Steven A. Branson, Esq. – Financial Strategies

As 2009 draws to an end, many are checking their IRA options. Of course, the sooner you can invest, the better for your allocation, so that is a cash flow matter. As for how much you can invest, please see the 2009 limits below. Also keep in mind the Roth IRA conversion options mentioned in a prior newsletter.

Here are the rules from the IRS website:

Modified AGI limit for traditional IRA contributions increased. For 2009, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

* More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),

* More than $55,000 but less than $65,000 for a single individual or head of household, or

* Less than $10,000 for a married individual filing a separate return.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $166,000 but less than $176,000. If your modified AGI is $176,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? in chapter 1.

Modified AGI limit for Roth IRA contributions increased. For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.

* Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.

* Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2009 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

* Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

See Can You Contribute to a Roth IRA? in chapter 2.

Modified AGI limit for retirement savings contributions credit increased. For 2009, you may be able to claim the retirement savings contributions credit if your modified AGI is not more than:

* $55,500 if your filing status is married filing jointly,

* $41,625 if your filing status is head of household, or

* $27,750 if your filing status is single, married filing separately, or qualifying widow(er).

See Can you claim the credit? in chapter 5.

Temporary waiver of required minimum distribution rules. No minimum distribution is required from your traditional or Roth IRA for 2009. See Temporary waiver of required minimum distribution rules for 2009 in chapter 1.

Let us know if you have questions or comments. Thanks,

Steven

The article below suggests time management tips for use of voice mail. (This leaves us all more time for investment, financial and other planning work.)

Of course, you can always e-mail, text or just hope for a live conversation!

Let me know what you think…..

Thanks,

Steven
Stop Wasting Time on Voicemail

1:43 PM Friday November 20, 2009

Tags:Time management

Every time you make or receive a phone call that involves leaving or listening to a message, you’re wasting time. You can’t write as fast as people speak, so transcribing phone numbers, addresses, and other information from a voicemail message is tedious. When you have to leave a voicemail for someone, you’re forced to listen to Robotic Voice-Mail Woman trod through the instructions on how to wait for the tone before you can start.

There are two ways to cut this unnecessary voicemail overhead out of your day:

1. Get your voicemail messages transcribed automatically and emailed to you. Instead of calling your voicemail and having to listen to messages directly, you can receive text transcripts via email on your smartphone or desktop. Several online services can store, convert, and email you voice-to-text transcriptions of your voicemail messages. I use the free (but invitation-only right now) Google Voice service to do just that. In addition to a host of other features, you can forward your existing cell phone’s voicemail messages to Google Voice. Google stores them, transcribes them, and can email you both the playable audio file and the text transcription. Google Voice’s transcriptions are far from perfect; in fact, most times they’re laughably inaccurate. (There’s even a blog dedicated to bad transcriptions, entitled “GV Screwups.”). However, the transcripts are good enough for you to get the gist of the message without dealing with time-consuming playback.

If you don’t have an invitation to Google Voice, several other pay-for services offer voicemail transcription services, like Jott Voicemail, YouMail, CallWave, and MessageSling. Almost all of these services are built to work with mobile phones, and whether or not they work may depend on whether your carrier allows call-forwarding.

2. Bypass unnecessary voicemail instructions with One-Star-Pound. Every time you need to leave someone a message on their mobile phone, you have to sit through this time-wasting, robotic script: “To page this person, press five now. At the tone, please record your message. When you are finished, you may hang up, or press one for more options.” You can skip through this drawn-out greeting and get straight to the beep, but the key to do so varies depending on the carrier. Blogger Jeremy Toemon came up with a three-key combo that works on major U.S. mobile phone carriers. Toemon explains the three steps and why they work:

Step One: Push 1. If your friend is on Sprint (or possibly Verizon, but not always), this skips the greeting and you are done; leave a message. If you hear a message that says “One is not a valid option” skip to Step Three below, otherwise continue to Step Two.

Step Two: Push *. If your friend is on Verizon, you’ll hear the beep and can leave your message.

Step Three: Push #. This works for both AT&T and T-Mobile subscribers, and you’re all set to go.

