Biggest Single Factor Why People Struggle Financially

DebtWhat do you think is the biggest single reason people struggle financially? They don’t make enough money, they don’t save enough, they don’t know how to take advantage of the stock market, maybe a combination of all of these?


By far the biggest single factor is the debt people carry, especially on credit cards and student loans. This problem has become more acute in recent years as investment returns have been almost flat and wages have become stagnate. In 2015 the average American household carried over $15,000 in credit card debt. Making the “minimum monthly payment” is a slow death march to your financial well-being.

Think about it, bank accounts and money market funds are paying you less than 1% on your money, US 10 Year Treasury’s pay under 2%! It is just difficult to make a normal return of 6-8% most people need to fund their retirement. Yet you will go out and purchase stuff on a credit card and pay 12 – 20% interest. Now, I’m not talking about the disciplined people who automatically pay-off their entire credit card balance each month. I would say these people might actually be pretty smart if they have credit cards that pay them 2% “cash back” on their purchases, they are “beating” the system.

The consumers I’m referring to carry a stack of cards in their wallets/purses and know which ones are already maxed out. If your money is worth 1 – 2%, your wages only increase 2-4% a year you just can’t afford to pay 18% interest on a credit card, it’s a financial downward spiral, there is no recovery.

So, if you are in that situation, what can you do? The answer is simple, pay off all credit cards ASAP. Then only use your card for future purchases if you can pay the entire balance at the end of the month.

There are some ways you might be able to do this without inflicting excessive pain. For example, I would suspend my 401K retirement contributions at work and make sure every penny of this money goes to credit card debt reduction. Figure out the highest rate card you carry and pay that one off first. Another possibility, is to swap debt, if you have a house take out a “home equity line of credit” completely earmarked for credit card debt reduction. Yes, you’ll have to pay back the HELOC but it will be at a much lower rate and spread out over time.

Don’t get me wrong, all of us have used credit cards and made payments. They helped us handle unexpected emergencies, and we may not have had the cash at the time. As you get older and start to plan the purchase of your first house, college education for your kids or plan your retirement you’ll want to closely examine the use of all types of credit, even home mortgages. The conventional wisdom is to plan so that you retire with a paid-off house. However, you might also develop a strategy to carry a very low interest mortgage 4% or less, while investing in returns of 6% or higher while maintaining access to a much higher level of cash.

In all cases paying the “minimum monthly payment” will haunt you for a lifetime.



Stock Exchange Eliminates Stop Loss and Good till Cancel Orders

AppleThe New York Stock Exchange has announced that on February 26, 2016 they will no longer accept a Stop or Good till Cancel Orders. Many investors use “stop orders” to protect their investments, or so they think. There are many forms of “stop” orders, such as Stop Loss, Stop Limit, Training Stop Loss, etc.

Here is an example, you bought 100 shares of Apple (AAPL) @ $90/share awhile back, and it is now $118/share. You want to protect some of your gains so you entered a Stop Loss Sell Order, Good Till Cancelled @ $100/share. Therefore if Apple drops to $100/share it will automatically sell and you’ll have a profit of $10/share. You can also set a higher sell price, for example, if Apple hits $125/share sell automatically to lock in your profits. The old theory was that every time you buy a stock or fund you also enter a high and low sell price.

However, here is why this doesn’t work so well.

The Stop Loss price, $100 in the above example is not necessarily the price you will get on a volatile daily drop. What happens behind the scenes is that as the stock hits your Stop Loss price of $100, it becomes a “market order” and sell at the immediate “market price”.

However, on a very volatile day like the “flash crash” in August 2015 a momentary, intra-day sharp drop in prices triggered an avalanche of selling and all these Stop Loss orders were hit, but not at the price you would expect.

During a momentary flash crash your $100 Apple Stop Loss price, became a “market order”, but because of the crash the momentary price for Apple dropped below $90, even for a few moments. You stock would have sold for maybe $80, far below what you thought was “a protected” price. Of course moments after you stock was sold for $80, Apple jumped right back up to $108 price for that day. See the Apple daily stock chart above.

In theory the Stop Loss concept was very good, however in the current day of computer trading with 60% of daily volume coming from high-frequency trading there can be unintended consequences.

Don’t fear however, even though the NYSE won’t accept Stop Loss and Good till Cancel orders next year, most major brokerage houses will offer internal systems that should handle your orders in a similar way.



Major Changes to Social Security – The Budget Deal


The Congress passed a new Federal Budget deal (Bipartisan Budget Act of 2015) this week that makes some significant changes to Social Security and the strategy of “file and suspend”. Just as background, many of us senior citizens have filed for Social Security but “suspended” benefits until we hit 70 years old. Why? Because we get about 8% per year in additional benefits. See my previous article about this here.

