Jonathan Clements's Blog, page 420

Subsidize Me

ARE YOU GETTING RICH off your neighbors—or are they mooching off you? You might imagine your financial success, or lack thereof, rests squarely on your own shoulders. But much also hinges on the behavior of your fellow citizens.

In numerous financial situations, one group in society effectively subsidizes another. Much of the time, you want to be the recipient of the subsidy—but not always. Consider seven examples:

Spenders subsidize those who save prodigious amounts. The profligate keep the economy humming along, ensuring plenty of jobs and healthy GDP growth. We savers reap the reward, as the strong economy keeps us employed, while also driving up the price of the investments we buy.
Active investors subsidize those who index. As our overconfident neighbors try—usually without success—to pick market-beating investments, they keep the market reasonably efficient and liquid, allowing us indexers to collect the market’s return while incurring minimal investment costs.
Those who carry credit card balances and pay late fees subsidize those of us who make money off our credit cards, by collecting handsome credit card rewards while never carrying a balance. What if the financially sloppy got their act together, paid on time and paid off their balances? Credit card companies would be forced to slash the rewards they offer—and we freeloaders would collect less.
Those of us without insurance claims subsidize those whose cars get clocked, whose homes burn down and who need major medical care. But in these cases, we should be happy to pay the subsidy. Policyholders with claims often suffer physical distress and have their lives disrupted, plus they may have to pay a deductible and face higher insurance premiums down the road.
When it comes to Social Security, traditional employer pensions and income annuities, those who die young subsidize those who live long lives.
The reverse is true of life insurance: Those who live long lives subsidize the beneficiaries of policyholders who die young. Still, given a choice, I suspect most owners of life insurance would prefer to pay the subsidy, rather than have their family receive it.
Those who let their life insurance lapse effectively subsidize those who keep paying their premiums. The cost of both term and cash-value life insurance is front-loaded, with policyholders paying more in the early years than their mortality risk justifies. This, however, doesn’t mean you should hang onto life insurance for as long as possible. If your family would be okay financially if you died tomorrow, you may want to let your policy lapse.

When insurance companies set premiums, they’re often banking on some policyholders doing just that. In the case of long-term-care insurance, however, the lapse rate has proven far lower than insurers had expected. Result: There’s been less “wasted” premium dollars from lapsed policies to subsidize the policyholders who stick around. This has been a key reason behind the sharp increase in premiums on existing long-term-care policies.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Bogleheads.org

MY INTEREST IN PERSONAL FINANCE began during a road trip five years ago. Driving alone, in a desolate part of the state, my choice of radio stations was limited. Desperate to find something other than static to listen to, I punched the “seek” button and came across Dave Ramsey’s radio show.

As someone who has always tried to live within or below my means, I appreciated his “beans and rice, rice and beans” philosophy. Ramsey’s advice was straightforward and easy to understand, even for someone like me, who didn’t have a clue how mutual funds differed from municipal bonds.

When I returned home, I checked out a variety of investing books from my local library. Many were too advanced for me to understand completely the first time through but, with time, I slowly began to decipher the language of personal finance and investing. I also began to investigate several personal finance websites, seeking advice on subjects ranging from early retirement strategies to how to maximize Social Security benefits.

Last year, I came across the Bogleheads forum. The tagline on the forum homepage is, “Investing Advice Inspired by John Bogle.” During my quest to educate myself about various financial subjects, I’d frequently come across references to Bogle, primarily related to his role in founding Vanguard Group. The forum homepage includes links to several webpages describing the basic Boglehead philosophy of investing. I quickly became intrigued.

When I started browsing the forum, I was intimidated by what I saw. The list of abbreviations alone was, no pun intended, mindboggling. ETF, REIT and TSP were just a few of the cryptic abbreviations I’d see while browsing topics. I vowed to keep reading and deciphering. Now, nearly a year later, I feel like the forum has helped me to become significantly more financially literate.

The Bogleheads forum is divided into six main categories, the most popular being “Investing—Help with Personal Investments.” People who post in this category share all the details of their financial life—salary, savings and investments. They seek advice from other forum members about potential investments, asset allocation and what percentage of their salary to dedicate to various financial goals.

