Oblivious Investor http://www.obliviousinvestor.com Low-Maintenance Investing with Index Funds and ETFs Fri, 12 Feb 2016 14:11:17 +0000 en-US hourly 1 http://wordpress.org/?v=3.9.11 Investing Blog Roundup: “Active vs. Passive” No Longer a Debate http://www.obliviousinvestor.com/investing-blog-roundup-active-vs-passive-no-longer-a-debate/ http://www.obliviousinvestor.com/investing-blog-roundup-active-vs-passive-no-longer-a-debate/#respond Fri, 12 Feb 2016 13:00:49 +0000 http://www.obliviousinvestor.com/?p=7561 People like to talk about the “active vs. passive” debate in investing. But for several years now, there really hasn’t been much of a debate. Most investors prefer to use low-cost passively managed funds — and for good reason. Morningstar’s John Rekenthaler describes the state of affairs thusly:

“Cheap funds haven’t merely scored a knockout; they have put conventional funds into a coma. From which, I believe, there will be no recovery. There’s nothing to indicate that the pattern will reverse. The higher-cost funds continue to trail in performance, to receive few recommendations, to be eliminated by financial advisors’ screens, and to generate unfavorable publicity. It’s over for them. The larger funds will continue to exist, for decades, because of the powerful force of inertia. But eventually, their current shareholders will expire. And there will be no new generation to replace them.”

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Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Politics and Investing Don’t Mix http://www.obliviousinvestor.com/politics-and-investing-dont-mix/ http://www.obliviousinvestor.com/politics-and-investing-dont-mix/#respond Mon, 08 Feb 2016 13:00:35 +0000 http://www.obliviousinvestor.com/?p=7560 Fear is a powerful sales tool.

A sales technique that I’ve seen more and more of recently is the exploitation of a person’s political views in order to instill fear and, ultimately, sell undesirable financial products. The pitch goes something like this:

  1. [Political event X] just happened or is likely to happen.
  2. As a result, the economy will take a nosedive.
  3. You should buy my product to protect yourself.

The technique is popular because it’s effective.

The technique is popular because it can be used to appeal to just about any set of political views. (To appeal to people with left-leaning political views, the pitch is typically something to the effect of the market being rigged by the financial elites. To appeal to people with right-leaning views, the pitch is often about over-taxation, over-regulation, or excess government spending.)

And the technique is also popular because it can be used to sell just about anything. For example:

  • The economy is going to hell, and that’s why you should buy gold.
  • The economy is going to hell, and that’s why you should buy my market-timing newsletter.
  • The economy is going to hell, and that’s why you should buy this annuity.
  • The economy is going to hell, and that’s why you should invest in my hedge fund.

The fact that this approach can be used to pitch just about anything — as well as the fact that it can be used to appeal to either of two directly contradictory sets of beliefs – is precisely the reason you should never trust it.

In order for the pitch to work out well for you, the pitch-person has to get their political prediction right, they have to get the resulting economic prediction right, and they have to be right (and honest) that the product they’re pitching is indeed a good solution in a scenario in which the economic prediction turns out to be right.

That’s what’s necessary in order for it to work out well for you. In order for it to work out well for them, they just have to convince you to buy in the first place.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Why Not Annuitize? http://www.obliviousinvestor.com/investing-blog-roundup-why-not-annuitize/ http://www.obliviousinvestor.com/investing-blog-roundup-why-not-annuitize/#respond Fri, 05 Feb 2016 13:00:03 +0000 http://www.obliviousinvestor.com/?p=7558 I’ve written before that I think too few people annuitize their savings. Or, said differently, I think many people would benefit from exchanging a portion of their liquid assets for a guaranteed stream of lifetime income (most often by delaying Social Security, but also in some cases by purchasing an actual lifetime annuity). This week, Christopher Farrell of The New York Times provides several very reasonable counterpoints to that idea.

