Doing well with investments over time means avoiding emotional input in your decisions - fear, greed, emotional attachment to or aversion to certain investments and so on
Right now, fear may seem the prominent emotion: "I can't afford to be in stocks, look what happened in the last few years!" (The same person might have wanted to be 100% stocks 4 years ago ....)
However, if you listen to this fear, and buy only bonds, CDs, fixed annuities, REITS, etc., you risk the greed reaction down the line: "How come my returns are the same as my pal's? Why didn't you have me investing for growth?"
Obviously, stripping the emotions out of the decision making is critical. Doing so would allow for balanced allocation to stocks, bonds and other appropriate investments. This way, the volatility now is dampened some, yet the return in the future has the requisite growth for the risks taken.
Where are you on the fear/greed balance? Do you have stocks you refuse to sell (or will never buy)?
Let us know if you have questions or comments. Thanks,
Steven
Ever want to be able to calculate your own mortgage payments, in terms of interest and principal to see the impact of the tax decution? We have launched iMortgage (the one with the big "M" in red) via the Apple Store (go to http://store.apple.com/us then click on iPone or iPod and search apps)
The financial world for buying a house has changed. This app allows you to take control of your house buying and mortgage application process by being able to calculate what the costs will be for you over time, after-taxes. This way, you know how much you can afford, whether refinancing will pay off, whether you should rent instead of buying, and whether it pays to increase your principal payments or up your investing instead.
This new App allows you to calculate the answers to these and other financial questions relating you home ownership. The input/output includes standard mortgage principal and interest payments, the after-tax amount for these payments using your tax bracket, the comparison of home ownership costs, including property taxes and maintenance, vs. renting, over time, and the savings on total interest paid by increased principal payments vs. the portfolio value you would have if invested instead.
Let us know if you have questions or comments. Thanks,
Steven
What does it mean, in today's world, to invest long-term, that is to buy and hold funds or managers for years? The question is a serious one in that investment performance is measured over very short periods and then comparisons are made. Such analysis fails to account for whether a strategy has had time to realize its goals, let alone whether competing strategies have had a chance as well.
The short-term rating of investments has two serious problems: it forces many managers to push for short-term results, often leading them to drift from their announced strategy (or turn over their portfolios each year, which increases transaction costs and taxes due), and it leaves investors looking for results too soon, so that they may end up selling what may be a great long-term investment because a competitor looks better in the short run.
How do you guard against this? First, understand that the volatiliy you see in the short term dampens down over time. That is, swings in the stock market could be plus or minus 30% in a year but come down to plus or minus say 5% for a 5 year annualized return. Second, realize that you are giving your strategy a fair chance by waiting, rather than panicking or responding on impulse. Third, realize that the real way to ultimately achieve good returns from the market is by waiting. The uncertainty built into the market means that it rewards those who can wait, and they are the ones with lower trading costs and less taxes due.
How do you find managers to help you invest this way? Look for those with low turnover of key people, who invest in their own funds, and who have the conviction to stick to their strategy even when it is out of favor. They often buy a stock that continues to go down in price before it ultimately turns up, over time.
So be a contrarian, invest for the long term!
Let us know if you have questions or comments. Thanks,
Steven
Investors looking for returns from "risk free" investments are frustrated with low interest rates. However, the flip side is that borrowing is cheap. The place to start reviewing your debt structure is with your mortgage. If the rate is high, refinancing, even after closing costs, can make for big savings over time.
Rates are at lows not seen in many decades and are not likely to go lower: 30 year fixed mortgages are as low as 4.75% in Massachusetts.
However, if you have not dealt with banks in a few years, be prepared for a very different experience. The lenders that were willing to do "no-doc loans" a few years ago want more documentation that you can believe, much of which may not even seem reasonable.
And even if you do qualify for a loan, recent home buyers may not have enough equity as their homes will appraise for much less than what they paid, which may not leave enough equity for the bank loan to value ratios.
What type of loan is best? This depends on what you do with any cash saved by using a mortgage with a lower monthly payment. If you invest well, then that may be best. If you will just spend the money, then a 15 year mortgage may be better for you than a 30 year, as the rate will be lower and the higher payment will pay off the mortgage much faster (look for our iPod app on this and other mortgage issues).
Let us know if you have questions or comments. Thanks,
Steven
Will the requirement that some portion of your pension or profit-sharing plan be invested in annuities be a good result? This is diametrically opposed to the notion of fully privatizing Social Security floated by the prior administration. The former intends to protect investors from high risk and the latter would have allowed them to take any risk.
The recent market meltdown lead to the idea that annuities were appropriate. However, as Judith A. Hasenauer said in Will Annuities Be Mandatory in Qualified Plans?, "The recent problems of the financial markets notwithstanding, equity investments remain perhaps the best and maybe even the only types of investments that provide working people with some hope of achieving and maintaining their financial goals for retirement."
At a finer level, would the annuities be fixed annuities, acting more like bonds or even Social Security, or variable annuities, where asset allocation strategies would be involved? In the former case, the potential returns are much lower and more assets would be needed. It the latter case, the upside is greater but so is the risk.
Perhaps the best mix will be to treat Social Security as the annuity/bond component and leave qualified plan investing as is, with some crucial exceptions. For example, no participant should be allowed or required to invest heavily in his or her own company (witness the Enron example).
If the President or Congress impose an annuity requirement, you will need to review your retirement plan in great detail, from both an investment and a financial independence perspective.
Let us know if you have questions or comments. Thanks,
Steven
The health care reform retained the Health Savings Accounts (HSA), which are, loosely put, Roth IRAs for health care.
