Spreadsheets Can Destroy Your Investment Portfolio

A lot of portfolio back tests (and their resulting charts) are just silly. Any moron can go into a spreadsheet to find what worked best in the past (especially when cherry picking dates). But it takes some real thinking to work out a strategy that can deal with future unknown risks.

You can't optimize for returns going forward because you don't know what those returns will be. So anyone designing a portfolio based only on what worked best in the past is making a major tactical error with their investments. A mistake that could destroy a retirement plan.

What I liked most about our "Forever" Portfolio is that it eliminates most risk. As a lifelong entrepreneur, I really believe that after 40 years of trading and investing, I understand the nature of the unknown and investing RISK. It's not about going into a spreadsheet, hand picking some dates and blend of assets to see what did best, and then going out and buying those investments. If investing were that easy we'd all be filthy rich!

Rather, back-testing can really only show you what DIDN'T work well in the past, so you can avoid repeating those mistakes, or at least be aware of those risks. Back-testing can never prove something will work best going forward. Also, back-testing will never show you extraordinary events, such as civil unrest, unprecedented government intervention in the markets, inflation, etc.

These risks need to have some diversification applied as well and the Forever Portfolio actually considers these risks that spreadsheet-only portfolios do not.

This is why I find it so absurd when some analyst or pundit claims that an asset like gold is "worthless" in an investing portfolio because of some biased spreadsheet work they did. I wonder if these people have ever gotten far enough away from their spreadsheets to see how the world markets really work?

Having some portfolio insurance like gold around is a really splendid idea. YES, the Forever Portfolio holds gold, silver and displays a good record with other assets likes stocks (mainly ETFs), bonds and cash. But what in history suggests this is not a good idea? Show me the flaw! Show me the data?

It doesn't matter what your chart is showed worked best over a particular time period. The fact is that concentrating your bets is dangerous, and sometimes your stocks and bonds don't payout on your timetable. This is just how life works. I am finding out more each day. Diversifying a little bit is prudent.

Tips on Saving Money

It was raining as Bob drove home that Sunday night. It was late and all he could think of was the presentation he was scheduled to present the next day. If everything went well, the presentation could potentially earn him a promotion. Bob decided he would start saving up after that. Or maybe he could finally buy a car.

As he contemplated the kind of car he should get, the tire of his rental climbed over a piece of rubber on the highway and swish went the car rotating out of control. He hit the brakes! But the car didn't stop until it hit the divider on the road. It was a rental and just to save money he hadn't brought insurance.

Like most, Bob didn't have enough savings for this rainy day. He had been saving money, but he was not aware of the right ways to save money. Count your blessings and start saving if you're not suffering from such financial burdens, here are some small steps that can save you a fortune.

Use Paper Money Instead of Credit Cards
When you use paper money you can mentally keep count of how much money you have spent. While using credit cards it is easier to lose track of your expenditures.

The best way to save money is to make a budget. When you go out shopping, make a list and take the required amount so you don't overspend. To avoid the use of credit cards you may either break them or freeze them. Freezing them will give you enough time to decide whether you really need it or not while the ice thaws.

Shop for Cheaper Substitutes
Using a cheaper substitute of certain products will save you a lot in the long run. Check the prices at various places before buying anything expensive. Do your laundry and ironing at home if possible. Make your own lunch, coffee and meals. Make use of discount offers and look out for sales. Before buying something, make sure you really want it.

Save Money on Entertainment
Borrow books and rent movies instead of purchasing them. While going out with family try to plan trips in advance. Find some low cost events, parks and other places. Family vacations can be very expensive. However the cost can be reduced by booking and planning ahead of time.

Set Goals
Set monthly and yearly goals for your savings according to your income and your objectives for saving. For instance if you are saving for a house, you need set a higher goal as compared to saving for something less costly like a car. Keep a record of your expenses. Set milestones for savings, and once your reach them give yourself a treat.

How to Save Money on Groceries

"A penny saved is a penny earned" - Benjamin Franklin

Groceries use up a major portion of your monthly expenditure. And when it comes to groceries, saving money is an art. It is easy to save money on groceries and to not over spend. It's even easier if you say good bye to impulse buying.

Here are some tips for saving money on your next grocery shopping trip.

Make a List
Make a list of all the items that you need as you start running out of the products you use. Go online, search for brands and compare their prices. Mention those brands and their prices on the list. If possible purchase generic brands and products from the store you go to.

