Market Volatility - My Letter To Our Clients

This is a letter that I sent to our clients on August 22, 2015, to address the current market volatility. 

"Our goal is to help people overcome their worries and concerns about money and investing so that they have more time to focus on what's most important to them."

That's a quote from a marketing brochure that Simone and I put together when we started our business back in 2007. Although we haven't used those brochures for years, that sentence still summarizes what I try to do for each of our clients. My sincere hope is that the financial planning we've done has reduced your financial worries and brought more enjoyment to your life.

I'm writing this to address last week's volatility. I realize that even if our clients don't pay attention to the day-to-day movement of their investments (which is never a good idea!), it's impossible to escape the constant barrage of negative headlines that accompany market downturns. This is my response to all of the do-something-now-before-it's-too-late-this-time-is-different articles that you'll come across now and in the future.

I thought it might be helpful to put together a list of the main points that I'd like to make about why we do what we do. This would probably be easier to follow than writing it in paragraph form, and it would be something that you could refer to easily in the future.

In addition to reviewing the list below, I think it would wise to reread all of the Company Updates, Client's Corner, and other articles that I've uploaded to your web portal during the time that we've worked together. These documents were selected to reinforce what we discuss during meetings. It would also be helpful to review past meeting agendas, your meeting notes, financial plans, etc. 

Problem: It's impossible to predict the future.
Solution: Develop a financial plan and update it as needed.

The good news for clients reading this is that your financial plan has prepared you for things like the volatility we experienced last week. During the planning process we discuss what might happen in the future and then built an investment strategy to prepare for it so you don't have to react every time the market swings.

Problem: It's impossible to time the market.
Solution: Stay invested, focus on the long-term, and don't panic and sell during downturns.

Was the downturn last week the start of a new bear market? Or was it just a short-term overreaction to current events? Only time will tell, but reacting to it is the wrong thing to do. Getting out of the market or reducing your stock exposure in response to downturns might feel like a good strategy, but it's a sure way to turn a decline in value into a realized loss. There's no shortage of studies showing that market timing leads to increased costs, higher taxes, and lower performance.

Problem: It's impossible to pick the best investments.
Solution: Select diversified, passively-managed mutual funds and ETFs.

Just like it's impossible to predict the short-term direction of the market, it's also impossible to predict which individual stocks or bonds will do best at any given time. You can eliminate the risk of losing a large percentage of your portfolio in a single holding by investing across a diversified portfolio consisting of thousands of stocks and bonds. Even professional fund managers fail to beat their respective benchmarks. Only around 1 in 5 mutual funds outperform over 10+ year time periods, and it's impossible to know which fund will outperform in advance. Selecting mutual funds and ETFs that track an index of stocks and bonds - instead of trying to pick the best individual holdings - helps make sure that you get as much of the market's return as possible.

Problem: The stock market is volatile.
Solution: Don't put short-term money in the stock market.

It's a fact that the stock market is volatile. It's also a fact that you can't lose money in stocks if you avoid selling when stocks are down. Although there's never a guarantee, you can limit the chance that you'll have to sell stocks during a downturn through regular planning. For clients that aren't retired, we regularly review their cash reserve to make sure they shouldn't have to touch their investments for an emergency expense. For retirees, we regularly review their spending needs and withdrawal strategy to make sure they have enough in cash and bonds to support their projected spending needs in a downturn.

Problem: Your money is worth less each day.
Solution: Invest for long-term growth.

Some individuals avoid the volatility of the stock market in favor of "safe" investments like cash and bonds. A common misconception about these types of holdings is that at least this money will be "safe," but that's not true. I believe that inflation is a larger danger to investors than volatility, especially since it's a danger that many don't "see" until it's too late to do anything about it. For example, retirees that don't get enough growth to outpace inflation might have to make huge reductions in their spending later in life.

So to summarize these points, your financial plan and investment portfolio were designed with market events like last week in mind. Reacting to these events might make you feel better over the short-term, but could do permanent harm to your financial situation.

Please contact us if you have any questions or concerns about the funds we manage for you. Likewise, let us know if your financial needs or goals change.

Best regards,

Neil

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

What Would You Say You 'Do' Here?

One of my favorite scenes in the movie Office Space is when Tom Smykowski is interviewed by the consultants hired to help Initech downsize. During the interview it becomes painfully obvious that his position isn't necessary. When he's finally asked point blank, “What would you say you do here?”, Tom replies, “…I have people skills! I am good at dealing with people! Can’t you understand that?!?”

As an investor it’s important to look at each of your holdings like a consultant and ask what it’s doing in your portfolio. Each investment should have a clearly identifiable role in the overall risk/return of your portfolio. This post covers some of the asset classes commonly used in portfolios to see what they might do to affect a portfolio's return potential.

The portfolio mixes discussed are for educational purposes only and are not recommendations. The portfolios are divided evenly between the investments used in each example and are rebalanced annually.

US Stocks

I tend to think of large-cap US stocks as the first building block of an investment portfolio, so that’s where I’ll start. An investment in Vanguard 500 Index (VFINX) — a mutual fund designed to track the S&P 500 index, one of the more popular benchmarks for large-cap US stocks — would have earned an annualized return of 7.66% for the 10-year period ending June 30, 2014.

The next asset class we might consider adding to our portfolio is small-cap US stocks. Although they tend to be more volatile, stocks of smaller companies have historically outperformed large-cap stocks.