Since 2004, you can contribute up to $3,050 or twice that ($6,150) for a family. If you are over age 55, you can add $1,000 more. Your health insurance has to have a deductible of $1,200 ($2,400 for a family).
Like a Roth IRA, there is no tax due on any income generated in an HSA. The savings can be invested in many ways, including equities (which would only make sense if you believe you will not draw from the HSA for many years). The investments in the account can be used for health expenses, or be kept for future years, and such a distribution is not taxable. (Making a distribution for other than health care expenses will be taxable.)
HSAs will become more popular by 2014, if not before, as then everyone will be required to obtain insurance and some may elect high deductible plans, for which an HSA makes sense.
For planning purposes, being able to grow assets tax-free now to hedge against future health care costs is a great tool. If you are interested in setting up a plan, let us know.
Let us know if you have questions or comments. Thanks,
Steven
Any change will hurt some and benefit others. For investing, selecting the former to sell and the latter to buy will be crucial as the health care reform become implemented.
It is not typical for me to reference self-serving statements from managers, but the following links are well written and make you consider options for investing (in or outside of the Artio fund):
Artio Sector, Spotlight-Healthcare And see also Forbes on healthcare, personal finance, investing ideas and small-caps
The white paper published by Aritio Smallcap Fund concludes with this summary:
All four of these investment themes have particular relevance in the smallcap arena. We believe each represents compelling investment potential over the long-term, given the growing need for cost reduction in the healthcare sector. We continue to explore these and other investment ideas related to healthcare trends in the Artio US Smallcap Fund.
What do you think? Let me know.
Let us know if you have questions or comments. Thanks,
Steven
From the predictions we see, Congress will be reviewing and in most cases renewing certain tax cuts. They will also pass some additional tax changes.
Here is a summary of what is expected to become law (let me know if you need more detail):
The following expired provisions are expected to be renewed: The tax free status of distributions made directly from IRAs to charity; the add-on to the standard deduction for state and local property taxes; tax breaks for state sales tax, college tuition and teachers' school supplies; 15-year write-offs for restaurant renovations and leasehold improvements; and the R&D tax credit. The will also be a small business tax cut for hiring (let me know if you need details).
2010 is the year for Roth IRA conversion strategies, where the taxes can be paid over two years. Because of market volatility, you may want to have separate IRAs by asset classes so if one goes down, you can "un-convert". (See prior posts on this) Note, however, that Roth conversion income can affect Medicaid premiums and taxation of Social Security benefits.
Also expected is an increase of tax rates for income and capital gains taxes for high income tax filers, where one possibility is raising the top tax rate to 39.6% on singles with taxable income above $196,000 and on married couples for taxable income over $231,000. With this could be a top capital gains rate of 20% for this group, up from 15% now. Itemized deductions could be affected as well - perhaps by capping at 28% the rate at which itemizations reduce a filer's tax liability.
Future changes to tax rates will affect planning for 2010 - taking more income and possibly selling assets then later buying them back to up the basis for future sales.
The item still missing from the list is the fix for the estate tax (see prior posts on this). The expected change will be reviving the estate tax retroactive to January 1. However, Democrats support a $3.5-million exemption amount and a 45% rate while Republicans want $5 million and 35%. If no action is taken, 2010 will continue to have no estate tax and 2011 will have a $1 million exemption with a 60% top rate.
If you want to consider how this all applies to you, for income taxes or estate planning, let us know -Begin planning now
Let us know if you have questions or comments. Thanks,
Steven
Among the anticipated changes in taxes for individuals are the increase of the long-term capital gains rate from 15% to at least 20% and the elimination of the qualified dividend rate of 15%. How do you respond? That depends on several factors.
If the investments are tax-sheltered, as in an IRA or 401(k) plan, then the change has no impact: current growth is sheltered and withdrawals are always taxed as ordinary income. If the investments are in a taxable account, then the analysis involves your long-term plans and investment style. On the long-term capital gains, if you may be selling investments soon, doing so now and buying back (subject to the wash sale rules, if applicable), would increase your basis so that less would be taxed later at a higher rate. However, if you plan to hold investments long-term, there is little reason to react now. That is, the increased tax far in the future is less, on a net present value basis, than paying a lower tax today.
The long-term capital gains tax is still likely to be less than the maximum marginal rate, so converting what would be earned income into capital gains remains attractive (e.g., the basis for exercising and holding Incentive Stock Options)
As for the dividends tax, again this depends on your investment strategy. If you believe that the proper stocks or funds include those that distribute dividends, then the tax cost is part of your analysis in selecting those investments over funds or stocks that do not pay dividends.
As with any decision regarding the tax impact on investments, it is the investment strategy that should rule the outcome.
We will report more on possible tax changes and related strategies in upcoming newsletter posts.
Let us know if you have questions or comments. Thanks,
Steven
We are working on releasing an applicaiton for iPods and iPhones that would help you determine how much house you can really afford to buy. (We hope to launch it in a month.)
This is especially important as interest rates may be rising. WE also allow you to compare renting vs. buying - an idea that would have saved people money over the last few years.
Here is a brief summary of the basic app:
Mortgage Calculator
Buying a house takes capital for the down payment and cash flow to cover the mortgage and other payments. This application allows you to analyze your ability to purchase a house, with the impact of the "tax shield" or savings generated by deducting your mortgage interest. This lowers your effective payment, which is important to know if you can really afford to purchase a house.
Let us know if you have questions or comments. Thanks,
Steven