In an experiment summarized by Gary Belsky and Thomas Gilovich in Why Smart People Make Big Money Mistakes (Simon and Shuster, 1999), shoppers in a grocery store were offered free samples of fancy jellies and a $1.00 coupon good for buying the jar of their choice. During some hours the samplers had six kinds of jelly from which to choose, and at other times they were offered 24 different varieties. The coupons were bar coded to enable tabulation of the buying response of the two groups. The results were somewhat surprising.
Increasing the number of choices to 24 led to a dramatic increase in traffic to the sample table, as 50% more shoppers tasted the jellies and accepted the coupon. However, with all those choices, many more people could not make up their minds. Of those who were exposed to six choices, 30% used their coupon to make a purchase, but in the group with an array of 24 flavors, only 3% took the purchasing step.
Too many choices, it would seem, can lead to indecision.

The role of emotion

Recently, a different sort of experiment about making choices was discussed during National Public Radio’s RadioLab.
Two groups each were given a number to memorize. They were told that once they were confident of the number, they would proceed to another room and recite the number for a researcher. Participants in one group were given two-digit numbers, the others seven-digit numbers (like a telephone number without the area code).
As each participant walked to the second room for the recitation, he or she was interrupted and offered a choice of snack by another researcher. The choice was between a piece of chocolate cake and a cup of fruit salad.
By a statistically significant amount, those who were remembering two digits favored the fruit, and those with the longer strings of digits chose the cake.
The researchers assumed that because the fruit salad was healthier, it would be the rational choice, all things being equal. The cake, on the other hand, would be a less rational, more emotional preference. The study concluded that when one is working with larger amounts of data—such as remembering seven digits instead of only two—one is more likely to rely upon emotions in decision-making.

An investor’s context

Whether research such as this has meaning for investors is a provocative question. For sponsors of 401(k) plans, accepting the notion that having a substantially larger universe of choices may result in delays of investment decisions by plan participants might reasonably lead to a cap on the number of investment alternatives to evaluate, for example.
One can quarrel with the idea that chocolate cake is bad and, therefore, an emotional choice, while fruit salad is inherently a better and more rational choice. But the larger, clearer point is that the subjects who were under minor stress—the need to remember more numbers with no penalty for failure—made different choices than those who had even less stress.
It goes without saying that these are stressful times for investors, and that investors are deluged with more and more economic and investment data on a daily basis. That is why we believe that professional investment advice has become more valuable than ever.
To learn more about our capabilities in this area, please contact one of our investment officers at your earliest convenience.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Successful investing is never haphazard. An orderly, disciplined approach is necessary for successful management of your investment assets. It’s a step-by-step process, starting with the assessment of your goals and needs.

Information gathering and analysis
The important first step is to take a thorough personal financial inventory of your investment assets: Then you need to look beyond your investment portfolio to your retirement plan interests, real estate, life insurance and annuities. By looking at what you currently hold, you will be able to determine better the direction that your investing should take.
The next step is to define your goals and needs. This process involves asking yourself a series of questions. To begin, what are the short- and long-term financial objectives that your investment portfolio needs to meet? Capital to improve or expand your practice? For college education for the children? Building a solid financial foundation for your retirement years?
What is the time horizon associated with your objectives? If, for example, you have a need for cash in the near term, your portfolio should include sufficient liquid and low-risk (and low-return) investments. If, like many investors, you are investing for the long term, you may want to lean more heavily on a variety of equities—investments that, in the short term, may seem somewhat volatile but over the long term may offer a better return.
There are other questions to ask. What circumstances make you very different from other investors? Do these circumstance affect how much current income you need from your portfolio? What portion of that income, if any, should come from tax-exempt investments?

The risk factor
Once your goals are established, there’s a wide range of investment opportunities from which you may choose. The next step you must take is to determine whether a particular investment is right or wrong for you. Several factors will come into play, one of the most important of which is the risk associated with that investment.
Are you the kind of investor who is at ease with upswings and downswings in the market? Or are you the kind of investor who is apt to spend nights worrying when the market makes a sudden downturn? In other words, you must determine your investment “comfort level.”