One of the more cost-effective ways to add small-cap stocks to your portfolio is to use a mutual fund that invests in the entire US stock market like Vanguard Total Stock Market (VTSMX) instead of using a separate small-cap stock fund. The average annual return of Vanguard Total Stock Market was 8.31% for the 10-year period ending June 30, 2014, which is 0.65% more per year than Vanguard 500 Index.

International Stocks

Although they’ve underperformed US stocks recently, as a long-term investor it’s a good idea to consider having international stocks in your portfolio. Not only could you benefit during times when international markets outperform the US market, but you could also benefit from international investments if the dollar declines against other currencies. For this asset class I’ll use DFA Large Cap International (DFALX) which invests in large-cap stocks in developed international countries.

Moving 50% of our portfolio to DFA Large Cap International and keeping the other 50% in Vanguard Total Stock Market for large- and small-cap US stock exposure would have earned 7.80% per year from June 2004 through June 2014. Although this mix produced a lower return than Vanguard Total Stock Market by itself, splitting your portfolio evenly between these two funds did produce better results than only holding an S&P 500 index fund over the same timeframe.

Emerging Market Stocks

Emerging markets like Brazil, India, and China don’t always move in lockstep with developed markets, so adding emerging market stocks could be a great way to diversify your portfolio. For this asset class I'll use DFA Emerging Markets (DFEMX).

A portfolio with one-third in Vanguard Total Stock Market, one-third in DFA Large Cap International, and one-third in DFA Emerging Markets would have averaged 9.45% per year through June 2014. This is 1.14% more per year than Vanguard Total Stock Market and a whopping 1.79% more per year than Vanguard 500 Index!

Real Estate Investment Trusts (REITs)

Many investors consider REITs to be an important addition to a portfolio. The historical return from REITs has been similar to large-cap US stocks, but REITs offer great diversification benefits since they don't move in tandem with the overall stock market.

Moving 25% of your investment assets to Vanguard REIT Index (VGSIX) — while holding 25% in US stocks, international stocks, and emerging market stocks — would have increased our theoretical 10-year average annual return to 9.76%. That’s quite a boost over a portfolio of only large-cap US stocks!

Value Investments

The last thing I’d like to do to our hypothetical portfolio is to add separate holdings for US and international small-cap value stocks. For domestic small-cap value stocks I’ll use DFA US Small Cap Value (DFSVX) and for international small-cap value stocks I'll use DFA International Small Cap Value (DISVX).

Just like small-cap stocks offer a higher return potential than large-cap stocks, value stocks have historically outperformed the market as a whole. But in order to capture the potentially higher returns from small-cap and value stocks, you have to be patient enough to hold them for the long-term. And this can be difficult to do when other segments of the market are outperforming value stocks.

So our final theoretical portfolio is evenly divided between Vanguard Total Stock Market Index, DFA Large Cap International, DFA Emerging Markets, Vanguard REIT Index, DFA US Small Cap Value, and DFA International Small Cap Value. This mix would have generated an average annualized return of 9.91% from June 2004 through June 2014, surpassing all of the other mixes we've discussed.

You can see that each of the mutual funds in this hypothetical portfolio serves a specific purpose. They each each represent a specific asset class — or a segment of the market with higher potential return in the case of DFA US Small Cap Value — and mixing them together is a way to have something that “zigs” when other holdings “zag.”

Don’t make the mistake of thinking that you’re diversified just because you have several different holdings. Take time to review each investment you have and ask, “What would you say you do here?”

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Investments mentioned in this post and throughout this blog are for educational purposes only and are not recommendations. Seek investment advice from your personal financial advisor before making any investments.

Who Moved My Small-Cap Fund?

Actively-managed mutual funds have a lot of flexibility over the types of investments they hold. One problem with this flexibility is that it often leads to style drift, which is a term used to describe a gradual change in investment style within a fund. Style drift is important to understand since a change in the investment style of a single fund could change the expected risk and return of your overall portfolio.

I wasn’t concerned about style drift when I first started investing. I believed that a good active manager could outperform the market by changing investment styles as the market changed. However, after years of trial and error - and stumbling across the efficient-market hypothesis in 2005 - and realized that style matters much more than skill.*

Avoiding style drift is one of the many reasons investors select index funds over actively-managed funds. Since index funds track specific indexes, their holdings and investment strategies are completely transparent. Managers of index funds aren’t able to change the investment style since they are required to replicate the performance of the index they follow.

For example, an index fund that tracks the S&P 500 Growth Index isn’t going to start to invest in emerging market stocks because the manager thinks they look cheap relative to US stocks. Likewise, a mutual fund that tracks the MSCI World ex-USA All Cap Index isn’t going to hold US stocks. With a portfolio of index funds, you’re in control of how much exposure you have in a specific asset class. And not having to worry about style drift in your portfolio helps you keep the hot side hot, and the cool side cool.

Okay. So now that I’ve told you that you don’t have to worry about style drift in your index funds, I’m now going to explain why you have to worry about style drift in your index funds. Confused? I’ll explain.

Let’s consider US small-cap stock indexes to illustrate how an index fund might drift off course. There are several indexes that track US small-cap stocks, and each individual index has a specific set of criteria to determine what constitutes a “small-cap stock.” The stocks of companies that meet the criteria will be added to the index, and the mutual funds that track that index will be required to buy that company’s stock. In the same manner, index funds have to sell stocks that are removed from an index.

Instead of having strict breakpoints to define “small-cap”, many indexes have bands that allow the index to continue to hold a stock after it migrates out of the small-cap portion of the market. This happens when a small company continues to grow and enters the “mid-cap” area of the market. The basic idea behind bands in an index is to reduce turnover and trading costs for the mutual funds that track that index.

