Prosperity Wheel
The new way to look at investing
Introduction
If I could convince you in just a few minutes that everything you thought you knew about investing was wrong, when would you want me to start?
Hi. I’m Steve Covell and if you answered the above question “Right now!” —then let’s get started:
First of all, let me tell you something about myself. I’m an attorney with over 30 years of experience in the field of estate planning. Several years ago I started to notice something very wrong: even sizable estates were evaporating when they were supposed to be growing. The problem wasn’t the legal side, that was working as planned. It was the financial side -clients were investing just like they were told, but were still losing money. I wanted to know why. (more…)
Broker Wheel
The Broker Wheel is the outdated investing model that has been used for more than 100 years.
Before you can easily understand the Prosperity Wheel and how it works, you first need to understand the Broker Wheel.
The Broker Wheel illustrates how brokers have been putting investors for years into various combinations of stocks, bonds and mutual funds. All of the talk about “diversifying” investments is nonsense. The Broker Wheel merely spreads risk among risky categories of investments. Investing this way will make you –broker. Let’s look at why. (more…)
Money Buckets
The final step before you can appreciate the Prosperity Wheel, is to understand how you view money and taxes.
People generally view their money as being in three different buckets: Now Money, Later Money, and Maybe Never Money.
I don’t mean that they literally have three different accounts with those names, or that they literally look at their money this way. But I can tell you from experience that just about everyone thinks this way from a philosophical viewpoint. They usually first realize this is how they view their money when I point it out to them. More often than not, there is a big “Yeah, now I see what you mean” moment. (more…)
Prosperity Wheel
The Prosperity Wheel™ is goal oriented, not product oriented.
If you looked at the Broker Wheel, you will notice that it is product oriented. That is, there are stocks (products), bonds (products), and mutual funds (more products). There is no particular goal. It is just groups of “things” that produce commissions and fees for other people —and it will always look about the same for every investor.
The Prosperity Wheel can look very different for different people. That is because it is goal oriented, flexible and is always in motion. Prior to retirement, for example, the green Now Money spoke of the wheel might be much smaller since there is employment income and investments are more in in the blue spoke —Later Money. (more…)
Three New Rules for Today’s Investors
A recent poll revealed that 8 out of 10 Americans believe we are in another recession. Now they may be correct or they may not be, that is for the economists to tell us in a few months when these things are measured. But either way, you DO need to realize that the rules for investing successfully have changed. With that in mind, here are 3 new rules for today’s investors:
Rule #1: Traditional buy and hold is dead.
We all learned in the 1980′s and 1990′s that success in investing comes through “long-term” investing. You should “buy and hold”. And guess what? That worked really well when the markets were trending upwards steadily. But how has that worked out since January 1, 2000?
On January 1, 2000, the S&P 500 entered the day at 1469.25. As of this morning (September 6, 2011), it enters the day at 1173.97. That represents a capital loss between 20% and 25% over almost 12 years. Throw in some dividends and you are basically breaking even. That’s a lot of risk for essentially no return!
On top this, with the economy in the dumps, you have no reasonable expectation of the stock market to perform well any time in the near future. When the economy sags, so does the market.
Rule #2: Bonds are no longer a “safe haven”.
30 years ago, in September of 1981, 10-year Treasury bonds were paying about 15.5% interest. From that point, interest rates steadily decreased. Today, in September 2011, that same 10-year Treasury is only paying 2% interest. Here’s what most people miss.
Bond values are inversely related to interest rate movements. That means when interest rates go down (the last 30 years), bond values go up. We have seen utopia for bond investors over the last 30 years, thanks to interest rate movements.
Of course, the problem is that interest rates have no more room to go down. At this point, they can only go up. For bond investors, this spells TROUBLE.
Rule #3: Annuities are suddenly popular again.
As baby boomers are nearing, and entering, retirement, overwhelmingly they are focused on one thing – sustainable retirement income. It turns out that this is exactly what annuities are designed to provide. But today’s annuities are not your father’s annuities.
In your father’s time, annuities were a longevity bet. If you lived a long time, you won. If you didn’t, the insurance company would keep your money and they would win.
Today, it’s a whole new ball game. Most annuities are now set up to provide you lifetime income through a “withdrawal” benefit. This means that any money left over goes to your beneficiaries, not the insurance company. Plus, you maintain control over your account vs. just forking your money over to the insurance company.
We all know that much of the world moves through cycles. What is old often becomes new again. When it comes to investing, what is old (annuities) are becoming new again in a positive way.