Next step: structuring your portfolio
Each asset class—stocks, bonds, cash equivalents—has its own expected rate of return and its own risk characteristics. You must develop the appropriate investment mix of assets that satisfies your tolerance for risk, is in harmony with your objectives and needs, and fits your time horizon, income needs and tax picture. This balancing process includes an analysis and measurement of the risk and returns of different classes of investments that you might chose, as well as a projection of the potential interactions of risk among those classes. This analysis is critical to structuring your portfolio effectively.
This process will help you develop a diversified portfolio by mixing different asset classes in varying proportions. The process is dynamic one. Adhering to the asset classes is especially important. You need to make certain, for instance, that when your strategy calls for an investment in an equity fund, that the fund is fully invested in equities. Or, that when an allocation calls for a five-to-seven-year bond fund, the fund continues to provide that maturity range.
Further, you must keep a vigilant eye on your portfolio, ascertaining that the rates of return, relative to the investment mix, fall within the range that you have established. Continuing research for new investment opportunities also plays an important part in the monitoring process. What’s more, a review and rebalancing of your portfolio may be called for when personal circumstances (such as marriage, loss of a spouse or retirement) dictate.

Consider this next step
The process just described may appear somewhat daunting. However, the rewards are commensurate with the task. You may wish to seek assistance. We recommend that you avoid a “cookie cutter” approach to your investment planning. All investors are unique. Models based upon generalities or created for investors with so-called “similar characteristics” are a shortcut, but one that may turn out not to be the best path for you.
We offer an investment planning service specifically customized to each of our clients’ needs. If you would like to know more about this service, please feel free to contact us at any time.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

E-mail 1: So I met with 2 lawyers yesterday to talk about the beef. They are very interested in going by the book.

E-mail 2: What do your guys mean by “by the book”? Another interpretation of “by the book” would entail each of us paying 750 lbs. to the FDA, plus more each year if the beef grows mold.

The writers of these cryptic e-mails, as reported in Crain’s New York Business, were not butchers or ranchers. They were two of Harry Seggerman’s adult children, referring in their own code to a $12 million secret Swiss bank account. Seggerman had enjoyed a very successful 50-year career on Wall Street, including a stint as vice chairman at Fidelity Investments and supervising the launch of a hedge fund called International Investment Advisors, specializing in Korea. At his death in 2001, Seggerman’s estate was worth an estimated $24 million. Under his will Seggerman’s surviving spouse inherited $5 million of the $12 million Swiss account, with the balance divided among five of his six children.
The issue being discussed in the e-mail exchange was whether to reveal the Swiss account to the IRS. The account was fully subject to the federal estate tax, which in 2001 would have eaten up 55% of the children’s inheritance. They decided to leave the money in Switzerland, not reporting it to the IRS. They set up Swiss accounts of their own to receive the money, and they used surreptitious means to transfer funds back into the U.S. By disguising the transfers as loans, for example, they also hoped to avoid income taxes on the money.

Enter FATCA

The practice of wealthy families hiding assets in offshore accounts has long been of concern to Congress. A U.S. Senate report in 2008 claimed that the annual lost tax revenue from offshore banking could be as much as $100 billion. In response, the Foreign Account Tax Compliance Act (FATCA) was introduced in Congress in 2009, and it was enacted in 2010 as part of the HIRE Act (Hiring Incentives to Restore Employment Act). However, the IRS had been going after secret offshore accounts long before FATCA was adopted.
In 2009 the IRS reached a settlement with Swiss bank UBS concerning accounts of American citizens. UBS paid a fine of $780 million and turned over information on about 4,500 of its clients. That’s when the Service discovered what the Seggerman heirs had done.
The surviving spouse, the disinherited child, and another child who is mentally impaired were not prosecuted, but the other four children were charged with tax evasion. All four have pled guilty. They could spend up to 11 years in prison. (They haven’t been sentenced as of this writing.)

Compliance costs

FATCA imposes significant regulatory costs on foreign banks, and it also requires new reports by Americans of their foreign holdings via Form 8938. The burdens are such that many foreign banks reportedly are no longer willing to accept American depositors. Many have questioned whether the new revenue will outweigh the substantial compliance costs. Nevertheless, at least ten countries already have concluded new treaties with the U.S. for implementing FATCA.
According to Time magazine, the number of Americans renouncing their citizenship rose sevenfold from 2008 through 2011. BBC News Magazine reported another surge in the second quarter of 2013. The IRS maintains that FATCA created no new tax obligations on U.S. citizens living abroad; it only put in place mechanisms for detecting tax evasion. But it may be that for some expatriates, the mechanism is onerous enough that they will change their citizenship.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Market observers long have detected that investment decisions have an emotional component. Behavioral finance scholars have produced a series of studies that point out mistakes that investors tend to make in managing their portfolios. Because it is basic human psychology that is behind their actions, even experienced investors are likely to make these mistakes.

