10 spring financial and tax things to do

  1. As the new tax law is in effect, have you determined its impact versus your 2017 tax? Should you be adjusting your withholding or estimated payments? Do you understand what tax law changes affect you?
  2. See if you will be itemizing in 2018 under the new tax law. Based on the new higher standard deduction amounts of $12,000 for individuals and $24,000 for married couples filing jointly, see if your itemized deductions will exceed these amounts. Some itemized deductions rules have changed significantly. If you can’t itemize every year, you may be able to itemize in alternating years by bunching charitable contributions or other deductions every other year. If you are able to itemize, there has been no change in the tax treatment of charitable contributions.
  3. Check your retirement and insurance policy beneficiary designations, particularly if you or your family has had any major life transitions. These designations control what happens to your money, not your will or estate plan.
  4. Have a credit card that is used only for monthly or recurring charges. This credit card should not be used online. Don’t use it for shopping, at restaurants or gas stations. Have this separate credit card for only for cell phone bills, utilities, cable provider or other recurring items. Even though I am very careful, I have been subject to online credit card fraud each of the last three years with one of my “outside” credit cards, so having a separate credit card like this that is used only for recurring charges has been a huge timesaver.
  5. Review if your life and disability insurance policies are adequate, particularly if you have children who have not completed college.
  6. As your health is even more important than your finances, make sure you are taking care of yourself. Get an annual physical. Regularly get adequate sleep. Have medical tests done that are recommended for you, even if they are not fun. We all know which those are!
  7. Spring cleaning can mean donating clothes or household items you don’t wear or use. If you can benefit from itemizing, keep a list of what you donate and the receipt from the charity, so you can properly deduct these donations.
  8. Change some of your online passwords. Try to change one a week or 4 a month. And start using a password manager, like 1Password, to make your online life so much easier, securer and efficient. Long time readers and clients knew this would make the list…..but are you using a password manager?
  9. Check your projected Social Security benefits at ssa.gov if you have not started to collect Social Security. It is helpful to know your projected benefits and it’s good to review your past income data to ensure it’s accurate. You should do this every few years. This took me about 5 minutes. I had done this previously so I had an online account. They require you to change your password every 6 months and now send you a security code by text, as additional online security. It could not have been easier. I quickly retrieved my SSA password in 1Password and then stored the new password I created this week.
  10. Have a written investment policy, so you are investing with a plan and not reacting to market moves or basing investment decisions on guesswork, forecasts or your emotions. Clients of our firm all have written investment policies.
  11. Bonus item….just as spring cleaning can mean cleaning out closets and garages….idle cash sitting under a mattress, or more realistically at the bank earning a fraction of 1% is not wise. Short term US Treasury bills can yield around 2%, so don’t be satisfied with not earning interest on your cash savings.

We hope these tips are helpful to you and your family. Please feel free to share this information with others.

What is your next step? Which ones will you actually do?

$1 Billion Tax and an Incredible Investment Story

John Paulson, a large hedge fund manager, owed Federal and state taxes of $1 billion this week. And he owed $500 million a year ago, April 2017.

Incredible. That is so large that the IRS cannot even process it all in one check, as the IRS cannot accept a check for more than $999,999,999. A problem we should all have!

But there is much more to this story, which you should know about.

Paulson’s huge tax liabilities are from $15 billion of profits he and his hedge funds made by betting against subprime mortgages prior to 2008-09.  He was able to defer the payment of those taxes until 2016 and 2017 because of a tax law which no longer exists.

How have Paulson and his firm, Paulson & Co., done since 2008?

This is where the story gets even more interesting than the huge tax payment.

After Paulson’s 2008 success, investors flocked into his funds. By 2011 his hedge fund firm was one of the industry’s largest, managing $38 billion seven years ago, according to the Wall Street Journal.  Today however, Paulson is managing less than $9 billion and most of that is his own money.

Why the huge reversal of fortune?

Paulson’s oldest fund, Partners Fun, has underperformed the S&P 500 every year since 2008.

For 9 straight years, from 2009-2017, his main hedge fund underperformed the S&P 500 and often by incredibly large margins.

Chart Information above is found in WSJ Article $1 Billion Tax and an Incredible Investment Story.

The Partners Fund underperformed the S&P 500 by more than 40% each year during 2016 and 2017.

