Wednesday, May 29, 2013

A Losing Strategy: Investing In What You Know

If you are over the age of 50, you probably remember Peter Lynch. He was the famous manager of Fidelity’s Magellan Fund from 1977 to 1990. Over those 13 years, Mr. Lynch achieved a compounded average investment return over 29%, while the S&P 500 Index only rose 15.8%.

Adages of Peter Lynch: “Never invest in any idea you can’t illustrate with a crayon.”  and “ Invest in what you know.”  People use these statements to justify terrible investing decisions. Warren Buffett has also offered similar advice about how you should never invest in businesses that you don’t understand.

But here’s the thing you need to remember: It is just the starting point for investors like Mr. Lynch and Mr. Buffett, not the end point. Yes, they may have started with things they knew. But they also did a ton of research, and it’s this second part that’s missing from many investors’ decision-making process.

A study was done to see if individual investors could outperform a benchmark essentially by buying what they know.

Summary of the findings:
  • Individuals failed to diversify
  • Folks that invested in “what they know” did 5% worse than the index
  • The stocks they sold outperformed the stocks they bought by about 4%
Peter Lynch advocated buying what you know. And research into human behavior demonstrates that people prefer to bet in a context where they consider themselves knowledgeable or competent.

The authors of “Why Smart People Make Big Money Mistakes," noted: "For every example of a person who made money on an investment because she used a company's product or understood its strategy, we can give you five instances where such knowledge was insufficient to justify the investment."

Keep these findings in mind the next time you're tempted to invest in what you think you know.

Tuesday, May 7, 2013

ObamaCare Q & A

When does enrollment start?
October 1st, 2013

When does Obamacare take effect?
January 1st, 2014

To Whom does the ObamaCare Law apply?

What does Obamacare's "Employer Mandate" require?
The mandate requires employers with 50 or more employees (or “full-time equivalents”—we’ll get to that next) to offer coverage or pay a $2,000 fine per employee, not counting the first 30 employees, starting in 2014. Employers with an average of at least 50 or more full-time equivalent employees on business days during preceding calendar year.  For 2014 only, employers can elect a 6 month averaging period during 2013 to determine if they meet this threshold.  Full-time under Obamacare is 30 hours per week, not 40.  Part-time workers are aggregated.  Seasonal workers are excluded (if they work up to but less than 120 days per year).  Work performed by employees outside the United States is not counted.   All "related entities" are counted together and form a SINGLE EMPLOYER

What does the "Individual Mandate" mean?
The law’s individual mandate will require nearly all legal U.S. residents to obtain health insurance whether they want it or not, with certain exceptions.

Is anyone exempt from Obamacare?
Yes.  Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, undocumented immigrants, incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of an individual’s income, and those with incomes below the tax filing threshold (in 2009 the threshold for taxpayers under age 65 was $9,350 for singles and $18,700 for couples).

What are the penalties if you’re not exempt?
Those individuals without coverage are supposed to pay a tax penalty. Those without coverage pay a tax penalty of the greater of $695 per year up to a maximum of three times that amount ($2,085) per family or 2.5% of household income. The penalty will be phased-in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by the cost-of-living adjustment.

How are employees counted toward the 50 employee threshold?
The law counts the hours worked, not the number of full-time employees you have. If a company’s employees worked an equivalent of 50 full-time employees' hours, the requirement to offer affordable health care insurance is triggered.

We have less than 50 full time employees - do we have to comply?
No, but there are parts of the law which apply to you.  Companies who employ fewer than 50 full time employees are exempt from being required to provide affordable health insurance. Smaller employers may opt to offer health insurance at a reasonable cost by participating in a Small Business Healthcare exchange.  All employers regardless of number of employees are supposed to act as a "source of information for employees. As of March 1, 2014, all employers covered by the federal Fair Labor Standards Act are required to inform employees about the existence of the exchange in their state and how employees can access it. The Department of Labor has indicated that it will provide guidance to employers and a template for providing such information. 