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Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Transferring an IRA and 401(k) in a Divorce http://www.obliviousinvestor.com/transferring-an-ira-and-401k-in-a-divorce/ http://www.obliviousinvestor.com/transferring-an-ira-and-401k-in-a-divorce/#respond Mon, 01 Feb 2016 13:00:42 +0000 http://www.obliviousinvestor.com/?p=7554 A reader writes in, asking:

“My divorce was finalized a few weeks ago, and I am supposed to receive a portion of my ex-husband’s IRA and 401k. Are there any specific rules to follow as far as how to move the money from his accounts to my IRA? Or does he just take the money out, write me a check for the appropriate amount, and I deposit the money in my IRA?”

Yes, there are specific rules to follow. And it’s important to note that the rules are different for IRAs than for employer-sponsored retirement plans. Let’s talk about IRAs first.

Transferring IRA Assets in a Divorce

Publication 590-A speaks to transferring an IRA after a divorce. There are two key points here.

The first key point is that there are two ways to do it:

  1. Change the name on the account (in cases in which the entire account is being transferred to you), or
  2. Move the money via a direct trustee-to-trustee transfer, in which the money is sent directly from one financial institution to the other.

A check written to you is a problem, because it does not fall under either of these options. That is, it is not possible to do a “rollover” in which the money is sent to you, then you put it into your own IRA. It has to be a direct transfer from one financial institution to the other (i.e., from the custodian of your ex-spouse’s IRA to the custodian of your IRA).

The second key point is that the divorce decree (or a written document incident to such decree) must specifically state that you are supposed to get this interest in your ex-spouse’s IRA.

Transferring 401(k) Assets in a Divorce

The rules for an employer plan — such as a 401(k) or 403(b) — are different.

First, rather than the divorce decree needing to state that you’re supposed to get an interest in the account, it has to be a “qualified domestic relations order” (QDRO) that states that you get an interest in the account. Also, it’s critical that the order includes certain specific pieces information in order to qualify as a QDRO.

Second, with an employer plan, a rollover is possible. That is, as long as there is a QDRO ordering that you get the part of the account in question, the plan can make out a check to you, and you can then deposit it (i.e., “roll it”) into your IRA — though you only have 60 days (from the date you receive the distribution) to do so.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: How Long Do Bear Markets Last? http://www.obliviousinvestor.com/investing-blog-roundup-how-long-do-bear-markets-last/ http://www.obliviousinvestor.com/investing-blog-roundup-how-long-do-bear-markets-last/#respond Fri, 29 Jan 2016 13:00:51 +0000 http://www.obliviousinvestor.com/?p=7557 This week, I enjoyed two articles that each take a look at how long bear markets tend to last. For me, the biggest takeaway is that there’s a lot of variation. Just because a market decline has lasted a given length of time (or hasn’t yet lasted a given length of time) doesn’t mean that we should/shouldn’t expect anything in particular in the near future.

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Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Do Target Retirement Funds Automatically “Buy Low, Sell High”? http://www.obliviousinvestor.com/target-retirement-funds-buy-low-sell-high/ http://www.obliviousinvestor.com/target-retirement-funds-buy-low-sell-high/#respond Mon, 25 Jan 2016 13:00:35 +0000 http://www.obliviousinvestor.com/?p=7555 A reader writes in, asking:

“Like you, I like the idea of ‘all in one funds,’ specifically the Vanguard Lifestrategy series. I have a significant portion of my IRA in Lifestrategy Moderate Growth. What I’ve wondered about is how those funds handle rebalancing during the type of market volatility we’re experiencing now-i.e., is it done on a continual basis, as new cash comes in and distributions go out? Or quarterly? Is it inherent in these fixed-ratio funds that they will, to some extent at least, ‘buy low and sell high?’”

Vanguard’s LifeStrategy and Target Retirement funds use daily cash flows into (or out of) the fund to rebalance the portfolio. Beyond that, further rebalancing only occurs if the fund’s allocation strays outside of a certain target range (which Vanguard does not publish). You can find a bit more info in this interview with Vanguard’s John Ameriks.

And, I would not say that it is inherent that the funds-of-funds will automate a “buy low, sell high” process. In periods during which the market exhibits momentum (as opposed to mean reversion), the funds’ daily rebalancing will actually harm performance rather than help it.

For example, if the stock market continues to drop slowly but steadily for an extended period, an investor in a LifeStrategy fund would experience greater losses than an investor who had a DIY allocation that was originally identical but never rebalanced over the period. (Reason being that the LifeStrategy investor will keep rebalancing into stocks every day, only to see them decline further.)

