Home News  Location About Us Contact The Advisory Firm

james daniel
James A. Daniel, CFP®
(678) 566-3711




Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and in the U.S., which it
awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.



tafThe Advisory Firm Newsletter:  January 2012

THIS MONTH IN PERSONAL FINANCE: Market Cycles, the new 1099-B's, Annuities, State Contacts and more.......


As we kick off 2012, I have a lot to share with you in regards to personal finance. So let's get started:

Market Cycles: Secular Bear / Cyclical Bull?

I have recently been giving a lot of thought to investing strategy and asset allocation. It seems there is much discussion in the financial advisor community and all of Wall Street for that matter as to how everything seems to be highly correlated these days. When I refer to things being highly correlated I am talking about asset classes: large cap stocks, mid cap, small cap, international , commodities, etc. As it seems that when the market is in a "risk on" mode everything rises together and when the market gets spooked and is in its so called "risk off" mode everything declines together. It makes it very frustrating to try and diversify clients enough so they withstand the drops but still enable them to make some money when the market is in buy mode. (I posted a short blog about this over at the figuide.com website recently as well.)

The biggest challenge for me personally has been trying to explain to clients (on the investment side) why I continue to lean toward more of a defensive mode. I just haven't had a huge comfort level with the market since early 2008 and despite the bounce back in 2009 and 2010, I still can't say that I am eager to overweight portfolios in equities. For that reason, I am still keeping a more moderate income oriented approach at this time.

The reason this is frustrating for many advisors is that we were all schooled in the Asset Allocation theory that you allocate investments across different asset classes and it will smooth out the ups and downs. The problem with this theory now is that everything moves together so the question is does Asset Allocation still work?

Well, hallelujah! I came across this chart below and it has finally given me a rational explanation for my defensiveness and a corresponding answer to the question does Asset Allocation still work!


What you see above is an inflation adjusted historical chart for the S&P (courtesy of dshort.com). The blue lines are Secular bull markets and the red lines are Secular bear markets. Secular markets can be decades in length but typically last around 15 years. Within any Secular market you can have Cyclical bull or bear markets (follow me here). A Cyclical market can last 2 to 3 years and be counter trend to the overall bigger picture Secular market. For example: Based on the chart above we entered a Secular bear in 2000, however since March of 2009 we have technically been in a Cyclical Bull. Does this make sense?

So how does this relate to my question of does Asset Allocation work? and why am I still feeling a bit defensive?

Asset Allocation works great in Secular Bull Markets and in some cases the beginning stages of Secular Bear markets. (Small Caps and Real Estate held up well during the Large Cap Growth carnage of 2000 to 2002.) However at this stage in the Secular Bear they are highly correlated with every other asset class in the market.

The Take-Away

Asset Allocation will still work for those of you with longer time horizons, so don't rush out and begin changing your 401k's. It just may take some time for us to enter another Cyclical Bull for that to happen.

As to why am I still feeling a bit defensive here? Its that I don't think this Secular Bear is over for a few more years. I could of course be completely wrong and be kicking myself for having clients underweight in equities, however a wise man once said "opportunities are made up easier than losses".

The IRS wants to know your BASIS!

New Tax Basis reporting rules are in effect beginning this year!

Custodians and Brokers are now required to report to the IRS cost basis on equities acquired after 1/1/11 and on all other assets (ETF's , Mutual funds) beginning with purchases made this year. The new basis information will be reported on form 1099-B.

So how is this different from the past? In the past the IRS has relied on you to tell them what your cost basis was if you had a transaction to report on your tax return. You would get the 1099's showing the sell proceeds (and the IRS would get that info), but they were never given any formal document showing what you paid for the stock or fund. It was up to you to give them a purchase date and price. That is changing now as they will know what you paid for that security. (they must have figured that some folks were fudging the numbers a little!)

How does this affect you?