One-Star-Pound: Train your fingers now and never listen to “at the tone, please record your message” again.

How do you cut down time spent dealing with voicemail? Let us know in the comments.

Let us know if you have questions or comments. Thanks,

Steven

There are interesting technologies being proposed and promoted.

Some of you may have even seen investments worth considering or at least want to consider “going green” with a portion of your portfolio.

Before you do so, consider the Harvard Business Review article reprinted below. The notion of “range anxiety” for dead batteries in electric cars is just one example of the need for infrastructure before all the technologies will have a chance to work.

Therefore, be very cautious about any green investing….. until we see more work done to support such technology ….

Thanks,

Steven
Throwing Money at the Energy Problem Isn’t Enough

12:18 PM Monday October 26, 2009
by Gardiner Morse

Tags:Green business, Technology

Today the U.S. Energy Department announced major funding for 37 cutting-edge energy research projects, from biofuel-producing bacteria to CO2-eating enzymes. The goal, as department secretary Steven Chu put it, is to “spur the next industrial revolution in clean energy technologies.” That’s an inspiring notion – but throwing money at clean-tech is a partial solution at best, no matter how revolutionary the research.

America has always had a love affair with technology, and president Obama is as smitten as Secretary Chu. Obama was in Boston on Friday just a few miles from our offices, touring an MIT clean energy lab and plugging the energy and climate bill now lodged in the Senate. He was clearly dazzled by the innovation he saw – “windows that generate electricity by directing light to solar cells; light-weight, high-power batteries that aren’t built, but are grown…; more efficient lighting systems that rely on nanotechnology” and so on.

But here’s the problem. No technology exists in a vacuum. Consider this: President Obama would like to see a million plug-in hybrids and electric vehicles on the nation’s highways in five years. But though automakers may have the technology and capacity to churn out that many electric cars, who’s going to buy them if there’s nowhere to plug them in? That was a hot topic at a plug-in vehicles conference held in Detroit last week, where “range anxiety” – fear of getting stranded with a dead battery – dominated conversations. Electric cars won’t seriously compete with gas cars until there’s a robust infrastructure of recharging stations as reliable and convenient as gas stations are now. Similarly, biofuel from bacteria won’t power much transport until the systems for large-scale production, refining, and distribution are in place. It’s a classic chicken-and-egg problem. But there is a solution.

Technologies can only flourish as part of a complex system involving interdependent business models, markets, and regulatory environments. In their Harvard Business Review article “How to Jump-Start the Clean-Tech Economy”, Innosight’s Mark Johnson and Josh Suskewicz argue that Edison didn’t just invent a light bulb. He created a coherent commercial system to support it. He designed a technical platform that included generators, meters, and transmission lines; he piloted the project in an ideal test market (lower Manhattan, teeming with enthusiastic early adopters); and he used his clout to get the regulatory support he needed, fighting off the lamplighters’ union, among other things. In short, he imagined the business ecosystem his light bulb would need and set about methodically creating it.

The billions of dollars being funneled into clean-technology development are necessary but not sufficient. Governments and businesses should be thinking as creatively about the infrastructure, business models, and regulatory regimes that clean technologies will need as they are about the cool technologies themselves. “What will it take to transition from a fossil-fuel economy to a clean-tech economy powered by renewable energy?” Johnson and Suskewicz ask. “The key,” they conclude, “is to shift the focus from developing individual technologies to creating whole new systems.”

* * * * *

Let us know if you have questions or comments. Thanks,

Steven

Because some tax laws will lapse by their own terms and because new laws will certainly be enacted, the year-end tax planning for 2009 differs from most years: you need to also consider the changes that will occur in 2010 and even 2011. -Time for tax planning

First, when the Bush tax cuts expire in 2010, the two top tax rates will move up from 33 percent and 35 percent to 36 percent to 39.6 percent. For a couple making $500,000, the added tax will be about $6,000 per year, for a couple making $1 million about $30,000.

Second, the 15% capital gains rate will end. So, do you sell stocks now, perhaps using capital losses from prior years to shelter the gain, in order to increase your basis so that when you later sell, less will be taxed at the higher rate?

