Behaviorial Finance
The tendency of investors to become attached to a specific price as the fair value of the holding.
What is Anchoring
This type of account is subject to the kiddie tax. Trust tax rate apply
What are UGMA/UTMA accounts
This funding strategy is maintained by a state or state agency. These allow the parents/grand parents to purchase tuition credits or certificates on behalf of a designated beneficiary.
What are 529 Qualified Tuition program
Money deposited into the clients accounts include:
CD or bond payments the client receives
Dividends received by the client
Pension or IRA distribution received by the client
Withdrawals from mutual funds
Rent received by the client from investment property
What are Positive inputs for financial calculations
These are considered_______ when creating a financial Statement
Cash
Checking accounts
Money market account (Deposit and Mutual Fund)
Savings accounts
CD's close to maturity (less than 90 days)
Laddered CD's
What are Cash Equivelents
An individual erroneously believes that the onset of a certain random event is likely to happen following an event or series of events
What is The Gamblers Fallacy
Investors emotionally reacting to new market information
What is Overreacting
Financial Infidelity happens when one partner typically a spouse, lies to the other about debts, credit cards, keeps money in a secret account, hides purchases and generally lies about money
What is Financial Infidelity
These education investments are owned by the parents for the child. Since the parents own them they cannot be in an UGMA/UTMA account
What are EE Education Bonds
This type of college savings allows for contribution into an investment account that grows tax deferred. Distributions are tax free if used for qualified education expenses.
What are Section 529 plans
When money moves out of a clients:
Checking account
Investments into Stocks, Bonds, Mutual funds, IRA's
A repair is made to the investment property
Pension or 401K deposits made by the clients employer
Financial Statements consider these______ When creating a financial statement:
Variable and fixed annuities
Business Interests
Real Estate owned for business purposes
Collectables used for investment purposes
Pensions, IRA's, Roth IRA's
Mutual Funds
Stock positions
What are considered as INVESTMENTS on the financial statements
The tendency for individuals to mimic the actions of the larger group.
What is: Herd behavior can be called Fear of Missing out FOMO
Investors like pattern, and recent past represents a nice easy-to-find pattern that can become the basis for an investment decision
Ex: A fund that had a great year last year can influence an investor to "pull the trigger" based on the assumption that last years performance will repeat itself. Decision is made with little to no research
What is Over-Weighting recent past
Holding onto an investment for emotional reasons rather than considering more practical applications for the inheritence
What is Attachment Bias
This education savings plan is limited to $2,000 per year contributions total. The contributions are NOT deductible. Funds may be used up to the age of 30. The unused portion can be rolled over to a beneficiary who is another family member.
What are Coverdell Education Saving
This type of college savings has the following characteristics:
Tracks tuition inflation.
Suited to Risk averse investors.
Considered an asset of the parent for financial aid purposes.
What are qualified tuition plans (QTP)
If you input the pension or 401k Contributions by the employer as a positive you will get a wrong answer
What is the proper way to enter pension or 401k contributions
These are considered____ when creating a financial statement:
Home
Personal Property
Collectables for Personal enjoyment
Vacation Home
Automobiles or Recreational vehicles
What are Use Assets on the Financial Statement
The tendency to look at a past event and thinking we understand it, when in reality we may not.
What is Hindsight bias
The belief that when something goes right it us simply because you were smart and made the right decision. If it does not work out it is someone else's fault or bad luck.
This describes an emotional bias that causes individuals to value an owned object higher, often irrationally, than its real-world market value.
What is Endowment Bias
Under TVJS federal tax free withdrawals can be made from 529 plans for tuition for K-12. Maximum for primary studies is $10,000 per year. State level taxes vary.
What are 529 distribution for K-12 education
This type of plan has the following Charistics
Market based performance.
Suitable for risk tolerant investor.
Considered an asset of the parents for financial aid.
What are Section 529 plans
Use begin mode when entering
College tuition paid
Retirement benefits received
Family needs
What are BEGIN mode inputs
These are considered_____ When creating a financial statement
Credit card balances
personal loans
auto loan balances
Mortgage loan balances
What are Liabilities
The tendency to look at recent events (or Market Performance) and assume that those events will continue indefinitely.