Certain indexes from the Center for Research in Security Prices (CRSP) use bands instead of breakpoints. (You can read more about banding and migration at the CRSP website here.) Vanguard recently changed the indexes that many of their funds follow to CRSP indexes, and this index change resulted in a style change for the Vanguard Small-Cap Index mutual fund.

The table to the left shows the percentage of stocks in the Vanguard Small-Cap Index fund that were considered large-cap (L), mid-cap (M), and small-cap (S) as of 2/28/14. At that time, only 54% of the fund’s holdings were classified as small-cap stocks.

Dimensional Fund Advisors (DFA) is another provider of index funds. Unlike Vanguard, DFA offers funds only through approved financial advisors. After years of following their research, I was recently granted access to DFA funds for myself and for clients. We’re now in the process of updating client portfolios to include DFA funds where appropriate.

The table to the right shows the holdings of the DFA US Small-Cap mutual fund as of 2/28/14. The fund held 91% of its assets in small-cap stocks, much more than the Vanguard fund that tracks the same segment of the market.

The average market cap (i.e. company size) of the two funds helps illustrates how different they are. Vanguard Small-Cap had an average market cap of $2.87 billion on 2/28/14. The market cap for the DFA fund at that time was $1.45 billion, or 49.5% smaller than the Vanguard Small-Cap fund.

So when it comes to US small-cap stock funds, my opinion is that DFA US Small-Cap is a much better option than Vanguard Small-Cap. Both are index funds, but the DFA fund keeps a much stronger exposure to small-cap stocks and their potential to outperform larger stocks over time.

*A few years ago I gave some background into my transition away from active management in a post titled “To Index, Or Not To Index: That Is The Question.”

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

2013 IRA Contribution Cheat Sheet

I posted this handy IRA Contribution Cheat Sheet earlier in the year to help readers get a head start on investing for 2013. But don't worry if you're just getting around to thinking about contributing to an IRA! You have until April 15th to make a 2013 contribution.

Fifty-eight percent of Americans don't have a retirement plan and 20% of Americans plan on relying on Social Security for all of their retirement needs. That's shocking given that the current average Social Security benefit is only $1,269 per month!

Don't let retirement sneak up on you. Even if you're only a few years away from leaving the workforce, there's still time to improve your financial outlook in retirement. Funding an IRA in 2013 is a great way to do it!

The following cheat sheet will help you determine which IRA is best for your financial situation.

Created by 2013 Tax Rules

The statistics above are from a study conducted by Deloitte Center for Financial Services. The 2013 IRA Contribution Cheat Sheet is used with permission from Greene IRA Success.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Year-End Tax Tips

Don't pay Uncle Sam more than you have to! Tax day will be here before you know it, so take advantage of these tips before the end of the year to make April 15th a little easier to handle.

Tip 1: Be careful when buying a new mutual fund.

Most mutual funds pay out capital gains and dividend toward the end of the year. It's important to check for potential distributions before you buy a new fund to avoid a possible tax bill. The IRS doesn’t care how long you’ve a fund so you’ll be taxed even if you buy it just before the distribution. And since the share prices of funds and stocks drop by the amount they distribute, missing the dividend won’t affect your future return.

Tip 2: Prepay your property taxes.

Property tax payments aren’t due until the end of January, but you can deduct them this year if you pay them by the end of 2013. However, if you expect to be in a higher tax bracket next year, then it might make sense to wait until January to pay your 2013 property taxes and then prepay next year’s taxes by the end of 2014 in order to double your deduction in a single year.

Tip 3: Pay your January mortgage payment before December 31st.

Paying your January mortgage payment before the end of the year will increase your 2013 mortgage interest deduction by the extra amount of interest you pay in the January payment. This might not be a large deduction depending on your mortgage interest rate and outstanding loan balance, but every deduction counts!

Tip 4: Review your portfolio.

If you have investments in taxable accounts that are worth less than you paid for them, it might make sense to sell them by the end of the year to realize the loss. These losses can be written off against investment gains, and excess losses can be written off against income up to $3,000 then carried over to future years.

Tip 5: Defer income.

If you have your own business and use the cash method of accounting, you might be able to benefit from waiting until the end of the year to invoice customers so you don’t receive the income – and have to pay taxes on it – until 2014.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Tips For Saving Money When Buying Gifts

The holiday season is upon us! This time of year can be stressful, especially if you overspend on gifts and and end up in debt. Use these tips to help you save money and get more out of your holiday spending.

Tip 1: Start shopping early.

Waiting until the last minute to do your shopping can blow your budget in a couple of ways. First, you might end up having to pay full price for gifts if you don't give yourself time to comparison shop and keep an eye out for deals. And second, if you do most of your shopping online, you’ll have to add on the cost of expedited shipping if you wait too long. So start your shopping early this year and give yourself time to look for deals and take advantage of free shipping!

Tip 2: Use your smartphone.

Shopping around for deals has never been easier thanks to technology! If you have a smartphone, apps like ShopSavvy, pic2shop, and Goodzer can help you comparison shop to make sure you’re getting the best price. By scanning the barcode on an item you can see if you can find it for less at another store nearby or online.

Tip 3: Avoid shopping with credit cards.

Studies have shown that people tend to spend up to 30% more when paying with credit cards as opposed to cash. To make sure you don’t blow your budget, decide ahead of time how much you’re going to spend for each person and carry cash when you shop.

Tip 4: Keep your receipts.