FIRE (Financial Independence/Retire Early) is a subject that shows up frequently on the forum. Recently, one post focused on the question of early retirement withdrawal rates. Forum members quickly weighed in on the subject, offering links to blogs about early retirement, debating the logic of various withdrawal strategies and sharing their personal experiences.

Another forum user wanted to know how much money someone would need to stop worrying. Responders to the post offered formulas (25 to 50 times your current annual expenditures) and absolute amounts ($4 million), as well as the more straightforward answer, “Worries never go away.”

A recent addition to the forum is the Post Your Financial Milestone Announcements page. It can be both intimidating and inspiring to read stories of people who, at relatively young ages, already have six-figure incomes and seven-figure retirement nest eggs. Forum members use the page to boast about retirement account balances, as well as to brag about other financial life milestones, such as paying off their mortgages.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include USAFacts.org, Perking Up and  Aiming High .

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On the Other Hand

I LOVE THE QUESTIONS THAT KIDS ASK. This week, my first grader told me he had heard the word “caricature” and wanted to know what it meant. I explained it and then we went online to see some examples. In our highly politicized culture, we didn’t have to look far to see some exaggerated cartoon depictions of various political leaders.

It occurred to me, though, that our posture toward investments isn’t all that different. Oftentimes, financial commentators take a similarly one-dimensional, overly simplified view of things. The past several weeks have been a case in point. First, in response to a government economic report, stocks dropped 10% through Feb. 8. Then, in response to no news in particular, the market began to rebound and has since regained roughly half of what it had previously lost.

What will happen next? Turn on the TV and you will hear opinions of every stripe. On one side, an esteemed, Nobel Prize-winning economist will tell you that the market is at 1920s-like highs. Others, however, will tell you that the new policies in Washington could drive the market higher for years. If you find all this a little disconcerting, keep these three notions in mind:

1. What financial commentators say is incomplete. Putting aside the impossibility of being able to predict the future, no person ever has all of the current data. As a result, every opinion you hear from pundits is necessarily an overly simplified story, based on the information they have or are choosing to cite. The fact is, if you’re in the business of giving your opinion, you are more likely to burnish your reputation if you cherry-pick one piece of data and make a strong statement based on it, rather going on TV and honestly admitting, “Gee, I really don’t know.”

2. Many commentators want you to react. Take, for example, those polished brokerage firm analysts who frequently appear on TV. What is their role? They speak and publish regularly in an effort to get you thinking about your investments, with the hope that you will decide to make a trade—ideally through their firm.

3. What you hear won’t necessarily help. A classic 1987 study proved the detrimental effects of the media on individuals’ financial decisions. Psychologist Paul Andreassen created a simulated stock market environment and examined people’s trading behavior under two different conditions. One group was provided with daily price quotes for a group of stocks. The other group was provided with the same price quotes, but was also provided with news headlines about those companies. Result? The test subjects who received the news headlines traded more and made less.

Adam M. Grossman’s previous blogs include Five Ways to Diversify , Headlines and Head Games, and Five Steps to a Better 401(k) . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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Simple but Not Easy

WHEN I FIRST BEGAN INVESTING 16 years ago, I threw a bunch of investments at a wall to see what would stick. Someone I respected encouraged me to invest in master limited partnerships, so I purchased a few companies. I had no real idea what an MLP was or did. Sure, I spent some time surfing the net. But that was about it.

Fast forward one year to tax time. I had lost money and had no idea I had to file with the IRS for an extension, as I awaited the arrival of the Schedule K-1 tax forms from the companies. Why did I purchase them in the first place? This became the moment when my naiveté hit me. Clearly, I needed a plan, not a hodgepodge of investments.

Since passing the Certified Financial Planner exam and working for a large registered investment advisor, I’ve had the privilege of interacting with numerous clients. Their questions and concerns, coupled with my time spent in financial planning and investment management, have changed my views in many ways. Today, these are four of my core beliefs:

1. Keep it simple. No one wants to review a 50-page financial plan. No one. Part of the creativity in financial planning is distilling a client’s goals down to what’s important and manageable. People are more responsive and successful tackling financial goals when the necessary steps are served up in smaller doses.

