Safeguard #4: Buy Investments That Trend Upward (2009-02-02)

by David John Marotta

Crazy volatile markets push people toward irrational investment schemes. Methods to safeguard our investments won't prevent loss, but ideally they will prevent us from putting our money in investments where we should have known better. Let me give you an example.

There's always a way to make money in the markets. I'm going to tell you how you could have made a lot of money last year. Some investors used this technique to capture huge gains in 2008 while most investors were losing their shirts. What was their secret? Halfway through the year they bet oil prices would drop.

As oil approached $147 a barrel and everyone else thought it was going to $200 a barrel, these wily investors sold it short. That is, they bet on oil going down. Because they were right, their investment earned sizable returns.

They accomplished this feat by purchasing "put options," the right but not the obligation to sell a certain number of barrels of oil for a certain price for a specified period of time. If the price of a barrel of oil drops significantly, as it did, they could sell their put options for a profit.

Does this scenario sound enticing? Do you find yourself wishing you had your investments in oil puts last year? Envy and regret are powerful motivators in the investing world. But you must tame these emotions if you are going to learn how to safeguard your money.

Just because some investors made significant gains in commodity futures doesn't mean that is where you should have been invested. Most of the time when you purchase a put option, the underlying commodity does not drop significantly in price and your put option expires as worthless.

On average, commodity prices rise rather than fall. If you stop and think for a minute, you could assume that commodity prices would at least increase along with inflation every year. They rise reflecting inflation and they fluctuate along with the supply and demand of economic expansion and contraction.

If a commodity rises an average of 5% just for inflation, most of the time investments in commodity puts will lose money. You can purchase put options at various prices, but they all have to overcome strong tailwinds to move backward. The commodity has to drop more than inflation plus the price of the option itself just to break even and start making money. Just because they sometimes make money doesn't make them a good bet.

Imagine you are standing next to the roulette wheel in a Las Vegas casino trying to decide which bet you want to make. You can either bet on red or black, but you are getting confused because the last spin came up green: zero.

Just because the ball happened to land in zero the last turn doesn't mean zero is a good bet. On average, it is a losing bet. In fact, on average, so are red and black. Never invest in something that on average is a losing bet. Never invest in something that on average goes down. You don't want to be a gambler in Las Vegas at all.

Instead you want to be the house.

The house loses lots of bets. In fact, the house loses more bets than investors do over a year in the stock market. The house edge is small, but on average the house wins a steady stream of gains.

Any investment that, on average, doesn't go up shouldn't be an asset class in your portfolio. There are a lot of so-called investments that fit this description. They are best described not as "investments" but as "speculations." I concede there is a place in specific portfolios to invest in something that doesn't go up on average. But this situation is the exception, not the rule, and these decisions are warranted most commonly because of a large investment that needs to be protected. In this case, what you are really buying is "insurance," not an "investment."

Here's another way to look at short investments. If the markets appreciate 10% per year, then investments against the market lose 10% per year. Predicting market drops with such accuracy as to overcome a 10% headwind plus the transaction costs of shorting the market is difficult, to say the least.

And whereas investments that are long in the market can only drop a finite amount (to zero), short investments can lose an infinite amount because there is no limit to how much a stock can rise.

Gold is another example of an investment that on average does not appreciate in value.

Jeremy Siegel, author of "Stocks for the Long Run," analyzed investments over the past 200 years. Gold, on average, maintains its value over time. If you bought a dollar's worth of gold 200 years ago, after adjusting for inflation, it would be still be worth about $1 today.

Although gold generally holds its purchasing value, it still fluctuates wildly based on other factors of supply and demand. While it does so, the part of these movements that is not just random noise is simply an inverse reaction to the value of the dollar.

Over the long term, gold holds its purchasing power, but it has not for almost three decades. In January 1980, gold reached its high of $850 an ounce. The following year my wife and I became engaged and chose modest wedding rings that were still very expensive. Note that $850 in 1980 had the same buying power as $2,191 in today's dollars. Gold trading at $850 an ounce then was like gold trading at more than twice its current price. In other words, those people who purchased gold in 1980 have lost more than half their buying power during a 28-year investment. Even considering the October 2008 stock market drop, the tailwind of appreciation pushed stock investments to significant gains over the past 28 years. That tailwind is a powerful force for investment growth.

Investments that bet on stock market corrections are more dangerous than the market itself. Perhaps they should come with the following warning: "The stock market can go up as well as down!"

Holding investments for the long term makes sense because millions of people are working in thousands of publicly traded companies on your side of the investment. Your interest is congruent with theirs, and their very livelihood depends on your investment making a profit.

So look for great well-financed companies that deliver products or services of real value in order to make the trend of the investment upward. If the investment bets against that trend or simply holds its value, it should not be a major component in your allocation. There may be a place for options like insurance, but these are rare. As a rule of thumb, put your money only in investments that on average go up.

from http://www.emarotta.com/article.php?ID=322

Safeguard #3: Insist on Publicly Pricaed and Traded Investments (2009-01-26)

by David John Marotta

To protect our money, several safeguards are advisable. They aren't always necessary, but they are certainly safer than the alternative. One of these safeguards is to insist on investing only in liquid assets. Investors undervalue liquidity 99.9% of the time. You need to be in the other 0.1%.

Liquidity refers to the ability of an asset to be easily sold without losing value in the process. Imagine starting with a pile of money, buying the asset, holding it a week and then trying to sell it again. If you get back a much smaller amount of money, the asset is illiquid.

Because illiquid investments are hard to price, it's also difficult to compute what return you've received. I analyzed a real estate investment for a couple who had held it for 20 years. It was valued at $60,000 and paying a $6,000 return every year. I kid you not. It was paying a 10% dividend.

The investment had been illiquid for a long time, but now the general partners were offering to buy out any investors who wanted to sell. Alternatively, they were putting together another real estate deal in which you could invest additional money. Finally, if for some strange reason you liked your current investment but did not want to invest any additional money, you could neither sell your share of the old deal nor invest more money in the new deal.

The couple thought they had received a great rate of return. And believing no investment could be better than a 10% dividend, they were ready to sink more money into a similar investment.

Again, even with perfect hindsight, it is often difficult to recognize if illiquid investments have been a good investment because you may not be able easily to compute what return you've received.

In a simple analysis, it looked like a $60,000 investment was now paying a 10% rate of return. And so it was, but only after two decades of a zero percent return. Shares in the investment were not actually worth $60,000 because they were not traded in a public market. Without such a market to value the shares, their worth was at least questionable.

The fact that the general partners were now finally willing to pay $60,000 for the shares only meant they were worth at least $60,000. The fact that they were purchased for $60,000 some 20 years ago and were now paying a $6,000 annual dividend meant they were probably worth a lot more.

Even at a small 8% annual rate of return, the couple's $60,000 investment should have grown to at least $279,600. Perhaps the investment was indeed worth over a quarter of a million. Maybe that explained why the general partners were willing to pay $60,000 for the investment.

Assuming the investment has achieved an 8% return, the dividend is paltry. If the investment is really worth that much, the $6,000 dividend is only a 2.15% return, not a 10% return as previously supposed. Because of the illiquidity of the investment, nothing about it is attractive. The truth lies somewhere between these two extremes: the investment having absolutely no appreciation in 20 years and currently paying a 10% dividend and the investment having a decent 8% return over 20 years but only paying a 2.15% dividend. The illiquidity of the investment obscures the real return.

And that's the problem with investments that aren't publicly priced and traded. Because your investment can't be converted into cash, even after two decades you may still not be able to evaluate it. In this case we were able to determine that the investment wasn't worth selling for $60,000. The stream of $6,000 annual income was worth more than that. But it also was a mistake to invest any additional money in similar investments.

This situation illustrates a common dilemma with illiquid investments. Because they aren't easily sold, they often are not worth selling. Therefore it isn't worth buying them in the first place. That is the definition of illiquid: not worth buying and not worth selling.

Liquidity is a continuum. On one end, cash defines liquidity. Many investments, such as stocks, exchange traded funds and mutual funds, are so publicly priced and traded that their price is published in the Wall Street Journal every day. These are sufficiently liquid and can be realized in a matter of days. Holdings that have well-established public markets with adequate volume make buying and selling easy.

Even individual bonds fall in the middle of the spectrum. If you buy an individual bond this week and then try to sell it next week, it will lose some of its value. Bonds, unlike stocks, do not have a smooth and liquid market. You have to put a bond out for bid and then decide if you will accept the best price you are offered.

So even for bonds, it is best to structure your portfolio to hold them until maturity when the bonds pay back their principal. In the recent credit crunch, bonds that fell from investment grade to junk status were suddenly extremely difficult to sell. As a result, the price you could get for them dropped more sharply than it might have otherwise.

Real estate is another illiquid asset. Flipping real estate for a profit is usually not possible. Sales commissions and closing costs consume over 6% of the sales price. It has to be an extraordinary real estate market if you can buy a house one week and sell it for a 6% profit a few weeks later. Starting with a 6% loss because of illiquidity costs is a steep headwind to overcome quickly.

Moving further toward the other end of the spectrum are investments that are even more difficult to buy or sell. These have even higher spreads between their purchase and sale price, and even more return must be made just to overcome the spread between the bid and ask prices.

Real estate, hedge funds and private equity deals belong in this category. Some purposefully lock up your money and prohibit sales for several years. For others, something like a market exists for them but with very little volume. Finally, they may have capital calls where not only can't you sell, but you are required to invest more money in them. They all may have the allure of exclusivity, but they lack liquidity. Here is the critical question: "When you go to spend your money, will it be easily available?"

