The past two months have been a roller coaster ride for the stock market.  The S& 500 tumbled 9.8% from its Sept 19th all-time high of 2,019 to as low as 1,820 on Oct 15.  Because of the way we think, most of us worried about the possibility that this correction was turning into an outright market crash.  The instinct was to dump stocks.   History shows that this is a classic mistake that investors make.  Since that low on October 15th, the S&P is almost back to where it was in September, closing at 1985 on October 28th.   One of my favorite graphics from Carl Richards of The Behavior Gap that shows the fear/greed cycle and how it can be detrimental is the one below.

The graphic shows how investors sell out of fear when prices go down and subsequently buy out of confidence when the markets are at highs.  Here is a video explaining the chart

Carl Richards - Fear and Greed

Here is a chart from JP Morgan Asset Management that shows how much investor's returns collapsed when they missed a few of the best days in the market.  They found that if an investor stayed fully invested in the S*P 500 from 1993 to 2013, they would have seen a 9.2% annualized return.  However, if trading resulted in missing just the ten best days during that same period, then those annualized returns would collapse to 5.4%.

QUICK GUIDE TO SMALL BUSINESS RETIREMENT PLANS

The vast majority of businesses in the U.S employ fewer than 100 workers, yet these employees have less access to things like retirement planning vehicles and other benefits than those who work for larger companies.  I am going to include a column specifically on things to consider as both an employee and employer of small businesses.

Here's an overview of all the major features of each kind of retirement plan, including SIMPLE, SEP, 401(k), defined-benefit, and profit-sharing plans.  In choosing the right plan, it pays to have a working familiarity with the different kinds of retirement options.  

SIMPLIFIED EMPLOYEE PENSION (SEP)

A SEP will allow you to set up a type of IRA for yourself and each of your employees.  You must contribute a uniform percentage of pay for each employee, although you won't have to make contributions every year.  SEPs have low start-up and operating costs and can be established using a two-page form.  As a small employer, you can also decide how much to put into a SEP each year, offering flexibility when business conditions vary.

Employer's role: Set up plan for selecting a plan sponsor and completing IRS Form 5305-SEP.  No annual filing requirements for employer

Contributors to the plan: Employer contributions only; 100% tax-deductible

Date to set up new plan: By due date of tax return (including extensions)

Maximum annual contribution (per participant): Up to 25% of W-2 wages or 20% of net adjusted self-employment income for a maximum of $52,000 in 2014

Contributor's options: Employer can decide whether to make contributions year-to-year

Minimum employee coverage requirements: Must be offered to all employees who are at least 21 years of age, were employed by the employer for 3 of the last 5 years and had earned income of more than $550

Participant Loans: Not allowed

401(k) PLAN

401(k) plans - both traditional and Roth - have become a widely accepted retirement savings vehicle for small businesses.  They can vary significantly in their complexity

Key advantage: Permits higher level of salary deferrals by employees

Employer's role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. Also may require annual nondiscrimination testing to ensure plan does not discriminate in favor of highly compensated employees.

Contributors to the plan:  Employee salary reduction contributions and/or employer contributions

Maximum annual contribution (per participant): Employee: $17,500 ($23,000 for participants 50+) in 2014.

Employer/employee combined: The lesser of 100% of compensation or $52,000 ($57,500 including catch-up contributions for 50+) in 2014.

Contributor's options: Employee can elect how much to contribute pursuant to a salary reduction agreement. The employee can make additional contributions, including possible matching contributions, as set by plan terms.

Minimum employee coverage requirements:  Generally, must be offered to all employees at least 21 years of age who have completed a year of service with the employer.

Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.

Participant loans: Plan may permit loans and hardship withdrawals.

Withdrawals:  Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals are subject to tax penalty

DEFINED BENEFIT

Provide a fixed, pre-established benefit for employees.  This traditional type of pension plan is often viewed as having more value by employees and may provide a greater benefit at retirement than any other type of plan.  However, defined plans are more complex and therefore costlier to establish and maintain than other types of plans.

Key advantage: Provides a fixed, pre-established benefit for employees; allows higher tax-deductible contribution for older employees

Employer eligibility: Any employer with one or more employees

Employer's role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. An actuary must determine annual contributions.

Contributors to the plan: Primarily funded by employer

Maximum annual contribution (per participant): Actuarially determined

Maximum annual benefit: The maximum annual benefit at retirement is the lesser of $210,000 or 100% of final average pay

Contributor's options Employer generally required to make contribution as set by plan terms

Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year

Vesting: Rights to benefits may vest over time according to plan terms

Participant loans: Plan may permit loans

Click here to continue reading about the benefits of Profit-Sharing and SIMPLE IRA plans

WATERCOOLER

Brainteaser: PLEASE LET ME IN

There's a very attractive investment opportunity that's open only to investors who know the code to get in a password-protected website.  Here is what you observe as your colleagues try to get past the challenge screen:

Investor A encounters a screen with the number 12.  He types in the number 12 and is admitted.

Investor B encounters a screen with the number 15.  He types in the number 15 and is locked out.

Investor C encounters a screen with the number 15.  He types in the number 14 and is admitted.

Investor D encounters a screen with the number 8.  He types in the number 7 and is locked out.

Investor E encounters a screen with the number 8.  He types in the number 10 and is admitted.

Investor F encounters a screen with the number 2.  He types in the number 6 and is admitted.

Now it's your turn.  You encounter a screen with the number 9.  What is the correct response to get admitted?

Answer Below

IRS ANNOUNCES NEW 2015 RETIREMENT CONTRIBUTION LIMITS

For small business owners and self-employed workers that invest in a SEP-IRA or a single 401(k), the 2015 annual contribution limit increases $1,000 to $53,000.

The answer is eight.  The secret algorithm requires that the number of letters in each displayed number be doubled.  For example, the number 12 has six letters in it.  Double that and the correct answer is 12.  The number 15 has seven letters in it, so the correct answer is 14.  Your number is nine.  There are four letters in "nine" - four doubled is eight.