2. Don’t get sold. When we first meet clients, we see so many broken portfolios. Leveraged exchanged-traded funds (ETFs). Concentrated holdings. Expensive active funds. Variable annuities. We’ve yet to encounter a client who went knowingly into these products or who later had no regrets.

In most instances, these purchases reflect a persuasive salesperson, rather than the investment’s inherent appeal. Take a recent innovation: inverse volatility ETFs. During the recent market hiccup, their value fell to near zero and at least one fund provider decided to close its fund.

3. Let the plan work. I couldn’t tell you what my daily investment balances are. I don’t look at my monthly account statements. This is because I have a solid plan that already accounts for days like we’ve seen recently. We take the same approach with clients, knowing there will be good days and bad days. The focus is on what has been proven to work reliably over the long-term.

4. Control what you can. We can’t control or time the markets. No one has a copy of tomorrow’s newspaper. But we can control our asset allocation, how often we trade, what we pay for our investments and how disciplined we are. The harsh truth: Index funds outperform more than 80% of hardworking, intelligent, active Wall Street managers.

Taking action, for the sake of doing something, doesn’t build wealth. Adhering to a sound plan—and focusing on what we can control—ultimately enriches us the most, while also allowing more time for the important things in life. To be sure, this approach may seem simple. But as we’ve witnessed in recent weeks, it certainly isn’t easy.

Anika Hedstrom’s previous blogs include Betting on Me, Along Came Sheila and Gold Dust . Anika is a financial planner with  Vista Capital Partners  in Portland, Oregon. The views expressed here are her own and not those of her employer. Follow Anika on Twitter @AnikaHedstrom .

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Investors Have Spoken

THE MARKET IS ALWAYS RIGHT. It may have a different opinion tomorrow—perhaps radically different—but that doesn’t mean current prices aren’t the right ones.

Holler all you want that the stock market ought to be far lower. I do a fair amount of that myself (though the shouting is more akin to grumpy mumbling). But whether we like today’s share prices or not, they reflect the collective wisdom of all investors—and, if we want to buy or sell, they’re the prices we have to trade at.

That brings me to the S&P 500’s 10.2% nine-day market swoon and subsequent 5.9% six-day recovery. Around the world, every investor—amateur and professional—got a wakeup call over the past three weeks. They had a chance to contemplate today’s rich stock market valuations, rising bond yields and the potential resurgence of inflation. All of those worries received a thorough airing. Investors’ collective response: We’re happy to continue holding stocks at current prices, even though the S&P 500 companies yield just 1.8% and trade at 24.9 times reported earnings.

Are investors idiots? I think not. Quite the contrary: I believe it’s foolish to assume other investors are fools. Throughout my three-decade investing career, pundits have regularly argued that stocks are overvalued, and they have been dead wrong. Prices have—with the exception of a few relatively brief periods—remained elevated the entire time.

These lofty valuations are, I contend, bad news for long-run returns. Stocks will continue to kick off dividends and share prices may rise along with growth in earnings per share. But we can’t reasonably expect price-earnings multiples to climb in future the way they have in the past. That’s why I expect stocks to return just 6% a year over the past decade, while inflation runs at 2%.

But there’s a big difference between expecting modest long-run returns and predicting an almighty short-term crash. We will, no doubt, have occasional 20% or 30% market declines. But if there’s any message from the past 30 years—and from the past three weeks—it is this: We will likely never go back to the world of the 50s, 60s and 70s, when dividend yields averaged 4% and price-earnings multiples averaged 14.

It’s hard to imagine we’ll ever have another decade with average valuations at those levels. In an increasingly wealthy world, where many have extra cash to invest and harbor fewer fears about their own financial future, stocks are likely to remain richly priced. Are you sitting in cash, waiting for shares to return to historically cheap valuations? I fear it will be an awfully long wait.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . Check out his four earlier blogs about 2018’s market hiccup: The Morning After ,  Taking Stock , Speculating on Speculation and Tales to Be Told.

