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Buy A Car…Get A Check

February 7th, 2009 No comments

No, this is not Lee Iacocca with a check in hand luring you to buy a Chrysler. (For those of you TYTK – too young to know – Lee Iacocca was the CEO of Chrysler about 25 years ago).

There is a proposal that passed as an amendment to the stimulus bill (so called ‘American Recovery and Reinvestment Act ‘) in the U.S Senate. It would provide an income tax deduction to taxpayers who purchase a new car. The deduction would allow the taxpayer to deduct from their income sales taxes paid and the interest paid on any car loan.

The tax deduction would apply to single filers who earn less than $125,000 per year and married couples who earn less than $250,000 per year. How can you determine if you qualify? It’s not as easy of a question to answer as you might think. Here’s how to determine if you qualify, or at least what you need to consider to find out.

This question often comes up about legislation, and the media do not often provide the details in their stories.

First, this isn’t the yearly income your earn from your job. For many people, the actual reported income from your job is less than your stated salary due to top line deductions that your employer takes to pay for some benefits. Also, when you file your tax return, you would have to also add any passive income, which may include bank interest, dividends, or any gains you had, e.g. selling stocks.

The press release for the amendment also left out exactly what type of income they mean. To put this in IRS speak, we need to know which line number on the 1040 tax form the bill is referring to. The two important ones that came to mind are: Adjusted Gross Income (AGI) and Modified Gross Adjusted Income (MAGI). AGI is reported in line #37 while MAGI is calculated by adding back deductions from AGI in numerous ways depending on its context (Confused, yet?). After checking the amendent itself, they are referring to AGI for almost everyone unless you have foreign income. So just use your AGI.

So, if you need to estimate if you would qualify, calculate your AGI. A good starting point is to look at line #37 on last years tax return.

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Should You Buy an Investment Service?

January 20th, 2009 No comments

Over a year ago, I bought into an investment newsletter. After a year of carnage in the market, I learned quite a bit about the whole experience. Perhaps you can learn from my experience.

Nothing can test the mettle of an investment service more than a bear market. Or, as we are seeing now the father of all bear markets.  There’s been pretty much no where to hide the past year, whether it’s bonds, gold, international companies, commodities, or ‘value stocks’. Name your class of investment and it’s likely down, save for U.S. Treasury Bonds.  

Here are thoughts on buying an investment service. 

Know Their Track Record Before You Buy

Investigate the track record of the people that are running your service before you buy. The investment service I subscribed to was run by an advisor who first ran a newsletter starting in 2003 in a competitors shop. If you were investing in 2003 you will likely know that was the year the Internet Bubble deflated and the market bottomed out.  It doesn’t take a genius to see that it’s easier making money buying stocks at the bottom of a market cycle than buying at the top or in the middle of a bear market. I realized this when I subscribed; the advisor had no bear market experience. I adjusted my expectations accordingly.

You Get What You Pay For 

This may sound obvious, but if you are paying an investment service that recommends stocks, then they are going to recommend stocks to you. Whether the overall market is trending up or down, their job is to do the research and make the recommendations. There likely isn’t going to be someone “ringing a bell” telling you to keep cash, sell stocks, or get out of the market all together. Only you can make that decision.

So, you don’t have to be a buyer if it doesn’t make sense to you. 

This is the most unlikely recommendation you will get, because why would someone who is selling you a service essentially tell you not to buy it? There are good reasons why they don’t want to do this, mainly because this message conflicts with the drumbeat of ‘long term investing’. Even if you are bullish on long term investing (as I am), you still need to take a nuanced approach. Anyone who has gone through a bear market knows this. There are positions you want to hold, but this still doesn’t mean that you can’t sell your speculative positions, keep a large amount of cash, or sell some positions when good fundamental reasons suggest you should. 

The Smartest Guy in the Room…

Don’t fall for the notion that the quality of the recommendations is proportional to how smart the advisor is. Sorry, but most of the ‘smart’ money at Wall Street doesn’t actually get good results in excess of index results. I’ve gotten better advice from my mother (she recommended selling Internet stocks while the bubble was developing in 1999 because her common sense said that they were too high). How about the experts who predicted an ‘active’ hurricane schedule last year, when they turned out completely wrong? Or the many ‘experts’ who kept recommending financial stocks all the way down (to bankruptcy, in some cases)?

Even the current darlings of the investment world, college endowment managers, have not been immune from the downturn. However, they are still fairing better than most. 

Forget the Answer, What’s the Question? 

If you chose to subscribe to a service, you are taking an active role in your investing. If you don’t want to invest the time and effort to do this, the appropriate path would be to invest using different types of passive ways. In my experience, the most valuable part of a service isn’t the actual recommendations, but the analysis behind them and the community discussion that inevitably develops. This helps a lot to build your own investing style by helping to determine what questions you need to ask.

Ultimately, you need to feel comfortable with what you are investing in.  I can’t tell you how many times I’ve felt that some other investment would be better than what I have. It’s easy to second guess yourself with so much punditry out there by so many people. There are many different ways to invest as well as individual investments, but this doesn’t mean that they all will work for you.

The recommendations you will get from the service should be seen as just the starting point. Take the time to learn more about them, and pick and chose which ones you invest in. 

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