Employers who do offer affordable health plans to employees are required to begin reporting the value of employees' health benefits on W-2 forms. This requirement takes effect for large employers (those who file 250 or more W-2 forms) for tax year 2012 W-2 forms, usually filed in January 2013. The IRS has indicated the reporting is optional for employers who file fewer than 250 W-2s) until they file their tax year 2013 forms.

Will my employer have to pay all of my insurance premiums?
No, but employers with over 50 employees must pay at least 60% of covered health care costs.  The insurance also must meet minimum standards set forth (the minimum benefits of a "bronze" plan bought on the Obamacare health insurance exchange) and cannot exceed 9.5% of family income for the employee. 

What if my company doesn't offer me health insurance?
Employees will be affected by health care reform in several ways, including a requirement that, effective January 1, 2014, all individuals must have health care coverage or pay a tax. Smart employers will develop a communication strategy in advance of 2014, so they are not inundated with employee questions later.

Individuals who are not offered affordable health insurance may qualify to receive a tax credit to purchase health insurance through an exchange if they have no other insurance and their income is below 400% of the federal poverty level, which is currently $11,170 for a single person and $23,050 for a family of four.  

Premium subsidies will be available for individuals and families with incomes between 133 percent and 400 percent of the poverty level, or $14,404 to $43,320 for individuals and $29,326 to $88,200 for a family of four.

The subsidies will be on a sliding scale. For example, a family of four earning 150% of the poverty level, or $33,075 a year, will have to pay 4% of its income, or $1,323, on premiums. A family with an income of 400 % of the poverty level will have to pay 9.5 percent, or $8,379.

My company doesn't offer health insurance and I can't afford it.  Will I be fined?
Beginning in 2014, the federal government will impose new fines on citizens and legal residents who do not obtain government-approved insurance.  Those without insurance will pay a tax that is the greater of a flat fee, or a percentage of family income. The flat fee will be phased in over several years.  In 2014, the penalty will be $95 per adult in an uninsured household, increasing to $325 in 2015, then to $695 in 2016, after which it will increase annually in line with consumer inflation.  For uninsured children, the fine will be half the amount applied to uninsured adults.  If greater, households pay 1 percent of their income in 2014, 2 percent in 2015, and 2.5 percent in 2016 and thereafter in lieu of the flat per person fee.

How will the fines or penalties be enforced?  Will I go to jail?
The Department of Labor has updated its audit procedures to include a review of group health plans’ compliance with PPACA, in addition to many other benefit laws (including new HIPAA rules, rules regarding wellness programs and other ERISA requirements).

I'm a small business and will offer affordable insurance under Obamacare - will we get a tax credit?
(In 2014, companies with less than 25 employees will qualify for a credit that could be as great as 50% of premiums if you arrange insurance via one of the Small Business Health Options Programs, or SHOP Exchanges). The tax break you get will depend on a couple of variables: the number of employees you have and their average salary.  However, this tax break won’t be offered to sole proprietorship’s. That factor may encourage you to incorporate or become an LLC. Small Businesses can apply for tax breaks of up to 35% (25% for non-profits) of the cost of their employees premiums if they have fewer than 25 full-time employees. To qualify businesses must pay for at least 50 percent of their employees premiums and their workers average annual wages can't be more than $50k. By 2014 the tax credit amount is increased to 50% (35% for non-profit).

What about pre-existing conditions after Obamacare takes effect?
Under the Affordable Care Act, people with pre-existing health conditions cannot be denied health insurance as of 2014, when the law takes full effect. No more “pre-existing conditions”. At all. People will be charged the same regardless of their medical history.

Can't my company just fire me or make me work less than 30 hours per week to get around this?
YES as long they don’t break any employment termination laws.

Can I keep the insurance I have now?
A business owner may keep the same group plan that is in place, but it has to meet the Affordable Act requirements. As an employee you will have a choice to elect your employers insurance that is offered or elect the State Exchange coverage and take a tax credit.

What will happen to annual spending caps?
There will no longer be spending caps after Obamacare takes effect.

Is there a limit on how high of an annual deductible insurers can charge?
Obamacare places a limit on how high the annual deductible insurers can charge their customers.