Archive for May, 2008
May 30th, 2008
Wendy M. Blair, CFSC
The President, Vice President, and the presidential candidates all released their 2007 tax returns. It took Bill and Hillary a little bit of time, but when you pay in millions – you wait until the last minute to file! Personally, I find the numbers just fascinating and if you haven’t seen them, I hope you do too!
- President and Mrs. Bush filed a joint return with $719,274 of taxable income. Their income was from his salary and investment income from a blind trust. They had a tax liability of $221,635 and made charitable contributions of $165,660.
- Vice President Cheney and wife, Lynne, had taxable income of approximately $2.5 million and a tax liability over $600,000. The Cheney’s income was comprised of his salary, Mrs. Cheney’s book royalties, and pensions. The Cheneys donated $166,547 to charity in 2007.
- Senator Hillary Clinton reported income from her Senate salary and interest on investments. She and former president, Bill Clinton, also received substantial amounts from his speeches ($10.1 million), from his book royalty ($4.4 mil), and from investments ($6.5 mil). Their total income for 2007 was over $20 million. They donated approximately $3 million to charities which reduced their tax liability.
- The Obamas received salary from his position as Senator and Michelle’s employment salary. The Obamas also had book royalties of approximately $4 million. Their AGI was $4,139,965 and they made charitable donations of $240,370.
- Finally, John McCain filed a separate return and reported AGI of $386,527. This was from his Senate salary and other investments. He reported charitable gifts of $105,467. John’s wife Cindy, a principal executive in the family-owned business, did not release her separately filed tax return.
May 28th, 2008
Wendy M. Blair, CFSC
On April 17, 2008, Senators Grassley (R-IA) and Baucus (D-MT) introduced a bill that would, increase the AMT exemption for 2008 to $69,950 for married couples, and extended other expiring tax provisions. Of great importance to many is the IRA Rollover provision to charities. Under the provision, which was in effect for 2006 & 2007, IRA owners over age 70 ½ may transfer tax-free up to $100,000 directly to qualified charities. For IRA owners who are required to take an annual required minimum distribution and also have charitable obligations, may use the RMD to pay the charitable obligation. Although there is no charitable deduction for the contribution, the RMD amount paid directly to the charity (up to $100,000) will not be included in ordinary income. This is a provision that will hopefully be approved very soon and taken advantage of by many IRA owners to help fund very worthwhile charitable causes.
May 27th, 2008
Wendy M. Blair, CFSC
This question seems to come often, especially, when markets are volatile. It may seem difficult to justify investing funds when the markets are going down, when those funds could pay down your debt. However, the best way to answer that question is to “do the math.” There are savings calculators available on line. These savings calculators illustrate how much money you could have at the end of the mortgage period by saving instead of prepaying. Also there are mortgage calculators available on most financial institution websites and other sites to help you determine how much mortgage interest you would save by prepaying your mortgage. Unfortunately, running the numbers doesn’t always give you the right answer. If you are concerned about job security or are nearing retirement and worrying about the debt is a major concern, than prepaying your mortgage may be the better option. Like most investment strategies the longer the time horizon you have the better off you are investing with a globally diversified asset allocation model combined with a low mortgage interest rate. A great website for financial calculators is www.asec.org. The calculator tab includes; savings, mortgage, budget, college savings, and many more.
May 23rd, 2008
Tracy S. Beard, CFP®
One of the most powerful illustrations I have shared with my clients over the years involves a very simple math concept. Imagine you started with a portfolio worth $100,000. If you lose 50%, how much return do you need to earn to get back to your original principal? Often an investor will respond by answering 50%. However, a 50% return on $50,000 would only bring the portfolio value to $75,000. The correct answer is 100%. Yes, that is correct. A 50% decline requires a 100% return to merely recover. This is why controlling risk in a portfolio is so important. When investors ignore the benefits of diversification and become speculative, they are subjecting themselves to this type of speculative risk. So what should an investor do? Listed below are a few methods that may help protect your portfolio from speculative risk.
- Avoid bad timing decisions and don’t let your emotions dictate your investment decisions – Too often investors misjudge risk. They think risk is high when risk is really low. For example, when the market corrects by 10%, most investors do not want to put money in the market. However, they usually line up to make deposits when the market is on an extended run up. What are implications of bad market timing? If you bought into the market in March of 2000 (when it felt good), your portfolio of Large US stocks fell over 50% by 2002. If you pulled your money out at the end of 2002 (when risk was actually low), you would have missed double digit stock returns for each of the next four years.