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This Week/Feb. 18-24

GET A WILL. Less than half of U.S. adults have a will. Without one, many of your assets will be distributed according to state law, plus you won’t have a say in who becomes your children’s guardian. Some folks don’t bother with a will, because they have a revocable living trust. But when you die, there’ll inevitably be assets outside the trust—and, for them, you need a will.

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Tales to Be Told

IF THIS TURNS OUT TO BE a major bear market, there will be a slew of articles to be written. It’s the negative correlation enjoyed by every financial writer: Even as our portfolios shrink, our potential for pontification soars.

But what if the market bounces back? It’s almost too painful to contemplate. Think of all the articles that won’t get written. If the past week’s rally continues, here are 10 stories that will have to wait for the next market downturn:

1. Don’t panic. To be sure, many of us ink-stained wretches—both here at HumbleDollar and elsewhere—have already churned out the ritual “keep calm and carry on” articles. It’s an underappreciated art form: You strive to sound intelligent as you warn that stocks could easily full much further—or, for that matter, go right back up.

2. Time to rebalance. This one is best written when stocks are off at least 20%. But deadlines are deadlines. We have to write something this week, so we’ll probably trot it out when the market is down a mere 11%.

3. She called it. There’s always some Wall Streeter—not necessarily female—who mutters “crash” before the crash occurs or, better still, actually moves clients’ money out of stocks and into Treasury bills. Our new goddess of market timing is swiftly hoisted onto a pedestal and thereafter her every pronouncement parsed by adoring investors, until her lack of clairvoyance becomes too obvious to ignore.

4. Lemons into lemonade. Without the fruit metaphor, no story on taking tax losses is complete. As share prices sink further and year-end approaches, readers will be reminded of the silver lining—that realized capital losses can be used to offset realized capital gains and up to $3,000 in ordinary income.

5. Underwater overseas. With U.S. stocks down 25%, xenophobic pundits will note that foreign stocks are even more wretched, down 29%. Where’s the diversification in that? The often-huge difference in 10-year returns between U.S. and foreign stocks is, of course, too inconvenient a fact to mention.

6. Active managers triumph. Index funds aim to keep their cash holdings to a minimum, so they track their target index as closely as possible. Actively managed stock funds often keep 3% or more in cash, so they can easily pay off departing shareholders and have money to put to work in new investment ideas.

The unsurprising result—that active funds often fall a little less during market declines—will be hailed as a sign that the long-awaited revival of active management has begun. Further signs will not be forthcoming.

7. Time to rebalance (again). Okay, we ran this story before. But this time, we really mean it. Cue the hate mail.

8. Off target. After months of searching, an intrepid financial writer tracks down an investor who is shocked—shocked!—to discover his target-retirement fund has gone down in value. How could something so sensible, offering broad stock and bond market diversification in a single package, be allowed to become the default investment option in many 401(k) plans?

The financial writer’s day is complete when a publicity-hungry congressman fires off a press release demanding Capitol Hill hearings. The congressman’s demand is met with widespread indifference from more sensible colleagues.

9. Conversion therapy. Otherwise known as “lemons into lemonade (part II),” writers urge investors to take advantage of the depressed stock market by converting their traditional IRA to a Roth. With share prices down sharply, the resulting tax bill would be similarly shrunken. Shell-shocked investors shake off their paralysis just long enough to send the writers yet more hate mail.

10. It’s a bear trap. Share prices begin their long climb back to new highs. Every step of the way, some ink-stained wretch strikes a literary pose of world-weary sophistication—and warns ominously that the good times won’t last.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . Check out his three earlier blogs about 2018’s market decline: The Morning After, Taking Stock and Speculating on Speculation. Also listen to his recent podcast with Steve Chen of NewRetirement.com.

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Wheeling and Dealing

CAR BUYING CAN BE OVERWHELMING, which partly explains why we held onto our 2002 Toyota RAV for as long as we did. When the time came to part ways, we needed to decide whether the replacement would be new or used, how much we were prepared to pay, the features we wanted and what vehicle would meet all our criteria.

