Articles of Interest - Amphora Wealth Management

Are you aware of the hidden costs in municipal bonds?

Created on Sunday, 25 January 2015 18:00

Q: Are you aware of the hidden costs in municipal bonds?

A: A markup is the difference between the price paid by a broker/dealer and the price a bond was sold to a client. Broker/dealers are permitted to charge fair and reasonable markups on bonds. Unfortunately, these markups do not have to be disclosed to the client. Because of this, the nominal ticketing fee on the client’s trade confirmation is often assumed to be the only cost, similar to a stock purchase. With markups not having to be disclosed, it is not surprising that many investors are surprised when they find out the true costs associated with purchasing bonds. Bonds are traded in an over-the-counter market where broker/dealers trade with each other. By comparison, equity markets trade on an exchange (such as the New York Stock Exchange). Because there is no centralized exchange for bonds, pricing is more opaque and difficult to determine. As a result, bond dealers have an advantage over retail investors, and many exploit this by charging large markups without the client’s knowledge. Let’s take a look:

municipal_bonds

The example above illustrates how the investor received a price of 113.18, which equates to a yield of 2.64 percent. The dealer, on the other hand, purchased the bond at a significantly lower price of 111.50, or a 2.80 percent yield. The dealer marked each bond up to $1.68, or $3,360 in total of which the client had no knowledge. This is a common practice. A 2014 Wall Street Journal article cited a study that showed that individual investors trading $100,000 in bonds of a municipality paid brokers an average spread of 1.73 percent, or $1,730.

We work with BAM’s Fixed Income department, which functions as a Registered Investment Advisor and, as such, cannot legally charge markups on any bonds purchased for clients. This doesn’t totally eliminate markups, however, because bonds still need to be purchased from other dealers in the market. What BAM’s Fixed Income Desk can do, though, is drive those markups down as much as possible by putting our dealers in competition for each trade, which can drive down the per-bond price and is in stark contrast to what is illustrated above.

Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.

The Consistency of Inconsistency, and How to Adapt Your Financial Goals

Created on Sunday, 04 January 2015 18:00

By Carl Richards, Director of Investor Education

Consistency_of_Inconsistency

When my children took their first steps, they were tentative. They were quick to grab the nearest object to keep their balance. However, it didn’t take long before they started acting like they were invincible. Seemingly overnight, my children went from hanging on my legs to running across the room.

Based on my own very small sample size, it seems children move very quickly from uncertainty about walking to absolute certainty they can run everywhere. Even when they trip or lose their balance, their memory of the event appears fleeting. Luckily for children, this sense of certainty, and their willingness to forget the falls, helps them get better at walking and eventually, running.

But this certainty that we admire in children can become a problem for adults. The author Nassim Taleb, in a recent interview with James Altucher, referred to this as the illusion of certainty.

From investing to world affairs, we tell ourselves that there’s so much information available that we can know what’s going to happen next. We tend to overlook that our certainty comes from selectively building a picture of the world that conforms to what we want to happen, not what will happen.

I see it all the time when people talk about trying to time the market by buying a bundle of stock at just the right moment. They’ll compile a list of recent events. Then, based on that list, they’ll express, with great certainty, that it’s time to get into the market. At that same moment, others will assert that it’s time to sell and get out of the market. It’s both entertaining and frustrating to hear different people use the exact same information to justify two opposite actions.

Unfortunately, the noise isn’t going to disappear any time soon. Change and uncertainty are consistent in their inconsistency. We don’t really know what will happen next, and we need to get better at living with that reality. We can start by putting the noise in context.

By accepting, or even embracing, the idea that uncertainty is part of the deal, that in itself becomes a type of certainty. Instead of being shocked by every change or unexpected piece of news, we adapt. We figure out another path that keeps us moving toward our goals.

If you do this yourself, you’ll soon discover that your certainty about uncertainty separates you from a lot of people. Just look around and listen. It’s mind-boggling how sure people are about what they “know” will happen in the future, even though their certainty is an illusion. Rest assured that it won’t take long before something weird happens. Then, you’ll adjust while they panic.