Third, IRA distributions may be taxed at higher rates in the future. So, do you take the current law deferral and not distribute in 2009 or instead distribute anyway so that less comes out in future years at higher rates?

Fourth, do you delay major deductions such as planned charitable gifts? The deduction could be worth more in 2011 or you could be in the AMT.

There are some changes the did get enacted for 2009 that help:

The first time home buyer credit of $8,000 is extended for contracts signed by April 30, 2010 and closing by June 30, 2010 (however, there is a phase out of this credit for high income filers).

Also, small business can carry back 2008 or 2009 losses five instead of two years.

All of these issues can lead you wondering what to do. The starting point, whether you do the work or hire someone to do it for you, is to create good working tax projections for 2009, 2010 and 2011. From these, you can see if you are in the AMT or not, if you will have more income taxed at higher rates in the future, etc.

Let us know if you have questions and what help we can supply …..

Thanks,

Steven

Let us know if you have questions or comments. Thanks,

Steven

The article reprinted below raises good issues on risk, asset allocation and rebalancing your investment portfolio.

The author asks us to remember how we all felt a year ago (if you want a good video reminder, try this: http://video.nytimes.com/video/2009/09/11/business/1247464530167/wall-street-one-year-later.html%22%3Evideo%3C/a )

Then, as you think of the risks you took staying invested, he suggests that you need to remember that feeling now, when you consider taking on any more risk, e.g., adding to stocks.

One of his best comments he makes is that you should be rebalancing your portfolio at key points in time.

If you stayed in equities or bought more at the beginning of this year, you actually need to trim back now, because the recent gains mean that you are over-weighted in stocks and need to sell and buy investments that did not do as well to maintain your asset allocation.

Over time, rebalancing can be a technique that helps to get you out of investments at the top, when others want to buy, and into investments at the bottom, when others want to sell. In other words, the stock market gains are more a sign to trim that to add…..

Let me know if you have questions or comments …. Thanks,

Steven

Going Green (this is a follow on to the SRI post earlier this year)

Going green – as we advise on socially conscious funds, investing “green” may not be the best solution; investing well and contributing charitably or politically to “green” causes may have a better impact on both your personal wealth and the environment

That being said, the attention surrounding Al Gore’s documentary, “An Inconvenient Truth,” and his new Nobel Prize, has resulted in a growing number of mutual funds and ETFs claiming to have green credentials. However, identifying the strongest investment options among this growing fund and ETF niche is a challenge as you may be surprised that not all green funds fit your needs.

There are some funds, and some stocks, that do well and others that do not. We are reviewing these to see what works well for investing.

A related comment comes from some mortgage work we do, as seen on the Marblehead Savings Bank webpage:

If all U.S. households received and paid their bills electronically, the country would:

Save 16.5 million trees each year, or the amount of lumber needed for 216,054 typical single family homes;

Reduce toxic air pollution by 3.9 billion tons of carbon dioxide equivalents, akin to taking 355,015 cars off the road; and

Reduce by 1.6 billion pounds the solid waste generated in a year, equal to 56,000 fully loaded garbage trucks.

At our firm, we are doing what we can: filing tax returns electronically and saving files as PDFs rather than printing them.

Let us know if you have questions or comments. Thanks,

Steven

Our goal is to help people make good decisions about their personal finances. And, as I say when I first meet a potential client, our best clients call saying “I am thinking of ….” while our toughest clients call saying “Guess what I just did…”

The article below from Morningstar emphases the need to do the analysis of your goals in order to make good financial decisions – in other words, getting advice and creating a financial plan that you implement over time, including answering investment decisions, especially in these tough times.

Contact us if we can help you with this

Steven

Planning Questions in Disguise

I spent last week answering questions for investors on the new Bucks Blog at The New York Times. It was an interesting reminder of the vital role of a real financial planner and the ongoing process of planning.

Almost every question I answered should have been answered by saying: “Find a real financial planner, tell them everything, and do what they say.” Of course, you can’t do that over and over because no one will listen to you, but boy, it was tempting.