So what are the Social Security changes that might affect you?

  1. The Deemed Filing Rule. Today you can file for a “restrictive application”, you let your benefits grow and just file for spousal benefits (1/2 of your spouse’s retirement benefits). If you will be 62 or older as of 1/1/2016, there will be no changes to this deemed filing rule or to the restricted application strategy. However, if you are younger than that, two changes take place. First, the restrictive application goes away. If you file for any benefit, at any age, spousal or your retirement you will be “deemed” to have filed for all benefit types. Secondly, deemed filing now starts immediately for anybody when they become eligible for either spousal or their own retirement benefits if they’re already collecting one of these benefits (spousal or their retirement). This eliminates the restricted application strategy for those who have planned on it and will costs them a bunch of money. This was all along just a loop-hole but people took advantage of it and it costs all of us taxpayers a lot of money.
  2. File and Suspend Strategy. As I mentioned above it is a great strategy to file and suspend and earn 8% each year. Today, while you “suspend” your retirement you can get a spousal benefit. Under the new rules, suspension of benefit requests that are submitted more than 180 days after enactment of the bill, assume 4/27/2016 or later, there will be three changes: a) While your benefits are suspended, you cannot receive a spousal benefit, b) While your benefits are suspended, nobody (your spouse) can receive a benefit based on your work record, and c) You’ll no longer be the able to retroactively unsuspend (this is a little more complicated).

I guess the bottom line is that the government can change the rules at any time regarding those who get Social Security. In the above cases the changes are probably the right thing to do so that people to “game” the system, but it was a legitimate strategy.



Tip to Save Taxes on a RMD – Transfer “In Kind” Stock

StocksWe are all faced with the dilemma of taking Required Minimum Distribution from our IRA accounts when we turn 70 years old. If you have accumulated large IRA’s (including transferred 401K accounts), this can be a problem:

  • You may not need the approx. 4% annual amount
  • The RMD when added to your pension and Social Security might put you in a much higher tax bracket, Social Security might be taxed at a higher rate
  • You have to pay income tax on the RMD as “ordinary income”, not getting any preferred tax rate break

There are a few ways to help minimize taxes with your RMD. For example, you can use an actual “in kind” stock transfer. This works really well when you have good quality stocks held in your IRA that are currently depressed. Instead of taking the RMD in cash (or selling stocks for cash), just transfer the actual stock “in kind” to your taxable account. You will still pay tax as ordinary income on the RMD stock value, no way around that. However, the appreciation of that stock in your taxable account will be under the Capital Gains tax rate, today 15%.

Here is an example:

A 71-year-old man in the 30% tax bracket takes an in-kind RMD of a stock position worth $50,000 at the time of the distribution. He’d owe $15,000 in taxes on the distribution. His cost basis on that stock in the taxable account would be $50,000. If the stock goes up to say $80,000 in the next three years and he decides to sell, his tax bill would be $4,500–his $30,000 gain multiplied by the 15% capital gains rate.

However, let’s say that same person keeps the depressed stock in the IRA and takes a distribution of $50,000 in cash from the IRA instead. His tax bill on the RMD would be the same–$15,000. But if he were to then sell the same stock 3 years later from the IRA at a market value of $80,000, his tax bill on that distribution would be $24,000.

The tax savings would be substantial, a $19,500 tax savings.

Beware of Issues with Your Will and IRA/Stock Market Account

191rsejjt85zljpgIt should be really simple, a loved one dies and the heirs would like to get access to the loved ones account. But wait, there is a growing trend with some brokerage firms that make it much slower and harder to get any information. A story in the Wall Street Journal indicated a qualified beneficiary waited almost one year to get access to funds they were entitled to. These firms have tight federal guidelines that may keep them from even providing statements or summary of holdings.

So what can you do to improve this situation?

  1. The most important step is to make sure beneficiary information on all taxable, IRA, Roth IRA and 401K accounts is completely up to date. Keep in mind that if the will beneficiary is different than the one shown on the account, the account rules NOT THE WILL!
  2. Tell your beneficiaries ahead of time that are named, no need to give them all the amounts or % details, just that they are listed.
  3. You might want to just put the brokerage account into a trust, therefore a trustee can just deal with it without the hassle and delays of probate.
  4. It is also helpful to put somewhat recent copies of all account statements in files along with other important papers.

Last but not least, make sure you have an “In Case of Emergency” documents as I outlined in my January 2, 2015 posting.