Not only will keeping the receipt help someone exchange or return a gift you give them, but it can also save you money. While you're doing your holiday shopping you might find that an item you bought has gone on sale shortly after your purchase. Most stores will refund you the difference if the purchase was made within a couple of weeks, so keep that receipt!

Tip 5: Give the gift of time.

Consider donating your time if you don’t have room in your budget for gift giving. Anyone with young children would probably appreciate you offering to babysit more than a gift anyway! If you’re handy, you can offer to help people with any unfinished projects around their home. And if you’re good with computers you can offer to help people fix their old computers or set up their new gadgets.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Tips For Saving Money And Spending Less

Smart consumers are always trying to find ways to stretch their dollars. After all, the first step of financial success is to live below your means! Follow these tips to help you find ways to save money, spend less, and improve your finances.

Tip 1: Deal With Your Debt

The place to start saving money is by dealing with money you’ve already spent. Overspending can lead to credit card balances, expensive personal loans, and other high-interest debt. Unless you develop a plan to pay off these debts - and then stick to that plan over time - the odds of paying them off aren't in your favor!

Set aside a specific dollar amount for debt repayment each month, and make sure this amount is above the minimums due on all of your debts. Pay the minimum due on each of your debts and then direct the remaining amount toward the debt you'd like to pay off first.

Paying extra toward the debt with the highest interest rate is the best way to go mathematically. But if you're dealing with multiple debts, starting with the debt with the lowest balance might be the best way to go since you'll start reducing the number of your outstanding debts faster.

Tip 2: Implement A Cooling-Off Period

Impulse purchases are a big reason why many of us overspend. Even if your spending habits don't lead to you having debt, they could still hurt you by taking away money that could be used for your financial goals.

One way to cut down on impulse purchases is by implementing cooling-off period. And remember it's not just big-ticket items like TVs, smartphones, and cars that can lead to trouble; smaller purchases add up quickly! Consider implementing a cooling-off period of a week or two before making purchases. Use this time to see how the purchase will affect your budget and to determine whether the purchase is a “need” or just a “want.”

Tip 3: Stick To A Shopping List

How many times have you gone to a store like Wal-Mart or Target for just a couple of items and come out with a cart full of stuff? Making a list before you go shopping – and sticking to it once you’re there – can help you spend less.

It also helps to go directly to the part of the store that has what you're looking for. Wondering around a store aimlessly or carefully going down every aisle are two great ways to end up buying things you don't really need!  

Tip 4: Use Automatic Bill Pay

Late payment fees are expensive and can add up quickly. You can make sure you never miss a due date by setting up automatic bill pay for your credit cards, utility bills, phone bills, etc. Not only will this make sure you're never charged a late fee, but it will also free up some of your time.

Most banks offer automatic bill pay, or you could have your bills charged directly to your credit card. I prefer to have my bills charged to my card and then have my card automatically deduct the full statement balance from my checking account at the end of the billing cycle. That way I get reward points and only have to worry about one draft from my bank account each month. 

Tip 5: Check For Recurring Charges

It’s easy to lose track of how much you’re paying for magazines, newspapers, credit monitoring services, video services like Netflix and Hulu, and other recurring subscriptions. So go through your bank statements and credit card bills to see what you’re paying for and determine whether or not it’s worth keeping. 

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

The Importance Of Stock Dividends

Stock returns come from two sources: capital gains and dividends. A capital gain occurs when a stock you purchase appreciates in price. Dividends are payments made directly to shareholders and are not affected by the day-to-day changes of a stock's price.

Capital gains tend to be the most exciting portion of stock returns since stock prices fluctuate daily, but dividends have the potential to make a huge difference in your total return over time. 

Price Return vs. Total Return

Return figures of indexes like the S&P 500 are often based on the "price return" that only includes price changes of the index (i.e. capital gains or losses). The "total return" figure also includes the dividends that were been paid out by the companies in the index.

The S&P 500 averaged a total return of 9.7% per year over the past 40 years. With dividends removed the return falls to 6.4% per year. So over the past 40 years dividends made up around 1/3 of the total return of large US stocks.

S&P 500 Returns (12/31/1972 – 12/31/2012)

With Dividends	9.7% Per Year
Without Dividends	6.4% Per Year

To put this into perspective, a $10,000 investment would grow to over $400,000 if it compounded at 9.7% per year over 40 years. That same investment would only be worth around $120,000 if it grew at 6.4% per year. That’s a huge difference and illustrates the impact of letting stock dividends compound over time.

Initial Investment Of $10,000 Over 40 Years

@ 9.7% Per Year	$405,756
@ 6.4% Per Year	$119,582

*For educational purposes only and does not take into account taxes, investment costs, and other fees.

 
How To Profit From Dividends

Hold Value Investments – Adding “value” investments to your portfolio can increase your dividend income since they tend to pay more dividends than “growth” investments. Keep in mind that growth and value tend to fall in and out of favor over time, so you might want to have a mix of both in your portfolio.

Don’t React to Market Swings – Instead of panicking out of stocks during downturns, focus on the fact that you’re able to buy shares at a discount with your dividend income. And remember that you won't receive the dividends if you sell your stocks during the downturn.

Be Careful Of Equity-Indexed Products – Some advisors sell annuities and insurance that promise “equity returns” without losses. Unfortunately most of these products use the “price index” that leaves out dividends, so your long-term expected return will be much lower than you might think.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com. 

3 Things To Consider With Rising Interest Rates

There has been a lot of coverage in the news recently about the Fed’s decision to raise interest rates. With the recent history of record-low rates, it may be difficult to remember that periods of rising rates are normal. In fact, rising rates can create opportunities for investors. So how can you take advantage of the current interest rate climate?