These were relatively easy tasks. While I realized that purchasing a used vehicle made more sense financially, we decided on buying new. As with computers, tablets and mobile phones, it seems cars are rapidly adding new features and we wanted to be as current as we could. An aside: Our auto insurance premiums did not increase with the new vehicle. Instead, we saw a decrease over what we were paying for the 2002 Toyota RAV. This is likely because of all the safety features found in today’s new vehicles.

We researched the various models we were interested in, going to the manufacturers’ websites and to KBB.com to look at reviews, retail vs. dealer costs, rebates and financing available, and so on. Eventually we narrowed our choice to five vehicles—all vans from manufacturers such as Toyota, Honda and Chrysler. The moment we dreaded was upon us: driving onto the car dealership lot.

Armed with all that we had learned from our research, we went to several car dealers, looking at the vehicles we felt would meet our needs. The salespeople didn’t seem to care much about meeting the needs we spelled out. They just wanted to be the one who sold us the new vehicle.

After spending a morning going from dealer to dealer, it didn’t take us long to decide that the Chrysler Pacifica was going to best match what we were looking for at a price that was in our range. Now it was time to meet the dreaded sales manager to finalize the price, determine the rebates and financing available to us, and to negotiate the trade-in value of the RAV.

Having done my research, I had a good handle on what the price of the vehicle should be. But, of course, the initial offer from the sales manager was significantly off. I told the sales manager where I wanted to be. With generous rebates and an offer of 0% financing, we eventually agreed on a price: $32,000.

Next, it was time to negotiate the value of the RAV. I knew that the RAV, because of its age and condition, was not going to fetch much. But the initial offer of $750 was almost insulting. It was a fraction of what I expected. Even with further negotiation, the final offer—$1,500–didn’t come close to what I expected. But I admit to caving in and accepting it. Once the ordeal with the sales manager was done, it was time to settle the deal in financing.

I walked into the glass-enclosed financial consultant’s office, expecting to sign off on the deal. Together, we reviewed the numbers. Something didn’t seem right. The numbers weren’t adding up. I disputed what the financial consultant was explaining to me. The sales manager was called in. He defended the numbers. I walked out, telling them the deal was off. The salesman, who was my initial contact, went after me. I also told him the deal was off and walked out the door.

I knew I would receive a call from someone at the dealership. Sure enough, in a few hours, the dealership’s general manager was on the phone. “What went wrong?” “I’m so sorry.” “Please come back in and let’s work this out.” I told her I would, but on the condition that I wouldn’t be dealing with the sales manager. She agreed, I returned, and the deal that I originally agreed to was made.

I hope it’ll be many years before I have to buy another vehicle. What are the lessons here? Do your research before heading to the dealership. Know what you want. Know what the price should come in at. Know what rebates and financing are available. There is so much information available on the internet these days. It isn’t difficult to find.

And one more thing: Be prepared to walk.

Nicholas Clements is one of Jonathan’s older brothers. He is retired and lives just outside Washington, DC. His previous blogs include Odd Couple, Hunting for Happiness and Help Wanted . Follow him on Twitter @MDScaper .

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Check Him Out

AS AN ATTORNEY AND AUTHOR WHO HAS WRITTEN and lectured extensively on the tax aspects of marriage and divorce, I frequently receive questions from couples contemplating marriage. Generally, they come from similar backgrounds: They’re both affluent. They’re both getting married later in life. They’re both aware of trends in divorce rates.

I urge couples considering marriage to ponder the tax consequences beforehand, especially when one or both of them are remarrying. To illustrate how I’d advise them, let’s say it’s going to be a second or third marriage for both John and Marsha—something that’s not uncommon nowadays, judging from The New York Times’s Sunday Styles section reports on weddings.

Something else that’s no longer uncommon: Her holdings considerably exceed his. Possible reasons she’s wealthier: She was enormously enriched by her former employer’s IPO; much-married and several-times-widowed, Marsha inherited assets from her spouses; or a couple of divorces resulted in her receiving several sizable settlements.

Both Marsha and John are old enough for AARP membership. Why do their ages matter? While divorces among younger adults are becoming less common, so-called gray divorces among those age 50 and older are increasing. And since remarriages tend to be less stable than first marriages, divorces among those 50-plus and remarried are about double the rate for those who’ve only been married once.