Tax Tips: Selling Your Home
Capital Gains
The taxation of gains from selling your home can be complicated. The tax treatment depends on factors like the amount of the “gains” and how long you owned your home prior to the sale. “Gains” by the way are often an illusion. You can own a home for thirty years and have big gains that are based solely on inflation. You may actually have a real loss, but still be liable for capital gains taxes.
Excluded amount. You may be able to exclude up to $250,000 in gains from the sale of your primary residence ($500,000 on a joint return). Keep in mind that you must have used your home as your primary residence for at least 2 out of the prior 5 years before a sale.
Losses. Someone asked me if they could deduct a loss on their home. The answer, basically, is no.
Prior tax credits. If you received a first-time buy tax credit, the waiting period before you can sell and exclude the gains is longer. Check with a tax consultant, but typically the waiting period is 36 months instead of 24 months.
Basis. Basis determines how much your gains actually are. If you paid $200,000 for your home 5 years ago and sold it last week for $300,000, then your basis is $200,000 and the taxable amount is $100,000. But that $100,000 is well within the excluded amount, so unless there is some other problem, there should be no taxes owed. If you remodeled your home along the way for $30,000, that could raise your basis to $230,000 and your taxable amount would be lowered to $70,000. The trick, however, is to be able to prove to the IRS exactly how much that remodel cost. Always keep receipts for any major upgrades to your home. People don’t always think about what improvements could increase their basis. Even things like landscaping and adding a fence can add to your basis.
There are additional issues with selling your primary residence. We have only discussed the amount that can be excluded after a 2-year waiting period.
Source: IRS Tax Tip 2011-15
Stock Broker Conflicts
Many people are not aware that stock brokers can have built-in conflicts of interest.
Does your broker recommend a particular stock or mutual fund because it is the best for you, or the best for the broker? Here is the disclaimer that the SEC requires brokers to put on their Web sites and advertising (we added the bolding):
“THIS IS A BROKERAGE SERVICE
The Securities and Exchange Commission requires all broker-dealers who give brokerage advice for a fee to make the following disclosure. Accounts enrolled in this service are brokerage accounts and not advisory accounts. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time. Please call us at XXX-XXX-XXXX if you have questions about the differences between a brokerage service and an advisory service.”
The Widow Tax
Getting pushed to a higher bracket is what we call the "Widow Tax"
Leaving an IRA to a spouse can be a bad idea.
Many people think that leaving an IRA to a spouse or to the children through a “stretch” is a good idea. It isn’t. All it does is leave a highly-taxed asset to people that are going to pay even more taxes.
In the case of a deceased spouse who leaves a traditional IRA to a surviving spouse, the result is almost always to kick the survivor into a higher tax bracket. Most people do not understand that there is a huge difference between the rates imposed by the IRS on married filing jointly and a single taxpayer. Take a look at our chart, for example, which are the actual rates from the IRS for the 2011 tax year.
You can easily see that the biggest bracket jump is from 15% to 25%. That jump makes a tremendous difference in marginal taxes paid and it happens at a relatively low amount of income. Now, if you are married filing jointly you don’t run into that 15% to 25% bracket jump until you go over $69,000 of taxable income. But look at what happens to a surviving spouse. The survivor jumps to the 25% bracket the second he or she goes over only $34,500 of taxable income.
Stop and think for a moment about what this will mean for the surviving spouse who inherits an IRA. In the first place, every cent taken out and every cent of future growth is going to be taxable at the Filing Single rates. In the second place, the survivor will not even have an option about taking taxable income once age 70½ is reached. So, the bottom line is this: a spouse who inherits an IRA will likely pay more taxes on the same money, and will have few options about how and when income is taken. This problem should be addressed while both spouses are alive. The Prosperity Wheel can eliminate the Widow Tax by the way Core Money is structured.
Tale of Two Dogs
This is the Tale of Two Dogs. One dog was worth $5.00 and came from the pound. The other dog was a Tibetan Mastiff and in 2009 a Chinese lady paid $582,000 for him.
Now, under the state law of a particular state (Louisiana, in this example) “All dogs, cats and other household pets” are exempt from seizure. The statute has no limit on the value of the pet. Under the theory that a dog that is a pet can have any value and no creditor can touch him, then it would not matter if you have an inexpensive dog or one that is worth over half a million.
In either case, no creditor can take your dog. That is not to say that someone should take $582,000 out of their stock portfolio and buy a Tibetan Mastiff. But it is an example of how you can take the same basic asset and convert it from an non-exempt asset into an exempt asset. This can be done just as easily with investments. That is, you can take a non-exempt investment and transfer the money to an investment that state lawmakers have chosen to afford protection against creditors –an exempt asset. This is done all the time by savvy investors who want to protect their assets against the legal system and is just one aspect of the Prosperity Wheel’s design to protect your money.