1. Buy Stocks. 

Since 1970, there have been 21 periods where the 10-year rate moved a whole percentage point. The S&P 500 had a positive return for 15 of those 21 periods.

Yes, every market is unique, and every spike in interest rates can be due to a wide range of influences. Generally speaking, however, increasing rates will cause investors to sell bonds and buy stocks. Bond prices move inversely with interest rates, so as rates go up, prices come down. Long periods of low rates indicate high relative prices for bonds. When prices start to come down, investors look for more attractive investments. The increase in demand raises stock prices.

2. Rebalance Your Portfolio.

Interest rates affect an organization’s ability to borrow and pay back debt. Low rates improve the ability to pay back loans, so companies borrow more. The increased funds create more spending, which drives corporate development. When rates go up, the concern is that companies will be less likely to borrow. This concern affects pricing within the market.

When market prices are impacted from Fed activity, the movements are typically erratic. The reason for this is that changes in interest rates can create uncertainty, which leads to volatility. The more volatile a market, the more opportunities there are for an investor to buy low and sell high. Active investors can benefit from buying during down swings and selling during peaks.

3. Diversify Your Bonds.

Corporate Bonds – Higher rates are not necessarily bad for companies. An increase in value of a company’s equity (which we’ve seen in times of rising rates) improves a company’s credit quality. This positively affects the value of the company’s debt. Corporate bonds are impacted much more by the company’s financials than external factors.

Short-Term Bonds – Changing interest rates can create opportunities in bonds with different maturities. Shorter duration bonds are typically less sensitive to changes in interest rates. This is primarily because there is less exposure to the long-term effects from Fed activity. A strategy that uses short-term fixed income gives investors the ability to capitalize on rate movements. When these bonds mature, the principal can be reinvested at the higher rates.

Global Bonds – Foreign bonds can be a great way to diversify your U.S. investments. Interest rates in each nation are driven by different factors. By taking a look at the entire global landscape, investors can uncover other opportunities within the bond market. At the same time, investors who diversify can avoid the potential impact of a continuing rise in U.S. rates.

This is a guest post by Kyle Brennan. Kyle is a financial author, specializing in SEO and copywriting services for investment advisors. He received his MBA and MS from Creighton University and is a Level III Candidate with the CFA Institute. If you’d like to contact him, please e-mail kylembrennan@gmail.com.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

How To Handle A Lump Sum Of Money

A bonus, inheritance, or other lump sum of money is a great opportunity to improve your finances if handled properly. Ensure you make the most of your money by following these four steps.

Step 1: Don’t make hasty decisions.

It’s important to realize that you don’t have to make any decisions right away about what you want to do with the money. In fact, you probably shouldn’t. Receiving a lump sum can lead to a lot of strong emotions – especially if it’s an inheritance after a loved one passed away – so it’s a good idea to work through those emotions before you make any decisions.

Step 2: Consider keeping the money separate.

In community property states like Texas, inherited money is a separate asset if you don’t commingle it with your spouse’s assets. Keeping an inheritance separate could help protect it in the case of divorce or if your spouse were to be sued. I don’t practice law so consider consulting an attorney, especially if you’re dealing with a large sum of money.

Step 3: Seek out security while considering your options.

Your primary goal while considering what you want to do with your money should be to keep it safe. You can do this by keeping it in an FDIC insured account like a savings account, money market account, or certificate of deposit (CD). You won’t earn much, but you won’t lose any money either. The FDIC coverage limit is $250,000 so one account is sufficient if you have less than this amount, and you can use more than one bank if you need more coverage.

Step 4: Be careful when getting professional advice.

Do your homework before trusting someone with your money. Ask about qualifications, experience, and credentials when interviewing potential financial advisors. Be sure to ask how advisors are paid and how much they'll earn if you follow their recommendations. This is especially important if you're interviewing a commission or fee-based advisor since hidden sales commissions can be a huge conflict of interest. Working with a fee-only advisor like us will help keep the focus on advice rather than sales. You can get a list of questions to ask a potential advisor from the CFP Board’s website (www.cfp.net).

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

2013 IRA Cheat Sheet - Get A Head Start On This Year's Contribution!

Did you remember to make a 2012 IRA contribution by the April 15th deadline? If not, you're not alone.

A recent study found that 58% of Americans don't have a retirement plan. The study also revealed that 20% of Americans plan on relying on Social Security for all of their retirement needs. That's a shocking revelation given the fact that the current average Social Security benefit is only $1,237 per month!

Don't let retirement sneak up on you. Even if you're only a few years away from leaving the workforce, there's still time to improve your financial outlook in retirement. Starting an IRA in 2013 is a great way to do it!

The following cheat sheet will help you determine which IRA is best for your financial situation.

Created by 2013 Tax Rules

The study sited was conducted by Deloitte Center for Financial Services. The 2013 IRA Contribution Cheat Sheet is used with permission from Greene IRA Success.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

2012 IRA Cheat Sheet - Don't Let Confusion Keep You From Contributing!

A recent survey found that almost half of Americans have little or no confidence that they'll be financially prepared for retirement. Many individuals in this situation plan on working longer, but that option could be cut short by bad health, disability, or loss of a job.

If you haven't started saving for retirement - or haven't saved enough - now's the time to start, and an individual savings account (IRA) is a great investment vehicle to use.

The deadline for making a 2012 IRA contribution is April 15, 2013, so you need to hurry if you want to contribute for last year. Confused about which IRA to select? Here's an excellent cheat sheet that will help you determine which IRA is best for your financial situation.