You need your money to be there when you want it. Therefore, use liquidity as one way of avoiding investments you should not be making in the first place. Remember, it is to the advantage of agents who sell such investments that their products remain illiquid. Therefore avoid going to them for so-called free advice as well. Even a negative return in the markets is better than no return of your investment.

from http://www.emarotta.com/article.php?ID=321

Safeguard #2: Walk Away from "Too Good to Be True" (2009-01-19)

by David John Marotta

In addition to the all-important fiduciary requirement, you should insist on several other investment safeguards. Safeguard #1: Do not allow your financial advisor to have custody of your investments. The second safeguard: Avoid any investment opportunity that sounds too good to be true.

I learned this principle in a practical way from my father when I was 13 years old. One of my brothers had a friend whose father was doubling his money in an investment company that was importing Portuguese wine. They were selling it for more than twice what they had paid for it and making money hand over fist.

But they needed cash to buy the wine. After having the wine shipped from Portugal and distributing it around the Washington, D.C., area, they were paying 50% interest. Because orders had already been taken, it was touted as a sure thing. My father, George Marotta, was asked to invest in the next shipment.

His response was right to the point. He just said, "It sounds too good to be true." That was it. No looking into the matter, trying to determine where the catch was. He simply refused to waste his time on it.

My brother wanted to take the money my parents had saved for him and invest it in the Portuguese wine deal. Why not, he reasoned. It was guaranteed, wasn't it?

Again my father refused to allow my brother to invest anything. He explained that they couldn't be making 50% interest every six months. There had to be a hidden difficulty or complication.

Six weeks later the scandal broke on the front page of the Washington Post. There was no wine. Families lost their life savings and their children's college funds. It was all a Ponzi scheme. They were paying early investors with the money taken in by subsequent investors. Without any real returns, all Ponzi schemes eventually run their course and then implode.

Nothing really changes. For many people, greed can block common sense. This natural but deadly impulse is one you must learn to overcome.

Shortly after my father's wisdom was vindicated, it was suggested he give his sons some practical experience in investing by finding a good pick for us, some penny stock that was going to two pennies without very much risk.

My father again replied wisely, "If I knew a penny stock that was going to two pennies without any risk, I would invest our life savings and double our money. Such an investment doesn't exist."

Here's the hard lesson: There is no such thing as a sure thing, and if something sounds too good to be true, it is.

I used to analyze offers to find the proverbial catch. I would scrutinize the small print and find where they were going to make their money. Curiosity drove me to know, and in the process I learned a great deal about the dishonest methods companies use to separate fools from their money: bait and switch, allure of exclusivity, guarantee or your money back, limited time horizon and automatic charges.

And then there were the handful that really sounded too good to be true. And it struck me that they were blatantly lying. Nothing could be found in their literature to determine where the snag was because they simply were not telling the truth. And that is part of the lesson to be learned. You don't need to know where and how they are lying. But if it sounds too good to be true, it probably is.

Madoff Securities was recently caught in the largest Ponzi scheme in history. For years, Bernie Madoff collected assets with returns that seemed amazing. Hedge funds fronted for his investments, putting their own private label on his $50 billion scam.

Madoff was known as the guy who never seemed to lose money. It was implied he was subsidizing down months in the markets, a common rationale around Ponzi schemes. There has to be some reason given in a Ponzi scheme for the total lack of volatility, and the rationale commonly offered is that the company eats its losses during down months.

But it is a securities fraud to misrepresent either an investment's returns or the volatility of those returns. We are always reminding our clients and our readers that the markets are inherently volatile. Despite this tendency, they have also been profitable, even taking into account the significant drop in 2008. You should expect to see and understand the risk you are taking. Don't be mesmerized either by the promise of a high return or a sure thing. Even Treasury bills carry the inherent risk that you will lose your buying power to inflation.

Although the preceding may sound cynical and paranoid, many posing as financial advisors really do try to separate you from your money. Fortunately, only a few do it fraudulently. Others may do it legally in small amounts through hidden fees over a long period of time. Both may be actively calculating how to maximize their portion and minimize yours and how to hide how much they are keeping and the real return you are receiving.

So the challenge for investors seeking financial advice is clear. Where is the moral high ground? How can investors avoid as much as possible the conflict of interests inherent in many compensation schemes and find an advisor who simply helps clients meet their goals?

The National Association of Personal Financial Advisors (<a href="http://www.napfa.org" target=_blank>www.napfa.org</a>), created in 1983, is an industry association of firms that provide independent financial advice. Their compensation is not clouded by the purchase or sale of a financial product.

You have a right to be proactive and ask the right questions. It is up to you to know how your advisor is compensated and how your investment return is calculated. And if past returns sound too good to be true, don't believe them. Visit <a href="http://www.napfa.org/tips_tools" target=_blank>http://www.napfa.org/tips_tools</a> to learn more and become a truly savvy, and safe, investor.

from http://www.emarotta.com/article.php?ID=320

Safeguard #1: Do Not Allow Your Advisor to Have Custody of Your Investments (2009-01-12)

by David John Marotta

I was recently asked if investors should trust their financial advisors. And my short answer, you may be surprised to hear, was no.

Given all the greed and deceit revealed last year in the world of financial services, this question of trust could not be more timely.

If your advisor is not a fiduciary, he or she has no legal obligation to act in your best interest. Only about 7% of those working in financial services are fiduciaries, so the odds are your advisor is probably not.

Simply put, the term "fiduciary" applies to those who have the legal responsibility to manage other people's money. Fiduciaries are required by law to act in the best interests of their clients, beneficiaries or retirement plan participants.

Both the National Association of Personal Financial Advisors (<a href="http://www.napfa.org" target=_blank>www.napfa.org</a>) and the Center for Fiduciary Studies (<a href="http://www.fi360.com" target=_blank>http://www.fi360.com</a>) require its members to sign and uphold a fiduciary oath. In contrast, brokers and agents are not fiduciaries and often must disclose the following in writing: "Your account is a brokerage account and not an advisory account." And "Our interests may not always be the same as yours."

Being a fiduciary is the bright white line that separates those who sit on your side of the table and legally must act in your best interests and those who sit on the other side of the table and have no such obligation.

In addition to the all-important fiduciary requirement are several other safeguards that you should insist on. Foremost among them is that your financial advisor should not also have custody of your investments.

Custody refers to the entity that is legally responsible for holding your investments and keeping them safe. In the old days, custody literally meant keeping the paper certificates secure. In contrast, a contemporary custodian offers a range of services that investors commonly take for granted.

When securities are bought or sold, the custodian delivers or receives ownership of the shares in exchange for the agreed amount of money. This process, called "settlement," usually takes one to three days after the purchase or sale.

At one time the physical certificates had to be transferred. But U.S. legislation in 1975 enabled markets to use the Depository Trust Company (DTC), a unified central securities depository. Holding securities electronically or in "street name" makes it easier to transfer and keep track of them. Now the certificates do not move physically. Instead they are transferred via book entry settlement between securities account holders called "members" or "participants."

While the securities are being held for you, your custodian provides asset services, which amounts to exercising rights and obligations on your behalf.

Custodians collect all the dividends and interest accrued by the investment. They relay any corporate information or actions that affect your investments and provide a standard and streamlined way for you to receive information, exercise rights or vote proxies.

Having a financial advisor who does not have custody of your assets gives you an extra layer of accountability and oversight. Fiduciaries review potential custodians to determine the best one to house their clients' assets. They analyze the fees and expenses charged in exchange for the services offered. Then fiduciaries keep an eye on the chosen custodian on behalf of their clients.

With a hedge fund or private equity, there is much less accountability. No one--except the individual investor--is watching to see if fees and expenses are reasonable. If the managers of a private equity pay themselves well, their salary is simply an added expense.

The safeguards and monitoring of advisor and custodian work mutually. The custodian sends its own set of statements, a way for you as the investor to double-check what your financial advisor is telling you. Being defrauded is much less likely when you are receiving independent statements.

The custodian also prices your investments, ensuring that everything is really worth what your advisor says it is. When advisors provide their own valuations, they might use the opportunity to manipulate client investments.

Imagine a hedge fund or private equity investment where contributions and redemptions must be requested ahead of time. If net investment flows are into the fund, illiquid assets can be priced high so that investors buy fewer shares. But when net investment flows withdraw money from the fund they can be priced lower, so investors receive less money. If management is also invested in the fund, they can do the exact opposite when moving their own contributions and withdrawals to maximize their profits and minimize that of other investors.

It is even more frustrating when your investments are unknowingly leveraged in nontransparent hedge funds or private equity. Much of your investment may be used as collateral against speculative investments in the hopes of a profit great enough to break high-water marks and justify bonus fees. You may or may not understand these investments. Nor may you understand if they are in your best interest or only in the best interest of your advisor. Using a reputable third-party custodian can help ensure that reporting about your investments is transparent.

Not having custody of your investments may limit some of your advisor's services. So be it. Your advisor can help you with the paperwork to transfer money in or out of your investments but should not handle the money itself. Always make the check out directly to the custodian, never to your advisor.

You can give your advisor limited power of attorney to makes trades on your behalf and take out a fee, but your custodian should both watch out for excessive fees and make withdrawals by your advisor impossible. Your advisor may be able to transfer money between your accounts but only between those you own completely.

Do not allow your advisor to pay bills on your behalf. If paying bills is required, use a third-party service and ask your advisor to make sure it is reputable and honest.

As fiduciaries, we put all of these safeguards into practice to help secure our clients' investments. We instigate these because part of being a fiduciary means avoiding conflicts of interest and implementing secure practices. By separating your custodian and your advisor, you'll have peace of mind, knowing that the fees you are paying are reasonable and your assets are secure.

from http://www.emarotta.com/article.php?ID=319

Compute Your Net Worth Once a Year (2009-01-05)

by David John Marotta

Last year's markets took a heavy toll on your financial plan. You may have been on track at the beginning of the year, but now you must reevaluate. The storm has blown you miles off course, and not making any adjustments is destined to end in a shipwreck.