His fund underperformed the S&P 500 by more than 10% in 4 of the 9 years, in 2009, 2011, 2013 and 2014.

Paulson Partners Fund S & P 500
2009 6.12 26.49
2010 11.69 14.91
2011 (9.88) 1.97
2012 9.88 15.82
2013 18.39 32.18
2014 0.8 13.51
2015 (3.14) 1.25
2016 (27.23) 11.82
2017 (20.27) 21.67

How did this occur and what are the lessons for you?

Paulson’s strategy has been the opposite of many of the philosophies of WWM.

  • We believe in diversification.
  • We stress that it is difficult to outguess the markets consistently over long periods of time.
  • We do not make huge bets on single stocks or on specific industries.
  • We don’t believe in shorting stocks (betting that a stock will go down).
  • We use a consistent and replicable investment strategy.
  • All these factors worked against Paulson, since he struck it rich in 2007 and 2008.

After 2008, John Paulson and the hedge funds he manages have made huge bets, most of which have not been as successful as a broadly diversified investing strategy.

He made huge investments in gold stocks, which got crushed after 2009. In 2011, the funds lost more than $100 million on a Chinese forestry company, of which they owned 14%.

In 2014, he advocated a theme of drug industry consolidation and invested heavily in Valeant Pharmaceuticals International, Inc. The stock went higher from $140, but by April, 2016 it was under $36 per share. That month, he told his investors he would change his risk management strategy and would no longer put more than 35% of the funds assets into any one industry. It was too late however, as that strategy had contributed to years of vast underperformance. Then he invested more in Valeant and it went down much further.

The more I read about this series of events and investments, the worse it got. It is almost unbelievable that Paulson and his firm could have appeared so smart (once?) and then make so many very bad investment decisions for so many years.

Paulson’s Partners Fund lost over 10% during the first two months of 2018. Paulson Enhanced Fund, which uses borrowed money to invest in merger deals, is down 20% this year, fell 30% last year and lost about 49% in 2016. Their use of leverage amplified their incorrect bets.

It appears that he made over $1 billion in bets in 2016 and 2017 that the S&P 500 would go down. The opposite occurred, as stocks broadly rallied, and his opposite bet again was a huge loser.

The moral of this story is Paulson got very rich due to his gut instincts prior to 2007 and 2008. He is still very wealthy. He has made large donations to NYC institutions and donated $400 million to Harvard University’s School of Engineering.

However, for those who invested in his funds after 2008, which is nearly all of their outside investors, Paulson’s firm had been a disaster on a comparative basis to financial industry benchmarks.

The key for us and the clients of our firm, and for the friends or relatives of yours who do not yet use our firm: We are investing the right way…for the long term.

Others may have strategies that may work for a year or a period of time. The strategies may work temporarily.

But you are not investing for one year. You need to know and understand the strategy that your financial advisor is using for this year, and the year after that and 5 years from now. You are investing for the long-term.

If predictions and guesswork or forecasting are their strategy, or what is really underlying their actions (even if they don’t use those terms), then you are using the wrong investment strategy for your serious money.

If you are not sure what strategy your advisor or money manager is using, ask him or her. You need to find out. If you are still not sure, ask us. We can figure it out.

I’m sure that many of Paulson’s investors after 2009 would have benefited from understanding this, if they would have known how and why he was temporarily successful and been willing to understand the answers.

And now you know “the rest of the story.”


WSJ article, Worried About Your Tax Bill?  Hedge-Fund Star John Paulson Owes $1 Billion. By Gregory Zuckerman 04/11/2018

Paulson Partner Fund data from WSJ article citied above.

S&P 500 performance information is from Vanguard 500 Index  Investor fund, VFINX, per Morningstar.com as of 4/19/18, net of fund fees.

Major change to credit cards coming

Starting later this month, most major credit cards and large retailers will stop requiring signatures on credit card transactions.

Due to the broader use of chip technology, signatures are now largely irrelevant. You may still be required to sign at locations that do not use chip technology.  

Visa, American Express, Mastercard and Discover will stop requiring signatures to complete credit card purchases later in April.

Signatures will not disappear completely, as retailers will have to decide whether they want to stop having you sign to complete a transaction. Target plans to eliminate them this month and Wal-Mart has already stopped them for most transactions.