Created by Tax Code 2013

The study sited was conducted by the Employee Benefit Research Institute. The 2012 IRA Contribution Cheat Sheet was used with permission from Greene IRA Success.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Make The Most Of Your Tax Refund

For many Americans, tax season means looking forward to a refund when they file their taxes. If you're one of the filers that will be getting money back, I have some good and bad news for you. 

First, the bad news. A tax refund represents money you overpaid throughout the year, so it's basically an interest-free loan to Uncle Sam. Instead of overpaying and receiving a refund, you can use the IRS Form W-4 to adjust your tax withholding and keep more of your money throughout the year.*

The good news is that getting a tax refund offers you an opportunity to make some smart financial decisions. The average tax refund was around $2,800 in 2012, so many people receive enough to make a huge positive impact on their financial situation.

Here are a few smart options to use your tax refund.

Option 1. Pay off debt.

Paying off debt is the first thing to consider doing with your refund since dedicating a lump sum toward your debt is a great way to get started down the road to eliminating it completely. A low interest mortgage or student loan is one thing, but what about a high interest credit card or other loan?

Paying off high interest debt is an excellent financial move. Any extra dollar you put toward a debt will save you that percentage of interest over the next year. For example, if you have a credit card with an 18% interest rate, you'd essentially be earning an 18% return on every dollar you put toward that debt since you’d avoid that interest.

Option 2: Build your emergency fund.

Most people know that you should have from 3 to 6 months in a cash reserve, but not everyone has a reserve. A tax refund could be used to start a reserve if you don’t already have one, or use it to replenish your cash reserve if you’ve used some of the funds over the past year. You can check www.DepositAccounts.com or www.BankRate.com to find a no-fee, high-interest savings or money market account to use for your emergency fund.

Option 3: Fund an Individual Retirement Account (IRA).

You have until April 15th to make an IRA contribution for 2012, but if you miss that deadline you can still get a head start on 2013. Funding an IRA is a great way to prepare for retirement, and you can choose between Traditional IRAs that give you a tax deduction now or Roth IRAs that can provide tax-free income in retirement.

The maximum contribution for 2012 is $5,000, or $6,000 over 50, as long as you had at least this amount of earned income for the year. Both contribution limits are $500 higher for 2013, for a total of $5,500 and $6,500 respectively. 

Option 4: Fund your college savings.

It’s often difficult to juggle saving for retirement with other financial goals like preparing for your children’s college education expenses. Using a tax refund as a lump sum contribution toward college savings can be a great way to save money for college without adding an extra monthly bill. You can go to www.savingforcollege.com to learn more about the different types of college savings plans.

*Be sure to consult your tax preparer for help determining your tax withholding. The IRS doesn't like it when you underpay! 

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Tips For Finding Tax Preparer

Many Americans have already started preparing their taxes even though the deadline to file isn't until April 15th. While doing your own taxes might save you some money, the penalties and interest charged by the IRS for even a simple mistake can wipe out years of savings. Working with a tax preparer can free you from the stress of doing your taxes and help make sure they're done correctly.

Here are a few tips to follow when looking for a tax preparer.

Tip 1: Check the tax preparer’s qualifications.

An easy way to start your search for a qualified tax preparer would be to look for an Enrolled Agent (EA), Certified Public Accountant (CPA), or tax attorney. Anyone that carries one or more of these credentials will have gone through a lot of education, testing, and is required to do continuing education.

Just because someone isn't an EA, CPA, or attorney doesn't mean that he or she isn't qualified to do your taxes. It just means that you'll need to do more due diligence. One way to do this is ask if he or she is affiliated with any professional association that requires testing and/or continuing education.

Tip 2: Check the preparer’s history.

You can check up on an EA's background through the IRS Office of Enrollment. In Texas you can research a CPA’s history through the Texas State Board of Public Accountancy and a tax attorney’s history through the State Bar of Texas. You can also contact your local Better Business Bureau to see if there are any complaints against a tax preparer you’re considering.

Tip 3: Ask about fees.

Be sure to select a tax preparer that charges a flat fee, by the hour, or similar method. Avoid preparers that charge a percentage of the refund or make wild claims about how large of a refund they can get you. You want to make sure that the preparer you select doesn't have an incentive to bend the law to get you a larger refund.

Tip 4: Ask about availability after April 15th.

Many tax preparers are only available during tax season. This is especially true of preparers that work for many of the large franchises. If you want someone that will be available after April 15th – and this is important if you’re a business owner or have complicated tax situation – then make sure the person you’re working with will be available throughout the year.

Tip 5: Review the return before signing it.

You’re still responsible for the accuracy of the information on your tax return even if you pay someone to prepare it for you, so make sure you understand everything on the form before signing it. Ask questions about anything you're unsure of and never sign a blank return or tax form.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

It's Not Too Late To Reduce Your 2012 Taxes

Did the New Year sneak up on you? Were you too busy over the holidays to do any year-end tax planning? If so, don't worry! There are a few things you might still be able to do to reduce your 2012 tax bill.

Contribute to a Traditional IRA

One of the easiest tax deductions you can still take for last year is to contribute to a Traditional Individual Retirement Account (IRA). To claim an IRA deduction for 2012 you need to make the contribution by April 15th and designate it is a “prior-year contribution” when you deposit the money.

(Note that you could contribute to a Roth IRA instead of a Traditional IRA, but you don't get tax deductions for Roth contributions. You can learn more about IRAs here.)

