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Welcome to my blog!  If you are interested in retirement issues, you are welcome to come along with me as I "think out loud" about my recent retirement.  The most recent article that I have written appears at the top when you arrive at this site; previous articles are listed along the right margin; just click on the title of any article that may interest you.  I hope you will find some of them of interest.  You can also reach me through my web site:

Black Swans

Have you ever seen a black swan?  No?  Well neither had anyone in Europe or the western world during the 17th century. It was widely believed for centuries prior that there could be no such thing as a “black” swan.  Having seen only white ones, Europeans naturally assumed that white was the only color that a swan could be, but they eventually learned otherwise.  In the late 17th century, William de Vlamingh, a Dutch explorer, discovered black swans in the wilds of Western Australia.  It was a shock to many to learn that black swans, which they had long thought impossible, actually existed.


Fast forward to the early 2000s in America where we meet a gentleman named Nassim Nicholas Taleb.  Taleb was a finance professor, Wall Street trader, and is a writer.  He wrote Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets in 2001, where he applied the history of the black swan to various random events from more recent history.  Following the mortgage debacle and subsequent market meltdown of 2008 and the early months of 2009, he further refined his black swan theory of events in another book, The Black Swan: The Impact of the Highly Improbable.  The theory of black swan events has evolved further still and is now used to describe any phenomenon which occurs which had previously been thought impossible and subsequently has a major impact. 


Specifically, according to Taleb, a Black Swan event has three defining characteristics:

1. The event had been thought highly unlikely and is a major surprise.

2. The event has a major effect.

3. After the event it is rationalized by hindsight as if it could have been expected.  "We should have seen that coming!"


The terrorist attack of 2001 is a perfect example of a Black Swan event, but not all Black Swans are catastrophic and harmful.  The development of the internet and widespread use of personal computers can also be viewed as Black Swan events.  The Japanese earthquake and the subsequent nuclear reactor problem, the dissolution of the Soviet Union, and the Arab Spring are other Black Swan events.  In short, any occurrence previously thought impossible but which eventually occurs and has a major impact can be seen as a Black Swan.  Could we be experiencing one even now in the political arena of our country?


It is now taken for granted in the financial world that Black Swan events will continue to appear from time to time, so can we prepare for them?  Of course, if we could adequately prepare for them, they would not be Black Swans!  But, we can arrange our affairs as if we expect the unexpected to continue to occur.    We can live our lives with the knowledge that Black Swans will visit from time to time and note where we may be vulnerable so we can take measures to lessen their unpleasant effects.  For our finances that means having an emergency fund in place, and ensuring that our portfolios are well diversified.  The tech stock bubble and subsequent crash of 2000 was a Black Swan for those who had piled into all of the speculative tech stocks of that era, and it quite thoroughly highlighted the risk of not being properly diversified.  Proper diversification cannot completely protect from market Black Swans, but it has historically helped to lessen their effect when compared to the practice of making big bets on single stocks or on just one asset type (think real estate in 2008.)


Black Swan theory is fascinating, and it is an interesting exercise to contemplate when the next one may appear.  I have noticed that more and more commentators on the various financial channels have recently been using the term (and not in the ornithological sense), but they likely have no better idea of when the next one may appear, or what form it may take, than do you or I.  I don't plan to lose sleep over Black Swans, but I will try to make sure that I am not caught completely off guard when one shows up.  So, be alert for Black Swans as you face your future; you will likely see one sometime, somewhere.  And, always bear in mind that though it will never be the most important thing, still, money matters.



Do Well While Doing Good: Donor Advised Funds

The charitably minded well-to-do have long enjoyed the tax benefits of charitable trusts and foundations.  If properly designed, they allow them to support their favorite charitable causes while enjoying generous tax benefits.  Typically these types of arrangements are expensive to set up and require oversight to ensure that they stay in compliance with tax laws.  Thus, they are usually not cost-effective for middle income givers.  That changed with the advent of “donor advised funds (DAFs),” and we peons can now reap the same tax benefits as the rich.  Here is how they work.

A number of mutual fund companies (Fidelity offers a good one) now offer DAFs for their clients.  Once you fill out the appropriate paper work, the fund company will gladly accept custody of your donated money, invest it as you advise them to do, and put it in a great big pot of money with other like-minded donors.  When the fund company receives your money, it has been donated.  The fund is a tax qualified 501(c)(3) charity, and you can take the charitable deduction on the entire amount of money donated in that year.  You then advise the fund company to whom you want the money given at some future time, and they will send your money to those charities, as long as they meet IRS requirements.  You may parcel the donated money out to various charities over a number of years if you like.  Almost all of the well-known charities qualify, and most, if not all, churches meet those requirements.  Many families are now making their church contributions via automatic, recurring, DAF disbursements.

DAFs allow givers a number of tax planning tactics. They can pre-fund several years’ charitable contributions in one year to maximize tax benefits in a particular year, and that can really make sense when the funding uses appreciated assets from a taxable account.  For instance, if you are holding shares of a mutual fund with a large capital gain, you can transfer those shares to your DAF and take a deduction for the entire amount.  Were you to first sell those shares in order to  make the contribution, you would be left with less to give as you would first have to pay the capital gains tax on the sale.

They can also prove useful by offsetting the income one realizes when converting a traditional IRA to a ROTH IRA.  If someone were to convert $10,000 of traditional IRA funds to a ROTH, federal tax would be required on that amount.  However, if they were to donate $10,000 to their DAF from a taxable account in the same year, they could offset the tax requirement of the ROTH conversion, and ROTH conversions can often prove beneficial.

DAFs can also help you surpass the standard deduction threshold when you file your tax return.  Consider a retired couple, both 65.  Their standard deduction for 2014 will be $14,800.  Unless they can surpass that threshold with itemized deductions, they will not realize any tax benefit from their giving.  However, if they were to choose to prefund their DAF for a number of years, it might put them over the threshold.  If they were to also to pay two years of real estate taxes in that same year, they might very well surpass the standard deduction threshold and realize some significant tax savings.

DAFs have thus far remained off the radar for most in spite of the fact that they can be such an effective way to give.  If you are going to give the money anyway, you might as well give it in a way that is most advantageous to you.  DAFs can offer that advantageous way.  You might as well do well while you do good!  Feel free to contact me with any questions, and remember, though far from the most important thing, still, money matters.

Fly/Drive Safely

13 November 2014