This experience got me thinking about a couple of questions:

1. How can you make reasonable investment decisions without an overall plan?
2. How do you decide when or what to invest in without any context?

Can you imagine visiting the doctor and getting a prescription before a diagnosis (and feeling good about it)? Why do we expect anything different when it comes to investing?

I guess it is because people are confused about the goal. Finding the best investment is not the goal. Having the money to send your kids to college or retire on your own terms is a goal. If finding the best investment is the goal, you may not need a plan. Then, you are left with some really hard questions about market-timing and stock-picking. Good luck.

But if the goal is to reach your financial goals given a certain set of resources, then the questions of what investment or when, can only be made within the context of those goals. All this got me thinking about how many investing questions are really planning questions in disguise, and how many of these questions go away with a real planner involved.

Let us know if you have questions or comments. Thanks,

Steven

Taking a financial health day (like a mental health day, but for your finances)

A recent New York Times article spoke of taking a day that used to be “a mental health day” to work on financial planning matters, or a “financial health day”

With work and other matters demanding attention, many financial matters get put off. One that the author singled out was estate planning – one I often see people put off.

The list he created, as paraphrase and augmented by me, included:

1. Cash back credit cards – switching to or using mileage on existing cards

2. Insurance riders – updating or adding new items for coverage, which may entail appraisals

3. Phone service review – seeing if you have the best phone set up at home (bundling phone, internet and cable to save for example or even dropping the phone for your cell phone)

4. Cell phone service review – seeing if you have the best plan for your usage

5. Nanny tax service setup – setting up payroll for any household employees. The services are inexpensive and save you time.

6. Establishing an estate plan – putting in place a will

7. Insurance benefits – applying for reimbursements

8. In case of emergencies lists – this list tells people were all crucial papers and other items are stored (I have a list on my computer as well as in my safe deposit box)

9. Auto pilot charitable giving – setting up an automatic deduction from a checking account (or doing United Way via payroll)

10. Shopping spree – using the balances on gift cards or, as noted above, using your mileage. The balances do not earn you interest so might as well buy something, as a reward for all the work done on the other items.

These are obviously all worthwhile endeavors. Some take more than one day, such as getting appraisals or executing and estate plan.

I would add to the list the following items:

11. Updating the estate plan you have for changes you want to make in selected fiduciaries or changes in tax laws

12. Checking asset ownership and beneficiary designations for your estate plan so that the plan works as you intend

13. Putting assets in your revocable trusts to avoid probate (this is more important in sates other than Massachusetts)

14. Making sure you have proper liability insurance and an umbrella policy and replacement cost on your home

15. Using your flex plan before year end

16. Tax planning – one we always check with our clients – so that changes during the year are covered by changes in estimates or AMT strategies

17. Cash planning to be sure you have funds for the big purchases….. like cars, with now being possibly a good time to buy

18. Education funding – using 529 plans and any available tax strategies

19. Homestead filing, to protect the equity in your home

20. Reviewing your disability insurance to see if you can add to it

As you know from our work, we can help with many of these items so let me know if you or any of your friends and associates want to improve your Financial Health ….

Let us know if you have questions or comments. Thanks,

Steven

Remember when Peter Lynch, then of the Magellan Fund, said that sometimes you can find a great investment by just looking around you?

The article below shows that there are serious pitfalls in sticking to companies you know and like. That worked once for Starbucks, but it is no longer a good stock in which to invest (others in that market are doing better).

Sometimes you can find real value, but as with any other investment, you need to do your homework….

Thanks,

Steven

Familiarity Can Breed Bad Investment Decisions

by Mike Taggart | 10-27-09 |

When considering stocks to invest in, many investors gravitate toward well-known companies. Whether blue-chip stocks, longtime favorites, or companies that are often in the news, there seems to be something inherently comfortable about investing in a well-known stock. However, this comfort can be at best superficial and at worst catastrophic to portfolio performance. The reason behind the comfort is what’s known as the illusion of knowledge.

