Being True to Your Investment Personality

Are you a saver who prefers certainty, or an investor who desires the opportunity for higher returns at the expense2014 building of safety? Which emotion do you feel more when you think about investing: fear or euphoria? How much of your portfolio are you willing to subject to the risk of the stock market for the chance at achieving higher returns? Knowing this – your tolerance for downward fluctuation in your portfolio – and investing accordingly is critical to your life-long investment success.

Risk tolerance is fairly stable. The problem lies in the fact that our perception of risk changes with the markets. For example, let's say a conservative investor with an appropriately conservative portfolio is watching the stock markets rise for a couple of years. This investor may not only feel envy over a friend's higher returning portfolio, but also perceive there is lower risk when the stock market has been rising. He may then abandon his true investment personality out of envy and inverted risk perception. He may even load up on stocks just prior to the bear market. What then? He will very likely bail out of the very stocks he just bought after suffering substantial losses. The risk of bailing out of a weak market is the most critical risk to avoid; and this is best done by understanding your own risk tolerance and being true to this tolerance. So, as you can see, being true and steadfast to your risk tolerance is far more critical than choosing the right/best investments.

Once you get your risk tolerance right, and accept this, investing is easier and higher returns are far more likely. You then begin receiving the returns you deserve based upon the risk you have accepted. Envy is eliminated and market timing is eliminated. Changing investments or strategies (in the pursuit of higher returns) is eliminated. Risk and return go hand-in-hand. You will no longer feel like you didn't receive the returns you deserve.

Getting crystal clear about what you value, living the lifestyle you can afford, and accepting your investment personalities are three areas where being true to yourselves will propel you towards the life you really want.

Being True to Your Income

As a young man, I fell in love with a beautiful curvaceous automobile called a Mazda MX-6. I wanted to be the onecar picture behind that wheel and to live the life of someone who would drive that sexy sports car. I bought it in a rush of euphoria. The problem was that I was neither sexy nor rich! And after the rush faded, I was left with a liability that crowded out my ability to do all the other things I really wanted to do – save, change careers, and buy a home. I tried to live the lifestyle of someone else – someone with a high income. Pretending to be someone I was not, was a sure fire way to ensure that I would never be the person I wanted to be. I was not being true to my income or myself.

Finally, living within your means is honest. How do you know if you are living beyond your means? If you have more than one dollar of REVOLVING credit card debt, you are living beyond your means. If you do, stop using them. Credit cards only make is easy to spend money on things you don't need and can't afford.

Now, what if you not only lived within your means, but also created a budget that was based on your values. Now that is a powerful combination. We want our values to dictate our spending rather than allowing our spending to dictate our values.

Budgeting is not simply a tracking exercise designed to deprive you. Instead look at it as a process to determine if you are in harmony with the things you hold dear, rather than as a process of tracking or trying to do without.
If you are not true to your income, you are trying to live a life you can't currently afford. As I learned, acting rich will never make you rich.

Financially Secure By Being True

We all want to make the best financial decisions; and many of us have the financial knowledge to do so, but having1william starnes this knowledge does not necessarily prevent us from making mistakes. It is not easy because money is fraught with emotion, family history, and financial trauma. On top of this it is also influenced by our core values and beliefs (and some of our beliefs may not be rational). We must know ourselves. In fact, managing yourself – your moments of euphoria, envy, fear, and insecurity can only be achieved once you've obtained some self-awareness.

Why Knowing Ourselves is Critical & Comforting

Financial decisions are easy when we are crystal clear about who we are -- and we remain true to this. Being true to ourselves will bring us closer to financial security. Even better, knowing and accepting who we are is relaxing and comforting. We are no longer striving to be someone we are not, or living a life we cannot currently afford.

Just think about how confident and secure you would feel if you were absolutely certain about who you are, what you want, what you can afford, where you are going, and what decisions would need to be made in order to get there. You would not be swayed by the media, family, or friends. You would be better able to withstand the forces that try to bully you into making poor financial decisions. With stronger convictions, you will stand firm when your emotions (or others) attempt to sway you into making bad financial decisions.

So, knowing who you are (which may include our beliefs, values, identity, foibles, weaknesses, strengths, etc.) and always making financial decisions that are congruent with who you are creates confidence, power, and strength. This strength is needed in the face of external pressures and influences.

Three Areas Where Knowing Yourself Will Impact Your Life

I would like to talk about three areas where being confident and true to ourselves would have a massive impact upon our financial futures. They are: being true to your values, income, and your investment personality. In this blog post, I will discuss just the first one.

1. Being True To Your Values

One of the fastest ways to BOTH get to know yourself and be true to yourself has to do with values clarification.

Have you ever had difficulty making a financial decision? If so, if you look close enough you will see that is may have to do with a lack of clarity around what you think is most important (i.e. values clarification). Just think – what if your strongest values were financial security? Wouldn't this easilly eliminate a lot of purchases that would conflict with these values?

Ask yourself, "Is this the best possible use for this chunk of money, if my goal is creating lifelong happiness for myself?"

Knowing what you really want is a way of wearing blinders to all the "bright shiny objects" that try to lure us away from our true goals. Constantly revisit what is important to you by keeping them in the forefront of your mind. Whether it is a saying, a picture, or a personal mission statement, review it each day and keep it urgent in your mind.

In the next blog post, I will discuss how being true to your income can lead to financial security.

Are You an Inadvertent Tax Cheat?

In my experience, clients are completely honest in reporting their income. Of course, this is easy when most incomejail is reportable directly to the IRS via w-2's and 1099's! However, there is income some taxpayers think is non-reportable.

