It is a pleasure to be sending you this issue of the Newsletter. The feature article discusses why stories matter and how we construct various stories of our life. Stories are as important in our view of ourselves as investors as they are in other aspects of living. There a brief list of quotations from famous people on living with money, followed by articles on why investors periodically pay higher than expected income taxes, important recent changes in Social Security, and activities with the O&A staff, including an event which allowed the Katonah staff to meet clients in VT and NH. But we begin with an article on how important it is for long-term investors to keep a long-term perspective.
David W. Otto, Editor



With today’s markets in flux, presenting daily swings of a percent or two, investors are unsettled. So a lengthy piece on this subject from a Litman Gregory newsletter to which we subscribe caught our eye. The recent article was titled “What It Means to Be A ‘Lifetime Investor’ and Why This Concept Is So Important But Largely Ignored.” What follows is from the opening paragraphs.

“Many investors are more financially sophisticated than they were decades ago thanks in part to the availability of information on personal finance and investing. But there is also a large portion of the investing public that has a tendency to get whipsawed—over and over. They have a ‘recency bias’ [defined as ‘the tendency to think that trends and patterns we observe in the recent past will continue in the future’] that can contribute to performance chasing; they give up too soon when an investment disappoints; they are overconfident in their ability to make sense of investment markets and specific investments; and they are susceptible to the grass is always greener way of thinking.

“To guard against these very common human tendencies, investors must do two things: First, they must find an investment philosophy that resonates strongly and is grounded in sound investment theory...

“Second, investors must embrace the reality that they will be investors for the rest of their lives….The concept of being a lifetime investor may seem straightforward, and sometimes things that are simple may seem unimportant. But in our view, executing this concept is hugely important and is a strong facilitator of success in meeting an investor's long-term investment goals….

“Being a lifetime investor facilitates accepting certain investment realities, including the very real cycles of over- and underperformance that managers and consequently portfolios experience. The investor can accept that over a lifetime, a prudent investment approach will likely disappoint at times, occasionally for a few years, but over the very long term, common sense discipline wins. These periods of underwhelming performance are likely not [significant] to investment returns over decades. Understanding this helps to protect the investor from giving up on something that will work well over the long run just because it has been out of [favor].

“What this all gets at is being disciplined about building and sticking with an investment program. It's easy to say but surprisingly difficult to do.”

This article states the investor’s dilemma well. It is essential to find a way to ignore the noise of day-to-day market fluctuations and concentrate on the long view, which usually seems to work out, even if it’s not quite as planned.

Building and sticking to a philosophy of money and investments is a challenge. Perhaps the following feature article will stimulate your thinking.



In early November, the Vermont Humanities Council sponsored a conference titled “Why Do Stories Matter?” The opening address was by William Cronon, a historian from the University of Wisconsin who made a rather surprising statement: “History is not about the past, but about the stories we tell about the past.” The facts of history become relevant only as they are given a context. He demonstrated how there can be a number of interpretive variations about the same “facts.” The storyteller puts on his own spin, including about situations that involve how we live with money. Here are a few examples.

First, though, it may be useful to see the various financial issues people deal with as falling into three levels. The basic level might be called “Getting on Track.” This stage addresses financial issues that can be a problem to many folks, such as management of debt, a lack of saving, or overspending. The second level might be referred to as the “Neutral State” where there are no major financial problems but money concerns still create worry, and during certain periods can take a fair amount of energy to manage. The final level could be seen as a “State of Fulfillment,” where money and financial decisions have become a resource or a tool used in finding a meaningful and rewarding life. This level also assumes that the person has figured out what is “enough,” and is relatively content with a certain life style.

A client from years ago who I’ll call Samantha spun out, at our first meeting, a story of impossibility. Things just kept happening to her. She would get ahead $200 and then a repair to her car would cost $600. At one point her uncle died and left her $10,000. She decided to spend $2,500 on a longed-for trip to Europe. That would allow her to have three-fourths of the bequest left to pay off debts and still have a cushion left over. But while she was in Europe the refrigerator broke in her apartment back home. Buying a new refrigerator used much of her cushion. Plus the European trip actually cost more than $2,500. In less than a year she again had begun accumulating credit card debt. She felt dragged down by circumstances beyond her control and had the potential of living out her life that way.

But then consider the story of Jessica. Jessica graduated from college with no debt. When she entered graduate school the next year, she had a grant that was supposed to cover all of her expenses. But the grant money did not arrive until mid-October, so she used her credit card to get started. When the grant money arrived, she paid off her credit card, but before the end of the academic year, she was out of money and had to use her credit card to finish the second semester. Without quite realizing it, Jessica had moved up her standard of living, yet her grant was not sufficient to support that lifestyle.