John and Marsha were already mindful of those stats. They met with financial professionals who offer premarital financial planning. She also had him assent to a prenuptial agreement, just as she did in advance of earlier marriages.

What else might Marsha do? I counsel her to ask for copies of John’s federal and state tax returns. Depending on what they reveal, she might decide that it’s prudent to stay single or, if they do wed, to file separate returns.

Following are summaries of scenarios I created that, albeit unromantic, are based on actual events.

Fear of filing. Suppose it turns out that John has no copies, as he hasn’t filed tax returns, something that’s common across all levels of society. I tell Marsha to find out his potential liability for back taxes, penalties and interest, and also when he’ll file returns and arrange for installment payments that’ll square him with federal and state tax agencies.

My advice, should Marsha wed: She ought to file separate returns and not mix her assets with his. In addition, she should ask John what other shoes might drop.

A less troubling, but still problematic scenario. While John has filed 1040s, he owes considerable amounts in back taxes, and interest charges continue to mount. Marsha’s tactic, assuming they wed: Again, file separately and don’t comingle assets until he has squared accounts with the IRS. I remind her of a snag if they file jointly and are due a refund: The IRS can apply the refund to his back taxes.

John has filed returns and owes no back taxes. That’s good news. But Marsha should still scrutinize his 1040s, because they can offer all kinds of insights into John, both financial and otherwise. Below are eight such items:

1. Alimony payments. On the front of a 1040 will be deductions for alimony payments to John’s ex-wives. Did he tell Marsha about those payments?

2. Dependency exemptions for children. A divorce settlement (or settlements) allows John as a noncustodial parent to claim such exemptions. The place to claim them is on the front of a 1040. Had he told Marsha about those children?

Keep in mind that, under 2017’s tax law, personal exemptions won’t be allowed starting with the 2018 tax year, and the deduction for alimony payments won’t be available to those divorcing or signing separation agreements in 2019 or later years.

3. Gambling. John’s returns show substantial amounts of gambling winnings as the source for “other income” on the front of his 1040s. While the IRS allows him to offset those winnings with deductions for gambling losses, losses are deductible only up to the amount of winnings. I caution Marsha to ask whether, in the past, he’s incurred nondeductible losses that far exceed his winnings. If so, the amounts John wagered might indicate that he’s a compulsive gambler.

4. Medical expenses. At the top of the Schedule A, John claims hefty deductions for medical expenses. In 2017 and 2018, they’re allowable only for the part above 7.5% of adjusted gross income. True, he might be able to easily explain the deductions as attributable to payments for insurance premiums and expenses usually not covered by insurance, such as dental work, hearing aids, glasses, medically required home improvements or private duty nurses.

But I point out to Marsha that there could be another reason for substantial write-offs: John sees a psychologist or psychiatrist. There’s nothing wrong with that. But Marsha should know what issues John is grappling with—and also share the emotional struggles she has.

5. Donations. John’s Schedule A shows he’s a chintzy contributor, whereas Marsha’s return shows she’s a generous giver. While that needn’t be a deal breaker, they should discuss donations before marriage.

6. Schedule C. As John operates his dental practice as a sole proprietorship, he files a Schedule C. A cursory review of the amounts entered for business receipts and expenses suggests he’s understating gross receipts and overstating expenses. Whereas dentists in his area typically claim expenses equal to about 50% of gross receipts, his expenses equal about 75% of gross receipts.

A plausible explanation for the discrepancy: John doesn’t deposit cash payments received from patients into the practice’s bank account, and he tells his accountant to use bank deposits to calculate gross receipts. Marsha shouldn’t hesitate to ask John whether he’s trying to pull one over on the IRS.

7. Withholding. Like millions of other Americans, John receives big refunds every year, either as a deliberate form of forced savings or simply by neglecting to claim enough exemptions on his W-4.

But interest-free loans to the IRS are anathema for someone like tax-savvy Marsha, who meticulously monitors her withholding from wages and outlays for estimated payments, and thus files tax returns that usually show small balances due. Filing jointly could mean that they receive no refunds. That could be a big disappointment for John, who is used to getting checks. It’s a good idea for them to discuss how they’ll handle withholding.