Everything in the financial markets has changed: energy, financials, real estate, bonds, equities, even the dollar. If you are within 20 years of retirement (age 45 to 65), it's critical to get your retirement planning updated. Computing your net worth annually is like taking a sextant reading to chart your course toward financial security.

Net worth gives you a snapshot of how much money would be left if you converted everything you owned into cash and paid off all your debts. Compute your net worth by creating four lists.

Liquid assets: An asset is something you own that has significant value. A liquid asset can be sold in a matter of days. Include personal bank accounts (checking, savings and money market), certificates of deposit, bonds, mutual funds, stocks and exchange-traded funds. Use values as of December 31 of the previous year so all of your amounts are calculated on the same day.

Nonliquid assets: Nonliquid assets are those things you own that incur a penalty when they are sold. Include the value of your retirement accounts (IRAs, 401ks, 403bs, SEPs, profit-sharing plans and pension plans). Add real estate investments as well as the market value of your home. Use the assessed value.

Other nonliquid assets may include proprietorships, partnerships or company stock in a firm that is not publicly traded. Add the cash value of any life (nonterm) insurance. Some people include jewelry, collectibles, cars and boats in this category. Although these items often have a high retail value, their true worth is often a small fraction of their initial cost. I do not recommend including personal property.

Immediate liabilities: List what you owe to creditors. Immediate liabilities include credit card debt, car loans, student loans, other loans and any bill or debt that must be paid within two years.

Long-term debt: For most people, long-term debt is primarily their home mortgage, but it may encompass other real estate or business loans.

The first time you gather all of this information will be challenging, but it gets much easier each subsequent year. By keeping an annual record of your net worth, you're creating a valuable financial planning tool.

Next compute three additional values. For your total assets, add your liquid and nonliquid categories; for your total liabilities, add your immediate liabilities and long-term debt; and finally, for your net worth, simply subtract your total liabilities from your total assets.

Use these net worth numbers to compute other values useful for reaching your financial goals. For example, your emergency reserve (liquid assets minus immediate liabilities) should be at least half your annual income. Any extra can be invested more aggressively for appreciation. Your debt load ratio (total liabilities divided by total assets) should be under 35%, with your home mortgage comprising most of your debt.

If you are trying hard to pay off your mortgage ahead of schedule instead of making a huge effort to save and invest, your attempts are laudable but mistaken. The quickest path to wealth includes holding a home mortgage you could pay off but you choose not to in order to take advantage of the tax benefits. The rich leverage wisely and invest.

A net worth statement helps you measure your progress toward retirement. At age 65 you can only withdraw 4.36% of your portfolio to maintain your lifestyle. In other words, to keep the same standard of living, you will need about 23 times what you spend annually.

Take your net worth and divide it by your annual take-home pay. The result shows you how many times your annual standard of living you have amassed in savings. If you are younger than 40, the number probably comes to less than five, which is adequate for now.

Progress toward retirement is not linear. This equation, determined by quadratic regression, estimates how much of your current net worth you should have saved given your age. It gives you a benchmark for determining if you are on track to retire by age 65:

Savings should equal 0.0125 x^2 - 0.5746x + 7.4668, where x is your age in years.

The result should be between zero and 23. That number tells you how many times your current annual income you should be worth. The formula is most accurate between ages 45 and 65.

By age 45, you should be worth about seven times your annual spending. More sophisticated retirement planning includes the difference between taxable, tax-deferred and Roth accounts as well as Social Security guesses and defined benefit plans, but the method described here will approximate your progress. This table shows by what age you should have saved different multiples of your annual spending.

If your net worth is higher, congratulations! You may be able to retire earlier than 65. For every 1 unit you are over, you could consider retiring about a year earlier. Conversely, for every 1 unit you are under your age's benchmark, you may have to work an additional year beyond 65.

Between ages 40 and 50, your net worth should increase by 1 unit of your annual spending every two years. That means your current net worth divided by your take-home pay should be 1 unit greater than it was two years ago. And if you are between age 50 and 65, your net worth should have increased this year by one times your take-home pay.

Want to retire younger? Try lowering your standard of living. Most retirees spend about 70% of the gross salary they earned while working. If you can live off 50% of your take-home pay, it's not as essential to save as much.

Need to catch up? Save more than 15% of your take-home-pay. Determine how far you are behind and what additional percentage you can save each year. For example, at age 30, you should be worth 1.5 times your annual income. If your numbers don't match that ideal, an additional 0.3 times your annual income will help you get there. You could save an additional 10% of your income (for a total of 25%) for three years. If that's too much, try saving 20% (an additional 5%) for six years.

Money makes money. By the time you reach your 40s, you should have enough investments to be earning about half of your annual spending each year. Early in life what you save is most important for building wealth, but as you approach age 40 what you earn on your investments becomes critical. While you are young, the best advice a professional can offer is to "save." As you amass significant wealth, it is more pressing to "manage" well what you already have.

All financial planning begins with a clear understanding of your net worth. A PDF template on our website (<a href="http://www.emarotta.com/budget" target=_blank>www.emarotta.com/budget</a>) can help you compute and keep track of your net worth each year. Contact us or visit our website to download a free copy.

from http://www.emarotta.com/article.php?ID=318

Financial Resolutions for the New Year (2008-12-29)

by David John Marotta

Every year many of us make New Year's resolutions and then can't follow through because we claim we're too busy. The most common priority--if another hour can be found in the day--is to spend more time with family and friends. The second one on the list is to find time for physical fitness. But given two extra hours, far too many of us just work that much longer on our backlog of pressing responsibilities.

This year, however, is different. Financial planning concerns very likely threaten to consume your life and ruin all your other New Year's resolutions. The tsunami of 2008 left your finances beached in a tree, and a plan to get back on track in order to meet your goals is imperative. You can't afford to spend time with family and friends and make it to the gym unless you have someone on your team watching out for your finances. Few of us are disciplined enough to accomplish what we need to do without help.

If you are young, you may not have had that much saved relative to your annual spending anyway. But if you are older than 40, what you save each year is small compared with what you already have invested. So growing that money is critical. And for both young and old alike, for every seven years you delay saving and investing, you cut in half the lifestyle you might enjoy in retirement.

Here are some suggestions. First, ask the right questions and stay the course until you've found the answers. Goals that are shared are ten times more likely to be acted on. Don't wait until you have everything set up to seek out accountability.

Second, make those goals concrete and then document them. Set your savings goals as a specific annual percentage of your adjusted gross income (AGI). We recommend saving at least 10% of your AGI in tax-free retirement accounts and another 5% toward retirement in taxable investments. If you are behind on your savings (over age 40 with less than five times your AGI in investments), you may want to save more in order to catch up.

Third, craft the best strategy to implement your goals, including prioritizing the appropriate retirement vehicles. We recommend investing just enough to get the entire match that your company's 401(k) plan offers first and then funding your Roth IRA accounts next. After these two, make certain you have enough nonretirement savings. By prioritizing your investment vehicles, you are deliberately putting your money into accounts that combine the greatest number of asset allocation choices with the lowest possible fees. Many company 401(k) accounts have such high fees and poor choices that they frustrate investors.

Fourth, automate your plan. Automating putting money in an employer-defined contribution plan is easy. Automating a taxable savings plan is just as painless. Most brokers offer an automatic money link between your investment account and your checking account. They also offer a monthly automatic transfer between the two accounts.

Finally, monitor your plan and rebalance your portfolio regularly. I recommend doing this halfway through the year after your June 30 statement.

Your plan must be comprehensive. Investment management may be at the core, but it is not the most critical element. Managing your investments must be done in the context of sound financial planning that you and an advisor monitor and review regularly. Financial planning includes retirement projections, figuring out how much to save and setting reasonable spending rates in retirement.

But an even more important element than financial planning is a comprehensive wealth management plan, which should include reasonable and appropriate insurance and liability coverage.

Perhaps the most critical component of wealth management in the new year will be tax management. With the potential for tax rates to fluctuate even more than the stock market, the value of tax management has never been greater. In addition to positioning your family's wealth to take advantage of all the possibilities, from Roth conversion to municipal bonds, you also will need help to contend with the plethora of changes in estate planning laws over the next few years.

Investment management, financial planning, wealth management and estate planning underline the need for integrated life planning. You can learn to enjoy life more, and find time for family and exercise, if you delegate the financial, tax and legal issues to trustworthy advisors.

A skilled financial advisor can help you realize the benefit of saving and investing with a minimal amount of work. But be aware that salespeople cannot be objective in helping you determine what to purchase when they have a vested interest in selling you a product. To find a fee-only financial advisor, call the National Association of Personal Financial Advisors (NAPFA) at 1-888-FEE-ONLY (1-888-333-6659) for a list of members in your area or visit their website at <a href="http://www.napfa.org" target=_blank>www.napfa.org</a>.

from http://www.emarotta.com/article.php?ID=317

A Christmas Sermon (2008-12-22)

by David John Marotta

Christians celebrate the birth of Jesus on Christmas Day. But for too many of us, it's the season that unravels the careful financial planning of the previous 11 months. So this year, instead of trading your financial goals for a mountain of gifts and debt, take a moment to contemplate how a spiritual perspective can help you put your wealth in perspective.

In Christianity, my religious tradition, we are only stewards of our wealth. We are entrusted to use it wisely to meet the responsibilities we've been given. Thus our money belongs to God, and we must first ask ourselves, "What does God want us to do with his money?"

You may find a spiritual perspective on wealth either strange or presumptuous. But for all of us, money is an unconscious placeholder for what we value. The way each family uses money expresses their beliefs. Even when someone uses money hedonistically, it reveals their worldview. More commonly, our use of money negotiates a plethora of competing values such as education and recreation, security and travel, or children's needs and parents' needs.