The biggest change is that if you have an investment account (talking taxable brokerage or mutual funds account) you need to be aware that changes will be happening to the tax lot reporting methods for transactions with your custodian. This is especially important if you might have a fund or stock that you held before the legislation and then added to it after the legislation, those share lots will have to be tracked separately for cost basis purposes.

There should be quite a bit more info on this as we approach tax time, just be ready for delayed 1099's from custodians and even the potential for multiple "revised" 1099's as they get their reporting systems in sync.


It's always a good time for a quick review of Annuities! Despite being a fee-only advisor I don't have a deep hatred of Annuities. I know many on my side of the industry despise them along with our local consumer guru Clark Howard. However, I see them as another tool and in the right situation they can be useful.

Annuities have a fairly bad reputation, and should simply because they have been sold as a solution to every financial issue when they really are only a solution for just a few. Annuities are big business for insurance companies and offer big paychecks to the agents/brokers that sell them. For that reason there is always the question as to whether the annuity is in the best interest of the client or the person selling it!

Up until the past couple of years all annuities had to be purchased through an insurance agent / financial advisor and came with a large commission built in along with high internal fees. There has been changes in the market place and now firms like Vanguard and Fidelity are offering Variable Annuities with low fees along with entities like Jefferson National which offers a flat low fee product for fee-only advisors to use for clients. For Fixed and Immediate Annuities you are still required to get those through agents.

I have a brief explanation below of the 3 types of annuities, but in a general terms if pressed as to when an annuity might be a good fit for a client:

  • trying to avoid tax on large brokerage account (needs deferral feature)
  • someone with lot's of excess taxable cash and wants to let it grow until retirement (ie. won't need the money for many years)
  • someone that doesn't have any form of pension and is willing to trade a lump sum of money for a monthly income for life. (must have other buckets of money outside the annuity)

Variable Annuity: this is the most commonly sold. You build a portfolio inside the annuity just like you would in an investment account. The difference is you are invested in a limited selection of sub-accts (like mutual funds but structured a little different). Without the various bells and whistle riders which are sold you have no guarantee in these. Your account rises and falls based on your investments.

Fixed Annuity: You turn your money over to the insurance company and they guarantee you a minimum rate of return inside your annuity for set number of years.

Immediate Annuity: You trade a lump sum of cash for a guarantee of monthly payments. Pretty much the same as a pension plan. They calculate based on your age and lump sum amount.

The biggest problems with annuities are long surrender schedules and high internal fee's (unless you go through one of the companies above). They always tend to sound better than they actually are. A typical over-promise and under-deliver scenario. So buyer beware!


Local Georgia Contacts:

For folks reading in other states, just skip this as it pertains to Georgia residents only:

I came across some resources that are openly available and funded by our tax dollars but very few take advantage.

The first is Georgia Small Business Development Center. This tool offered by the University System of Georgia helps entreprenuers with business plans, identifying capital, financial consulting, marketing and operational assessments. Go to www.georgiasbdc.org for more info.

The second is the Public Service Commissioners office. I recently spoke to one of our elected Commissioners that said he was surprised at the lack of consumer inquiry he gets. Learn more: www.psc.state.ga.us


Outside the Financial World:

Lastly, this is a neat tool I came across:

I get at least 10 financial magazines a month and was always tearing out articles for future reference plus trying to save printouts of all the web page articles I read and placing in a file folder, only to be lost somewhere in my file cabinets. Well NO MORE!

There is a really neat tool called EverNote that you can download to your computer and iphone that allows you to have a place to store all those things. It is sort of an online file folder for you to collect and catalog images, articles, emails, webpages, etc. Anything that can be scanned or have a screen print done can be saved to a file folder in EverNote. It basically takes all of those file folders you have sitting around and allows you to transfer the items to your computer. The best part is it does a 3 way sync with your computer, iphone and a virtual copy. The next best part is that it is free! Isn't technology great?



© 2011 The Advisory Firm. All Rights Reserved.


The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.