And the same thing happens if the market goes up steadily for an extended period. That is, the LifeStrategy investor will constantly be selling stocks, only to see them move up further, and he/she will therefore underperform the DIY investor who doesn’t rebalance over the period.

But the opposite can happen as well.

If a decline turns out to be a steep but short-lived dip, the investor in the LifeStrategy fund will have gotten to buy some shares “on sale” whereas the DIY investor who didn’t rebalance will not have purchased any such “cheap” shares.

And if a brief rally occurs during a bear market, the investor in the LifeStrategy fund will have sold some stocks at the temporarily-relatively-high price, whereas the DIY investor who didn’t rebalance will not have done so.

In short, during periods in which the market heads relatively steadily in one direction, frequent rebalancing (as you would experience in a LifeStrategy or Target Retirement fund) will generally underperform a strategy that involves less frequent rebalancing. Conversely, during periods in which the market rapidly bounces back and forth, frequent rebalancing will usually outperform a less frequent rebalancing strategy.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Suing for Lower 401(k) Costs http://www.obliviousinvestor.com/investing-blog-roundup-suing-for-lower-401k-costs/ http://www.obliviousinvestor.com/investing-blog-roundup-suing-for-lower-401k-costs/#respond Fri, 22 Jan 2016 13:00:03 +0000 http://www.obliviousinvestor.com/?p=7551 After last year’s ruling by the Supreme Court in Tibble vs. Edison International, lawsuits have been brought against several large 401(k) plans, alleging that the plan fiduciaries have not done a good enough job of selecting the lowest-cost share classes available.

As Morningstar’s John Rekenthaler wrote in a recent article, participants in Anthem’s 401(k) plan have brought an especially ambitious suit, alleging that the plan’s funds are more expensive than they need be, despite the fact that they are mostly relatively low-cost Vanguard funds. It will be interesting to see how such cases play out in the next few years — and whether or not they bring any significant changes to the industry.

Investing Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Is Tax Planning a Good Reason to Delay Social Security? http://www.obliviousinvestor.com/is-tax-planning-a-good-reason-to-delay-social-security/ http://www.obliviousinvestor.com/is-tax-planning-a-good-reason-to-delay-social-security/#respond Mon, 18 Jan 2016 13:00:56 +0000 http://www.obliviousinvestor.com/?p=7552 A reader writes in, asking:

“I have a Social Security strategy that I have not read of or heard about. I am interested in your feedback. Given the size of my tax-deferred accounts, when I am 70 1/2, RMDs will make it such that I will pay tax on the maximum 85% of my Social Security benefits regardless of when I start benefits. I am considering taking benefits at age 62, so I can pay no taxes on the benefits for 8 years, then pay the full tax on the benefits at age 70 1/2 and beyond.”

Unfortunately, tax planning with regard to Social Security is a very case-by-case sort of thing.

Also unfortunately, a comprehensive analysis tends to be very time-consuming. In my opinion, the only way to do it appropriately is to use actual tax planning/preparation software and run through several years of simulations using Strategy A and several years using Strategy B, then compare the results (often in a spreadsheet). When I see people trying to do a DIY spreadsheet-only analyses rather than using tax software, they often end up leaving out something important (e.g., a credit for which they’re eligible in one case, but not in the other — or a tax to which they’re subject in one case but not in the other).

As such, I am convinced that this is one of the areas in which working with a financial planner can be most worthwhile.

With the above caveats, I would say that tax planning tends to be a point in favor of delaying Social Security, for two reasons.

First, each dollar of Social Security income is, at most, 85% taxable. So if a person has the option to, for example, spend down their IRA to delay Social Security and the net result is $100,000 less of IRA distributions over their lifetime but $100,000 more of Social Security benefits, that ends up being a “win” from an after-tax perspective.

Second, increasing the portion of one’s income that is made up of Social Security often results in a smaller portion of Social Security being taxable (because only 50% of benefits are included in the “combined income” figure that determines Social Security taxability).