- Broadly diversify across a number of assets classes throughout the entire planet – While diversification seems boring, it works. You will not hit a home run in any given year since you will not have your entire portfolio in the hottest market. Fortunately, you will not strike out either.
- Stop watching the financial networks every day – When one watches the news everyday, they tend to believe markets are more volatile than they actually are. This can play with your emotions and cause poor market timing decisions.
For more on building a diversified portfolio, feel free to visit our website at www.savantcapital.com
May 23rd, 2008
Tracy S. Beard, CFP®
A recent study done in Britain attempted to link testosterone levels with trading performance. The general conclusion indicated a higher testosterone level resulted in more aggressive trading. Aggressive trading led to better trades, and more profit for the investor. However, it also referenced irrational risk taking when traders had elevated levels of testosterone. Large declines and losses in a portfolio are often a direct result of irrational risk taking. Normally, we do not get caught up in the speculative trading practices utilized by most of the investment world. After all, it is extremely difficult to beat the performance of a broadly diversified portfolio of low cost index funds. But if you prefer to invest on the speculative side of the curve, this study maybe helpful. Here are a few considerations.
- If you are using a female broker, you can probably ignore this whole blog.
- Prior to placing trades with your broker, ask if he recently checked his testosterone levels. If the levels are high, have him call you tomorrow.
- If you have a male managing the account, see if he is willing to get married. Marriage has shown to lower testosterone levels. Better yet, see if they can have children as well. Becoming a dad has been linked to lower testosterone levels.
Kidding aside, the investment world is always trying to find methods or explanations to make a quick buck. Many experts agree the most successful investments avoid aggressive and speculative trading. Your time is probably better spent focusing on the following items:
- Reducing your investment costs
- Broadly diversifying across US and international markets
- Remaining disciplined during volatile periods
- Rebalancing your portfolio when necessary
May 21st, 2008
Tracy S. Beard, CFP®
Effective portfolio management utilizes risk to capture market returns. While we may not enjoy the fluctuation of the market, without it we would have to settle for the low returns generated from CD and cash based investments. For many of us, low returns combined with the impact of taxes and inflation could cause us to spend our entire lifetime working. So is the secret to higher returns found in taking more risk? The answer is yes, but only to a limited extent. Some risks are clearly not worth taking. Often a prospective client will present a portfolio that is concentrated in only a few stock holdings. One question emerges… Is the expected return for holding one stock higher than if you owned 2,000 stocks? Most would agree the expected return is not higher for holding just one stock. However, the risk is substantially higher. This can be confirmed by questioning anyone that owned Bear Stearns or Enron. There are a number of strategies investors may consider to reduce their concentrated stock holdings. Since the prevailing reason that clients hold concentrated stocks is to avoid the recognition of the gains (paying taxes), many are aimed at reducing the impact of the taxes.
Options to Reduce Concentrated Stock Holdings
- Complete sale: Incur the tax and diversify to reduce risk. This is the quickest method to diversify. However, if the assets are not in an IRA it also requires recognition of gain (you will have to pay the tax man).
- Give some of the shares in kind to a charity: If you are already giving money to a charity, you can gift them the shares of the stock. Since the charity is a non-profit organization, they can sell the shares and avoid the tax.
- Create a Charitable Remainder Trust (CRUT). With a CRUT, you create an irrevocable trust. The shares of the stock are used to fund the trust. Once the shares are in the trust, the trustee can sell them. The trust will then pay you an income for a set period of time. The gain is not avoided since you pay tax on the distribution from the trust. However, you can spread the tax out over a longer period of time. At the end of the term of the trust, the charity gets the remaining balance in the trust.
- Sell portions over a set number of years to spread out the tax recognition (i.e. 3 year plan)
Note: Be careful when selling assets if the owner is in poor health. In many cases, if a person passes away holding a highly appreciated stock, the gain is eliminated. This is referred to as the step-up in basis rule.
Disclaimer: Planning related to concentrated stocks is very complicated. The above examples are for illustrative purposes only. They do not reflect all of the options or all of the tax implications for investors. Please consult your financial/legal/tax professional when considering any planning strategies for concentrated stocks.
May 20th, 2008
Amy L. Barrett, MBA, CFA, CFP®, CDFA™
Since I’m up to my eyeballs in preparation for my 13-year old son’s Bar Mitzvah this month, I thought I would share some of my observations. In defending his assault on my view that he has to go through with it, I failed miserably to convey the fact that generations of Jews consider the age of thirteen a milestone. The fact is that in 4000 BC, the odds are that he would not have made it to thirteen. I didn’t tell him that because it would not have sunk in. I did remind him that if he doesn’t go through with it he might not make it to fourteen.