The pain of loss
Research by behavioral psychologists suggests that most individuals feel twice the pain over a financial loss as they do the pleasure of an equivalent gain. A classic 1979 study (“Prospect Theory: An Analysis of Decision Making Under Risk” by Daniel Kahneman and Amos Tversky in Econometria) found that people make different choices in equivalent situations, depending upon whether the choices are framed within the context of gain or of loss.
To illustrate this phenomenon, Kahneman and Tversky gave two groups a set of choices: Group 1 was told that in addition to what they owned, they had been given $1,000. They then were asked to choose between (a) a sure gain of $500 or (b) a 50% chance to gain $1,000 and a 50% chance to gain nothing. Some 84% of the group chose (a). Group 2 was told that in addition to what they owned, they had been given $2,000. They were asked to choose between (a) a sure loss of $500 or (b) a 50% chance to lose $1,000 and a 50% chance to lose nothing. Here, 69% chose (b). But the fact is that the choices that are offered to each Group are identical in terms of the net cash amounts that the individual could receive. Yet the phrasing of the questions caused the choices to be interpreted differently.

An evolutionary twist
This loss aversion concept was tested again recently by M. Keith Chen, assistant professor at Yale School of Organization and Management, in a study under review by the Journal of Political Economy. Chen and his associates gave capuchin monkeys small disks to trade for rewards—apples, grapes or gelatin cubes. Capuchins, noted the researchers, are well-suited subjects for study because they are relatively large-brained primates, skilled problem solvers and a close evolutionary neighbor to humans.
In one experiment the monkeys were asked to choose between spending a token on one visible piece of food that one-half of the time gave a return of two pieces, or two pieces of visible food that one-half of the time gave a return of only one piece. The capuchins vastly preferred the first gamble, which is essentially one-half of a chance at a bonus, than the second gamble, which is essentially one-half of a chance at a loss.
“The economic view,” Chen reports, “says that people are aware, rational and in control of their major decisions. Social psychology cuts in the opposite direction, maintaining that people are often unaware of the forces that dictate their behavior. We wanted to understand the interactions of these two things. What we’ve shown is that capuchin monkeys look remarkably like us; making rational decisions in many of the same settings that humans get right, but also make many of the same mistakes we make.”
“We are fighting tendencies [loss aversion] that may be biologically hard-wired,” concludes Chen.

Common conflicts
Most people don’t have the time or inclination to delve deeply into the field of behavioral finance. But they can look inward and examine how they have reacted to recent events. Here are the more common emotional reactions:
• Failing to act or procrastinating does allow one to avoid unpleasant thoughts, but, ultimately, it provides no solutions.
• Hitting the panic button can lead an investor to follow dubious advice or to chase the latest trend without any sound reason.
• Holding on too long to one’s investments‚ even when it seems logical to let go, is such a common emotion that psychotherapists have given it a name—“divestiture anxiety.”
• Loss of self-esteem, says John Jacobs, a New York psychologist with expertise in wealth issues, makes it possible for an individual’s feelings of worth to “rise and fall with the Nasdaq or Dow.”

Taking a rational approach to investing
If you see your own reactions in any of those described above, it’s time for us to spend some time together reviewing your portfolio to turn some of the negative emotions into positive action.
1. Be clear about what you are doing. Can you easily summarize your investment strategy on paper? It’s the foundation upon which your portfolio will be built. Your portfolio should reflect who you are—your goals, investing time frame and tolerance for risk. Developing and articulating your strategy will help keep you from making changes to it solely based upon how the market rises and fall.
2. Use the right tools to help you find success. Asset allocation—spreading your dollars among the basic investment categories, among stocks, bonds and cash equivalents—is an organized, systematic approach to building and maintaining a portfolio. Diversifying your holding within each asset class is important as well. For instance, within the equity portion of your portfolio, you may want to consider large-, mid- or small-capitalization stocks; choose a mix of stocks that yield dividends and those that are growth stocks with little likelihood of significant dividends. You may want to take a look at investing in the equities of companies outside of the U.S.
3. Be vigilant. Review your investment choices regularly and make the necessary adjustments accordingly. You may need to rebalance your portfolio, when your holdings in a particular portion of your portfolio exceed the original allocation target that you have set. Family and personal circumstances also may dictate that you review your investment strategy.
4. Don’t go it alone. The daily market reports that you read or hear notwithstanding, there are opportunities to be found out there. We can help you find them. Think of us as a valuable resource for unbiased, objective financial advice. As a partner who can help you to formulate an investment strategy that incorporates both your long- and short-term goals, tailored specifically to your needs and concerns. Contact us now to find out more.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.