Every spiritual tradition promotes certain actions and ideals as beautiful, virtuous and true and discourages others as ugly, sinful and false. Having a spiritual view of wealth management, whether based on the Judeo-Christian, Buddhist, Baha'i, or any other faith, helps us purposefully apply our values and use money to meet our goals.

The wisdom we gain from our spiritual traditions challenges us to consider our wealth from a new perspective. In the Christian tradition, the words directly attributed to Jesus, often marked in red in the Bible, have the highest authority. But whatever your religious faith, consider the words of Jesus as a prophet and spiritual leader. In the gospel of Matthew (23:23), Jesus says, "You give a tenth of your spices--mint, dill and cumin. But you have neglected the more important matters of the law--justice, mercy and faithfulness."

Giving a tenth of your income each year, or tithing, is a noble endeavor. Many people use this percentage as a benchmark of their generosity, but Jesus offers us a greater challenge and an important warning. He cites three values that are particularly germane when dealing with our perspectives toward wealth management: justice, mercy and faithfulness.

Justice, the first virtue, is acting fairly. The notion of justice seems to be instilled universally in the human mind and heart. We all recognize injustice, especially against ourselves! But the truth of justice is that all people, regardless of their wealth, have equal value in the eyes of God. Although most believe this to be true in the abstract, wealth can make people act otherwise.

We tend to treat those with power and wealth with more respect and deference than those without. And if we have acquired wealth, we may think ourselves better than others for having done so. But being more productive does not make us more valuable. True justice values every person. And its opposite is pride, believing ourselves better than others because we have wealth, status and power.

In the Christmas story, the wise men come bearing gifts for the baby Jesus. They bring him gold because he is a king. Some have cynically mocked the golden rule, misquoting, "He who has the gold makes the rules." The gift from the magi reminds us that Jesus has the gold, and with him as king, justice rules. Wealth need not make us prideful, and we can treat others with equity and humility.

Mercy, the second virtue that Jesus mentions, translates as kindness toward those in need. Mercy is also a universal virtue. Few would argue against being tenderhearted and compassionate. Although the goodness of mercy is universal, unfortunately the practice is not. Statistics show that the more money people possess, the smaller percentage they give to charity.

If mercy is the virtue, greed is the vice. Making progress toward our financial goals need not blind us to those struggling behind us. Part of our careful planning and budgeting should include cheerfully helping those charities and individuals in need. Jesus emphasizes that becoming generous and merciful is even more important than giving a fixed percentage of our income.

Frankincense, the second gift of the wise men, was used to offer prayers to God. It reminds us to have faith that a power greater than ourselves cares for us. Every person among us needs mercy.

The third virtue, faithfulness, involves a covenant relationship with God to trust ultimately in the spiritual, not the material. If we are not vigilant, the many things we buy with money can become the center of our lives. We can find ourselves literally worshipping material goods.

In his book "Mere Christianity," C.S. Lewis warns, "One of the dangers of having a lot of money is that you may be quite satisfied with the kinds of happiness money can give and so fail to realize your need for God. If everything seems to come simply by signing checks, you may forget that you are at every moment totally dependent on God."

The Old Testament law in Deuteronomy 8:11-18 makes this temptation even clearer: "Be careful that you do not forget the Lord your God. Otherwise, when you eat and are satisfied, when you build fine houses and settle down, and when your herds and flocks grow large and your silver and gold increase and all you have is multiplied, then your heart will become proud and you may say to yourself, 'My power and the strength of my hands have produced this wealth for me.' But remember the Lord your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant."

The opposite of faithfulness is fear. We fear that God has forsaken us or is indifferent to our struggles. But fear can paralyze us. And if we do not take risks, we are unable to live and enjoy fully the life God has given us.

The final gift of the magi was myrrh, a bitter gum used in death and burial. In the Christian tradition, it reminds us that even at Jesus' birth, his death on our behalf is foreshadowed. As the apostle Paul writes in the letter to the Romans (8:32-34), "If God is for us, who is against us? He who did not spare His own Son, but delivered Him over for us all, how will He not also with Him freely give us all things? God is the one who justifies; Christ Jesus is He who died, yes, rather who was raised, who is at the right hand of God, He intercedes for us."

If God is for us, we can trust him, and take courage no matter how dark the future may appear. Look to integrate finances with your spiritual traditions to reflect the best of your values and live life holistically.

Seek to avoid pride, greed and fear is a common mantra in investment management. Jesus substitutes the positive virtues: justice, mercy and faithfulness. Don't think more highly of yourself if you have money. Be generous to those in need and trust that God cares for you. Remember these principles this Christmas season, and you will remember the one whose birth we celebrate.

from http://www.emarotta.com/article.php?ID=316

Financial Time Perspective (2008-12-15)

by David John Marotta

I was back at Stanford University recently and heard famed psychologist Philip Zimbardo lecture on his latest book, "The Time Paradox." His work suggests that understanding your own time perspective may help you unlock the secrets of financial freedom. In other words, how we think determines who we are and what we do.

Zimbardo's book focuses on how we perceive the effects of time on every aspect of our lives and our decision making. His Time Perspective Inventory scores individuals in six different time perspectives. Each perspective comes with strengths and weaknesses, and some are better at handling modern life and wealth management.

Within Zimbardo's categories are two past, two present, and two future perspectives. Both the past and future perspectives are abstractions. In a very real sense, we only experience the present. The past is an abstraction of gratitude and regrets. Similarly, the future is an abstraction of possible fears and longings.

Although present thinking may have been critical in simpler times of survival, it isn't necessarily the best perspective today when wealth itself is also the abstractions of shares in a company or zeros in a bank account.

People who live in the future are by far the most successful. Western civilization rose and prospered because of our future-oriented culture. Unlike present hedonists who live in their bodies, Zimbardo writes, "Futures live in their minds, envisioning other selves, scenarios, rewards, and successes."

He explains that you can test for future thinking as early as age four by giving children one marshmallow and telling them if they wait until you get back to eat the marshmallow, you will give them another one. Interestingly, children who have learned to delay gratification at age four score an average of 250 points higher on their Scholastic Aptitude Test (SAT) 14 years later. It isn't that time orientation is determined by age four. In fact, Zimbardo argues we are all born as present hedonists, seeking pleasure and sustenance while avoiding pain and bitter tastes. But by age four it is already apparent that some children live in an environment that encourages a future orientation.

Futures make money. They earn more. They get more education. They get better jobs. But most importantly, they save more and spend less. They discuss finances with their children and model future-oriented choices every day for the next generation.

Much of the advice in this column could be summarized as acting in a prudent future-oriented way in your investments.

Present hedonists use their money for fun and exciting experiences. They are the most likely to pile up credit card debt or experience home foreclosure. Their journey from rags to riches, if it happens, is often a round-trip ticket. They consider savings a token expense and a low priority. Impatience may cause them to chase returns.

To present fatalists, money just doesn't matter. They don't designate their money for present or for future enjoyment but simply spend it because it's there. Thus their spending and investments are random, and they are unlikely to reach their long-term goals.

Past-oriented people are rare in the United States. They generally do not take risks, and they invest conservatively. Past-positives focus on their achievement of earning and saving and do not want to risk losing money. Past-negatives remember only investment downturns and don't want to be burned again. Neither the past nor the present-time perspectives prove to be as successful as the future perspectives at managing their wealth.

We can view our present market turmoil through each of these time grids. Past-positives are thankful for longer term gains over the last few decades, whereas past-negatives only measure their losses from the recent high watermark. Present hedonists use market losses as an excuse to enjoy rather than invest; present fatalists don't believe what they do matters because global forces are completely out of their control. Only future goal-oriented investors recognize that the stock market has gone on sale, and today is an even better day to invest in a balanced portfolio.

Zimbardo also points out that "smarter people have higher annual incomes but are no wealthier than average people are." Given that every 10 IQ points correlates to $4,250 a year more in annual income, smart people should be richer. Alas, they are not. Smart people make more, but they also spend more, sometimes a lot more. Zimbardo concludes with this simple moral: "To become wealthy you cannot spend more money than you make, and you must invest wisely." Sage advice.

Some researchers suggest that the present orientation of the poor is pathological. But Zimbardo is more optimistic. He believes we can learn to be sufficiently motivated and to change our attitudes and the behaviors associated with them.

Zimbardo offers the following five simple steps toward achieving financial freedom and using time to work for you: (1) The present is the best time to start investing. (2) Time in the market is more important than timing the market. (3) Know when your time will be up; those with a long time ahead of them can afford more risky investments. (4) You can't time the markets. (5) A hedonistic time perspective is an expensive habit few can afford.

I asked Professor Zimbardo what he thought was the ideal time perspective for Americans today. He replied, "It is vital to develop an optimal blend of several time zones, so that you are able to flexibly shift mentally from one to the other depending on the situation. When there is work to get done, call up your future focus--but not excessively so (that can lead to sacrificing family, friends, fun and sleep). When you complete a task, take a time-out to reward yourself, indulge the present hedonist in you (get a massage, manicure, hot tub, see a movie, read a good book, meet a friend at a coffeehouse) but only moderately so. And always make time to engage with your positive past, your family, your own identity over time, with your legacy and cultural foundation. The past gives you roots; the present hedonism supplies the energy to take chances, to improvise, to take risks; the future gives you wings to soar to new destinations, to imagine new visions. You can have it all if you work at creating this balanced time perspective."

Perhaps a future study could find the correlation between your Zimbardo Time Perspective Inventory Score, your credit score and the size of your investment portfolio. To see how you score, visit <a href="www.thetimeparadox.com" target=_blank>www.thetimeparadox.com</a>; take the test and score it.

from http://www.emarotta.com/article.php?ID=315

Owners of Second Homes: Beware of New Tax Laws (2008-12-08)

by David John Marotta

If you own two homes, sell the one you are living in and move into your second home as soon as possible. Tax changes taking effect on January 1 will make owning a second home much less attractive in 2009. As a result, the already depressed market for vacation homes will deflate even more.