Lately, much that I say doesn’t sink in. In fact, that I repeatedly remind him that that he must sing in Hebrew, several long blessings in front of 150 people who he barely knows. Does he practice? NO. It’s a good thing that only my brother-in-law, a serious Jew, and the Rabbi will know that he faked it.
The only logic that appeals to him is that he will get gifts in exchange for his years of preparation and song. Money is a motivating factor. In fact, he has his wish list already assembled. Perhaps spiritual leaders got it wrong, instead of offering heaven for a lifetime of good deeds, they should have offered a Bar Mitzvah and very big party!
May 14th, 2008
Amy L. Barrett MBA, CFA, CFP®, CDFA™
Since active investing leads to inferior returns when compared with passive investing, the key steps to building a successful passive portfolio are below.
Choose stocks, bonds, and other assets based on Modern Portfolio Theory (MPT) - There is a trade-off between risk and return so select investments to gain the maximum expected return for a given level of risk.
Purchase broadly diversified baskets including a wide range of asset classes - A diversified basket includes
U.S. stocks (large and small), Foreign Equities (with Emerging Market stocks), Real Estate, Commodities, and perhaps high quality Fixed Income.
Hire investment managers that have low asset turnover - Turnover is buying and selling of assets. The turnover costs include a bid-ask spread (selling to the bid and buying the offer), market impact (big traders can cause the market to move), and higher trading cost (paying a commission on sales and purchases).
Keep your costs down - Mutual funds with high expenses reduce return. Buy only no-load, low cost funds (i.e., passive index funds).
Manage your taxes - Taxes reduce return so purchase tax-efficient investments for your taxable accounts. Tax-efficient investments control the amount of income distributed in order to reduce investors’ tax liability.
Systematically rebalance your portfolio - Rebalancing instills discipline by selling assets that have grown above the target. This reduces risk and adds return over time.
To answer “How Should You Choose Assets?” I recommend that the do-it-yourself investor visit The Vanguard Group website. Vanguard and other low cost index mutual fund companies offer a variety of broadly diversified index funds. For investors who are not the do-it-yourself kind, a good financial advisor can help you decided on a strategy and choose assets that can help you reach your long-term goals.
May 12th, 2008
Amy L. Barrett, MBA, CFA, CFP®, CDFA™
A previous blog dated March 5th provided a short risk tolerance questionnaire to help you, the investor, select a personal and appropriate level of stocks-to-bonds in your investment portfolio. With the right amount of investment risk (stock-to-bond ratio), you can withstand tough times — like current markets — without selling your investments. Armed with the knowledge of your risk tolerance, your next step in order to achieve a solid investment plan is to choose the stocks, bonds, and other assets to fill your portfolio. But, how do you choose your assets? If you are like most of our prospects, your investments are “all over the place” meaning that they are a hodge-podge of investments. Investors often collect assets without a thought of their overall strategy. Ideally, investors should purchase assets so that the portfolio may meet their life goals.
There are two investment philosophies, active and passive investing, that lead to different methods of building a portfolio. Active investors bet that they can pick the best stocks and funds plus they can “time the market” (buy when the market is low and sell when the market is high). Active investors believe their ability to select stocks and “time the market” will allow them to outperform all other investors. On the other hand, passive investing involves buying broadly diversified investment baskets - a broad variety of investments. Passive investors believe that their stock picking ability and market timing are not superior to the average investor’s ability. In fact, passive investors believe they have no more knowledge than average investors do. Though this view is not flattering, the fact is that passive investors routinely get better results than active investors do. A recent Savant analysis found that 70% of the large cap mutual funds (existing for ten years) had lower return than the S&P 500 Index return. After the investors pay taxes (which reduce return), perhaps 80% would fail to beat the index return. These funds fail because most fund managers are not superior at stock selection or market timing. Active investors may win for a while, but consistently winning over a long period of time is nearly impossible.
May 5th, 2008
Richard A. Bennett, CFP®, CFSC, AIF®
Now that we have put the 2007 income tax year behind us, we need to start planning for 2008. In 2008, there is likely (unless the lawmakers change the legislation) to be an attractive tax break for individuals in the 10% or 15% tax brackets. That break involves the tax rate for capital gains dropping from 5% to 0% for the tax years 2008, 2009 and 2010 for people in those brackets. Thus, retired individuals or others who do not have income levels may be able to sell appreciated securities and pay 0 taxes on some capital gains. This break may allow individuals to diversify there portfolio or generate extra cash for special needs. A good article which discusses the tax break can be found http://www.nysscpa.org/cpajournal/2006/1206/essentials/p40.htm.
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Wendy M. Blair, CFSC 