A closer look at mutual funds
Did you know there are more mutual funds than there are stocks? That’s right, there are some 8,500 mutual funds out there to choose from. Let’s take a closer look at the green portion of the Broker Wheel -the mutual funds.
Load. When consumers caught on that mutual funds were “load” or “no-load” and that load referred to the fees charged to get into a mutual fund (or get out), they started demanding no-load funds. The response from the mutual funds? Just make the fees hidden within the fund so they could be called “No-load” -which is what consumers wanted. Almost all mutual funds are “no-load” these days. However, some load funds are sold on the basis that they have extra special management or some other reason to justify the load fees. According to the SEC, as printed on their Web page, “Higher expense funds do not perform better, on average, then lower expense funds”.
Hidden fees. The average fees hidden within a mutual fund are about 1.5% according to the Motley Fool. Our own experience is that average fees range from 1% to 3% and even higher with 2% being average. These fees are almost impossible to find unless you carefully read a long prospectus or you have access to services that tell you all the hidden fees, like we have available to us. Sometimes you can only find “management fees” disclosed. However, there are other fees, such as 12b-1 fees that are even more hidden. These are fees you are charged for the fund’s advertising, glossy brochures, and so on. In other words, you pay fees so the fund can get other people to invest.
Proprietary funds. This is the worse trend I see happening, and most of my clients don’t even realize it happened until it is too late. Proprietary funds are owned by or are exclusive to a particular broker. There are two problems here: one is that there is a conflict. Do you suppose a broker for a particular big brokerage firm might have an incentive to recommend their own product? Secondly, you can’t move these funds. With common mutual funds you can change your broker by simply transferring your account elsewhere. With proprietary funds, you can’t move them to a different broker. If you want to move, you have to liquidate the fund and more often than not, from what I see, you will be liquidating at a loss. So, you’re stuck where you don’t want to be.
Mutual funds can be highly taxed. Do you like getting a 1099 for your mutual funds every year, even in years when your fund is losing money? The fact is that mutual funds generate taxable events for you every time income, dividends or capital gains are generated within the fund. When a fund liquidates a position in a stock, you pay your share of capital gains.
Learn the Prosperity Wheel in 10 minutes
It's fun, easy and will change the way you think about investing.
Just start with the Introduction above and go through the tabs. You will learn why you can't sleep at night, why you pay more taxes than you need to, and why traditional investing methods leave many people broke in retirement.
For best results, go in sequence. Start with the Introduction and go all the way through. Then go back and click the Broker Wheel tab, read through, and then go to the Money Buckets tab. Finally, after going through the first three tabs, you will be ready to click on the Prosperity Wheel tab.
Three New Rules for Today’s Investors
A recent poll revealed that 8 out of 10 Americans believe we are in another recession. Now they may be correct or they may not be, that is for the economists to tell us in a few months when these things are measured. But either way, you DO need to realize that the rules for investing … [Read More...]
Stock Broker Conflicts
Many people are not aware that stock brokers can have built-in conflicts of interest. Does your broker recommend a particular stock or mutual fund because it is the best for you, or the best for the broker? Here is the disclaimer that the SEC requires brokers to put on their Web sites and … [Read More...]
A closer look at mutual funds
Did you know there are more mutual funds than there are stocks? That's right, there are some 8,500 mutual funds out there to choose from. Let's take a closer look at the green portion of the Broker Wheel -the mutual funds. Load. When consumers caught on that mutual funds were "load" or … [Read More...]
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The Prosperity Report is our short, easy-to-read, weekly email newsletter with news and tips based on the concepts of the Prosperity Wheel. I guarantee you will enjoy it. Click on the image or Here for more information.
The Widow Tax
Leaving an IRA to a spouse can be a bad idea. Many people think that leaving an IRA to a spouse or to the children through a "stretch" is a good idea. It isn't. All it does is leave a highly-taxed asset to people that are going to pay even more taxes. In the case of a deceased spouse who leaves a traditional IRA to a surviving spouse, the result is almost always to kick the survivor into a … [Read More...]
Tale of Two Dogs
This is the Tale of Two Dogs. One dog was worth $5.00 and came from the pound. The other dog was a Tibetan Mastiff and in 2009 a Chinese lady paid $582,000 for him. Now, under the state law of a particular state (Louisiana, in this example) "All dogs, cats and other household pets" are exempt from seizure. The statute has no limit on the value of the pet. Under the theory that a dog that is a … [Read More...]