Raskin Planning Group

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Making Irrational Financial Decisions is Only Human (Part 4): Hindsight Bias

{3:50 minutes to read}

Parts 1-3 of this article series evaluate behavioral reasons that cause humans to make irrational financial decisions. Part 1 shows how anchoring can be detrimental to long-term objectives. Part 2 describes Loss Aversion and the concept of “pain of loss” vs “pleasure of gain.” Part 3 discusses selective thinking, known as Confirmation Bias.

Have you ever heard a pundit on television mention, after the fact, a certain event was predictable and completely obvious because of reasons A, B and C? It seems like every day so called “experts” are telling us why certain events happened; they then suggest that someone should have known or predicted the result. This happens in sports, politics, natural disasters and financial markets.

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Making Irrational Financial Decisions is Only Human (Part 3): Confirmation Bias

{3:50 minutes to read}

Parts 1 and 2 of this article series evaluate a few behavioral reasons that cause humans to make irrational financial decisions. Part 1 shows how anchoring can be detrimental to long-term objectives. Part 2 describes loss aversion and the concept of “pain of loss” vs “pleasure of gain.”

Another behavioral concept describes the human tendency to adopt biases in understanding and processing certain kinds of information and events. If “seeing is believing,” then why is it possible for two people to observe the same event or read the same article and reach different conclusions?

We all have preconceived opinions or biases. It is part of being human. A bias can be difficult to avoid because we tend to selectively filter information and pay more attention to things that support our opinion. We tend to ignore or rationalize information that doesn’t support our bias. Behavioral economists call this selective thinking Confirmation Bias.

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How bonds fit into an overall investment portfolio

This is the second in a two-part series about bonds. The first article, "What You Don't Know About Bonds Can Hurt You" discussed a variety of bond fundamentals that all investors should know. This article will discuss how bonds fit into an overall investment portfolio.

Why should bonds be part of your portfolio?

If you want current income and/or if you want to reduce the risk of owning stocks, bonds are a great diversifier. Their performance characteristics are often "non-correlated" to stocks. When stocks go up in value, bonds may go down or not go up as much.

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Making Irrational Financial Decisions is Only Human (Part 2): Loss Aversion

{4:30 minutes to read}

Part 1 of this article series takes a deeper look at irrational financial decisions and the reasons for them according to behavioral economics and financial research. Ultimately, the findings show that anchoring can be detrimental to long-term objectives.

One of the first and most interesting tenants of behavioral finance is the concept that a loss produces “pain” greater than the “pleasure” of a win. In other words, losses have more emotional impact than an equivalent amount of gains.

For example, the amount of pleasure gained from finding $50 should be the same as if you found $100 and then lost $50. The completely rational person would find both situations equally pleasurable, since both situations net $50. However, in most cases, people would prefer the first example.

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Making Irrational Financial Decisions is Only Human (Part 1): Anchoring

{5:50 minutes to read}

Classic economic and investment theory suggests that people act rationally. However, research by psychologists and social scientists in the mid-1990’s has shown that people often make irrational decisions in specific and predictable ways.

Our next few articles will discuss how behavioral economics and behavioral finance affects decision-making. Understanding behavioral science won’t turn you into a robot consistently making the most profitable, well-reasoned and rational financial decisions. Hopefully, these articles will help you understand and improve your financial decision-making.

Are all of your financial decisions based on rational and relevant facts? In many instances, the answer is probably yes. However, humans have a tendency to attach or “anchor” beliefs to a reference point, even though the reference point has very little to do with the actual decision under consideration. These anchors can lead us to make financial decisions that aren’t in our best interests and don’t help us meet our personal financial objectives. Here are some examples of anchoring...

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What You Don't Know About Bonds Can Hurt You

{4:55 minutes to read}

Recently, we completed a comprehensive financial plan for new clients in their early 60's. They are near retirement, have been great savers and have accumulated a sizeable nest-egg that should be sufficient to help them meet their retirement goals for the next 30+ years. It is probable they will leave a sizeable inheritance for their children, although that isn't their primary goal.