Yes, it’s not easy to get comfortable with uncertainty. But as we know from the old saying, few things in life are certain except for death and taxes. There’s no reason to think we can’t learn to deal with the rest as it comes and end up pretty close to where we want to be anyway. It will just happen with fewer panic attacks along the way.

This commentary originally appeared December 15 on NYTimes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

Making the Most of Resolution

Created on Sunday, 04 January 2015 18:00

By Tim Maurer, Director of Personal Finance

You’ve heard that New Year’s resolutions have a horrendous success rate, right? One source suggests the number is as low as 8 percent … 8 stinking percent.

But why? Is it for a lack of resolve? Somehow, I don’t think that’s it.

It took a heck of a lot of resolve for your nephew to conquer the video game “Call of Duty: Advanced Warfare” in only two days. Yet, we may question whether that resolve was well spent.

So, how are you spending your resolve?

Too often, our resolve is spread across an array of tasks so numerous that our effectiveness is diluted. But what about people who are good at multitasking? That’s a myth, says Stanford psychology professor Clifford Nass:

“The research is almost unanimous, which is very rare in social science, and it says that people who chronically multitask show an enormous range of deficits. They’re basically terrible at all sorts of cognitive tasks, including multitasking.”

Nass equates the effects of chronic multitasking to smoking. Just because you do it all the time doesn’t mean it’s good for you.

Another downside of applying our resolve too broadly is the inevitable disappointment that comes from falling short of our goals. Indeed, when was the last time you actually got to the end of your daily to-do list and thought, “Gee, I wonder what I’ll do next?” Even the most productive days don’t feel like it when there are still 10 incomplete tasks staring us in the face.

Why do we do it? Why do we wear busyness as a badge of honor, even though it diminishes our productivity and saps the satisfaction of a good day’s work? New York Times essayist Tim Kreider has some ideas. He writes:

“Busyness serves as a kind of existential reassurance, a hedge against emptiness; obviously your life cannot possibly be silly or trivial or meaningless if you are so busy, completely booked, in demand every hour of the day.”

Is it possible that we could accomplish more in 2015 by doing less? Is it possible that by aggregating our resolve and applying it to fewer tasks, we could be more productive and derive greater satisfaction from our effort? And practically speaking, how do we decide where we will and will not apply our attention?

There’s a simple five-minute exercise that should give you several top candidates for the chopping block. It’s a concept I shared in a blog post for Forbes.com in January 2014, and it’s worth repeating as we enter 2015.

You need only a pen or pencil and one piece of paper with a line down the middle. On the left-hand side, write LIFE TAKING. On the right-hand side, write LIFE GIVING.

As I wrote last January:

“Fill the Life-Taking column with the roles (or tasks within roles) that drain you. They’re onerous chores, not labors of love.

On the Life-Giving side, list the opposite — those practices you can pursue for extended periods of time, wondering where the time has gone. You might be tired after a long day of life-giving activities, but you’re not weary.

I should be clear that this exercise is not a license to shed roles to which you’ve pledged yourself — like being a good parent or spouse — or common duties on no one’s life-giving list — like changing diapers or cleaning dishes. …

But if the majority of your roles and the duties you’ve accepted are life-taking, I encourage you to consider making some difficult decisions in an effort to improve that ratio. That may mean saying yes to some things, but it almost certainly means saying no. …

Following through on this exercise may be simple, but it’s not easy. Stakeholders are likely to be disappointed, whether you’re giving up a board seat, book club, church committee or poker night. Your income may also be reduced if you sacrifice an activity that creates cash flow, change jobs or invest in furthering your education. …

You can cause a monumental shift for the good in your life and work by simply removing life-taking activities. Your performance in life-giving roles has room to flourish, increasing your productivity and satisfaction. Even more surprising, some activities will move from life-taking to neutral — or even life-giving — after your overall burden is lightened.”

Perhaps the key to successful New Year’s resolutions isn’t in determining what we will do but instead what we won’t do. This new year, let’s acknowledge that we have all the resolve we need to arrive at January 1, 2016, fully satisfied with the work and objectives to which we apply ourselves. Then, let’s employ wisdom in determining how best to channel that resolve.

Page 65 of 106