Tax season and the first hints of spring tend to arrive in concert here in Atlanta, and this year is no exception. After what has seemed an unusually harsh winter, the mercury is forecast to climb into the 60’s over the next several days even as many of you are working to pull together the information to complete your taxes.

Given that we’re just about in the middle of tax season, the first column details the tax documents you’ve received and ROTH and IRA contributions that should be made before you file. In our financial planning tip for the month, we examine your potential liability if your credit or debit cards are lost or stolen. Finally, our client question covers when it makes sense to hold on to an underperforming mutual fund and when you should sell.

As always, please feel free to use the link at the bottom left to forward this newsletter on to family or friends who might find it useful. Additionally, if you have any questions or suggestions regarding topics, let me know. Lastly, if you do need any tax documents or if your accountant has questions and it would be helpful for us to speak with him or her, don’t hesitate to contact us.


Micah Porter, CFA

Preparing to File Your Taxes
Micah Porter, CFA

The IRS deadline this year for brokerages to mail out their 1099s was February 15th, so at this point you should have all the documents you need to file your taxes (though you may want to wait a bit for reasons outlined below). What you actually received will depend upon the type of account, and whether there was any activity within the taxable account. Here’s a rundown of the most common documents:

1099 – for those of you with taxable accounts, you will receive a 1099 from TD Ameritrade for each account. The 1099 is used to report income on your taxable account. Each mutual fund or investment reports income to TD Ameritrade, who consolidates this information by account.

In the past several years, all brokers including TD Ameritrade have been forced to send out revised 1099s when there are changes in income reporting by mutual funds. While we hope this won’t happen this year, we cannot guarantee that this will not be the case.

1099-R – for those of you who have taken distributions from your IRA, you should have received a 1099-R from the custodian reporting this income. You will also receive a 1099-R for the taxable portion of any after-tax annuity distributions you received during the year.

Realized Gain/Loss report – for clients with trades in their taxable accounts, we mailed realized gain/loss reports along with our year-end reports. If you have any questions about these reports, or if you did not receive one and believe you should have, let us know.

Minerva Fees – we always send invoices to clients when billing for our fees, and the year-end report also reflects fees paid during the year. Management fees paid from a taxable account are tax deductible.

Aside from gathering documentation, an issue some of you might face is whether or not to make a ROTH or traditional IRA contribution. The contribution must be made prior to filing your return, and if you think you might want to make a contribution, you’ll need to determine if you are eligible to do so. Additionally, you’ll need to decide whether a ROTH or traditional IRA contribution would be more beneficial.

If you made an IRA or ROTH contribution last year, we’ll be in touch within the week to see if you would like to do so again this year. Additionally, for those of you who think you might like to make a contribution but aren’t sure, feel free to give us a call and we can help answer those questions for you.

Financial Planning Tip – Credit Card Fraud
Micah Porter, CFA

By all rights, this particular column should fall under question of the month, but it was such a good question that it led to a few key tips regarding protecting against credit and debit card theft. The original question was whether or not it made sense to purchase credit card insurance, and that led me to do a bit of research into exactly what one’s liability is if your credit or debit card is lost or stolen. Note that I specifically state credit OR debit card here, as the liability differs for each and these are the rules in existence as of February 2010.

According to the FTC, for credit cards the most you will owe for unauthorized charges is $50 per card, and there is no responsibility if you report the loss of a credit card before it is used, or the unauthorized charge involves only your credit card number.

For debit cards, the possible losses are higher – and potentially unlimited. They are as follows:

  • $0 if you report an ATM or debit card as missing before it is used.
  • Up to $50 per card if you report the loss within two business days after you discover the loss (although there is lack of clarity in the FTC document regarding how one might prove when one discovered the loss).
  • Up to $500 per card if you don’t report the loss within two business days of discovering the loss.
  • Unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you.

Finally, for debit cards, if the loss involves unauthorized transfers involving only your card number (and not the loss of the card) you are liable only for transfers that occur after 60 days following the mailing of your bank statement containing unauthorized use and before you report the loss. Again, all of these regulations were current as of 2010, so depending upon when you’re reading this, they may have changed.

So, how should you protect yourself? The FTC provides a number of tips and additional information here.  A few of the most important are as follows:

  • Keep a registry of your credit cards, their numbers and the contact information for the card company so you can quickly contact them in the event of loss.
  • Treat your card numbers as you would your social security number, and only provide the information to businesses you know to be reputable.
  • Don’t carry your PIN and debit card in the same wallet or write it on the card.
  • Review your statements every month to ensure there are no unauthorized charges. The theft of card numbers versus the cards themselves is increasingly common, so you might not know your card has been stolen. Even with debit cards and their higher liability, you can limit that liability if you quickly catch the fraudulent transaction on your bank statement and notify your bank.

While following the above steps won’t eliminate the possibility of a loss, they should help limit one if it does occur. In a future newsletter we’ll examine identity theft and review steps you can take to protect yourself against that as well.

Client Question of the Month
If a fund is underperforming, when do you sell?
There’s not a simple answer to this question, but it’s one you’re likely to confront even among top-performing fund managers. Litman Gregory conducted a study several years back of performance of top-performing funds over a 10 year period. They defined top-performing as those funds that beat their benchmark by 1% or more (annualized) over the 10 year period.

What they found was that every top value fund underperformed benchmark by at least 2% annually, and many underperformed by 5% or more annually. The same trend was found with funds in other asset classes as well. In short, an extended period of underperformance was almost inevitable. Yet over the 10 year period each of these funds outperformed the index by a material amount.

While this result might seem surprising, if you take the types of active fund managers we – and Litman Gregory – tend to seek, it’s not as surprising. First, in most asset classes, we look for managers that are value-focused and who conduct extensive analysis of the companies in which they invest and are likely to hold onto long-term. Such a strategy is, by nature, somewhat contrarian as the stock prices of such companies wouldn’t be a bargain if other investors recognized the value.

Second, most of our managers have low portfolio turnover, which means they tend to buy and hold their investments for an extended period. In many instances, there will be a period of underperformance before the market recognizes the value of a company’s stock. Finally, we generally seek managers that have relatively few holdings, as the larger a portfolio the more likely it is to simply track the index – and if we wanted that, we could buy an index fund.

All of the above characteristics make it likely that a fund will diverge from a benchmark return, and from time-to-time that divergence will be on the downside. If a fund underperforms, we will revisit our due diligence and confirm that nothing critical – the fund manager or the fund strategy, for example – hasn’t changed and that nothing was missed in our initial analysis. If everything checks out, then we’ll continue to exercise patience and continue holding the fund.