Previously, any capital gains on your primary residence were excluded up to $250,000 for singles and $500,000 for couples. A primary residence was defined as any home you had lived in for two of the previous five years. The "prior rule" gave seniors moving to a new residence three years to make the move permanent. During that time they could still sell their original residence and take advantage of the exclusion.

It also allowed seniors who had a vacation home to move there and sell their primary residence. After two years their vacation home qualified as their primary residence. Young grandparents approaching retirement could buy a retirement home as a vacation destination while they were still working. After retirement they had time to sell their original home and in two years gain a full exclusion for their new residence.

With the new rule, primary residence is not something you can qualify for. Rather it is just a percentage of the time you live there.

The new law eliminates the capital gains exclusion, prorated on the amount of time a home was not your primary residence. After January 1, every day you aren't living in a home starts adding to the percentage of capital gains tax you will ultimately be obliged to pay.

Also, capital gains are no longer waived on a primary residence unless it has always been your primary residence. Starting in 2009, the percentage of time a home is not your primary residence will be the same number used to calculate the amount of capital gains that won't be waived. For example, if you own a house for ten years and have only lived in it for five, you will have to pay taxes on half of the capital gains when you sell it.

These are the same capital gains that President-elect Obama promised during his campaign to raise from 15% to 28% on the most productive citizens. Some states (e.g., California) tax capital gains at ordinary income tax rates, adding an additional 9.3%. So people who make significant contributions to society could easily be facing taxes of 37.3% on gains that are mostly inflation.

This isn't just a problem for the wealthy. You can be pushed into the top 1% of income tax payments simply by selling a house in California. Middle-class couples routinely get hit with unexpected taxes selling a home with capital gains well over the $500,000 exclusion. Because it is not a onetime exclusion, couples who have stayed in the same house for 40 years get socked with the tax, whereas couples who move every decade have multiple chances to realize smaller gains that are under the limits. People who move frequently shouldn't be rewarded with a tax break.

Here's another factor to consider: Home appreciation is mostly inflation. Taxing government-created inflation as so-called gains isn't fair. Even according to the official inflation numbers reported by the government, the equivalent of a million-dollar home today was a $179,154 home in 1970. Calling the $820,846 inflation a capital "gain" is ludicrous.

Class envy is equally mindless. Capital gains on real estate affect your finances even if you don't own a second home. The housing market isn't segmented into primary and secondary residences. What depresses the values on second houses depresses the value of all homes.

The second-house class is the very group that could have helped shore up today's slumping housing market. Speculators who would have bought real estate at the current depressed prices will find this option far less attractive in 2009. Instead the new law will encourage them to sell their current residence (taking the full deduction) and move into their second home. Then their second home will become their sole and primary residence, and they won't have to deal with future nonexempt capital gains taxes. Ask your financial advisor about the potential costs of continuing to own two homes. If you delay, you may be holding an unused vacation home until you die just to avoid this new tax burden. And as a result, your heirs will inherit the house with a step-up in cost basis.

Because of the law, thousands of additional homes will be added to the market, softening the demand for housing even further. It is as though a shortage of people are buying real estate and we've passed a one-per-customer tax incentive law. There is no reason to discourage what no one is willing to buy. The new legislation will probably push home values to new lows during 2009.

Why the law was changed is unclear. The old law was difficult to abuse. Those who were rapidly turning over real estate could not take advantage of the law. If someone tried to flip 25 homes, it would take 50 years. The new law doesn't make any sense, but if it did make sense, it probably would not be Congress.

The new law won't bring in much additional revenue either. But it will complicate record keeping and tax returns for anyone selling a home they have not lived in continuously. As a result of these disincentives, buying or selling vacation homes will become less desirable.

This legislation graphically illustrates the deadweight costs of taxation. Rarely is the concept so clear. The law will remove much of the value of vacation homes from the economy without collecting much additional tax revenue. All pain, no gain. It teaches us a sad lesson about the destructive power of taxation.

Vacation homes represent an expense that can easily be let go in challenging economic times. Many families own a vacation home during the season of children or young grandchildren. After that, the travails of maintenance and repairs outweigh their pleasure in the home. Management companies remove much of the headache but make the economics even more problematic.

In times of rising home values, the investment in a home at least kept up with inflation, but with the new laws the government will tax you on that inflation. As a result of these changes, consider simply renting a vacation home and letting someone else pay the capital gains tax.

from http://www.emarotta.com/article.php?ID=314

When Will the Markets Stop Dropping? (2008-12-01)

by David John Marotta

For the many investors glued to the news, the markets appear to be dropping uncontrollably and unstoppably. It doesn't appear rational, and they worry it could go to zero. From high to low, losses have halved account values. Waiting appears foolish, and selling seems cowardly. When will the markets stop dropping?

U.S. credit market debt is at an all-time high. It has grown from 250% of gross domestic product (GDP) a decade ago to more than 350% this year. Even 250% a decade ago set highs we hadn't seen since the Great Depression. The problem has not been the federal deficit, which has actually shrunk from 46% to only 37% of GDP. The primary problem has been borrowing, both by our financial institutions and by households. These two components (domestic financial debt and household debt) have both risen dramatically.

Domestic financial debt rose from 64% of GDP to 114% over the past decade. Financial institutions leveraged because it meant they were making more money. Borrowing money and putting that money to work translated to bigger profits in a rising economy.

Household debt was the second biggest increase. It rose from 66% of GDP to 100%. Savings rates dropped and spending rates soared.

If Adam put $100 in the bank, the bank only kept $10 and loaned the other $90 to Cain. Then Cain bought a plow from his brother Seth, who put $90 back in the bank. The bank kept $9 and promptly loaned the other $81 to Cain's son Enoch. Enoch paid his cousin Enosh, who put the money back in the bank. Feeling rich again, the bank loaned $73 to Irad, who paid Kenan for a pair of sandals. Kenan put the money back in the bank, which loaned $66 of it to Lamech.

The debt was fruitful and multiplied.

At this point the bank had $27 in cash reserves and $244 in outstanding loans. This situation was the United States a decade ago. Nobody wanted dollars while profit could still be made by keeping the money moving.

Lamech bought a couple of wedding rings from Jared, who put the money back in the bank. The bank loaned Jubal $59, who bought wood from Noah to make a lyre.

At this point the bank had $41 in reserves and $369 in outstanding loans. There appears to be $410 of wealth, and if there had been a stock market back then it would have been at an all-time high.

The number of dollars flying around is so high that people would rather have stuff than dollars. The line of Seth was preparing for a rainy day, but the line of Cain, so long as the velocity of money continues and no one tries to lower their debt or deleverage everything, will appear normal, perhaps even better than normal.

And then the rainy day came, and the bank asked everyone to pay them back.

A day of reckoning always comes when people use debt to leverage their investments. Only those who have assets will survive the deluge intact, and even the savers will not avoid getting wet. It is as if being debt free is your boarding pass for entering the ark. A little rain, and suddenly no one wants fancy jewelry and musical instruments. The only thing people want is cash to pay off their bank debt. Their very survival depends on it.

Highly leveraged financial institutions are going out of business, and the marginally leveraged ones are scrambling to pay down some of their debt in advance of the rising water. They are selling whatever they can to raise money. Individuals who enjoyed using their mortgages as ATM machines are now in danger of losing their homes. People used to be willing to pay $140 for a barrel of oil. Now they would prefer $60 cash instead.

To use a different analogy, it is as though your next-door neighbor got into credit card debt and is now trying to pay it off. On his front lawn he is having a yard sale. His couch is going for $10, his good china for $20 and his plasma TV for $25. And you think to yourself, "That's the exact same couch I just paid $200 for, and my neighbor is selling it for $10!" In fact, you are amazed that the entire contents of your house have dropped in value.

Diversification among household contents did not help because the financial institutions that are deleveraging also owned a nice diversified portfolio. Nothing is fundamentally wrong with couches, china and plasma TVs. The problem is that when a nation is deleveraging, everyone wants cash to pay off their debts. When you look down the block, it seems like every other house is having a yard sale.

Selling your assets in this market is a foolish move.

If you don't need to sell your couch, getting $10 for it is even more risky than holding on to it. If you sell your couch for $10 (fearing the going price for couches might drop to $9), at what price would you buy another couch again? If couch prices drop to $8, would you buy then? If couch prices rise to $12, would you buy then? Study after study suggests that by getting out, you risk having to buy the investment again later at a higher price.

The contrarian move is to look for an antique dining room table for $30. Buy it, store it in your basement for a few years and then sell it for a nice profit. Your neighbor desperately wants the $5. If you sell your couch for $5, you are investing in cash. You are betting that one of your neighbors is going to want $5 tomorrow even more than he wants $5 today. You are getting $5 today and offer that $5, hoping to get something even more valuable than a couch for it.

In other words, you are generating cash with the expectation that if the markets drop further you will put the money back into the markets and get some good china for it.

Many seasoned investors are fearful, which drives them to get the $5 one way or another and never buy household goods again. That is not a wise long-term plan. It is easy to get out of the markets, but it is difficult knowing when to get back in. Investor psychology tells us people won't get back in if the markets drop lower. They simply stay out until the markets show signs of recovering. And "recovering" means waiting to get back in until the markets have risen considerably higher than the point at which they got out.

Second-guessing the markets is especially difficult because they are a leading rather than a lagging indicator. They change direction long before the underlying fundamentals of the economy. Studies suggest that the markets start to go up 9 months to a year before the economy begins to recover. That means the markets may be bottoming out now in the expectation that the economy will recover in the third or fourth quarter of next year. As financier Warren Buffett recently wrote, "What is likely is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."

