Saturday, January 26, 2008

Why Are Taxes So Complicated? And a Simple Proposal to Fix Them.

The U.S. Tax System is broken. Any system that requires professional help, the use of a computer to file, and costs a bunch to file is broken in my opinion. The Federal Government estimates is takes 3 billion hours per year to comply with the tax code. The mean hourly wage in the United States is $18.84/hour. That means on average it costs at least $56 billion per year for Americans to file their taxes. We should absolutely scrap the entire U.S. Tax Code as it exists today.

What should we replace it with? I'd say a national sales tax is one simple solution. 45 of 50 states already collect a sales tax, so the incremental cost of implementing the system shouldn't be too much and we have already proven that collectin sales taxes CAN work. While I can't say I am an expert on it yet, the Fair Tax proposal seems to be a fairly evolved attempt at a flat national sales tax. It is supposedly bipartisan, though it appears to only have the support of two democrats in Congress which is not exactly a ringing endorsement. It gives rebates up to the poverty level, sheltering the poor from taxes altogether. It will dramatically reduce the cost of compliance since we already have a redundant sales tax system in place. Evasion will probably be no worse than under the current income tax system (some likely to happen under both systems).

Monday, January 21, 2008

The Stock Market is Getting Crushed! Should I Sell Stocks in My Brokerage Account or 401K?

Well, we are definitely having a correction. If the U.S. equity markets follow the Europeans they will be down 15% for the year tomorrow or 20% from the peak of the market in October. Many readers may be wondering what they should do with their stocks given the big correction? The answer is it depends on your time horizon.

For those with a long time horizon (10 years or more) and that should be most of you, you should generally ride this out and stick to your plan. Below you can see the inflation adjusted returns for stocks vs. bonds since WWII from this article in the FPA Journal.

As you can see, on an inflation adjusted basis stocks have far outperformed bonds since World War II. I particularly like this table because it only goes through 2003, before the market recovered from the tech bust. The bottom-line here is that as long as you have a long-term time horizon you should do better owning stocks than bonds. That suggests that you should not bail out of all your stocks just because the market takes a dive. Instead you should view it as an opportunity to buy more because good companies are now on sale. Remember to maintain your international exposure as well, these stocks will be the most volatile in market swoons, but they should also have the more growth than US equities over the long term. Emerging markets stocks should be particularly volatile, but should also have the best long-term growth characterization.

If you plan to retire in less than 10 years, you should have at least 30-40% of your portfolio in bonds or cash. If you do not I would advise immediately raising enough cash to survive for your first 5-7 years of retirement and then ride out the rest of your equity exposure with a long-term view.

The bottom-line is: don't panic. Most recessions last 12-24 months or so. Stocks have historically represented a great long-term investment and they should continue to do so in the future. The worst thing you can do is panic and lose confidence in your investment plan. Stick out the tough times and even invest more in stocks that go "on sale" if you can afford to and you will be rewarded over the long-term.

Please note that the above is merely the opinion of the author. Please consult your financial professional about your specific circumstances.

Sunday, January 20, 2008

The Cheaper Alternative to Glasses: A Failed Experiment So Far.

Well, my cheap eyeglasses experiment is a dismal failure so far. The pair I ordered from came quickly enough (within one week), but there was one problem. When I put them on my fluffy litttle black cat looked like a blurry fire-breathing space alien (I'm still having nightmares)! Everything was blurry, even moreso than without wearing the glasses at all. Well, I knew that meant one of three things: 1) I had entered the prescription info wrong, 2) my doctor had written down my prescription wrong, or 3) the glasses were made wrong. It was pretty clearly not number 1. My receipt matched my prescription exactly, so I had entered it correctly. I had to go back to my doctor's office to resolve number 2. Sure enough as soon as he put the glasses in his machine he was like "These are really messed up." All signs pointed to #3. It turns out they made the left eye +1.25 instead of -1.25. Also the right eye power was -2.0 despite me entering -1.5. Needless to say I am feeling like I got what I paid for. I emailed the company about 2 days ago explaining the problem and despite an automated reply that said I would hear from them in 24 hours, I have heard nothing yet. Meanwhile, undeterred I entered my prescription at and we'll see if they can come up with something better. I have not sent my old frames to the eyeglass people yet to be replaced because I want to be sure I have another pair that I can use as a backup first. However, their box for me to mail my glasses to them arrived in a jiffy so at least so far they are living up to their promise to make ordering lens replacements online easy. The saga continues...

Sunday, January 13, 2008

Bank of America to Buy Countrywide: Will Savingslink Survive?

Well, Bank of America announced last week that they will buy ailing lender Countrywide Financial. That is likely to mean the end of Savingslink in my opinion. Savingslink's role for Countrywide was to increase their deposit base. This was a major reason for their 5.25% APY on the account -- to draw more capital which Countrywide then used to provide home loans. Bank of America on the other hand already has a huge deposit base due to their many branches and strong retail customer base. Therefore, soon after the transaction closes in Q3 2008 I would expect the Savingslink program to be rolled into some Bank of America savings program or shut down all together. At the very least, interest rates on the account should come down appreciably. If you have a Savingslink account, it's time to start looking for another account and as I mentioned a few weeks ago you should visit Bank Deals to help you find the highest rates. I recently set up an account at FNBOdirect and found it quite easy to do.

Saturday, January 5, 2008

Do You Have a Will? You Should.

If you are over 18 years of age, you should probably have a will. The number one benefit of having a will and trust for most people is to avoid a time consuming and costly probate after your death. Additionally, you can have a living will so your loved ones don't have to guess about what you would want them to do in the event you become incapacitated. Finally, if you have children it is downright irresponsible not to have a will to provide for them in the event something happens to you.

How much does getting a will cost you might ask? I would expect to spend about $1000 on getting one set up, but that number might vary widely depending on your lawyer. If you avoid even one mistake this one time expense will probably end up paying you back in spades. When you go to your lawyer it also helps to be an informed consumer. I highly recommend The Complete Guide to Wills, Estates, and Trusts by Alexander Bove as a great introduction to the topic that is written with the layman in mind. Having read this book, you can sit down with your lawyer with some ideas already in mind about how you want to do your estate planning.