Beware Congress may “kill – off” the “Stretch IRA” for your Heirs

Stretch IRAIn my last post I discussed Understanding Death and Taxes – Your Taxable Account . I also mentioned there was a big difference between investments inherited in a taxable account vs. an IRA or 401K account.

Currently if you bequeath investments held in a traditional IRA or 401K account your heirs will have to pay tax on the account(s). Currently the holdings are drawn down over a lengthy period of time and taxes areas this occurred, hence the term “Stretch IRA”.

If Congress kills the Stretch provision, your heirs would have to draw down the investments over 5 years and probably get hit by very large tax bills (drawdown plus their normal income). The Whitehouse tried to eliminate the Stretch in 2013 and again this year. Sooner or later this may get eliminated.

What might you do to anticipate leaving your heirs with a huge tax burden?

  1. Consider withdrawing money from your IRA to live on instead of the conventional wisdom of withdrawing from a taxable account. Maybe calculate out the amount that will still say keep you in the 25% tax bracket.
  2. Consider converting some of the IRA to a ROTH IRA (which is never taxed). Yes you again will pay taxes on the conversion but your heirs will pay less.
  3. Consider purchasing life insurance so that your heirs can use the proceeds to pay tax bills.



Understanding Death and Taxes – Your Taxable Account


The current “death tax” threshold is $5.43 million; many people therefore feel they don’t need to worry about a death tax. Of course there is no such thing as a “death tax”, it is actually called the Federal Estate Tax. Not to be confused with complex State Estate Taxes.

Here is what you need to know.

When you die and leave stock in a taxable account to someone the “cost basis” value of that investment is reset to the current market value upon your death. This can be a huge advantage for your loved ones. For example, if you bought 500 Apple (APPL) at $100/share years ago and then it split 7:1 and is now trading at $127. Your “cost basis” is $50,000, the current value is $444,500. If you sold it you would be paying a huge capital gains tax on the $394,500 gain. However if you die and leave the stock (not cash) to say family members, the “cost basis” becomes $444.500. Therefore, If the person(s) inheriting the stock immediately sold it there would be NO TAX. This is called a “step-up in cost basis”. You can use this information in your overall estate planning.

Beware of the “stretch IRA” law change! Notice I mentioned taxable account, it is completely different in a retirement account, either IRA or 401K. I’ll explain this in my next blog posting.

5 Simple Reasons to Sell an Investment

In my last posting “The Easiest Way to Lose Money in the Market – Selling” I discussed how the average investor unfortunately sells when stock prices are dropping and panic sets in.

There are however some simple rules that you can use to determine when is a good time to sell an investment, including stocks, bonds, funds or ETF’s. These rules aren’t for day traders; they are for long term investors.

  1. Rebalancing. Investors need a plan that includes diversification. The larger the portfolio the more diversification makes sense. Let’s say that you determine Healthcare should be 10% of your portfolio. At the end of a quarter you review your holdings and see that your Healthcare has gone up so much that it is now 15%. This is just too high and you decided to sell some of your holdings in this sector and “rebalance”.
  2. The Story Changes. You always need a specific reason to buy or sell a stock. I started buying Airline stocks in early 2014 when I saw that oil prices were dropping and each of my airline stocks had a unique story. American Airlines was bought by US Airways, Delta bought a refinery in Philadelphia, JetBlue announced a restructuring. At the same time I started selling my Utilities in late 2014 to lock in my gains as it became clear that the Federal Reserve would start raising rates in 2015 and Utilities would not be a good place to be for the next 12 months.
  3. Look at the Technical’s. Technical’s refer to stock charts. It is really important that you know how to read and understand stock charts. If you are a long term investor you might want to look at the 12 month “daily” chart. On this chart you can plot the following comparisons:
    1. 50 day EMA (exponential moving average), this is 2 trading months
    2. 200 day EMA, this is roughly 10 trading months
    3. SPY, the industry standard ETF normally referred to as “the market”

Death Cross

Here is an example of a strong selling indicator, a “death cross”. One of my past holdings was AEP, American Electric Power, one of the largest and best run utilities in the country. In the last few days AEP’s stock price ( had a “death cross”, a clear broken trend. The 50 day EMA (black Line) crossed below the 200 EMA (green line). In addition, AEP (blue line) was already trending below the overall market SPY (purple line). Sell, sell, sell! 

4. Play with House Money. When you make a lot of money in a speculative stock, sell some on an “up day” to take some profits. This is especially true in a tax sheltered account like an IRA or 401K plan. Jim Crammer always preaches this.