With market volatility and deleveraging pushing the markets to irrational lows, the corresponding recovery could be an equally volatile snap-up in some sectors. Missing the upside could be costly.

As an investor, you should always have five to seven years of spending in relatively stable investments. The remainder of your portfolio should be able to weather the duration of even this tsunami. If you don't need to sell your couch to deleverage, sit on it. And if you are especially contrarian and courageous, buy your neighbor's antique dining room table.

from http://www.emarotta.com/article.php?ID=313

Dropping the Baton in Estate Titling (2008-11-24)

by David John Marotta

How you "title" the property you own is a lot more important than you might think. Failure to title your assets properly could undo the best will and trust planning that money can buy. And it could make a huge difference in how much estate tax your estate will pay and how much hassle your heirs will experience when you die.

Consider the case of Jonathan and Martha Kent. Jonathan spent his entire adult life building his business in Smallville to a value of $5 million. Then the Kents were in a car accident. Jonathan was killed instantly, and his wife Martha died four months later from her injuries. Their son Clark returned from Metropolis to handle their estate.

Let's look at the different ways the Kents could have titled their property and the effect of each one. We'll think of Jonathan's estate as a baton. The various ways of titling that ownership are alternative ways to hold the baton.

<b>Sole ownership</b>

If Jonathan was the sole owner of his small business, he was the only one holding the baton. When he died as sole owner, the baton fell to the ground. The required legal process called "probate" would determine the next holder of the baton. If he did not have a will, the laws of the state where he lived at the time of his death in effect would write his will for him, under its laws of intestate succession.

In Virginia, state law assumes you would leave a third of your estate to your current spouse and two thirds to children, if you have children from a former marriage. If you don't have any children from a former marriage, state law provides that your entire estate goes to your current spouse.

The probate process can take months, even years. The personal representative must gather together the decedent's assets, pay his debts and taxes, and distribute the estate as directed in the will (if there was one) or as the laws of the state dictate if there was not. In Virginia, probate fees of about 0.15% of the value of the estate, are paid to the clerk of the court, and the executor of the state could charge an additional 3% to 5% of its value. On the Kent estate, probate costs alone might be well over $150,000.

You don't want to drop a $5 million baton into probate.

Also, if Jonathan was driving and a lawsuit was brought about the accident, his entire estate could be subject to any subsequent legal action. During the probate process, it might be difficult to pay Martha's medical bills.

Fortunately, no estate taxes apply when a spouse inherits assets. But just as probate has finished transferring assets to Martha, she dies, dropping the baton again and requiring another probate process.

During this second probate, assets are passed to the children, and all of the assets over $2 million are subject to 45% estate taxes. So the taxes on a $5 million estate would be $1.35 million. Even though the business is worth $5 million, Clark and his brother don't have the money for the estate tax, and they are forced to sell rather than inherit the business. Clark must return to his dead end job as a reporter for a city newspaper.

<b>Joint tenancy with rights of survivorship (JTWROS)</b>

In a JTWROS arrangement, two or more people hold the baton, and each one has an equal share. One person can sell his or her share and pass their grip on the baton to someone else. They can also break off their piece of the baton and keep the piece. But if they die, their share is given to those still holding on. The last one holding the baton owns it outright.

JTWROS does not require probate, which would make the transition of ownership from Jonathan to Martha easy and straightforward. But it does not protect the estate from legal action. Nor does it help solve the estate tax problem for Clark.

Joint tenancy titling trumps a will. Even if you have been careful in your estate planning documents, if you are not equally purposeful and intentional in how you title your assets you can ruin your plan. Financial accounts that use POD (payable-on-death) or TOD (transfer-on-death) arrangements, if sloppily done, can also thwart all your best estate planning intentions.

<b>Tenancy by the entirety (TBE)</b>

Only persons married to each other can hold property jointly as tenants by the entirety. With TBE, each spouse holds the entire baton. They can't sell their share and pass the grip to someone else because they don't hold a piece of the baton separate from the other tenants' pieces. And they cannot break off a piece of the baton and keep it for themselves.

TBE can provide asset protection features unavailable in other forms of joint ownership. Suppose Jonathan's accident was due to his negligence. If he and Martha held the baton as TBE, Martha can inherit the entire baton at Jonathan's death, free of Jonathan's liabilities.

In our litigious culture, wealthy individuals often have a bull's-eye painted on their backs. Everyone should make asset protection a priority. You should probably have an excess liability insurance policy, often referred to as an umbrella. If you are married, your real estate should be held in TBE. Virginia law also allows married couples to title their investment assets (called personal property) as TBE. Generally speaking, creditors cannot seize assets held in TBE because doing so infringes on the other tenants' rights to the entire baton. TBE isn't perfect, but it does give some liability protection to married couples.

TBE, like JTWROS, trumps a will. It has to be integrated carefully with your estate planning documents to ensure that it will not thwart your plan to reduce your estate tax exposure.

<b>Revocable living trust</b>

With a revocable living trust, the trust owns the baton. Think of it as a glove. The trustee controls the glove, and usually you name yourself trustee during your lifetime. Your hand is in the glove and holds the baton. Because the trust is revocable, you can do anything you want while your hand is in the glove. You can pass the baton from your gloved hand to your ungloved hand, passing the baton between the trust and sole ownership.

So long as the glove is holding the baton when you die, the baton does not fall into probate. The trust still holds the asset in the same way the glove still holds the baton. On your death the trust becomes irrevocable. The trust documents specify the next trustee and the distribution of the assets. The next trustee slips his or her hand into the glove and immediately controls the assets.

Revocable living trusts are common estate planning instruments. They avoid probate and thus help families hold on to the baton. By themselves they don't limit estate taxes or creditor claims, but they can be effective estate planning tools. In Virginia and many other states, the assets in your revocable living trust at your death are still subject to the claims of your creditors.

<b>Bypass Trust</b>

A bypass trust is someone who will hold the baton in a trust after you die, for the benefit of your surviving spouse. A bypass trust may provide Martha Kent with income from the business while she is alive, but it passes ownership in the business to her sons after she dies.

Upon Jonathan's death, with proper planning he could have arranged to put as much as $2 million free of estate tax in a bypass trust for the benefit of his wife for her lifetime. Upon her death it will pass tax free to the children. Martha can leave an additional $2 million to her children tax free. With the wise use of a bypass trust upon the death of the first spouse to die, up to $4 million can pass to the children tax free, leaving only $450,000 worth of tax owed on the remaining million. With additional estate planning, the family can avoid even this tax.

Depending on the asset, the process for changing the title of your assets varies. To change the title on your house you must record a new deed. Changing the title on your car requires a trip to the Department of Motor Vehicles. If you want to change the title on your investments, you must send your custodian a letter. Drawing up legal trust documents to facilitate asset titling and transfer requires professional legal advice, which could be expensive. But the alternative is often even more costly.

Aside from the expense, estate planning remains a topic that few people want to contemplate. On the one hand, raising these issues with family members can make you feel like the prodigal son wishing his father was dead and he could enjoy his inheritance now. On the other, avoiding these issues can mean a lifetime of regret.

I'm very grateful that my father asked for an hour of family vacation each year to talk about estate planning issues and explain the plan. It may feel morbid the first time, but after a while, it seems loving and caring.

When people die without proper estate planning, the state distributes their assets in their own time. If someone involved is incapacitated, you may not be able to act on their behalf. Just because you are expected to take care of their affairs doesn't mean you will have the legal right.

Clip this article and send it to your parents as a way to begin the discussion. They will realize you want to know exactly what to do in an emergency. For your own estate, bring this column to your financial advisor and ask for a review of your titling and beneficiaries.

from http://www.emarotta.com/article.php?ID=311

Marotta Advisors join NAPFA Bus in Richmond, Virginia (2008-11-20)

by David John Marotta

Financial Organizations Are Taking Financial Education On The Road:

NAPFA Consumer Education Foundation, TD AMERITRADE and Kiplinger's Personal Finance magazine

join forces with local financial advisors to deliver financial education during national bus tour.

The national savings rate in the United States is currently at an all-time low, which means millions of American families are not in a position to plan for their long-term financial well-being.  This is a trend that must end.  To help educate people on the need to save and to promote the need for financial literacy, the National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation (NCEF), TD Ameritrade Institutional, and Kiplinger's Personal Finance magazine have teamed up with local members of NAPFA to bring this important message coast-to-coast.<img src="images/napfabus.jpg" align=right>

NAPFA members from across the state of Virginia met in Richmond on Thursday, November 20th, 2008, to conduct free advice events and symposiums to help consumers get their financial life back in order. The State coordinator for this event, Matt Illian, of Marotta Wealth Management of Richmond, and Bob Arms and Frank McCraw, of Marotta Wealth Management of Charlottesville, were on hand to answer financial questions for the attending public. David John Marotta, President of Marotta Wealth Management, was a guest speaker at the symposium, which addressed issues of concern for Virginians.

For the next year, Your Money Bus Tour will be going from border-to-border and coast-to-coast to deliver this important message.  Fee-Only financial advisors will be in cities across the country to conduct free advice events and symposiums where you can learn what you need to do to start saving and get your financial life in order.

