The Taxman Cometh

It's the time of year when envelopes start plopping into the mailbox from all one's financial institutions with weird codes that only the IRS could devise.  Interest income, earnings, mortgage interest, retirement accounts - each has its own special number so that the government can keep tabs on what we're worth, (and how much they can wrest from us).

My taxes this year will be more complex than ever before.  The sale of the Brooklyn chateau generated a capital gain which just falls within the guidelines to exempt me from paying tax (I hope).  Doubtless, I shall have to jump through myriad TaxCut hoops to prove that to the government's satisfaction.

Then we bought a house, just in time to benefit from the expansion of the First Time Homebuyer Tax Credit.  Now some of you may be smelling a rat here.  How can I be a First Time Homebuyer, if I just sold a house, right?  Well, I'm not.  But Eric is.  And apparently, I may be able to take his deduction (you should know he is on board with this).  If I've lost you at this point, and you're still interested, there's a Wall Street Journal article on the subject here.  Even if I can't take his deduction, then at the very least I should be able to get the existing homeowner deduction, which Congress handily passed just before our sale went through.


So far, so good.  But moving state will complicate matters.  Even though I haven't worked since I've been in California,  those of you who have been following these posts will know that I also have some investment income to declare.  Remember my foray into the stock markets?  Well it transpires that I am a reasonably successful "day trader".  Although I have yet to come anywhere close to replacing my former income (sadly), I have made enough to afford a wee ski trip to Squaw Valley over SuperBowl weekend (yippee!).  At least, I think I have.  I haven't yet worked out how much of my investment gains will be clawed back, which may yet come as a nasty surprise.

At any rate, I am delighted to report that my stock market experimentation has so far yielded a realized return some 10 times greater than the interest I am earning in my savings account. So thank you, Mr Buffet, I'm glad I took your advice.  (Also glad I bought your shares, as they are up a healthy 4.9% from September as of today's close)!

One thing I have learned, since venturing into the treacherous seas of short term investing, is that it requires a very strong stomach.  While the markets have not yo-yo'd in quite the same way that they did in the fall of 2008, there have been a couple of times when I thought I'd be writing off losses at tax time.  Fortunately, I appear to have dodged that bullet this year.

I haven't yet set aside the time to evaluate the full situation, but I am hoping that Uncle Sam may give us a windfall this year, which we'll obviously put towards the wedding.  After all, the tax code is largely designed to favor married couples, a throwback to the traditional view that marriage reinforces a stable society.

My investment goal for the next six months is already determined, however.  I have a (rather expensive) wedding dress to pay for.  You'll know if I made it when we post the wedding photos in July...

Where to Invest Post-Crash?

In the dark days of the stock market catastrophe last fall, Warren Buffet advised us to buy American equities. Despite my deep misgivings, I followed his advice, wagering a very small amount of my savings (around $1500) in the worst stock market since the Depression. I am delighted to report that a year later, I am 25% up on the investment. $375 won't go far, but it's a darn sight better than the return I would have achieved on my savings account right now, which offers a pathetic return of less than 1%. The laughably named "high yield" promotional CD currently offered by Bank of America would bump it up to a less than stunning 1.2% APY.

I am by no means an investment guru (perhaps this post should come with a financial health warning?) - but as a result of the sale of the Brooklyn Chateau, I now have significantly more to invest than I did last year. Of course, I also have a great deal more to lose.

Real estate has been good to me. I sold my first (London) apartment for double the amount I paid for it within five years. The little house in New York also realized a decent return, even in a truly lousy market in which to sell. In the medium term, most of the proceeds from the chateau will be reinvested in a new nest somewhere in Santa Cruz county. So my current preoccupation is figuring out how best to invest this money in the very short term (next six months), to achieve a decent return without excessive risk.

Of course, I am not alone. Savers all over the country are trying to find a way to make their money work for them, rather than working for the banks they so recently had to bail out. (Sidebar: American check-clearing rules are deeply antiquated, and seriously favor the banks, as the New York Times pointed out this weekend). Saturday's Wall Street Journal warned folks about the possible dangers of fleeing to bonds in search of yield, noting that investors in bonds could get slaughtered should interest rates rise (as they surely will in the not too distant future). Strike one for bonds (particularly longer term bonds).
Mutual funds are regularly touted as the safe option for the risk-averse investor. But many of them have expenses which could significantly reduce gains in as short a time period as six months, or penalties for early redemption (not helpful should we suddenly find our dream home and need to produce a down payment at short notice). But part of our plan will surely involve an index fund or two, as a relatively safe bet.

Stocks offer potentially rich rewards, but possibly devastating losses. I do plan to take a very small holding in Berkshire Hathaway, as a tip of the hat to the Oracle of Omaha for his earlier advice. But at over $3000 per share, it really will be a very tiny stake. Since investors receive Warren's newsletter, I hope to garner more pearls of wisdom in the coming months.

Now some of you might think that it is worth paying for professional advice. But very few financial gurus saw last year's financial tsunami coming. So could I be sure that a professional would look after my interests better than I can? If I lose my own money, I'll be irritated. If someone else loses it for me, I'll be madder than a chimp during a banana shortage.

The reality is, of course, that the old saw of keeping a balanced portfolio is still the best advice. We can neither afford to put our nest egg in only one low-interest producing basket, or in too many risky baskets.

In an earlier post, I mentioned our audition for Who Wants to Be a Millionaire? Despite our screen test, our Millionaire plan did not work out. We will not be coming to a TV screen near you anytime soon. So the real financial plan is pretty critical. Eric and I are still figuring out how to allocate our assets. If anyone has the silver bullet, please let us know. Otherwise we will muddle through, and (without detailing dollars and cents) let you know how our investment decisions pan out, percentage-wise, in due course. In the words of the Oracle, we hope to profit from folly, not participate in it...