Most of us know someone who has won a bet on a sporting event after basing his decision on nothing more than the teams’ colors. This goes against our intuition. How can such a basis for decision-making beat out other bettors who are well-schooled and more knowledgeable about the sport? It’s not simply luck. It’s that our intuition can fool us. The illusion of knowledge tells us that having more information about something, like a stock or a publicly traded company, will increase our predictive accuracy about future events. Studies have shown, however, that more information can actually decrease predictive accuracy and, simultaneously, increase our confidence. In other words, I think I know more about something than I actually do, so I believe that I can more accurately predict future events around this subject and I am extremely confident in my belief.

How does this fallacy appear in investing? One example could be placing stocks of local companies in client portfolios. After all, they are local companies. We read about them in the local press daily. We know people, maybe even executives, who work at the firm. Maybe a client works there or has friends or family who do. We seemingly know how well the firm is performing by collecting information from the newspapers or from social encounters. Such methods of collecting information for an investment can lead to anecdotal bias. (We collect a few anecdotes about a firm and extrapolate that evidence onto a broader frame, not understanding the missing pieces of our knowledge.)

At Morningstar, we provide equity research coverage on about 2,000 companies. As stock analysts, we are not immune to behavioral finance issues. In fact, we deal with them everyday. Our awareness, however, has led us to certain processes in our routines to ensure that we are not succumbing to biases. Performing scenario analysis on every stock we cover, for example, forces us to take a broad view of likely outcomes. And while we do speak with company management teams, we curb the anecdotal bias by corroborating data against regulatory filings and other management teams’ comments within the same industry. Battling our own behavioral biases is tough work, but we guard against it vigilantly. [The article goes on to discuss screening stocks by location, competitive advantages, and who in the company is running it and for whom, their own reward or shareholders?]

Let us know if you have questions or comments. Thanks,

Steven

The Morningstar article reprinted below on Investor Irrationality is worth reviewing in these challenging times

The article makes the case for asset allocation, with a long-term view, and to holding on and not attempting to time the market.

Implicitly, the article makes the case for having a good advisor work with you to avoid falling into these traps of irrational investing. We hope are guidance has worked!

Thanks,

Steven

In Practice: Patterns of Investor Irrationality

by Jim Licato and Alina Tarlea | 10-15-09

We value your feedback. Leave your comments, insight or criticism at the end of this article.

Here are some common ways issues of behavioral finance show up in practice.

The Melting Pot

Despite the recent run-up in the stock market, it is safe to assume that investors are still a bit hesitant to get back into the market (or to stay in the market), let alone consider the riskiest of investments. What investors should understand is that separate types of investments perform differently from one another, which has made it possible to lower the risk of volatile assets by combining them with other types of investments.

Allocation Return Risk

Large Stocks 20% 9.4 17.3

Small Stocks 20% 11.7 25.1

Bonds 20% 8.8 11.8

Cash 20% 5.8 0.9

International Stocks 20% 9.8 19.1

Total Portfolio 9.8 11.0

Mental accounting is a pattern of investor irrationality in which an investor mentally compartmentalizes investments while neglecting to focus on the portfolio as a whole. Mental accounting can often impede investors from making sound financial decisions.

This investor behavior is often evident when international investments are introduced. Risks that often raise red flags when investing internationally include currency, economic, political, and market liquidity. When clients view this particular investment in a vacuum, they are usually less receptive to include it in their portfolios. They are dismissing the potential diversification benefits of international investments and possible improvements in the risk/return trade-off.

While the relative safety of cash and bonds may be soothing, especially during this day and age, investors are sacrificing long-term growth. Some investors may be willing to sidestep greater returns because the volatility of stocks may be too intimidating. As shown in the table, by focusing on the whole portfolio (and not just the individual components), an investor would actually experience a risk level that was lower than bonds and a return that was comparable to stocks.

It is important to note that some mental accounting may be helpful for your clients. For example, if it is helpful for them to mentally account for investments in terms of the goals they are trying to achieve (retirement, college savings, etc.), mental accounting could be warranted. In most cases, however, where your clients are reluctant to get back into the market, or to just stay the course, having them concentrate solely on the total portfolio may help pacify them.

