Wee Three Things

As we are in the middle of the Holiday Season I thought now a fine time to take respite from fun and family and talk about taxes and estate planning, which, in the end is good for your family.

First, with the buzz around the fiscal cliff and the Bush tax cuts that are set to expire in 2013, what is getting overlooked is a tax that will definitely take effect in the 2013: the 3.8% tax on investment income.

Congress passed the 3.8% tax in 2010 to help fund President Obama’s Affordable Care Act and Medicare overhaul, and the new tax is scheduled to go into effect on Jan. 1, 2013.

As a result, you should meet with your advisor before year-end to decide whether to sell any assets before the end of the year. One simple idea is to rebalance your portfolio this December, instead of January, that way any gains would not be subject to the new tax. A good news note, about half of all accounts that hold dividend paying stocks are in tax-advantaged vehicles, so they remain indifferent to this new tax policy.

According to the congressional Health Care Caucus’ information site, the new tax will be imposed on unearned net investment income, including capital gains from stock sales, dividend income, bonds, mutual funds, annuities, loans and home sales. People subject to the tax are individual filers who earn adjustable gross income of more than $200,000 and married couples filing jointly with AGI of more than $250,000.

Next, if you're planning to make a charitable donation, do it before December 31 and you may be able to write it off on your 2012 taxes. A donor-advised fund can give you even more benefits. Remember you can receive an immediate tax deduction for contributions to offset taxable income, also, you can avoid capital gains taxes on the contribution of appreciated assets held for more than one year and it removes contributed assets from your taxable estate.

Finally, I found an interesting exhibit in one of my estate planning books. It compares Chief Justice Warren Burger and Elvis Presley’s wills. Elvis Presley’s will contains many important clauses that are necessary in a well constructed will. Warren Burger’s will is literally three sentences long. Elvis passed on 27 percent of his estate to heirs, while Warren Burger passed on 75 percent of his assets. The length and number of clauses mean very little to estate planning if proper planning is not completed.

Meet with your CFP® advisor or estate planning attorney, if you don’t have one start interviewing candidates.

CBlakely CFP®, CTFA      12/2012

Sources: http://health.burgess.house.gov/ Bloomberg LP, Estate Planning, by Michael Dalton

Revisiting the 4 Percent Spending Rule

A well-known approach to addressing prudent retirement spending is known as the “4% spending rule.” This guideline states that retirees with a diversified portfolio balanced between stocks and bonds can safely withdraw 4 percent of their initial balance at retirement, then adjusting the dollar amount for inflation each year thereafter.An inflation-adjusted withdrawal rate is intended to provide a predictable stream of withdrawals that keep up with inflation.

 

Conversely, using a percentage-of-portfolio withdrawal method, the retiree withdraws the same percentage annually from the prior year-end portfolio balance. The dollar amount will fluctuate with market performance, and while the portfolio balance and withdrawals may shrink, the portfolio is unlikely to ever be fully depleted.

In practice, retirees are likely to incorporate a hybrid spending method—spending moderately in years when the market is up and spending less when the market experiences prolonged downturns.

The factor that has the biggest impact on withdrawal rates is the retirement planning time horizon. For most people, an estimate of how long the retirement portfolio will be needed can be based on the investor’s current health and anticipated longevity, as determined by statistics, and history. An estimate of age 90 is a reasonable default given today’s longer life expectancies. For a 65-year-old married couple today, for example, there is a 72 percent chance that at least one spouse will live to age 85, a 45 percent chance that one will live to age 90, and an 18 percent chance that one will reach age 95!

With today's yields near historic lows retirees, whose dividends and interest combined are less than 4 percent are often reluctant to spend from principal to make up for the deficiency. And many are wondering whether 4 percent is still a reasonable spending goal.I feel it is a reasonable starting point for investors who follow a total-return spending approach. A total-return approach is one in which investors remain appropriately balanced between stocks and bonds, and diversified across varied asset classes so that portfolios may potentially benefit from both dividends and interest and appreciation of capital (i.e. stocks moving up in price).

Instead of changing the portfolio to chase income, by reducing equity exposure and adding bonds it may be wise to consider the total-return approach to allow for spending both from portfolio cash flow and from the potential increase in the portfolio value.This empirically decreases the odds of  outliving your portfolio.

CBlakely CFP®, CTFA                   October 2012 

 

Source: Society of Actuaries Retired Participants 2000 Mortality Table., Fiancial Planning Journal

Tips for Selecting a Financial Advisor - from the SEC!