The trees grow to the sky fallacy
What is inappropriate extrapolation
Investors seek patterns that help support decisions sometimes without adequate confirming research.
What is Spotting trends that are not there
This refers to the experiences and biases that can facilitate problem-solving and probability judgements. These strategies are generalizations, or rule of thumb, reduce cognitive load and can be effective making immediate judgments, however they often result in irrational or inaccurate conclusions
What are Heuristics
Education savings needs analysis calculation is a three step process.
1. Determine the cost of the first year of college
2. Determine the amount that must be available when the child is 18.
3. Determine how much the parents need to save.
What are the steps to determine how much needs to be saved for collegs.
have a annual contribution limit to $17,000 limit per parent/grandparent.
Can use up to 5 years of Gifts (85,000) per parent all at one time without incurring any gift tax penalties
Couples can contribute up to $170,000 max at one time.
What are 29 Contribution Limits
Use this mode when:
401k Defferals
Profit sharing contributions
Bond interest paid
Mortgage paid
What are END MODE input items
Assets - Liabilities =_____
What is Net Worth
This describes the over analysis of a situation or decision that can cause decision making to become stuck. Making no course of action or decision is acted upon. Situation may be too complicated or there may be too many choices.
What is Analysis Paralysis or Paralysis by Analysis
The tendency of investors to do nothing when action is actually called for
What is Status Quo Bias
This happens when the finances of the parents and children are inappropriately comingled.
Too much of this may lead to children having a lack of financial motivation and even to lower self esteem.
What is Financial Enmeshment
This college funding option provides a $2,000 tax credit plus 25% of next $2,000 of expenses with a maximum of $2,500 tax credit.
MAGI Phase out
First four years of college ownly
What is the American Opportunities Credit AOC
When investors are when it comes to gains (they do not want to give them up) they are risk seekers when it comes to losses (they will take big risk to avoid realizing them). Given a choice between a sure gain and a chance to win more, people usually opt for the sure gain.
What is Loss Aversion and Risk Taking
Subconscious beliefs people have regarding money, many of which were developed in childhood. Personal experience and family values can impact these. The four most common of these are"
Money avoidance
Money Worship
Money Vigilence
Money Status
What are Money Scripts
The challenge of reconciling two opposing beliefs is called?
Remembering the positive part of an experience but forgetting the negative
What is Cognitive Dissonance
This college funding option has a $2,000 max tax credit.
Any higher learning institution (undergrad, grad, continuing ed)
MAGI Phase outs
This describes the different ways people evaluate losses and gains. The losses have a much greater impact than a commensurate gain will have positive.
An economic theory positing that people have a tendency to view their wealth in nominal dollar terms rather than real terms that takes inflation into consideration. Also called price allusion
What is Money Illusion
The natural human tendency to accept any information that confirms our preconceived position or opinion while disregarding any information that does not support the preconceived notion.
What is Confirmation Bias
This college funding vehicle must be used by age of 30.
MAGI phase out
What is a Coverdell withdrawal
Entails looking at sums of money differently, depending on their source or their intended use.
Dividing investment between safe and more risky portfolios
What is Mental Accounting
Cognitive bias in which a person makes decisions based on whether the various options are presented in a positive or negative way.
"If you buy XZZ, you could make a 50% profit"
"If you buy XYZ, you could lose everything if anything goes wrong and also miss out on a 50% profit"
This is where investors tend to allocate their investment dollars equally across each option
What are Diversification Errors
Only one of these can be used as college funding vehicles. They cannot be combined.
What are Tax Credits, Distributions and withdrawals
The tendency to make a decision based on what the investor wands to happen rather than the probability of that outcome
What is Outcome Bias
The tendency to take no action rather than risking making the wrong one.
What is Fear of Regret
The tendency to place too much emphasis on one's own abilities. Often works hand in hand with confirmation bias
What is Overconfidence