Since their income has been sufficient to meet their lifestyle income needs, stock market volatility hasn't been a big concern, but now that they are approaching retirement they are concerned about another downturn in the markets. In the past, their investment portfolio has been mostly invested in stocks. Recently, they have started to increase their bond allocation, but they are concerned about bonds and don't really appreciate how and why they could be used in a portfolio. Like most of our clients, they have a lot of preconceived notions about bonds and really don't understand the "basics".

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Where’s the Risk With Risk Tolerance?

In a recent conversation with a client, the word “risk” came up numerous times. The conversation began by discussing their goals and objectives, but as we continued our discussion, there seemed to be many inconsistencies in their thinking about risk and the current structure of their investment portfolio.

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To Mortgage or Not To Mortgage...

That is the Question

Every week we receive an inquiry about one of two things: paying the existing mortgage off or purchasing a new residence -- with or without a mortgage. Many of our clients don't want debt, nor do they need to incur debt. They have plenty of assets and they would rather have a bit less money invested rather than worry about a mortgage payment each month. For these clients we strongly advise them to follow their initial instinct: no mortgage debt.

For other clients, mortgage debt is more complicated. They could pay off their mortgage if they want, but they would have less liquidity (or access to the funds) and that makes them uncomfortable. Or they would have to pay capital gains or income taxes if they were to liquidate their investments to pay off a mortgage.

Sometimes our clients have significant balances in their savings or money market funds (currently earning less than 1%) that exceeds the amount they need for liquidity. Meanwhile, they are typically paying more in interest on their mortgage than they are earning on their savings.

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Charitable Giving

5 Reasons to Establish a Donor Advised Fund

Recently, a long-term client was updating their financial plan; they were comfortable with their lifestyle and had enough financial security to help their children and grandchildren. We reviewed their income, expenses, assets and made sure we understood their short-term and long-term goals.

What's next for this family? They have satisfied their personal and family needs. Do they want to make a difference in their community? Is there a charitable organization or issue that is important to them? They have always made annual contributions to charities, but they haven't considered how they could make a larger impact.

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Develop a Culture of Charitable Giving in Your Family

Planned philanthropy can be an honorable and selfless family tradition.

We were recently talking to a client about their charitable intentions. They informed us that charity has always been an important part of their financial planning, but they have always done it quietly. They made it clear to us that they don't talk about their charitable contributions to their children or friends.

We also learned that they don't make large single gifts, but their annual giving is significant, as far as they are concerned. They certainly take advantage of the charitable tax-deduction, but their giving isn't tax-motivated. They feel it is important to give back to those less fortunate. They are also very supportive of their religious congregation. Not only have they financially supported organizations that are important to them, they also volunteer their time throughout the year.

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5 Big Planning Mistakes to Avoid in 2015

As we start the 2015 calendar year, consider this list of behavioral mistakes to avoid. By avoiding these mistakes, you will have a much better chance of meeting your long-term financial objectives.

Expect the unexpected, but don't be fearful of the unknown and paralyzed into inaction. Take appropriate risks.

Is your glass half-full or half-empty? Neither approach is always appropriate. Excessive optimism is a problem if you don't consider the consequences of losing a job or having a significant loss of income. Excessive pessimism is a problem if you are convinced that terrible things will happen and you keep your investments in no-risk or low-risk investments that barely keep up with inflation.

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Yikes! My Long Term Care Insurance Premium Increased 90%! What do I do now?

A colleague of mine recently asked me to help him with a unique client situation. Here is some background:

Raskin Planning Group was asked to review a long term care insurance policy (LTCi) of the client. The insured, a Texas resident, was recently notified of a 90% rate increase. The client called his agent who sold him the LTCi policy and expressed his dissatisfaction. The agent heard the client's concerns and came up with a solution: replace the existing insurance with a new LTCi policy. My colleague suggested the agent prepare an analysis, comparing the existing policy to the new policy. Instead, the agent prepared a variety of replacement proposals with no analysis.

It was at this point in time, we were asked to help out.

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6 Retirement Pitfalls to Avoid

Many of our clients have successfully accumulated large retirement account balances throughout their lifetimes. This was excellent planning on their part, as they deferred paying considerable income tax while they still had high taxable earned income.

But the IRS doesn't want you to defer paying income taxes forever. They force you to start taking "Required Minimum Distributions" (RMDs) starting at the age of 70 1/2. These distributions are taxed as regular income. The RMD at age 70 is about 4% of the IRA account balance and this percentage increases each year based upon an IRS life expectancy table.

