Year

Pathways Advisory Group, Inc.
Dustin Smith, CFP®













Uncertainty has been a major tax planning “roadblock” the past few years.  Although perhaps misnamed, the “American Taxpayer Relief Act of 2012” (passed January 1st, 2013) did put an end to the uncertainty.  Here is what to expect in 2013 (and beyond):

Tax Rates:  2012 Income Tax rates and Dividend/Capital Gain Tax rates were retained for Married Joint Taxpayers with taxable income below $450,000 ($400,000 for Single Taxpayers).  However, ordinary income above this threshold will be taxed at a new top marginal tax rate of 39.6%.  Qualified dividends/capital gains above the threshold will also be taxed at a new top rate of 20%.

Estate Tax:  The Estate Tax Exemption rises to $5.25 million in 2013 and becomes permanently indexed to inflation.  The top estate tax rate, for estates exceeding the exemption, increased from 35% in 2012 to 40% in 2013. The “portability” of the estate tax exemption, previously explained in a January 2011 blog, was also retained. 

Social Security:  The amount of earnings subject to Social Security (FICA) tax, otherwise known as the “wage base”, increased from $110,100 in 2012, to $113,700 in 2013.  However, the temporary reduction of the employee FICA tax rate to 4.2% expired.  The employee FICA tax rate returns to 6.2% effective January 1st. 

Personal Exemptions and Itemized Deductions:  Most taxpayers benefit from a Personal Exemption ($3900 in 2013) on their tax return.  Some taxpayers also benefit from Itemized Deductions.  However, both deductions are subject to a reduction in 2013 for Married Taxpayers with Adjusted Gross Income (AGI) exceeding $300,000 ($250,000 for Single Taxpayers).  The Personal Exemption can actually be completely phased out if AGI exceeds $383,950 ($331,650 for Single Taxpayers).  These provisions originally expired in 2010.

AMT:  Unfortunately, the Alternative Minimum Tax system was not repealed by the “American Taxpayer Relief Act of 2012”. But, it was permanently indexed to inflation.  This is good news – avoiding the uncertainty of the last minute “patch” each year. 

In addition to the above changes, there are some 2013 Tax Law changes enacted by the Patient Protection and Affordable Care Act:

Surtax on Net Investment Income:  A new Medicare Surtax on “net investment income” will take effect in 2013.  The new 3.8% tax will apply to the portion of “net investment income” exceeding $250,000 of Modified Adjusted Gross Income (MAGI) for Married Joint Taxpayers ($200,000 for Single Taxpayers).  “Net Investment income” includes rental income, dividends, interest, capital gains, royalties, passive income and nonqualified annuity payments.  But it does NOT include tax exempt “gains” on the sale of a principle residence.  

Itemized Medical Deduction Floor:  The “Floor” that your Itemized Medical Expenses must exceed to qualify for a deduction, will increase from 7.5% of Adjusted Gross Income (AGI) in 2012, to 10% of AGI in 2013.  This will make it more difficult to qualify for the deduction.   However, the increased “floor” doesn’t take effect until 2017 for taxpayers over age 65. 

Medicare:  The Medicare tax rate remains at 1.45% (2.9% for Self Employed) for Married Joint Taxpayers with earned income below $250,000 ($200,000 for Single Taxpayers).  However, the Medicare tax rate increases to 2.35% (3.8% for Self Employed) on earned income above these thresholds, effective January 1st.

In addition to changes to the Federal Tax code, Prop 30 will impact some California Taxpayers:

California Prop 30:  California Tax brackets were modified by Prop 30 to include new 10.3%, 11.3%, 12.3% and 13.3% brackets.   I could not find an official release of the 2013 Tax Brackets.  But the new brackets appear to be triggered by Married Taxpayers with taxable income exceeding $500,000 ($250,000 for Single Taxpayers).  And the new top bracket (13.3%) appears to affect all taxpayers with income exceeding $1,000,000.  Keep in mind Prop 30 was retroactively applied to the 2012 Tax Year. And it will be in effect for 7 years.

These changes will mean a substantial tax increase for some.  For others, the impact will be modest.  But a more permanent tax structure is good news for all!  For the first time in a while, we don’t have to deal with expiring tax rates in December…

The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional.  Some additional information regarding: Federal Tax changes (IRS publication ), the new Medicare Tax Rate and Medicare “Surtax” (Fidelity Summary ), Education Tax Credits (ACE Summary ), the impact of prop 30 on 2012 California Taxes (FTB link).  

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Thursday, February 14, 2013

Tax time is here!

We have been informed that Schwab’s 1099s are in the mail. The typical deadline of January 31st was extended last year. You should also have received an email from our office regarding the official transition from annual Pathways “tax packets” to Schwab “1099s” only. If you did not receive this email, please contact the office for more information.