Avail Discounts
Availing discounts is the simplest way to save money on groceries. Junk mail is often filled with discount coupons on various consumer goods. These coupons can also be found online and on the back of the packaging of the product as part of a promotional activity. Find out if and when there is a sale at the store you shop at. Also, certain stores offer points for the money you spend at the store and discounts can be availed by using those points so do check the receipt.

Follow a Budget
Before going to a store, based on the items you need, set a budget. And more importantly, pay with cash. Carry a little over the exact amount. This way you won't spend on things you don't need. Also, buy non perishable goods in bulk as they will cost you less. For perishable goods never forget to check the expiration date. If the date is due in a small period of time do not buy more than the quantity you require.

Scheduling Groceries
Go for grocery shopping when you are in a hurry. One more tip is that you should refrain from going grocery shopping when you're on an empty stomach, this will save you from spending on snack items. Also, try not to take your kids. Children tend to ask for treats while they're at the store, if you have children leave them at home.

Check the Bottom and the Top Racks
Product placement plays an important role in the market place. Hence, the most expensive products are placed at the eye level of the customer. The trick is to know that cheaper alternatives can be found either on the lower or on the upper racks.

Cognitive Biases and Shortcomings That Affect Your Ability to Trade

Playing the stock market as a day trader or over the longer term is something that requires a lot of skill, knowledge and patience, as well as a keen analytical mind. However these aren't the only factors that will impact on your ability to make the right decisions when trading. In order for you to use your brain as a powerful analytical machine you see, you need to be free from distractions and it needs to be operating as efficiently as it possibly can be -free from emotional biases and issues that can stand in your way.

As such then, psychology will play a big part in trading and it's crucial that you be able to control your thoughts and not let emotions and faulty thinking stand in your way when making the best decisions. Here we will look at some of the cognitive biases and issues that can sometimes do that, and how to overcome them.

Confirmation Bias

Confirmation bias is a phenomenon that most people deal with that prevents them from being able to see their error when they make mistakes or have the wrong idea. Confirmation bias describes our tendency to seek out information that confirms our beliefs, and to be more likely to accept that information when we hear it.

In other words then, if you've already made up your mind that a company has good stock, you might find that you overlook evidence to the contrary. To avoid this problem then, you should make sure that instead of looking for information regarding your chosen business, you instead aim to find information that disproves your current views. This is the method taken by science which always aims to disprove the existing paradigm (rather than support it) and it's the stance you should take when trading.

Loss Aversion

Loss aversion describes the human impulse to avoid loss. Of course no one wants to lose money, and this is obviously a good way to think when you're trading. However this does become a problem when you start being more afraid of losing than you are motivated by gaining. In other words, if there's a 50/50 chance of your making money on a deal or losing money, even if the amount you could lose was smaller most people would turn down the option. This is biased decision making however, and particularly when something like trading requires the occasional risk.

Attention

Sometimes our brain simply lets us down because it isn't focussed enough on what's going on, or able to follow the progress of many shares all at once. Losing money simply because you didn't notice your stocks plummeting, or missing a great opportunity because you were asleep are all human weaknesses but they can be avoided by using market trading software that has been set up to trade on your behalf and to raise points of interest with you.

Recapitalization to Raise Capital for Your Business

What is a recapitalization?

Recapitalization occurs when a corporation reorganizes its ownership structure. For instance, it may divide its stock into two classes: preferred stock and common stock. Preferred stock provides certain advantages and priorities over common stock, which may include a higher dividend rate, preference in the payment of dividends, liquidation preference, and voting rights. After recapitalization, common stock can be made available to investors, while the owner(s) of the corporation retain(s) control of the company by keeping the preferred stock. A recapitalization can basically be described as a reshuffling or rearranging of a corporation's capital structure. While the total value of the company is not affected by recapitalization, the value of each individual share will likely change.

Example(s): Jack and Jane each own 50 of the 100 outstanding shares of Acme Corporation, which has a total value of $100,000. Thus, each share is worth $1,000. Jack and Jane decide to recapitalize Acme, creating two classes of stock. The recapitalization will create 1,000 shares of common stock with a total value of $50,000 (or $50 per share) and 100 shares of preferred stock with a total value of $50,000 (or $500 per share). Jack and Jane will keep the preferred stock and make the common stock available for purchase.