After age 70, the larger the account balance, the larger the taxable distribution from your retirement accounts - possibly driving up your marginal tax bracket. That may mean a hefty amount of income taxes will be due.

Those clients that have successfully built up large retirement account balances should now focus on avoiding some tax planning mistakes that can be costly for them and their heirs.

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It’s Flu Season:

Does your financial plan need a shot in the arm?

Updating your financial plan is like an annual check-up with your doctor. You may feel good, but you just want to make sure the doctor agrees. The doctor asks you questions, performs some tests, gives you a flu shot, encourages you to eat healthy, exercise and, hopefully, sends you off until next year.

While the medical check-up is mostly a passive event (at least for the patient), a Financial Planning Check-up is much more active and requires more from the client. Here is the information we recommend that you gather for your Financial Planning Check-up:

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Too Many Eggs in One Basket:

6 Strategies to Reduce the Risk of Excessive Exposure to a Single Stock

Some of our clients own, or have exposure to, very large single stock positions. For these clients, we ask the following questions:

  1. If this single stock falls dramatically in value, how will the loss affect your financial condition?
  2. How will you feel if this happens?

Most of the time, the financial loss would make a significant difference to our client's financial plans. We then ask why the stock hasn't been sold and their answers often reveal an emotional attachment to the stock. Maybe it was inherited or the client was an executive at the company; perhaps the client is hesitant to sell the stock because the stock has very low basis and the capital gains are significant—incurring a large capital gains tax.

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What is the Value of Advice?

The financial services industry is fragmented and many clients don't really understand how companies and financial service providers work. In general, there are two players in the industry:

  • Service Providers
  • Manufacturers and Distributors (of financial products)

Do you know the difference?

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Is the Roth IRA the Holy Grail of Retirement Planning?

A client with substantial IRA and 401(k) account balances recently asked if there was any way they could contribute to a Roth IRA. They had heard that Roth IRA's are great because earnings grow tax-free and there aren't any required minimum distributions starting at age 70 1/2. We agreed that they are great. But, maybe not for this client.

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Annuities: The Good, the Bad and (maybe) the Ugly

We recently met with existing clients for a portfolio "checkup." The couple, in their mid-60's, is considering retirement in the next few years and has sufficient investments and retirement assets to meet their financial and family objectives. It is likely the clients will continue to be in the 28% or 33% federal marginal tax bracket during retirement because their taxable income is projected to be between $150,000 and $300,000.

  • They are interested in structuring their portfolio to emphasis current income, but they are becoming more concerned about the volatility and risk of the stock market.
  • They are active and in good health and expect to live a long time. They feel comfortable planning that at least one of them will be alive into their mid-90's.
  • They have an existing non-retirement annuity that was purchased 15 years ago and want it reviewed. What should he do with this asset that represents less than 5% of their net worth? It has doubled in value since it was purchased.

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Helping Children and Grandchildren Save for Retirement and Get Cash Back from the IRS

Recently, we were chatting with a client who is concerned that his under-employed college graduate child isn't able to contribute to a retirement plan. The client was always a great saver, understands the value of compound interest and wants the child to start saving now. Like a lot of twenty-somethings, the child is mostly self-supporting, but just doesn't have the additional funds to contribute to an IRA. Is there anything the parent can do?

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The Raskin Planning Group Philosophy: Helping Clients Reach Their Goals

Financial planning means something different to every advisor and to every client.

While some advisors focus on asset management, others focus on annuities and insurance products. Everyone is talking about something different. This creates confusion for the client, and a lack of confidence in the result.

At Raskin Planning Group, financial planning starts with the client’s objectives. We start with a plan - your plan. You need to know where you want to go before you can start the journey. While it is not essential to know every detail along the way, you should have a general idea about which direction you would like to take.

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Are You Happy With Your Investment Portfolio Returns?

We encourage clients to stay with a strategy that is designed to help meet their long term goals:

  • Diversified strategies include different types of stocks and bonds that might not increase as much as the market.
  • Conversely, when markets are doing poorly, the value of the diversified portfolio may not decrease as much as the market.
  • Trying to time markets by buying low and selling high is very difficult to do successfully and consistently.

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