5. Moves by the Federal Reserve. Never fight the Federal Reserve, as the saying goes, it will bite you in the backside. The upcoming rate hike by the Fed has been telegraphed now for almost a year. This means that most interest rate sensitive stocks or bonds will get hammered. Sell your bonds now, they are already dropping in price and you will lose much more in principal that the very small dividends they pay.



The Easiest Way to Lose Money in the Market – Selling

The average American spends more time researching what’s on TV tonight or their favorite team’s upcoming schedule than their investments. Some do what I call “buy and forget”, others listen to friends and own the latest fad stocks, and finally there is the group that trust someone else to make decisions like financial advisors.

The biggest reason people lose money in their investments isn’t due to a recession, the Federal Reserve or a “bear market”.  The reason they lose is really simple, they sell low! It is impossible to “time” the market, all the experts and talking heads on CNBC have no idea whether the market will go up or down in the short term. Short term being a day, a month or a quarter. In the longer run, stocks always go up, you just need to be patient and do a little homework. The problem isn’t as much buying high, it’s selling low based on your panic.

Take a look at the attached chart, it shows the market over the last 12 months (SPY is the S&P 500 ETF, commonly referred to as “the market”). The blue line is the SPY, the red line shows the 50 days moving average of the stock’s price.


It is easy to see that people who sold their stocks or funds in a panic, lost money. You can use any stock choice you want, the analysis is the same. You are your worst enemy, you sell or switch funds when the market goes down. I really pity the people who sold their stocks in 2008-2009 at the low points when the stock market was demolished. They then sat on cash, CD’s or bonds and missed one of the greatest rebounds in stocks in our lifetime. Along with your homework, time is the most important factor in your ability to make large returns on your investments.

Want some proof? Warren Buffet is currently worth about $73 billion is 84 years old. He made $70 billion of that after he turned 60 years old.  Your wealth will grow exponentially if you just follow some simple rules and don’t panic! Warren buys and sells based on fundamentals and investing in value. He buys low and sells (or holds) when the price is high.

In my next blog post I’ll give you some ideas when to buy and when to sell your investments.

My Top 5 Explosive Growth Stocks for 2015

GrowthEvery diversified portfolio needs an allocation of explosive growth or momentum stocks. These tend to be volatile and should have a great growth story behind them. You can’t pick these stocks based upon a single day or even a month’s performance. They also have a life span that is somewhat governed by technology or major market themes.

Ambarella (AMBR) This is a video chip company whose products are used in the leading wearable helmet camera GoPro (GPRO). They are also a leader in automotive backup cameras. It has a huge upside because, beginning in July 2018, all US made cars and light-duty trucks must have backup cameras. In addition they are a leader in ultra-high-definition TV, a next generation TV that we’ll all have someday. Last quarter, their 4th quarter they beat their revenue and earnings forecast. I bought this stock in late 2014 and it is up 60%. It is up 400% in the last 12 months and trades at a 55 P/E, not too bad.

AMN Healthcare Services (AHS) This company provides staffing and staff management services to the healthcare market. Obama Care has put pressure on hospitals and other healthcare facilities to both find qualified nurses and physicians and manage costs. The healthcare market will continue to grow for years to come and this company is well positioned to enjoy excellent growth. They are up over 100% in the last 12 months and trade at a 33 P/E. I first bought this stock in late 2014 and have added to my position a few times when it hit its daily 50-day EMA.

NXP Semiconductors (NXPI) This chip company provides “near field” communications for products including the Apple iPhone and Samsung phones and tablets. This technology is behind mobile payment systems like Apple Pay and competitive brands. They just recently signed up Chinese consumer electronics maker Xiaomi and acquired Freescale Semi in March. Freescale is a leader in automotive chips for keyless entry. The stock is up 100% in the last 12 months and trades at a 80 P/E. I bought this stock in late 2014 and it is up 40%.

Palo Alto Networks (PANW) This company is a leader in enterprise cyber security. This stock is in my basket of cyber stocks that include FireEye and CyberArk. They all have been hot for the last 6-9 months. Cyber threats will continue to be a hot topic for years to come. PANW and FireEye actually lose money but they continue experience substantial growth. PANW is up over 200% in the last 12 months when I started buying it.

Skechers (SKX) This is a shoe and apparel company. When I moved to Florida a year ago I found that I needs more casual shoes that were very comfortable. I bought a few pairs of Sketchers and I love them. After some research I bought the stock and after flat performance in 2014 it has really picked up. I’ve also seen the 2 founders on Jim Cramer’s Mad Money and they tell a convincing story. The stock is up 90% in 2015 and have overtaken Addidas and New Balance to become the #2 footwear provider in the US. The stock trades at a 32 P/E.