That is, for many people, delaying Social Security results in:

  1. a larger portion of their lifetime income being made up of tax-advantaged dollars of Social Security and
  2. a smaller portion of those Social Security dollars being taxable.

But the above points don’t always apply. For instance, for the reader who wrote in with the question, it appears that even if he delays benefits and spends down tax-deferred accounts in the meantime, 85% of his benefits will still be taxable.

And there are other factors involved as well. Ultimately, the best claiming strategy often depends on whether there are other tax breaks you’re looking to qualify for or other taxes you’re looking to avoid. For instance, for a person who retires prior to age 65 and who will be buying health insurance on the exchange, keeping “household income” very low until Medicare eligibility kicks in may be very desirable, as Affordable Care Act subsidies can be quite large. And that typically means delaying Social Security (at least until 65) while spending primarily from taxable accounts and Roth accounts.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Picking Funds with High “Active Share” http://www.obliviousinvestor.com/investing-blog-roundup-picking-funds-with-high-active-share/ http://www.obliviousinvestor.com/investing-blog-roundup-picking-funds-with-high-active-share/#respond Fri, 15 Jan 2016 13:00:58 +0000 http://www.obliviousinvestor.com/?p=7547 Over the last few years, one strategy that has been proposed for finding actively managed funds that are likely to outperform index funds has been to find funds with a high “active share” — that is, funds that have holdings very different from the index to which their performance is compared. A recent bit of research from Vanguard suggests exactly what you might expect: Yes, picking funds with a high active share results in a greater chance of finding one that outperforms, but it also increases the likelihood of selecting funds that significantly underperform.

Of note, the Vanguard research only looks at a relatively brief period of time, so more work is needed. But it’s a start in the right direction.

Investing Articles

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Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Can I Take a Loan from my IRA? http://www.obliviousinvestor.com/can-i-take-a-loan-from-my-ira/ http://www.obliviousinvestor.com/can-i-take-a-loan-from-my-ira/#respond Mon, 11 Jan 2016 13:00:11 +0000 http://www.obliviousinvestor.com/?p=7548 A reader writes in, asking:

“A friend recently told me that he took a loan from his IRA so he could take money out for a short time without having to pay penalty. I had never heard of that, so I called Vanguard and asked about it. They said that only 401k accounts have loans, not IRAs. Is that true? Was my friend wrong?”

The Vanguard representative is correct that IRA accounts do not have loan provisions, whereas many 401(k) plans do have such an option. (For more on 401(k) loans, see this MarketWatch article from Elizabeth O’Brien.)

Perhaps your friend was talking about the ability to “borrow” from an IRA by using the 60-day rollover provision.

To back up a step, there are two ways to move money from one IRA to another:

  1. Via a direct “trustee-to-trustee transfer,” in which you never have possession of the money, as it goes directly from one financial institution to the other, and
  2. Via a “60-day rollover.”

With a 60-day rollover, the first financial institution sends the money to you, and as long as you deposit an equal amount of money into an IRA within 60 days from the day you receive the distribution, it will be treated as if the distribution did not occur.

The 60-day rollover option exists so that you can move money from one retirement account provider to another. But it can also be used as a sort of short-term “IRA loan” mechanism, because it’s possible to simply deposit the appropriate amount of money back into the same account (rather than into an IRA with a different financial institution).

There is, however, one very important point to be aware of: You can only do one such 60-day rollover per year. So if you have executed such a rollover within the last year, you cannot “borrow” from your IRA in this manner, because you would not be able to put the money back into an IRA. (That is, the distribution would simply count as a normal distribution, potentially subject to the 10% penalty.) Similarly, if you do “borrow” from your IRA in this manner, you won’t be able to do so again within the next year, nor would you be able to do a normal 60-day IRA-to-IRA rollover during that period.

Of note, the one-per-year limit does not apply to:

  • Roth conversions (i.e., rollovers from a traditional IRA to a Roth IRA),
  • Direct trustee-to-trustee transfers, or
  • Rollovers involving an employer-sponsored plan (e.g., from a 401(k) to an IRA or vice versa).

Also, the one-per-year limit is no longer one rollover per IRA per year as it used to be, but rather one rollover per year regardless of how many IRAs you have.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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