8. Midst these thorns, there are some roses. Assume John’s Schedule D shows a substantial capital loss carry forward. Meanwhile, he has no unrealized capital gains. At $3,000 a year, it will take many years for him to use up his carryforward. Marsha, however, has a substantial unrealized capital gain. Marriage means she can realize the gain and offset it against John’s carryforward.

Similarly, suppose he operates a business that’s unprofitable. He has a hefty net operating loss carryforward, but not enough other income to absorb the carryforward. Marsha has sizable income. Marriage enables him to apply his carryforward against her income.

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include The Last Word and Lost Items. This article is excerpted from Julian Block’s Tax Tips for Marriage and Divorce, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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Headlines and Head Games

WARREN BUFFETT ONCE QUIPPED that, “you only find out who is swimming naked when the tide goes out.”

I’ve been thinking about this idea over the past two weeks, as markets around the world have given up all their year-to-date gains and then some. Since peaking on Jan. 26, the U.S. market, as measured by the S&P 500, has lost 8.8% of its value.

When the tide goes out like this, the emotional impact can be powerful—and the headlines just make it worse. For the past week, my phone has been lighting up with alerts like, “DOW DROPS 600 POINTS, ON TRACK FOR WORST WEEK SINCE 2009.”

The advice from industry experts is less sensational, but often so convoluted that it’s hard to know what to make of it. This, for example, was the comment Friday morning from one Wall Street analyst: “I know SPX corrects in about 5.56% increments, so that would be the 200-day moving average or about 2,540 with some room for modest overshoot.”

And it isn’t just Wall Street types who are weighing in now. On the radio on Friday, the local DJ spent time gloating over a recent stock sale. “I feel like a semi-genius,” he kept repeating. “I’m a winner.”

Struggling to make sense of the headlines and the crosscurrents of commentary? Here are four thoughts that may help you maintain perspective:

1. Admire your gains. Yes, the market has seen a sharp drop-off over the past two weeks, and it may continue. But prior to the decline, the market had more than quadrupled since 2009. Recent losses just turn the clock back to prices we saw as recently as Thanksgiving.

This is important to recognize, so you aren’t paralyzed by what’s going on. Thinking of rebalancing your account to reduce your risk exposure? The past two weeks’ losses shouldn’t stop you. In fact, market corrections like this are a good reminder that you should never try to time the market. If you have a plan, stick to it. Don’t drag your feet, hoping for a better price tomorrow.

2. Recognize biology is working against you. Research by behavioral economists Daniel Kahneman and Amos Tversky revealed a crucial fact about human psychology: We dislike losses much more than we enjoy gains. Roughly speaking, they found a two-to-one ratio. In other words, to make up for the emotional impact of losing $1, we would need to gain $2.

Think about it: The headlines last year were so quiet while the market was climbing an impressive 22%. But when the losses started in late January, suddenly the headlines switched over to ALL CAPS. This loss aversion, unfortunately, is just the way we’re wired. Sometimes, things really are as bad as they seem, but often they aren’t, so keep in mind that our internal systems overreact to the negative.

3. Look at the market through your own lens. Try to tune out the headlines and instead focus on your own financial picture. If you have a well-structured financial plan in place, the daily movements of the market should be irrelevant to you. In fact, if you are at a point in your career when you are saving, you should welcome a market pullback, because it allows you to buy at lower prices.

4. Remember the market isn’t just a giant slot machine. In the short-term, results can seem random and unpredictable, as emotions drive prices higher and lower. But when you strip out those emotions, there’s actually a fairly simple formula that underlies stock prices.

In technical jargon, it’s called discounted cash flow. Or in Warren Buffett’s plainspoken words, it’s the value of all the cash that a business might generate during its remaining life. As long as the population grows, and businesses innovate and become more productive, there is a reason you should expect stock prices to increase over time. It may not happen every year—and if we’ve had more than we deserve in recent years, we may have to give some back—but over time it is logical to expect the market to go up.

Adam M. Grossman’s previous blogs include Five Ways to Diversify , About That 22% and Five Steps to a Better 401(k). Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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