A large heating bill was a wakeup call to Jessica. To get control of her finances, she would stop eating out and “eat rice and beans” until she had her credit card debt paid off. She also went through her extensive library and sold the books she was no longer using. It did not take too long before Jessica had no debt.

In each woman’s case the telling of the story seemed to predetermine the outcome. Jessica puts herself in the driver’s seat. It is a story of determination and success.

What are your personal and family stories around money and investments? Are they useful or do they hold you back? By examining these storylines in the light of day, we have the opportunity to make changes in our perspective and behavior. Consider the following story.

Francine, an older woman who is retired as a secretary to a legal firm, is someone who moves back and forth between the second and third levels. She is a worrier so she will probably always spend some time in the Neutral State. A recent example is typical of a call we get from Francine periodically. “I just needed to be reassured. With the downturn in the market, I am worried that I may not have enough money.” It is easy to reassure her because Francine does not regularly withdraw money from her TD Ameritrade accounts. Her Social Security and pension income provide more than enough money for her day-to-day expenses. When she does take money out it is generally to give it away to family or charity.

During a conversation early in 2015 we pointed out that her account had built up in recent years, and we had raised the question of what she might want to do with that money. A while ago when her husband was alive, we had raised this same question. Our conversations resulted in a decision on their part to take their children and grandchildren on a Mediterranean cruise. Francine views that trip as one of the high points in her life. Following up on the call earlier this year, Francine got back to us to say that she has decided she really could afford to take her family on another trip – this time to South America.

Most O&A clients would not consider Francine to be wealthy. But she definitely spends time in the third level, the State of Fulfillment. She has concentrated on saving all of her life. Not surprisingly, she was born during the Depression. But she now can regularly see that money is a resource to be used, and occasionally uses it in ways that seem quite extravagant to her, given her history. Even though 2015 has not been a good year for her investments, she realizes that she has more money than she will spend in this lifetime and so is using some of her wealth to foster aspects of her life that mean to lot to her, primarily relationships with her family.

Stories are often rich and expansive. They ground us and help us manage our lives, including our financial lives.



Which of these statements would you post on your bathroom mirror?

Common wisdom has it that accumulating wealth is a mixed bag. People who don’t have a lot of money can be blessed by not being concerned about it. People who have money often agonize about having enough. Others worry about losing it. What follows are some quotations that put wealth in perspective.

“Whoever loves money never has enough.” Ecclesiastes

“Money never made a man happy yet, nor will it. There is nothing in its nature to produce happiness. The more a man has, the more he wants. Instead of it filling a vacuum, it makes one.” Benjamin Franklin

“If you get wealth before you learn how to use it, it can be a burden on you more than a blessing.” Tony Dungy

“If I were allowed only one answer to the question, ‘Wealth, is it worth it?’ it would be this: yes, if you give it generously. Don’t wait until you can afford it to start giving. Start right now enjoying that wonderful feeling we experience when we share our resources.” S. Truett Cathy

“Never forget the secret to creating riches for oneself is to create them for others.” Sir John Templeton

“The truth is you always get back more than you give away. Some people never learn this.” Warren Buffett

These bits of advice doled out by various financial sages warn us against loving money too much; caution us that we must learn to use our wealth, however much we have; and ultimately remind us that in all likelihood, we will make the most of our money by being generous.



“Why did I owe so much money for income tax in 2014?” We were asked that question by a number of clients this year and, while every situation is different, for many of you the general answer is the same. The issue centers around the U.S. government rules for the way taxes are handled for mutual funds.

In order to explain the 2014 tax predicament, we need to go back to 2008. That year the stock market lost 37%, which led to many investors selling their mutual funds. When investors sell a fund, the fund manager must sell the stocks (or bonds) held in the mutual funds in order to raise cash to pay back investors. Because of the drop in the market, many of the stocks and bonds that were sold in 2008 had lost money.

When mutual funds make money that money is not taxed at the mutual fund level, but rather the tax liability is passed on to the investors. But when funds lose money they do not pass those losses on to investors. Instead, losses are retained by the mutual fund to offset gains in a future year. That is what happened in 2008. The tax losses incurred in 2008 were temporarily held on the books of the mutual fund companies.

As the stock market rebounded and mutual funds again made money, the funds had tax losses on the books from 2008 to offset the gains. The result was that investors had little or no tax liability from their investments. That situation continued for several years. Even in 2012 and 2013, when the market made 16% and 34% respectively, many of our clients had only small amounts of taxable capital gain because mutual funds still carried forward losses from 2008. However, by 2014 mutual funds had used up these losses. The result was a significant tax bill passed on by a number of mutual funds, which resulted in higher taxes for most of our clients.