Be sure to visit <a href="www.YourMoneyBus.com" target=_blank>www.YourMoneyBus.com</a> for information on the progress of the tour. Advisors also particiated in short video blogs including:<br>David John Marotta at <a href="http://www.youtube.com/watch?v=uo0TVi9sjgg" target=_blank>http://www.youtube.com/watch?v=uo0TVi9sjgg</a><br>and Matt Illian at <a href="http://www.youtube.com/watch?v=0EfO-UBADi4" target=_blank>http://www.youtube.com/watch?v=0EfO-UBADi4</a>

If you have questions about the NAPFA Consumer Education Foundation or would like a schedule of upcoming talks, please contact Marotta Wealth Management, Inc. of Charlottesville at (434) 244-0000, toll-free at (877) 244-1001, or by email at charlottesville@napfafoundation.org

You can also learn more about the NAPFA Foundation at:<a href="http://www.napfa.org/consumer/NAPFAConsumerEducationFoundation.asp" target=_blank> http://www.napfa.org/consumer/NAPFAConsumerEducationFoundation.asp</a>

from http://www.emarotta.com/article.php?ID=312

Keep Christmas Your Own Way (2008-11-17)

by David John Marotta

In Charles Dickens's "A Christmas Carol," Ebenezer Scrooge calls Christmas a "humbug" because of the foolish way people celebrate it. He asks his nephew, "What's Christmas time to you but a time for paying bills without money?"

Sadly, that sounds like Christmas for many American families binging on expensive gifts.

Every year, Americans seem determined to be more frugal than the year before because of the latest economic conditions. One year it is rising energy prices; another year it is rising interest rates. This year, of course, the drop in everyone's investments looms large. And so once again Americans will promise to cut back on presents, food and decorations and to fund their celebration from actual income instead of savings or credit cards.

But while the retailers worry, cut prices and may have an off year, the credit card companies are never concerned. One in every five families won't pay off their credit cards in January. They will pay exorbitant interest rates instead and begin the downward spiral into financial ruin. Many families, in fact, are still trying to pay off their credit card purchases from last Christmas.

We are a nation of consumers and debtors. Total U.S. credit market debt has reached an all-time high in 2008 at 350% of gross domestic product (GDP), up from 255% a decade ago. This increase over the past 10years is not due to the federal deficit. Only a paltry 37% of GDP is federal government debt, which is down from 46% a decade ago. The largest increase has been in financial institutions, whose debt rose from 64% to 114% of GDP. The second largest increase has been in household debt, which rose from 66% to 100% of GDP. Now the country is de-leveraging, and American families must do the same.

Christmas is an emotional time. Few families set a budget for spending, and consequently credit card debt spikes considerably. Our materialism urges us to show our love for friends and family members with big and expensive gifts. As a result, we often buy even more lavishly than the receiver would have wanted us to.

It's time to differentiate between the celebration of Christmas and the commercialization of Christmas. This year, give your family the gift of financial peace of mind. Celebrate the season simply.

Four decisions, if made together as a family, can help reduce the frenetic materialism of the season and bring back the holiday's warm fuzzy feelings: Cut back your gift list. Limit how much you spend. Decide to be charitable. Determine which activities bring you real joy.

We get into trouble when the number of people we buy for increases beyond our means. Make a list. Cull the list. Engage in a little honest financial talk among friends and family. Copy this article and highlight this section. They will understand that your retirement account is way down, finances are tight and you need to be saving more money to get back on track. Other family members may be equally relieved to cut back their own gift list.

For example, you might decide that only children 12 and younger among extended family members will get gifts. If that decision doesn't keep gift giving reasonable, ask each extended family member to draw the name of one child under 12 and buy a gift. These seem like sensible rules.

Limit how much you spend. All of your excess holiday spending should fit inside 1% of your annual take-home pay. So if your net income is $40,000, you have a $400 budget for Christmas. If you bring home $100,000, you can spend $1,000. If these amounts seem small, you are in good company. On average, people spend about $800 on gifts alone.

Try taking care of all of your friends with a single baking project. Cookies, homemade granola, Russian tea, or herb mixes are easy to make in quantity and always welcome during the holidays.

Family Christmas letters are a wonderful way to keep distant friends up to date on your life, but consider sending them via e-mail or posting them on a blog or website for free. It is better for the environment--and your budget.

For family members, consider buying gifts that are already part of your budget or that encourage your children to develop their inherent talents. My favorite Christmas gift idea comes from "The Homecoming," the first movie about the Waltons, in which the father buys John Boy paper and pencils. His gift, which affirms his son's choice of writing as a career, is the emotional climax of the story. Many parents' gifts at Christmas have changed the course of their children's lives or careers by inspiring them thoughtfully in one direction or exposing them to a new interest.

Decide to be charitable. We either choose to be the kind of people who take delight in giving generously or we are not generous. Jesus, whose birth we celebrate at Christmas, saw a poor widow putting two small coins worth only a fraction of a penny into the treasury. He called his disciples and said, "Truly I say to you, this poor widow put in more than all the others. They gave out of their wealth; but she gave out of her poverty."

Giving ungrudgingly can be an act of faith, a recollection of all we have been given. It is ultimately a declaration that we want to be generous people.

Finally, decide which activities bring you real joy. Dickens himself understood this. As his son explained, Christmas was "a great time, a really jovial time, and my father was always at his best, a splendid host, bright and jolly as a boy and throwing his heart and soul into everything that was going on. . . . And then the dance! There was no stopping him!"

Take a lesson from how the reformed Ebenezer Scrooge celebrates Christmas. He does six things, and only first two of them cost money.

First, Ebenezer buys the Cratchits a prize turkey anonymously. He decides to treat his employee Bob Cratchit like family. Sharing a festive meal together promotes community. Today less than 20% of family meals are eaten together. Even if all you did during the holidays was to share a meal, it would make the season unique and special.

Expensive food does not make a meal a feast. In fact, it is eating out at fast-food places and precooked convenience foods that burden our budgets. The leisurely pace of homemade family meals costs a fraction of our typical eating on the run. Fold the napkins fancy, and use the good china.

Second, Ebenezer gives generously to the portly gentleman who was collecting for the poor. Ebenezer decides he wants to be charitable, and so he includes a great many back payments in his donation.

Third, Ebenezer is kind and gracious to everyone he meets. This attitude costs so little, but it sometimes seems as scarce as the latest sold-out fad toy. Ebenezer smiles. He is pleasant. He says, "Good morning, sir! A merry Christmas to you!" When he previously would have responded with a gruff word, he reacts now as a shock absorber with forgiveness and forbearance. These simple gestures cost us nothing but are all too uncommon.

As Ebenezer's nephew Fred describes Christmas in the opening scene of Dickens's famous story, it is "a kind, forgiving, charitable, pleasant time: the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys."

The fourth action of the reformed Scrooge is going to church. Worship is an act of celebration that helps us remember with gratitude all that God has provided. Our community provides scores of opportunities for free celebration during the holiday season.

Fifth, Ebenezer walks about the streets of London enjoying the sights. Sometimes a celebration can be simply taking time out of our busy lives to notice what is noble and beautiful all around us. Pausing and reflecting gives us time to refresh our bodies and renew our minds. It allows us to see beyond the ordinary and routine and appreciate life to its fullest.

Perhaps you don't feel that way. All the more reason to stop and reflect. Feelings often follow thoughts. Having an attitude of gratitude, being mindful of others in the present and looking confidently and eagerly toward the future encourages us to be people who live life with more satisfaction.

For his sixth and final new way to celebrate Christmas, Ebenezer goes to his nephew Fred's party for fun, games and music. Christmas provides the unique opportunity for the bonding that comes from joyful laughter.

After a musical interlude, the partygoers play "Forfeits" because "it is good to be children sometimes." The commands are usually silly requests intended to get everyone at the party laughing, such as "dance a jig," "tell how to make a pie without talking," "yawn until you make someone else yawn" or "try to stand on your head."

Next they play the games "Blindman's Buff," "How, When and Where" and then "Yes and No." None of these pleasures cost a cent, which is a lesson Scrooge as well as many of us have forgotten. Your best holiday delights need not even show up as a line item in your budget.

This year, take the hype out of the holiday. Feast merrily, give generously, show kindness, worship thankfully, live mindfully and laugh playfully. Cut back your gift list. Limit how much you spend. Simplify your Christmas, and set your family on the road to a lasting peace about finances.

from http://www.emarotta.com/article.php?ID=310

Give Generously During Hard Times (2008-11-10)

by David John Marotta

As a response to the recent market correction, you can enrich your life in three healthy ways: Cut back your spending, increase your savings, and give more generously to charities of your choice.

The first two recommendations are obvious. If your retirement account is down, reducing your spending and increasing your savings are the best ways to get it back on track. If you are still appreciating assets, this strategy will help you meet your retirement goals. And if you are retired, it will help you stay within your safe spending rates. Even trimming your expenditures by $100 a month during retirement can add an extra quarter of a million dollars to your estate over a 30-year retirement.

But just as critical during an economic downturn is increasing your charitable giving.

Charities are hit especially hard during rough economic times. They face reduced giving and often greater needs. They must find supporters who give more in order to offset those who give less.

Charity freely given is a virtue distinctly more valuable than any government program could be. For charity to be a virtue, it must be freely given. But government entitlement programs are funded from taxes. When you pay your taxes, it is no more virtuous if they are used to buy cruise missiles than to fund school lunch programs. The only virtue here is meeting your legal obligations.

Taxes are not freely given. They are coerced through the threat of imprisonment. Taxes are an obligation and a duty, not a virtue. Charitable begins only after you meet the financial obligation of paying your taxes.

The virtue of charity is an important one to understand and appreciate. True virtue and morality cannot be legislated. Government cannot make people virtuous; it can only make certain actions illegal. Coerced charity ceases to be charity. Politicians from both parties need to understand this principle.

Furthermore, only when you give of your resources is it true charity. Government has no resources of its own. It can only take the production of others and redistribute it, which certainly is not charity.

Those who seek to be charitable must first produce more than they consume to have something to share. As much as it may make you feel good to support laws that take from the productive and give to others, it is not charity on your part. Voting to spend tax dollars isn't charity. Only individuals who give from their own resources can be charitable. Voting for government entitlement programs is like being generous with your neighbor's credit card.