The maximum contribution for 2012 is $5,000, or $6,000 if you’re over 50, as long as you had at least this amount of earned income for 2012. Keep in mind that your ability to deduct the contribution will depend on things like your filing status, whether you have a retirement plan at work, and your income level. 

Contribute to a Health Savings Account (HSA)

If you have a high deductible health insurance plan you might be eligible to contribute to a health savings account, or HSA. Contributions are tax-deductible, money inside an HSA isn’t subject to taxes, and withdrawals are tax-free if they are for qualified medical expenses. Your HSA account balance can be rolled over to future years to save for future expenses.

For 2012, individuals can contribute up to $3,100 and families can contribute up to $6,250. You can contribute an extra $1,000 if you’re age 55 or older. Just like IRA contributions, contributions to HSAs for the 2012 tax year must be made by April 15.

Contribute to a SEP IRA

If you’re a business owner, there is still time to set up and fund a Simplified Employee Pension (SEP) IRA. The maximum contribution for 2012 is 25% of your wages up to a maximum contribution of $50,000, so this has the potential to be a huge deduction.

If you have employees you have to contribute the same percentage to their SEP IRAs as you contribute to yours, so keep this in mind when deciding how much to contribute. Contributions to SEP IRAs must be made by your tax-filing deadline including extensions, so you could potentially have up until October 15, 2013 to take this deduction on your 2012 tax return.  

To learn more about our company - and find out how we are different from other financial advisors - visit www.VannoyAdvisoryGroup.com or call us at (210) 587-6433.

Improve Your Finances In 2013

Here are a few simple steps you can take to improve your finances this year.

Step 1: Start by getting out of debt.

Not only does carrying debt mean you could end up paying a ton of interest over time, but it also takes away from money you could save and invest for your financial goals. If you decide that 2013 will be the year you tackle any debt you have, then check out www.PowerPay.org, a free resource to help you develop a debt repayment plan.

Step 2: Make sure you have a cash reserve.

If you don’t have an emergency reserve, then make 2013 the year you start one. The rule of thumb is to have between 3 and 6 month of living expenses saved, but don’t worry if you can only put away a little bit of money to start. Since most high-interest, “pay day” loans are for less than $500, even a small amount of cash can save you in an emergency. You can use www.DepositAccounts.com or www.BankRate.com to find high-yielding savings accounts and CDs to hold your cash.

Step 3: Start investing.

If you’re new to the world of investing then the easiest place to start is with your company’s retirement plan. If your company doesn’t have a retirement plan, then you could start an IRA or Roth IRA at a company that offers commission-free mutual funds. Even if you're already investing in your company's retirement plan, it's a good idea to start additional savings in an IRA, Roth IRA, or taxable investment account to supplement your retirement savings. Consider starting with a “target date” or “asset allocation” mutual fund that will give you instant diversification with a single investment.

Step 4: Get a second opinion.

If you already have investments, you might benefit from sitting down with a professional to discuss things like your asset allocation, individual holdings, tax management, or risk reduction. Keep in mind that someone that earns commissions will have an incentive to recommend changes, so look for an advisor that works on a fee-only basis and never accepts commissions from his or her recommendations. You can go to www.NAPFA.org or www.GarrettPlanningNetwork.com to find a fee-only advisor

To learn more about our company - and find out how we are different from other financial advisors - visit www.VannoyAdvisoryGroup.com or call us at (210) 587-6433.

Year-End Tax Tips for 2012

Tip 1: Don't overreact to talk about the "Fiscal Cliff."

It's almost impossible to turn on the TV, listen to the radio, or pick up a newspaper without hearing or reading something about the "Fiscal Cliff" and the impending economic disaster headed our way. Before you make any changes to your investments, you should think about getting a second opinion from a CPA or fee-only advisor. It's usually not a good idea to react to media hype!

Tip 2: Be careful when buying a new mutual fund. 

Most mutual funds pay out capital gains and dividends toward the end of the year, so you want to check for potential distributions before you buy a new fund. The IRS doesn’t care how long you’ve held a fund so you’ll be taxed even if you buy it just before the distribution. And since the share prices of funds and stocks drop by the amount they distribute, missing the dividend won’t affect your future return.

Tip 3: Prepay your property taxes.

Property tax payments aren’t due until the end of January, but you can deduct them this year if you pay them by the end of 2012. But if you expect to be in a higher tax bracket next year – due to tax increases or higher earnings in 2013 – then you could wait until January to pay and then prepay next year’s taxes in order to double up on the deduction.

Tip 4: Pay your January mortgage payment before December 31st.

Paying your January mortgage payment before the end of the year will increase your 2012 mortgage interest deduction by the extra amount of interest you pay in the January payment.

Tip 5: Review your portfolio.

If you have investments in taxable accounts that are worth less than you paid for them, it might make sense to sell them by the end of the year to realize the loss. These losses can be written off against investment gains, and excess losses can be written off against income up to $3,000. Unused losses can be carried over to future years.

Tip 6: Defer income.

If you have your own business and use the cash method of accounting, you might be able to benefit from waiting until the end of the year to invoice customers so you don’t receive the income – and have to pay taxes on it – until 2013.

To learn more about our company - and find out how we are different from other financial advisors - visit www.VannoyAdvisoryGroup.com or call us at (210) 587-6433.

Five Steps To Financial Readiness

Some of the work I've done over the past few years has involved working with the military. Along with providing individual consultations, I've also had the opportunity to conduct briefings (i.e. presentations) to groups of Servicemembers.