The rules will vary by card network. Visa is making card signatures optional in all of North America for retailers with chip technology. American Express is dropping signature requirements globally for all its cards. Mastercard is ending the signature requirement only in the US and Canada. Discover is ending the signature requirement in the US, Canada, Mexico and the Caribbean.

In addition to chip technology replacing the need for signatures, dropping the signature requirement speeds up check out, which is an added incentive for merchants.

Smaller retailers may continue to require signatures, as Square and other small retail payment systems may not abandon signature requirements so soon.

Credit card industry experts do not feel that dropping the signature requirement will have any effect on credit card security, as signature matching or checking is now done very rarely.

We strongly recommend only using credit cards with chips. You should try to make purchases at locations with chip readers, as they have greatly reduced credit card fraud for in-store purchases.


Trade wars, volatility and the stock market

As President Trump and his administration have discussed placing tariffs on various products, and China has reacted with similar tactics, worldwide stock markets have generally gone down.

First, a quick example of what you should not do. You should not over-react.

Wednesday morning I woke to CNBC reporting that the futures for the DJIA 30 stock index were down more than 600 points in pre-market trading. That represented a decline of 2.5% from the prior day’s close of 24,033.

However, by the end of Wednesday, the DJIA increased nearly 1% for the day. Other indexes were up even more. The broader large company S&P 500 was up 1.16% and the small company Russell 2000 gained 1.42%.

Those who reacted and sold stocks before 2 pm on Wednesday likely lost real money. Those who were patient and did not react to the early am news of the intensifying trade dispute ended the day with nice gains.

What is going on with International trade?

Irrespective of your politics, we are going to start with the assumption that trade should generally be fair and free between all companies and countries. Unfortunately, there is currently not a level playing field between countries. We are not going to deal with the specifics in this post.

How President Trump and other worldwide leaders resolve this issue remains to be seen. There is no way to predict an outcome. US leaders have threatened, but not yet actually imposed any new tariffs. This is an important distinction. No tariff changes have yet to be imposed by either the US or China. Each side has developed lists of products and potential tariffs, but these are all subject to negotiations which could take months to resolve. They will likely continue to add or modify these lists and threats for strategic purposes. For further reading on the topic, see below.***

Whether the actions by the Trump administration are successful in improving the US trading position with China, as well as addressing intellectual property rights, remains to be seen.

In the short term, the loss in stock market value has been significant, but not devastating. No one can accurately predict the long term impact to stocks from the trade battle which is brewing.The trade dispute is causing the stock market to be more volatile.

But let’s look at the word volatility. Volatility actually means when something changes quickly or unpredictably. You didn’t see the words “down,” “loss” or “gain” in that definition.

Volatility does not just mean when the markets suddenly go down.

Most people thought 2017 was NOT volatile because markets generally only went up. Last year was technically quite volatile, based on the true definition, as stocks did change a lot and few predicted the large increases.

Investing in stocks inherently involves volatility, both down and up. You must be prepared for this, for all sorts of reasons, both expected and unexpected. We work with you and structure your portfolio and asset allocation so that you can handle the volatility.

For more on handling volatility, you may want to watch this videoTuning Out the Noise.

Our general investment philosophy emphasizes smaller companies over larger companies more than most traditional financial advisors. We recommend this because historical financial and academic data shows that smaller company stocks outperform larger company stocks, though small companies are inherently more risky.

In terms of the current trade issues, our tilt toward smaller companies could be beneficial, as the impact of the trade dispute, real or threatened, could be a greater negative to larger companies than small companies. Only as an example, a smaller company which sells products primarily in the US or not to China may be impacted less than Boeing, which would be directly affected by potential tariffs on aerospace.

As we often say, it is not beneficial to try to time the markets. That is not a winning long term strategy. So, we do not recommend any significant asset allocation changes in response to these trade issues if your portfolio is properly structured and globally diversified.

Whatever occurs in this trade dispute, we hope that the leaders of all sides consider the impact of their words, positions and actions on their citizens and companies, as well as the global community.

You can be assured that we will provide you with updates, advice and commentary, as it is needed.

If you found this helpful, please feel free to share it with your friends and colleagues.


***I highly recommend the WSJ  article”Tariff Showdown Shifts to Intense Negotiation Period,” dated April 4, 2018.