The good news is that the capital gains tax rate is 15% for many people, lower than the rate on ordinary income. (High income taxpayers are charged at a rate of 20%.) The bad news is that investors have little control over what year they must pay those taxes. That is left to the managers of the mutual fund who make the decision as to when to sell a stock that has increased in value. For peace of mind it is important to remember that the market made a good deal of money from 2009 to 2013 and most mutual fund investors paid a minimal amount of tax in those years. But the tax man does exact his due eventually, and 2014 was one of those years.

So what does 2015 look like? This year the market returns are fairly flat. At least that is the case as the Newsletter goes to press near the end of November. Because mutual funds normally pay out virtually all of their capital gains in December, we are uncertain what tax liability will be passed on to investors in 2015 but a number of funds have declared the tax liability for their fund. It appears that this could well be another year with some fairly significant capital gains.

We are currently examining opportunities to do some tax-loss selling, but those possibilities seem limited. We do not want to sell funds we believe in just because they have lost some money. As we regularly state, we don’t let the tax tail wag the investment dog. That said, where it makes sense, we are selling some funds that have losses to reduce the tax burden.



At the end of October, Congress uncharacteristically passed budget legislation at lightning speed. Buried in this legislation were changes to Social Security. With little advanced warning, these modifications will significantly limit future Social Security claiming strategies.

If you were born on or before May 1, 1950, you are in luck! There will be no changes to your retirement benefits and the claiming strategies that have been available, remain so, with one modification. If you plan to “File and Suspend,” so that one spouse can collect benefits based on the salary history of the other spouse, you will need to take action before May 1, 2016. In fact, for the most part the changes affect only married couples.

For those of you born between May 2, 1950, and January 1, 1954, there will be some changes. If you will be 62 by the end of 2015, you will be able to claim a spousal benefit when you turn 66. HOWEVER, your spouse needs to either be collecting his/her Social Security benefit or have filed and suspended benefits before May 1, 2016. The options for people in this age group are complicated and difficult to fully explain. If you fall into this category, we should review your most recent Social Security Benefit statements so that we can evaluate how best to proceed.

Finally, if you were born after January 2, 1954, you now have very limited choices for your Social Security benefits as a result of two major changes in the bill. The first is that folks in this category are no longer able to “File and Suspend.” The second change is to the “Restricted Application.” This is likewise difficult to explain. In brief, earners can no longer elect to claim a spousal benefit until reaching age 70 and then switch to taking benefits based on one’s own record. If you are entitled to both a benefit based on your own earnings record and a spousal benefit, you will simply receive the higher of the two amounts and stay with that option for the remainder of your life, or until your spouse dies.

It is important to note that this legislation does not change the rules for surviving spouses. Surviving spouses will continue to be able to collect a survivor benefit if it is higher than their own benefit.

Consider yourself fortunate if your Social Security decisions are behind you, for you will continue to receive the same monthly amount. Also, these changes do not affect our general belief that it is best for most people to wait to collect Social Security benefits until 70. More than ever, however, we are happy to discuss these options and how the changes may influence your retirement planning.



Susan Otto Goodell, CFP®, joined Otto & Associates more than six years ago, and since she works primarily in VT, we have taken on a number of clients who live in VT or NH. While many financial planning firms use a model where each client works primarily with one financial planner, the O&A model assigns client tasks to those members of the firm who have expertise in a given area. While there is a good deal of overlap in our team approach, Deborah knows a lot about 529 College Savings Plans and does more detailed monitoring of investment options, Susan has expertise in Social Security options and retirement plans, Kathy and Joan both do a lot of client service matters such as opening accounts and changing beneficiaries, and David attempts to keep big-picture issues in focus. However, using this model means that with office staff in both NY and VT, not all clients know all staff members.

For many clients that matter was corrected when we had a cocktail party at the VT office (and home of David and Mary), followed by a dinner at a Hanover, NH, restaurant. The dinner was sponsored by Martin Stever from Pacific West Land, LLC. Pacific West manages real estate alternative investments from offices in WA State that a number of O&A clients are part of. We also took this opportunity for Martin to give an update on the various projects and field some questions. Reports from both clients and staff were extremely positive.

There have been suggestions that we do something similar in 2016 in both New York and Vermont. Next summer will mark the 25th anniversary of Otto & Associates and we are hoping to have two events so you can help us celebrate. More information will follow when the dates are closer.



Otto & Associates has a new website, and we urge you to check it out! Kathy has headed up this project that has been surprisingly complicated, in part because it is built on an entirely new platform.

For various reasons the staff has not attended a major conference in recent months, although Deborah and to a lesser extent, Susan, have both attended half day or full day investment gatherings. David and Susan and perhaps other staff will be in Orlando in early February for the annual TD Ameritrade Advisor Conference.

The O&A Holiday Party happened on Dec. 4. This is one of the few times that staff and spouses are together and it is always an enjoyable time, made the more interesting by the traditional Yankee Swap. Deborah, Susan, Kathy, Joan and David all join in wishing you the Happiest of Holidays.