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January 13, 2015

 

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John R. Deitrick, CFP� 
Thought for the Week:

Why Do We Even Try To Predict The Future?

 

SYNOPSIS

 

  • Annual predictions for the S&P 500 and other equity indices are almost always wrong, and the ones who get it right are nothing more than lucky.
  • Equities are far too volatile to conduct an annual forecast with any level of statistical accuracy over such a short time horizon. 
  • Forecasts are not entirely useless, however and money managers and investors can benefit greatly from the exercise of creating such forecasts. 

 

Annual Predictions Are Rarely Correct

 

The year has started off with a healthy dose of volatility thanks to falling oil prices and renewed fears in Europe, which are creating wonderful opportunities for buyers. Now more than ever investors are anxious to hear from market pundits and investment managers on how we think equities will perform in 2015.

 

This question is certainly warranted given the events that have transpired over the last decade, and investors want to know that they are with a manager who is good at predicting annual returns because he/she seemingly has a "feel for the market."

 

Unfortunately, annual forecasts are almost always wrong, and the very few who will get it right will be nothing more than lucky. Predicting annual returns from an asset class as emotionally sensitive as equities on a consistent basis is virtually impossible. Fear and greed are incredibly powerful and unpredictable forces that create dislocations in equity prices that often take months to normalize, which wreak havoc on short term forecasts.

 

Think back to some of the events that rocked equity markets in 2014. It's implausible to assume that any investor would have accurately predicted that oil would drop over 45% in six months, Russia's economy would come under tremendous pressure after invading the Ukraine, and Ebola would make it to the U.S.

 

Each of these events jolted equities, but they now appear to be either immaterial (Ebola) or actually beneficial to our economy (cheap oil). However, time was needed for the market to shake out the emotion and return to operating on fundamentals.

 

The chart below is one example of how poorly annual consensus estimates have predicted future outcomes. The green bar indicates the size of the difference between consensus estimates of annual U.S. GDP growth and the actual value at year end since 1969. 

 


If annual consensus estimates were even remotely accurate over the past 45 years, then the green bars would be so small that they would be barely visible to the naked eye. Instead, the opposite is the case, which indicates that predicting GDP growth over a one year period is extremely difficult to do with any level of statistical accuracy.

 

This conclusion comes as no surprise considering the sheer number of variables that can impact GDP on such a short term basis. For example, who could have possibly predicted that a Polar Vortex was going to cripple consumer spending last year by preventing most of the country from leaving their homes in the dead of winter?

 

NOTE: U.S. GDP is nowhere near as volatile as the S&P 500, so imagine how hard it must be to estimate a number that is as emotionally sensitive as an annual equity index return if consensus can't even get GDP right!

 

Predictions Are Not Useless

 

However, that's not to say that predictions are completely useless, and Global Financial Private Capital has a disciplined process to create expected returns for all of the asset classes that we incorporate into our investment process. Rather, it's important to know how to best use these forecasts as a manager and as an investor.

 

The process of forecasting an annual return forces a manager to think about all of the complexities in economies and financial markets, which creates a blueprint that we can then use to isolate the factors that currently matter the most. Therefore, as the year progresses and events transpire that were not predicted, we are able to assess the true impact to the economy and act accordingly.

 

Investors, on the other hand, are best served by using a manager's forecast for more than just a measure of perceived skill. Comparing a forecast to the actual return at year end will give very little insight into a manager's aptitude because you must dig deeper to eliminate the possibility of luck.

 

Rather, ask the manager how he/she derived the forecast and how he/she plans to act throughout the year if their original thesis turns on them. Only then will you get true value from their predictions for the coming months.

 

The bottom line is that annual forecasts are rarely accurate, but they are still a critical component to investing and provide tremendous value to both investors and managers alike. 

 

This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.  

Tax Brackets, Deductions, and Exemptions for 2015

From Bill Jacobs Bottom Line CPA, LLC

 

More than 40 tax provisions, including the tax rate schedules and other tax changes are adjusted for inflation in 2015. Let's take a look at the ones most likely to affect taxpayers like you.

 

The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates--10, 15, 25, 28, 33 and 35 percent--and the related income tax thresholds are described in the revenue procedure.

 

The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.

 

The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).

 

The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)

 

The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).

 

For 2015, the maximum Earned Income Credit amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children. This is up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase outs. Call us if you have any questions about this.

 

Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.

 

For 2015, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.

 

For 2015, the foreign earned income exclusion breaks the six-figure mark, rising to $100,800, up from $99,200 for 2014.

 

The annual exclusion for gifts remains at $14,000 for 2015.

 

The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) rises to $2,550, up $50 dollars from the amount for 2014.

 

Under the small business health care tax credit, the maximum credit is phased out based on the employer's number of full-time equivalent employees in excess of 10 and the employer's average annual wages in excess of $25,800 for tax year 2015, up from $25,400 for 2014.

 

Global Financial Private Capital and Advanced Retirement Design are not affiliated in any manner with Bill Jacobs or his firm Bottom Line CPA.  The views expressed in this article are solely those of the author and are not those of Global Financial Private Capital, LLC., an SEC Registered Investment Adviser or Advanced Retirement Design. Global Financial Private Capital and Advanced Retirement Design are not responsible for any comments made by the author of the above article.

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The specific products or services described in this section of the newsletter are neither offered through or recommended by Global Financial Private Capital, LLC., an SEC Registered Investment Adviser. 

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I hope you find this information adds value. If you would like to talk to John regarding these, or any other financial concerns, please feel free to call us at (614) 602-6506 and we will be happy to schedule a visit.
 
Have a great week!  Enjoy His gift of today!

 

Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital. 
 
 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP�, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame design) in the US., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

In This Issue
Thought for the Week: Why Do We Even Try To Predict The Future?
Tax Brackets, Deductions, and Exemptions for 2015
Anyone Out There Looking for Help??



John R. Deitrick,

CFP�,

  Founder

 

Advanced Retirement Design, LLC
 
7263 Sawmill Rd. Suite 150
Dublin, OH 43016
 
 ph: 614-602-6506
fax: 614-259-6094 
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