But doing good while doing well is an American tradition. We are a nation of generous people who generally don't want to pay taxes.

No matter what worthy organizations you support, you can donate up to 15% more if you give them appreciated stock instead of cash. For example, if you sell $1,000 worth of appreciated stock, you must pay the capital gains tax of 15%. If most of the stock's value is appreciation, the tax approaches $150, leaving only $850 for charitable giving.

This is the usual time of year to gift investments with gains to reduce your taxes. But that assumes you still have holdings with significant appreciation. Because of the market downturn, fewer people have appreciated stock, and nonprofit organizations as a result are feeling the pinch.

Fortunately another tax-savings opportunity is available for the charitably minded. The bailout plan includes one add-on that actually extended a good idea, at least for another year.

If you are age 70 1/2 or older and taking the required minimum distribution from your IRA account, you can give to charity directly from your IRA. Your gift will count as your required distribution. The gift will count as a distribution, but it won't be considered taxable income.

Normally you would be obliged to take the distribution, increase your adjusted gross income (AGI), and then gift to charity as a charitable deduction. The difference may not be obvious, but it's there. Many calculations in the tax code are tied to your AGI. Increase your AGI and you increase your phaseouts and other additional taxes. Take $5,000 out of your IRA and give it to charity, and you owe a significant additional tax on your generosity.

This provision in the bailout allows you to gift directly from your IRA. Although you won't get a deduction, it doesn't matter because it won't count as AGI in the first place. But here's the downside: This provision was only passed recently, and thus you can only use it on distributions you haven't taken yet. For many people, that might only mean their December distribution, but others take their entire distribution at the end of the year.

The details are complex, so contact your tax professional or financial planner to make sure you are complying with the IRS rules. And give purposefully what you have decided to give, not grudgingly or under compulsion, because God loves a cheerful giver.

If fear and worry about your own investments are eclipsing your charitable nature, there's help. The nonprofit <a href="http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm " target=_blank>National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation</a> is offering a free seminar this Wednesday, November 12, 2008, from 7 to 8:30 p.m. at the Northside Library, 200 Albemarle Square, Charlottesville. The topic is "Five Things to Do in These Financial Markets." Bring your questions and your concerns.

from http://www.emarotta.com/article.php?ID=309

The Assault on Free Markets (2008-11-03)

by David John Marotta

Free markets are under assault in America. We have seen much hyperbole and slander in these past two years of political polarization. But the idea of capitalism and free markets has received more negative campaigning and vicious attack than both candidates combined.

I prefer not to discuss the presidential candidates or the election tomorrow. Like many of you, I am sick of the campaign pomp and media horse race commentary that leaves those of us wanting a serious discussion of the issues quite frustrated. Rather, I want to talk about the specific proposal of increasing taxes on those households making over $250,000 ($200,000 for single people) and the claim that 95% of Americans will therefore not be affected.

Class politics and warfare are standard weapons of intellectual ideology but not a fruitful way of looking at American society. It is difficult to overcome the sneering and disdain for the productive class that both candidates have pounded into us. But such cynicism is unwarranted and a by-product of inexperience.

The charge is that to be "fair," the top 5% should be paying more, but we have no rational definition of that word. Politically, "fair" mobilizes and unifies support among voters. But if they stopped to ask, they would find they disagree on its meaning and implementation. In fact, the top 5% are paying considerably more than their fair share and should be given a tax cut.

As defined by adjusted gross income (AGI), the top 5% of taxpayers pay over 60% of the income tax collected by the federal government. That percentage, 53% in 2001, has increased every year. Concentrating the tax burden on the top 5% has also been the trend, rising from 35% in 1980. It isn't right to increase their taxes when they have already been laden with an additional 25% of the tax burden over the last 30 years. It isn't fair.

Despite these facts, this group has been so vilified as the idle rich that most Americans cannot sympathize. But the top 5% are not necessarily rich. And they certainly are not idle. Using income as a measurement of rich does not make sense. Imagine a small business owner who one year earns over $250,000 and leaves most of those assets in the business.

Using our class warfare definition, that small business owner is rich. But a quarter of a million dollars a year is not what it used to be. After adjusting for inflation, earning $250,000 today is equivalent to earning $44,336 in 1970.

Now imagine a couple in retirement with multimillions in a combination of investments and home equity. Using that same AGI yardstick, our retired couple could be below the poverty line. They may be wealthy, but they have no earned income. Why should the small business owner get socked with extra taxes and the retired couple enjoy a tax break?

Using the yardstick of annual income to talk about the rich and the poor as though they are fixed groups of people doesn't work either. Most people do not remain in the same income bracket over a single decade. Some fluctuate wildly. One year you could be below the poverty line because you are retired. The next year you could be in the top 1% simply by selling a second home in California.

Before we additionally burden those who are the most productive, imagine what running your own business would be like. Assume our small company has $1 million in gross revenues. Five employees earn $65,000 each a year, and you, the owner of the company, earn $75,000. Owners are paid both a salary for their work and again as owners of the company if any profit remains at year-end. Any profit in a small business flows directly onto the personal income tax of the owner, increasing AGI.

As the owner, you pay the employer portion of FICA and Social Security (an additional $24,800) in addition to having your own deducted. You also pay the average 78% of each employee's family health care coverage, an additional $11,059 per employee. Your total personnel costs thus add up to about $500,000. Perhaps all of your other overhead can be contained to $300,000, leaving, in a good year, $200,000 of profit, or 20%, a bare minimum of profit for the size of the business.

Small businesses go under at an alarming rate. The primary reason is cash flow. Either a drop in revenues or an increase in expenses swamps an owner's ability to keep the business running. The best defense is a healthy profit margin. Because of the risk, venture capital expects a return of 20% to 40%.

With any expected return of less than 20%, you would be better off investing elsewhere. If you think the stock market has been volatile lately, consider what it is like to start and run a business. The stock market as a whole will never drop to zero, but the value of a small business--even one in which the owner has invested years of sweat equity--can go belly up quite easily.

Let's assume you run your company with only a 20% profit margin, which for safety's sake you leave in the business for growth and expansion. So after adding this profit to your salary of $75,000, your adjusted gross income is $275,000. If your spouse has any income, you are in deeper trouble. If he or she is a business owner too, you may be part of the top 1% who pay 40% of income taxes.

If you are lucky enough to have $200,000 in profits one year, you must pay about half of it in state and federal taxes. You can only keep $100,000 in the business. If the next year you have $200,000 in losses but insufficient funds to cover them, you must declare bankruptcy. Through the simple ups and downs of business profits, our progressive tax code socializes your profits but privatizes your failures. And by doing so, we make the success of your business much more difficult.

Given the downturn recently in several industries, ask yourself what you would do if you were running a small business and had employees counting on their paycheck to feed their families. Last year you made enough profit to cover this year's losses, but you lost half that profit to taxes. Uncle Sam isn't going to give those taxes back this year, perhaps some next year, but not this year.

In addition to raising the top marginal rate from 35% to 39.6%, part of the proposed tax increase raises the cap on Social Security taxes. About a third of those affected by raising the cap would be small business owners.

In two Wall Street Journal editorials, Michael Boskin found these proposals would raise the marginal tax rate from 44.6% to 62.4%. As a small business owner, currently you can only keep 55.4 cents on any additional dollar you earn. After these tax increases, you will only be able to keep 33.7 cents on the dollar.

Although only a small percentage of small businesses will get hit with these taxes, they represent the bulk of economic productivity and job growth. Two thirds of small business profits are earned in households making more than $250,000.

Edward Prescott, who won the 2004 Nobel Prize in economics, compared the highly taxed European countries and the United States and found that Europeans work a full 50% less than Americans. Incentives toward work actually succeed. And lest you think the difference in work is simply cultural, in the early 1970s before Reagan lowered the top marginal tax rate, it was Europeans who worked nearly 50% harder than Americans.

The most productive wage earners are among the hardest workers. A study by Steven Landsburg showed that leisure used to be evenly divided among the classes, but it isn't any longer. Although Americans as a whole have an extra four to eight hours of leisure per week, this extra leisure has been gained primarily by those in the lowest tax bracket. Today more than ever, it is the working rich and the idle poor.

Many believe it is acceptable to redistribute income but would consider it absurd to redistribute leisure. It turns out there really is little difference.

Additionally, it isn't a zero-sum game. Money taken from those earning over $250,000 isn't necessarily used productively. The most productive wage earners also are the most productive people that society can allow to spend the wealth they have earned.

Those with significant incomes save, which lowers interest rates. They start and invest in companies that create jobs and expand the economy. They hire others because their own time is more valuable to the economy working in their business. And they give their money to private charities. By comparison, the government is more wasteful in everything it does.

The government does not save; it deficit spends, sucking capital from investment. Government may employ people, but it doesn't create jobs that stimulate the economy. Unlike private enterprise, government can deficit spend indefinitely, creating a moral hazard. Government may spend money, but none of its spending frees it to produce more in the economy. And government entitlement programs offer none of the negative feedback that private charities provide. As a result, they are ripe with unintended negative consequences.

Only about 5% of people start and run businesses. Their work employs the other 95% of us.

Small businesses are most likely to be started by middle-aged white men. This demographic is also the least likely to be favoring taxes on those with reported earnings over $250,000. In a recent poll, 71% of small business owners said they could not name one way either U.S. presidential candidate would help their business.

Tax the most productive members of society and everyone will pay with lower wages, less benefits, smaller 401(k)s and higher prices. All this pain and suffering simply for the opportunity to increase government's wasteful spending. We can't tax our way to prosperity. What we need is a revival and respect for the entrepreneurial spirit--and more empathy for the productive class.

from http://www.emarotta.com/article.php?ID=308