What are the advantages of recapitalization?

Raise capital through the sale of common stock

Recapitalization allows you to raise capital without taking on debt. You will give up partial ownership of your company through the sale of stock, however.

Owner(s) retain control of business

A recapitalization can allow the business owner to retain control of the business while simultaneously raising capital. In a recapitalization, you create two classes of stock: preferred stock and common stock. Preferred stock typically has voting rights, dividend rights, and/or preferential liquidation rights, which are spelled out in your articles of organization. You would keep the preferred stock, which allows you to continue running the company, and make the common stock available for purchase.

Recapitalization considered a tax-free reorganization by the IRS

A recapitalization is an exchange of a corporation's stock for other stock in the same corporation. Typically, the owner of common stock exchanges the common stock for a combination of common and preferred stock. Most recapitalizations are recognized under the Internal Revenue Code as tax-free exchanges. The owner of the common shares does not incur a tax liability when the recapitalization takes place. To qualify as a tax-free exchange, the recapitalization must have a valid business purpose. In general, as long as a corporate purpose for the recapitalization is identified, the transaction should qualify as a tax-free exchange.

What are the disadvantages of recapitalization?

Recapitalization is an extremely complex and expensive process

Recapitalizations have become extraordinarily complex and technical, thanks, in part, to the IRS. To structure and document a recapitalization, you need to hire attorneys, tax advisors, valuation experts, and other professionals to guide you through the statutory maze. Unfortunately, none of these professionals work cheaply.

Adverse tax consequences may result

Distribution of preferred stock through recapitalization may cause adverse tax consequences under Sections 305 and 306 of the Internal Revenue Code. Section 305 deals with the tax treatment of distributions by a corporation of its own stock, which may be taxable as a dividend. Section 306 applies to stock that has been distributed as a tax-free dividend to existing stockholders. Only a competent tax attorney should attempt to analyze the tax impact of recapitalization. In addition, you should be aware that an ordinary loss deduction is available only for common stock. Thus, a loss that occurs on the sale or transfer of preferred stock cannot be claimed as an ordinary loss.

Preferred stock dividends may drain the company of needed cash

In a typical recapitalization, a large, cumulative dividend has to be paid on the preferred stock to boost the value of this class of stock. For many corporations, the payment of these dividends every year may severely drain the company of needed cash. In many instances, it may not make business sense to put the future health of the company at risk just to raise capital. Furthermore, dividends payable to the preferred shareholders are not deductible by the company. Therefore, the money used to pay the dividends will be taxed twice, once at the corporate level and then when the individual receives the dividends.

S corporations may not do a recapitalization

If your business is classified as an S corporation, you cannot do a recapitalization because S corporations are prohibited from having more than one class of stock. For many companies, loss of S corporation tax treatment (which allows the shareholders to be taxed as if the company were a partnership) could be a very large disadvantage, especially since individual tax rates are lower than corporate tax rates.

How is recapitalization done?

Don't try this at home

Recapitalizations have become extremely complex and technical. There are numerous legal, tax, and valuation issues that must be addressed before, during, and after a recapitalization. Failure to follow all of the requirements can have disastrous income, gift, and estate tax consequences. Therefore, you should hire a team of experts to guide you through the entire process.

Hire competent, experienced legal counsel

You should hire a competent and experienced attorney to structure and document the recapitalization. Any attorney you hire should have extensive experience with securities and general corporate law issues. Among the other tasks in a recapitalization, new securities will have to be issued, stock certificates will have to be transferred, votes of the board of directors will have to be taken, and new shareholders will be created. All of these tasks require the assistance of an attorney.

You may have to hire a separate tax advisor

In addition to an attorney to draft all the documents needed to set up the recapitalization, a separate tax attorney or tax accountant may have to be hired to give tax advice before, during, and after the recapitalization. The tax laws governing recapitalizations are also very complex, so only an accountant or attorney who specializes in this area should be hired to give tax advice.

You may need an appraiser to value stock and other assets of company

You may also have to hire an appraiser to value the stock and assets of the company that you will recapitalize. In many cases, this appraisal can be very difficult. There is usually not a publicly traded market for closely held companies, so it may be difficult to find other similar types of companies to do a comparison appraisal. For this reason, you should use a professional appraiser experienced in corporate valuations.

Information provided by Blaser Investment Management Group, LLC.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services, Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.

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