One of the first courses I took as part of my MST (Masters-Taxation) program was on the basics of income taxes. In this class, my instructor would repeat the following phrase over and over again:

"All income regardless of amount or source derived is taxable unless specifically excluded in the tax code." This phrase is taken from Section 61 of the Internal Revenue Code.

Have you ever said, "I didn't get a 1099 for that income; therefore, I don't have to report it". WRONG. All income regardless of amount or source derived is taxable; and interest income is certainly not excluded. Therefore, if you earn $1 of interest income, it is reportable as income even though you did not receive a 1099.

Then why don't banks send the 1099? It reduces the cost and time burden associated with generating low income 1099's for the banks, taxpayers, and the IRS. And some banks may elect to send them anyway as it may be easier for them to avoid segregating customers.

Even worse, some taxpayers think if they are self-employed and don't receive a 1099 for the work they have done, they also don't have to report that. WRONG. The reporting requirement for businesses to generate a 1099 is for anyone who has been paid more than $600. This does not mean, if you don't get a 1099, the income is not reportable.

Like my professor, I will repeat again. All income regardless of the amount or source derived is taxable unless specifically excluded in the tax code.

Four Fascinating Consequences of the New Health Care Law

The Affordable Care Act (Obama Care) has changed the way many will buy and access health insurance. While most employed individuals will simply continue to receive their health insurance via their employer, there will remain times when clients may need to go the health insurance exchange (exchange is just a fancy way of saying "federal or state government website"). For example, in the event of a layoff, career change, or retirement you will want to get a quote from the exchange (  


The federal law has created various incentives and disincentives designed to ensure everyone participates and buys health insurance. As with any government program, these incentives create consequences - both intended and unintended. There are also those who benefit (which may surprise you) and those who will pay.  Here are four fascinating consequences about the Affordable Care Act (Obama Care) that everyone should be aware of:


1. The wealthy are being subsidized. You can have $2 million in an IRA, a $700,000 home (paid off), and $300,000 of cash in an investment account and receive a $7,000/yr health insurance policy at a cost of only $230/year (for a single person). The difference is paid by the Premium Assistance Tax Credit which is available only to those of "low income" even if you have "high assets". This is because there is no practical, easy way for the IRS to monitor net worth. Therefore, eligibility for the tax credits are based solely on income.  I have already worked with clients in this situation. 


Let's take a wealthy individual and run through an example of how they will receive a subsidy to buy health insurance. Let's say you are 58, single, and have $2 million stashed in your 401(k), have $300,000 in a taxable investment account, and earn $300,000/year. However, you were laid off (with no severance) at the end of 2013 and find yourself unemployed. Therefore for 2014, your "income" is perhaps $9,000 (interest and dividends). You are now living in "poverty" and are only expected to pay a maximum of $230/year for health insurance (if you purchase it through the exchange).  If you are age 58, the policy may have an actual cost of $7,000/year, yet your payment remains at $230/year even with $3 million in assets (including your home value)! You are subsidized by the government (i.e., taxpayer) to the tune of $6,770/year.  


Perhaps, since you no longer need employment to have access to quality health insurance, you will take a few years to travel, turn a hobby into a business, or simply "find yourself". In all cases, your health insurance will remain subsidized. This may even create incentives to keep income low such as moving money into low-cost annuities, delaying the collection of a pension, or making IRA contributions. Perhaps an early retiree will delay collection of Social Security to keep their income low prior to age 65 (Medicare age) so they can continue to receive the tax credits.


2. Employment and insurance access are no longer linked. In the past, for most individuals the only affordable, guaranteed access health insurance (without pre-existing condition limitations), could be found with an employer-sponsored plan. However, now employment and retirement decisions are no longer contingent upon having or losing access to an employer's health plan. In particular, some clients approaching age 65 (Medicare age) would consider staying at a miserable job simply to avoid having to pay the high cost of a COBRA or an individual health insurance policy. Not only are the policies likely to be of similar cost, they may even be far less due to the Premium Assistance Tax Credit mentioned above. Not only are you no longer tied to your job, but you may have an (cost subsidy) incentive to leave.   


3. Those with high incomes are being subsidized. If you have a family of four and you buy your policy on the health insurance exchange (i.e., website), you will be subsidized (i.e., you will receive a Premium Assistance Tax Credit) even if you earn as much as $117,000/year!  This is because the tax credits are for those with adjusted gross incomes of "as little" as 400% of the poverty level. For a family of four, 400% of the poverty level is an annual income of $94,200. So, if you earn $117,000/year and defer $23,000 into your 401(k), your AGI (which determines if you get a credit) will amount to $94,000 - which is less than 400% of the poverty level. Amazing!    


4. There is a huge incentive for workers with exchange purchased health insurance to keep their income under 400% of the poverty level. Going back to our family of four earning $117,000/year. If they earn $201 more of income, they will lose the tax credit entirely! For example, the maximum premium (according to the law) for this family would be $8,949/year. If their actual premium is $13,000/year, then earning just $201 more a year will cost them over $4,000 (as they would lose $4,000 of tax credits). How is this for an increase in marginal tax rates - which is a powerful incentive to minimize income at this threshold.

While there remains a lot to learn about the Affordable Care Act, we do know that there are a series of strange incentives and consequences that will be a boon to some and a bane to others. We have already assisted two clients this year in ensuring that they incur the ideal amount of income to maximize their tax credits without simultaneously losing out on other tax benefits (e.g., low capital gains rates) by not incurring enough income.  It is a delicate balance to navigate the confusing/frustrating tax laws that continue to unfold with each new piece of legislation.


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