10 Things You Absolutely Need to Know About Life Insurance

10 Things You Absolutely Need to Know About Life Insurance

By: Tim Maurer Life insurance is one of the pillars of personal finance, deserving of consideration by every household. I’d even go so far as to say it’s vital for most. Yet, despite its nearly universal applicability, there remains a great deal of confusion, and even skepticism, regarding life insurance. Perhaps this is due to life insurance’s complexity, the posture of those who sell it or merely our preference for avoiding the topic of our own demise. But armed with the proper information, you can simplify the decision-making process and arrive at the right choice for you and your family. To help, here are 10 things you absolutely need to know about life insurance: 1. If anyone relies on you financially, you need life insurance. It’s virtually obligatory if you are a spouse or the parent of dependent children. But you may also require life insurance if you are someone’s ex-spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you are stably retired or financially independent, and no one would suffer financially if you were to be no more, then you don’t need life insurance. You may, however, consider using life insurance as a strategic financial tool. 2. Life insurance does not simply apply a monetary value to someone’s life. Instead, it helps compensate for the inevitable financial consequences that accompany the loss of life. Strategically, it helps those left behind cover the costs of final expenses, outstanding debts and mortgages, planned educational expenses and lost income. But most importantly, in the aftermath of an...
Economic Growth Doesn’t Necessarily Mean Better Returns

Economic Growth Doesn’t Necessarily Mean Better Returns

By: Larry Swedroe Conventional wisdom can be defined as “ideas that are so ingrained in our belief system they go unchallenged.” Unfortunately, much of the “conventional wisdom” about investing is wrong. One example of erroneous conventional wisdom is that investors seeking higher returns should invest in countries that are forecasted to have high rates of economic growth, such as India and China. It certainly seems intuitively logical that, if you could accurately forecast which countries would have high rates of economic growth, you would be able to exploit the knowledge and earn abnormal returns. Unfortunately, relying on intuition often leads to incorrect conclusions. In this case, it fails to account for the fact that markets are highly efficient in building information about future prospects into their current prices, and investors fail to understand the difference between what is information and what is value-relevant information. The historical evidence on the correlation between country economic growth rates and stock returns demonstrates this point. A Study Of Growth And Returns The latest evidence comes from an August 2016 research paper from Dimensional Fund Advisors, “Economic Growth and Equity Returns.” Examining the data on 23 developed-country markets over the 40-year period from 1975 through 2014, and for 19 emerging markets over the 20-year period from 1995 through 2014, DFA found no significant relationship between short-term economic growth rates and stock returns. Countries were classified each year as either high or low growth depending on whether their GDP growth was above or below that year’s median, defined separately for developed and emerging markets. Researchers then looked at the stock market returns of high- and...
Looking at Your Portfolio Can Hurt Your Returns

Looking at Your Portfolio Can Hurt Your Returns

By: Larry Swedroe Earlier this week, we examined a pair of studies that sought to explore the relationship between the equity premium puzzle and investor behavior, specifically a behavior known as myopic loss aversion (MLA). MLA describes the tendency of investors who are loss-averse to evaluate their portfolios too frequently, thus causing them to take a short-term view of investing. That, in turn, leads to a focus on the short-term volatility of the market and, as a result, they invest too little in risky assets. Today we’ll look at some evidence from the academic literature that illustrates how MLA can be impacted by the frequency with which an investor evaluates his or her portfolio, as well as its implication for investors and some other possible explanations for the equity premium puzzle. Looking Hurts More Than Not Looking Based on historical evidence for the S&P 500 Index from 1950 through 2014, investors who check their portfolios on a daily basis can expect to see losses 46% of the time and see gains 54% of the time. However, while they see gains more frequently than losses, because the average investor tends to feel the pain of a loss with twice the intensity that joy is felt from an equal-sized gain, the more often investors check the value of their portfolios, the more net pain is felt. The pain/joy meter for an investor who checks his or her portfolio daily will show an average of -38 ([-46 x 2] + [54 x 1]). Over the period 1927 through 2015, investors who resisted the urge to check their portfolios daily and moved to...
Don’t Let Wall Street Fool You Into Taking Too Much Risk

Don’t Let Wall Street Fool You Into Taking Too Much Risk

By: Tim Maurer Competition for your dollars creates an inertia that always seems to lead Wall Street down the path of unhelpfully increasing the risk in your portfolio. The recent Wall Street Journal headline, “Bond Funds Turn Up Risk,” illustrates an especially alarming trend. Specifically, of increasing the risk in the part of your portfolio that should be reducing overall risk—bonds. Bonds are supposed to be boring. The primary role they serve in our portfolios is not necessarily to make money, but to dampen the volatility that is an inevitable byproduct of the real moneymakers—stocks. Yes, interest rates are low. Yes, it’s frustrating. Yes, it’s tempting to reach for higher yields in fixed income investments. But there is a price to be paid for that decision, as we saw last December when there was arun on high-yield “junk” bond funds. Wall Street has capitalized on low-yield frustration by articulating the “problem” while claiming to have manufactured the “solution.” It’s Sales 101. But the potential gain in higher returns (from corporate bonds, junk bonds, international bonds and dividend-oriented stocks) isn’t worth the excess risk taken. Here are four ways to ensure you’re not getting fooled, and to help you eke out a bit more interest without additional risk: 1) Take the Gut Check Test to better understand how much risk you’re really willing to take. Then take that level of risk where you’re better rewarded for it—in equities, not fixed income that comes with a shinier wrapper. (The preceding test should not be considered a replacement for a deeper risk-tolerance analysis with a knowledgeable financial adviser. But you will get...
IRS Gives Tardy Retirement Savers More Rollover Time

IRS Gives Tardy Retirement Savers More Rollover Time

By: Kenneth Kiesnoski Didn’t redeposit that 401(k) distribution check from your old employer into an IRA or your new boss’ qualified retirement savings plan within two months’ time? That once meant you’d likely have to fork over hefty taxes and penalty fees on those hard-earned, once-tax-deferred savings but now, thanks to a new Internal Revenue Service policy, your word that it was an honest mistake will be enough for the feds to give you a break. Under the IRS’ new “self-certification” rule, announced on Thursday, eligible taxpayers who can attest to experiencing one or more of 11 “mitigating circumstances” that led to their missing the normal 60-day time limit for tax-free funds transfer can qualify for a waiver. The revenue procedure posted at the IRS.gov website includes a sample letter taxpayers “can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.” “I’d much rather avoid subjecting myself (or my clients) to the mercy of the ‘mitigating circumstances,’ as defined by the IRS. Eliminate the worry and just get it done as soon as possible.”-Tim Maurer, director of personal finance for Buckingham and the BAM Alliance The list of 11 qualifying circumstances includes misplaced, uncashed distribution checks; severe damage to a taxpayer’s home; death of a family member; serious personal or family illness; incarceration; or restrictions imposed by a foreign country. The IRS will “ordinarily” honor a taxpayer’s “truthful self-certification” that the circumstances indeed apply and grant the waiver, the agency said in a press release. The IRS also has the authority to grant waivers in subsequent...
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