I usually wasn't asked to discuss something specific like "budgeting" or "debt", so over the years I developed a briefing that covered a variety of topics in order to cover as much ground as possible. This is a short version of my "Five Steps To Financial Readiness" briefing.

Step 1: Determine Your Current Situation

The best way to determine your current financial situation is to complete a personal balance sheet that lists your assets and liabilities. You can find sample templates online, but the easiest thing to do is to take a sheet of paper, draw a line down the middle, and list everything you own on the left and any debts you have on the right. Think of a balance sheet as a "financial report card" and complete one regularly to track your progress.

Step 2: Deal With Debt

Ignoring any debt you have on your balance sheet will won't make it go away and will almost always make it worse. The website www.PowerPay.org is a free resource you can use to come up with a personalized debt repayment plan.

Step 3: Start A Cash Reserve

You should set a goal of saving at least $1,000 in an emergency reserve even if you're working on paying off high-interest debt. If you don't have bad debt to pay down, then set a goal of saving between three and six months of living expenses. You can go to www.BankRate.com to find a fee-free high interest savings account to use as your reserve. 

Step 4: Review Your Credit Report And Score

Almost everyone looks at your credit report and score these days, so it's important to review your reports for signs of identity theft and make a plan to improve your score if it's low. You can get free copies of your credit reports at www.AnnualCreditReport.com and get suggestions for improving your score for free at www.CreditKarma.com. Go to www.FTC.gov if you've been a victim of identity theft.

Step 5: Plan For Future Goals

Once you've covered the basics you should start planning for financial goals like college expenses for your children, purchasing a home, and retirement. Websites like www.BankRate.com and www.SmartMoney.com have great articles about planning. If you want personalized advice, you can go to www.NAPFA.org or www.GarrettPlanningNetwork.com to find a fee-only financial advisor that never receives sales commissions from his or her recommendations.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

How To Avoid A Ponzi Scheme

On August 17, 2012, the SEC shut down ZeekRewards, an alleged $600 million online Ponzi scheme. This is yet another reminder that investors need to do their homework before trusting someone with their life savings. Fortunately, there are a few simple steps you can take to protect yourself from investment scams.

Beware of the promise of high returns and low risk.

A lot of investment scams attract investors by promising very high returns will little or no risk. After all, everyone wants to make a ton of money but none of us enjoy investment loses! Unfortunately that’s not how things work in the real world. If you want to earn higher returns, you’re going to have to take on more risk.

Be leery of consistent returns.

All investments fluctuate in value. The higher the expected return of an investment, the more volatility you should expect. Be leery of anyone that promises large positive returns on a consistent basis regardless of the market environment.

Check for registrations.

Many Ponzi schemes involve unregistered securities, so make sure any investment you buy is registered with the SEC or state regulators. Also, if you’re getting advice from someone, make sure that he or she is registered and licensed with the appropriate agencies. Here in Texas you can contact the Texas State Securities Board to research an investment or financial advisor.

Check your statement.

You should receive a statement on a regular basis that lists each investment you have as well as the market value at the time the statement was generated. Review the statements for inaccuracies and ask about anything you don’t understand. Also, these statements should come from an independent, third-party custodian, not directly from your advisor (see next tip).

Don't give someone custody of your money.

Never give an advisor custody of your money. Making sure your money is held with an independent, third-party custodian will make it impossible for your advisor to walk off with it like Bernie Madoff did. For example, we use TD Ameritrade as our custodian. Our clients deposit money directly into their own accounts at TD Ameritrade - not at Vannoy Advisory Group - and TD Ameritrade provides them with regular trade confirmations, statements, and other important account documentation.

Avoid complex or secretive strategies.

Warren Buffet’s advice is to never invest in a business you can’t understand, and that’s good advice to apply to investments as well. Swindlers often use complex or secretive strategies as a smokescreen to cover up what they’re doing.

Get a second opinion.

When in doubt, get a second opinion from someone that’s not directly related to the investment like a CPA or a fee-only financial advisor that works by the hour. You can go find a fee-only advisor through NAPFA or the Garrett Planning Network.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Money Saving Tips For Back To School Shopping

Tip 1 – Keep your school supplies list with you.

Always keep your school supplies list with you because you never know when you'll come across a bargain. Along with helping you take advantage of unexpected sales, keeping your list with you will help you avoid spending money on unnecessary supplies.

Tip 2 – Don’t shop too soon.

Waiting to shop for clothes until after school starts will give you an opportunity to take advantage of Labor Day coupons and sales. It will also give your child a chance to see what the other kids are wearing.

Tip 3 – Search online for coupons before hitting the stores.

Take a few minutes to do an internet search for coupons for the stores you’re planning to go to. You might be able to find better prices online, free shipping, or a coupon to print out and take to the store.

Tip 4 – Take advantage of tax-free shopping.

Texas allows for tax-free purchases of clothes, backpacks, and school supplies priced under $100 during the weekend of August 17-19. That will save you about $8 for every $100 you spend.

Tip 5 – Look around the house first.

Before you hit the stores, look around the house for extra pens, pencils, scissors, binders, and other supplies that are in good condition that your children can use. There's no reason to spend money on something you already have.

Tip 6 – Avoid buying lunches.

Making your child’s lunch will save a lot of money during the school year. When making lunches, you can save even more money by buying things like juices and chips in bulk and using reusable thermoses, plastic bags, and plastic containers.

Tip 7 – Don’t forget to add names.

Make sure you write your child’s name on his or her backpack, lunch bag, jacket, and other items to help you recover them if they get lost. This will save you from having to replace them.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.