Good luck with your taxes!

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Wednesday, January 30, 2013

A Look Back at 2012


Weston Wellington
Down to the Wire
Vice President

Although many investors have expressed frustration with stock market fluctuations in recent years, the time required to recover losses from the October 2007 peak appears broadly consistent with past cycles.
It took nearly 4½ years, but the cumulative wealth of an S&P 500 strategy with dividends reinvested finally reached an all-time record (measured on a month-end basis) in March 2012, and finished the year 3.3% above the previous high-water mark set in October 2007. Results were slightly better for a small-company Russell 2000 strategy: As of December 2012, cumulative wealth was 8.5% higher than the previous peak in May 2007.

The table at right shows how many years were required to achieve a new high in terminal wealth during some of the major market cycles in the past. Although many investors have expressed frustration with stock market fluctuations in recent years, the time required to recover losses from the peak in October 2007 appears broadly consistent with past cycles. We can draw some measure of solace in acknowledging that past generations of investors often found their patience sorely tested, as well.

Every year brings its share of surprises. Perhaps the biggest surprise of 2012 was the strength in stock and bond prices around the world despite a steady stream of discouraging news events. Individual investors and professionals alike were often flummoxed by markets that failed to behave in accordance with their pessimistic assessment of the future. A few examples are listed below.
(Index performance data represents total return for each respective three-month period.)

Market Cycles Based on Month-End Value of S&P 500 Index with Reinvested Dividends

Peak              Trough         Loss at       Recovery     Years to 
Month            Month         Trough        Month         Recovery
Oct 2007       Feb 2009     –50.9%      Mar 2012        4.4
Mar 2000       Sep 2002    –43.8%      Oct 2006         6.6
Aug 1987       Nov 1987    –29.5%      May 1989       1.8
Dec 1972       Dec 1974     –37.2%     Jun 1976          3.5
Dec 1961       Jun 1962      –22.3%     Apr 1963         1.3
Feb 1937       Mar 1938     –50.0%     Mar 1944        7.1
Aug 1929       Jun 1932      –83.4%      Jan 1945       15.4
DIMENSIONAL FUND ADVISORS


FIRST QUARTER 2012
S&P 500 Index: 12.59% 
MSCI World ex-USA Index: 11.34%

“ Investors go into 2012 hunkered down, frustrated, and skeptical. … If there is a common theme among analysts’ forecasts for stocks, commodities, and currencies, it is to brace for more of the wild swings that were the hallmark of 2011.” Tom Lauricella, “World’s Woes Leave Lasting Scars,” Wall Street Journal, January 3, 2012.

“ Morgan Stanley’s chief US equity strategist is the most bearish market strategist at any major Wall Street firm when it comes to forecasting the outlook for stocks in 2012. He took the same pessimistic view last year—and it turned out to be the most accurate.” Jonathan Cheng, “A New Year But the Same Ol’ Pessimism,” Wall Street Journal, January 7, 2012.

“ Clearly we are in a cycle of reaching pinnacle earnings, and at some point we are going to drop.” Quotation attributed to John Butters, senior analyst, FactSet. Michael Mackenzie and Ed Crooks, “Earnings Growth Falters for S&P 500,” Financial Times, January 9, 2012.

“ The world economy will experience a brutal slowdown. … Every European country will be in recession in 2012, and probably in 2013. … Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.” Quotation attributed to Felix Zulauf, Zulauf Asset Management. Lauren R. Rublin, “Barron’s 2012 Roundtable, Part One,” Barron’s, January 16, 2012.

“ Unemployment in the euro zone jumped to a 15-year high Thursday, while inflation unexpectedly accelerated.” Brian Blackstone, “Poor Economic Data Slam Europe,” Wall Street Journal, March 2, 2012.

SECOND QUARTER 2012
S&P 500 Index: -2.75% 
MSCI World ex-USA Index: -7.38%

“ Nearly one Spaniard in four is unemployed, according to data released yesterday, as the country’s financial predicament prompted a government minister to talk of a ‘crisis of enormous proportions.’ ” Victor Mallet and Robin Wigglesworth, “Spain Jobless Rate Nears One in Four,” Financial Times, April 28, 2012.

“ Suddenly it has become easy to see how the euro—that grand, flawed experiment in monetary union without political union—could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed in a matter of months, not years.” Paul Krugman, “Apocalypse Soon,” New York Times, May 18, 2012.

“ Feeble hiring by US employers in May roiled markets and dimmed the already cloudy outlook for an economy that appears to be following Europe and Asia into a slowdown.” Josh Mitchell, “Grim Jobs Report Sinks Markets,”Wall Street Journal, June 2, 2012.

“ Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bet.” Quotation attributed to Mark J. Grant, managing director, Southwest Securities. Andrew Ross Sorkin, “One Wall Street Seer Says the Greek Tragedy Is Near,” New York Times, June 18, 2012.

“ With leading investors shunning shares, a six-decade passion for equities has come to an end—leading to a less flexible, more conservative model of corporate financing.” John Authers and Kate Burgess, “Out of Stock,”Financial Times, June 24, 2012.

“ There is no natural flow into equities for the next five to 10 years. The rules of the game have changed.” Quotation attributed to Andreas Uttermann, Allianz Investment Management. John Authers and Kate Burgess, “Out of Stock,” Financial Times, June 24, 2012.

“ The quarterly rite known as earnings ‘preannouncement’ season is under way—and so far it isn’t boding well for stocks. … The downward revision in [earnings] guidance could portend a long slog for stocks and the overall economy, say analysts.” Joe Light, “Earnings Bode Ill for Stocks,” Wall Street Journal, June 30, 2012.

THIRD QUARTER 2012
S&P 500 Index: 6.35% 
MSCI World ex-USA Index: 7.49%

“ Investors already fretting about the health of the world’s biggest economies now face another worry: disappointing earnings. ‘The pillar of strength is US corporate earnings, and now we’re seeing signs that that is cracking,’ [says Morgan Stanley’s chief stock analyst].” Jonathan Cheng, “New Jolt Looms for Investors: Earnings,” Wall Street Journal, July 9, 2012.

“ The US economy slowed sharply in the second quarter, growing just 1.5% as consumers slashed spending and businesses grew more cautious about hiring and investing, underscoring that an already wobbly recovery is losing even more steam.” Neil Shah, “Weak Economy Heads Lower,” Wall Street Journal, July 28, 2012.

“ If small investors needed any more reason to be disgusted with the stock market, they got it Wednesday.” Neil Shah, “Weak Economy Heads Lower,” Wall Street Journal, July 28, 2012.

“ Wednesday’s tumble wasn’t quite as scary as the nearly $1 trillion drop of May 6, 2010, but it conveyed the same sense of markets spinning out of control and trading machinery gone mad.” Jason Zweig, “When Will Retail Investors Call it Quits?” Wall Street Journal, August 2, 2012.

“ The global slowdown in demand is hitting the manufacturing sector in the world’s largest economies, with activity sinking to its lowest level since June 2009, when most industrialized countries were mired in recession.” Norma Cohen, “Manufacturing Hits Three-Year Low,” Financial Times, August 2, 2012.

“ Activity in China’s manufacturing sector—the engine for much of Asia’s economy—shrank at the fastest pace since the depth of the global financial crisis.” Arran Scott and Alex Brittain, “Manufacturing Downturn Spreads Gloom across Asia, Europe,” Wall Street Journal, September 4, 2012.

FOURTH QUARTER 2012
S&P 500 Index: -0.38% 
MSCI World ex-USA Index: 5.89%

“ The slowdown in the global economy and anemic US recovery are expected to result in one of the worst US quarterly earnings seasons since late 2009.” Mahmudova and Michael Mackenzie, “Slowdown Set to Take Toll on US Earnings,” Financial Times, October 8, 2012.

“ This is unquestionably the worst earnings season relative to expectations that we’ve had in two or three years.” Quotation attributed to Chris Jones, J.P. Morgan Asset Management. Jonathan Cheng and Kate Linebaugh, “Weak Earnings Spark Selloff,” Wall Street Journal, October 24, 2012.

“ Wall Street’s post-election stupor is turning into a real headache for some stocks, as many well-known and even ballyhooed names fall into bear market territory. … Nearly a quarter of the stocks in the Standard &Poor’s 500—122—are in a bear market, unofficially defined as a 20% decline from a recent high.” Matt Krantz, “Big Name Stocks Hit Bear Markets,” USA Today, November 9, 2012.

“ China’s main stock index closed at its lowest level in almost four years Tuesday and slipped below a key psychological level, indicating investor worries over the health of the nation’s public equity market.” Shen Hong, “Shares Hit 4-Year Low in China,” Wall Street Journal, November 11, 2012.

“ Fears that Washington will prove unable to avoid looming tax increases and spending cuts have eclipsed concerns about Europe’s debt crisis, top business executives said Tuesday, and they worry that political gridlock might tip the economy into recession next year.” Damian Palette and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” Wall Street Journal, November 14, 2012.

“ Moody’s downgrades France sovereign debt rating, citing its ‘persistent structural economic challenges.’ ” William Horobin, “France Loses Another Top Rating,” Wall Street Journal, November 20, 2012.

S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2013, all rights reserved.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.
All expressions 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 be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 
©2012 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.