Short-Term Focus

It’s tempting for clients regularly to monitor their investment accounts. Instant access to real-time quotes and a barrage of media reports on daily stock market fluctuations can make it difficult for clients with a long-term investment horizon to stay focused on their goals. In reality, these daily market movements may not be as extreme as they seem. As investors look longer term, their perception often changes. (1989-2008 probability of losing money in the market: daily 46%, monthly 37%, quarterly 30% and annually 25%)

Short-term market fluctuations can be quite volatile, and the probability of realizing a loss within any given day is high. However, the likelihood of realizing a loss has historically decreased over longer holding periods. The [parenthetical above] illustrates that while the probability of losing money on a daily basis over the past 20 years was 46%, the probability dropped dramatically to 25% when analyzing an annual time period.

Periodic review of an investment portfolio is necessary, but investors shouldn’t let short-term swings affect their view of the future.

Investor Returns

Time and time again, financial experts have recommended a long-term approach to investing and have cautioned investors against market-timing attempts. Despite these warnings, a typical trait of investor behavior is overconfidence. People exhibiting this behavior believe they have the ability to identify market highs and lows, and they invest based on this belief.

It is extremely difficult, however, to consistently time the market, which is why overconfidence can lead to disappointing results. (related graph available on request) Contrary to their desired strategy, many investors end up buying high and selling low, which drastically diminishes their returns.

Morningstar Investor Returns measure how a typical investor performed over time, incorporating the impact of cash inflows and outflows from purchases and sales, as opposed to total returns, which assume investors held the investment for the entire time period. The graph compares average investor returns for stock and bond funds to the returns of stock and bond benchmarks. For all but two time periods analyzed, investor returns have been consistently lower than market returns.

Regret and Risk

Investors often react emotionally after realizing an error in judgment has been made. Investors prone to regret may base investment decisions on regretful decisions they made in the past, encouraging them to become either risk averse or to take greater risks.

Consider the situation of each of the following investors. Client A purchased shares in Company ABC on Jan. 1, 2007. He sold the shares at the end of June 2007 because the stock’s performance was flat. Client B considered purchasing shares in Company ABC on the same day Client A sold his shares, but she decided to take a pass. Company ABC went on to triple in price from July 2007 through July 2009. Which investor is unhappier as a result of his or her decision? The outcome is the same; both investors should have the same amount of regret. However, studies show that the regret of having done something is greater than the regret of not having done anything. Therefore, Client A has more regret than Client B.

There’s another layer to regret. Daniel Kahneman and Richard Thaler asked 100 wealthy investors to bring to mind the financial decision they regretted most. Most participants reported that their greatest regret was from something that they had done. Those who reported a regret of not having done something were shown to take on more risk; they held an unusually high proportion of their portfolio in stocks.

Jim Licato is Morningstar’s research and communications manager. Alina Tarlea is a Morningstar research and communications analyst.

Let us know if you have questions or comments. Thanks,

Steven

Now is the time to begin planning for 2009 taxes – and for 2010 tax strategies.

As with past years, the goal is to pay the least amount for 2009 and 2010 together. To do this, the common wisdom is to push income into 2010 and accelerate deductions into 2009. This is especially true if rates will go up in the future.

However, if you will be in the AMT for either year, or if one year with have especially large deductions or income, then the strategies change.

Also, there are some special considerations for planning this year:

* There are certain benefits only available in 2009 or 2010 such as the conversion to a Roth IRA with no income cap and the first time home buyer credit;
* Tax rates after 2010 are likely to go up as reductions in rates from the Bush tax laws end after 2010;
* You may have capital losses to shelter capital gains so you want to use them well;
* Furthermore, there may be taxes to pay for health care law and the stimulus package;
* Make sure you use your Flex account funds and any frequent flyer miles that will expire; and
* Finally, some features may be extended, such as the $8,000 first time home buyer credit.

Sitting down to review 2009 and 2010 could save you money. Also, the work you do now will help on what you owe for 2009 as well as the tax preparation.

There is a very good article with details on this from Kiplinger’s Tax Newsletter that I can forward to you if you wish – Let me know

Thanks,

Steven

Let us know if you have questions or comments. Thanks,

Steven