Moving beyond the irrational

This is a guest post by Mike Wagner, analyst for D. Scott Neal, Inc., written as part of his end-of-day  analysis of markets and securities on January 20, 2017, reflecting on the inauguration of Donald J. Trump as the 45th President of  the United States. Following his astute analysis of the day’s volatility, he wrote to me:

I have ruminated on today’s events for much of the afternoon. I seem to be caught between those who think the world stopped spinning at noon today and those who believe it began spinning again after an eight-year hiatus. Maybe it is an appropriate irony, then, I have so little to say on such a momentous day. It struck me while looking at the day’s volatility how incredible it is that in such a divided country a peaceful transition of power could occur even still. Our financial markets function still; our communications function still; save for a small few who will take absolutely any opportunity to loot and burn, our streets remain free of other-than-usual violence still; in short, the Republic survives.

I think back to my freshman year at the University of Kentucky when, for a history class, I spent the afternoon in Special Collections breathlessly reading and re-reading the 1942 speech H.L. Donovan, then-president of the University, gave in response to America’s entry into the Second World War and the University’s role in the same. He spoke with great eloquence of the sacrifices that victory in that conflict would require, noting that the country had discovered it could not have the flying fortresses, ships, tanks, guns, and other supplies necessary to successfully wage war without giving up many of the comforts and conveniences of everyday life. I wonder what sacrifices might be required for this freedom of ours to continue through what feel to be very troubled times. I wonder also what sacrifices I have ever had to offer for the enjoyment of this democracy, if, indeed, I have offered any. Reading the letter quoted by Senator Schumer during this morning’s inauguration proceedings of one Major Sullivan Ballou to his soon-to-be widow leads me to wonder who indeed loves democracy in its ideal as opposed to loving it only insofar as its abstract supports the particular philosophies to which one may subscribe?

These questions make exceedingly poor market analysis, I grant, but their answers, at present, lend me the same conclusion I have of the market itself on a day like today: I don’t know. No one, of course, knows what the market is going to do. That said, much of the work we do here ultimately rests on the premise that there is a psychology to the market crowd which might be irrational itself but which may be rationed through nonetheless, ultimately giving some sense of clarity. I find myself to be remarkably unclear at the moment, despite the felicity of the Elder signals. So, for tonight, I’ll close with a simple but sincere prayer: God help us.

10 Questions to ask your CPA

Documents such as 1099s, and W2s will soon be arriving in our mailboxes and tax preparation will get underway. Here are some questions you might want to ask your tax preparer as you meet with him or her:

  1. What changes in the tax law have been enacted during 2016 that will apply to my situation and affect my tax liability?
  2. How do changes in my family makeup change my tax situation?  Of course births, adoptions, deaths, marriages, separations, and divorces can all have an impact. You should also consider the importance of you or one of your dependents reaching a certain age-milestone. Some key ages to consider are: 18, 19, 24, 26, 59 1/2, 65, and 70 1/2. If anybody in your family passed one of these milestones, be sure to bring it up and ask whether it impacts you this year.
  3. How will a major purchase, such as a car or additional residence, affect my taxes?
  4. Do I have any remaining loss carryforwards from last year that I might take this year? Net operating losses, capital losses and charitable contribution carryforwards can be significant and important to reducing taxes this year.  Typically, preparers will keep track of the carryforwards for you, but it is still worth asking this question, especially if you have a different preparer this year.
  5. Am I eligible for ROTH conversion this year–and is it recommended?  A ROTH conversion allows you to convert a traditional IRA to a Roth and avoid future taxes and required minimum distributions. The ability to do a conversion is dependent on income.  Advisability is another question. The drawback is that all the taxes have to be paid in the year of conversion.
  6. Should I increase my retirement plan contributions?  In many cases, final contributions are allowed to be made up until the time of filing the tax return or its due date.  Don’t forget the catch-up provisions for those age 50 or older.
  7. Am I eligible to setup and make contributions to a SEP, SIMPLE, or solo 401(k)?  These retirement plans generally allow for larger contributions than a traditional IRA.
  8. Do you have any recommendations for reducing my taxes this coming year?
  9. Should I change my tax withholding and/or estimated payments for the current year?  If you owe taxes, most professionals will recommend that you increase your withholding to a level that will preclude a penalty for next year. Usually that is 100% or 110% of last years actual tax bill. However, if your income is expected to drop, some preparers are reluctant to advise that you withhold or pay in less than last year for fear that doing so would cause a penalty.  If you expect changes in income, up or down, those changes should be discussed with your preparer and appropriate adjustments be made.
  10. How can I authorize you to discuss my tax return with my financial advisor?  Conversation and open information sharing between tax practitioners and investment advisors can assist in minimizing your tax burden. Written authorization is now required to enable tax preparers to disclose any information about your tax return with other parties, including your financial advisor.  Obtaining that authorization while the return is being prepared will eliminate having to go back and do it later.


January 3, 2017



An updated tool in the investment toolbox

The Dr. Elder Impulse System

With volatility on the rise, you may be reminded by many advisors that it is not wise to attempt to time the market, that you should invest solely for the long term.  Modern portfolio theorists are fond of saying, “There isn’t anyone who can accomplish such a feat and do it consistently.” Of course, that’s true. What they don’t say is that consistency, while important, is not the end-all, be-all that it implies.  Yes, we want to win all the time, but that truly is impossible. What is possible is to have a winning ratio of gains to losses and over time, that will suffice. What the advice to stay fully invested all the the time ignores is the need to control downside risk.  Most of us want to avoid the next major downturn. Click below to read more.