From the SEC Office of Investor Education and Advocacy

Top Tips are as follows:

1. Do your homework and ask questions
2. Find out whether  the products and services available are right for you
3. Understand how you will pay for services and products and how your financial professional gets paid as well
4. Ask about the financial professional's experience and credentials
5. Ask the financial professional if he or she has had a disciplinary history with a government regulator or had customer complaints

Make a checklist with key questions to ask before hiring a financial professional. For a lot more information go to http://www.investor.gov/ 

CBlakely CFP®, CTFA             09/2012

Source: SEC

Wealth Planning Opportunities for 2012

Ieas I recieved which must be shared.

The Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2011 (2010 Tax Act) increased the lifetime gift tax exemption to $5 million in the year 2011, and, with an inflationary adjustment, to $5.12 million in 2012. By its terms, the 2010 Tax Act will sunset after Dec. 31, 2012, and under current law, the gift tax exemption is scheduled to revert to $1 million on Jan. 1, 2013. Thus, spouses who have not previously made substantial gifts have the ability to transfer up to $10.24 million to friends and family or to trusts for them if the gift is made before Jan. 1, 2013, with maximum rate schedules at 35 percent.

This alert is a reminder of the opportunities that continue to be available through the remainder of this year. It is impossible to predict whether Congress will act to prevent the scheduled exemption reduction to $1 million in 2013, so the amount of the gift tax exemption after Dec. 31, 2012, remains unclear. Due to the uncertainty, it may be prudent to consider certain planning vehicles to effectively utilize the benefits of the current exemption of $5.12 million while it remains in the law for the next few months, even if total assets are currently below the $5.12 million and $10.24 million thresholds.

Some of the benefits and opportunities of a gifting program using all or a part of the lifetime exemption are as follows:

1. Reduction in Estate Tax: If the exemption is reduced in future years, a current lifetime gift can substantially reduce the estate tax burden to a family on the death of the donor. In many cases, a current gift of $5 million can reduce the estate tax burden by 40 percent of the gifted amount, or $2 million, thereby increasing by that amount assets ultimately available to the family, all assuming the exemption is reduced to $1 million as scheduled. Gifts can also reduce the state estate tax burden that exists in many states.

2. Removal of Future Appreciation From Tax: A current gift removes any appreciation on the gifted asset from the estate. Thus, if $5 million is given today of an asset likely to appreciate (say real estate or traded stock interest) and the gifted asset increases to $10 million, the $5 million of appreciation is not includible in the donor’s taxable estate.

3. Retention of Control and Income from Gifted Assets: Some donors are concerned over the loss of control and loss of the income of gifted assets. It is possible to design a gift-giving program between spouses so both spouses continue to retain significant control over the gifted assets and simultaneously retain the economic benefits of the gifted assets. For instance, spouses may establish trusts for each other for their joint lives, and thereafter for family members, utilizing their available gift tax exemptions, ultimately permitting up to $10.24 million plus appreciation to pass to family members without estate tax consequences. The design of such trusts must carefully conform with case law and IRS rulings to achieve the intended result.

4. Retention of Control and Annuity Stream for Designated Period: Gifts can also be made to Grantor Retained Annuity Trusts (GRATs) in which the grantor retains control over the gifted asset and retains an annuity stream for a designated period of time, which may be many years or as short as two years. At the end of the designated period, the asset may pass to family members without gift or estate tax consequences, depending upon the duration of the trust and the amount of the annuity stream passing to the grantor. To be successful, the grantor must survive the trust term.

5. Leveraging Gifts With Personal Residence: In the case of a personal residence, a gift tax can be leveraged so that more than the reduced gift tax value can be removed from the estate. This can be accomplished through an approved technique known as a Qualified Personal Residence Trust (QPRT) in which the residence is placed in trust for a designated period of years. During the designated period, the donor reserves the right to continue to live in the residence. As trustee, the donor may determine when and if to sell the residence and reinvest into a smaller residence or retain the proceeds in the trust. At the end of the trust term, the residence or the proceeds of sale can pass, without gift or estate tax consequences, to family members. As in the case of the GRAT, the grantor must survive the trust period to be successful. For example, a residence worth $1 million could be gifted to a QPRT and the value of the gift might be only $300,000, depending upon the donor’s age and duration of the trust, thereby removing $700,000 from the estate, plus all future appreciation.

6. Protection From Creditors and Spousal Claims: Gifts can be directed to pass to trusts for family members in a manner that protects the assets from the potential creditors of the donees and from matrimonial claims of spouses of donees.

7. Charitably Minded Gifts: Charitably minded donors can benefit by making gifts to Charitable Lead Trusts, which accomplish the following:

a. Providing an annual stream of payments to favored charities,
b. Assuring the underlying principal of the trust will eventually pass to family members,
c. Avoiding gift and estate tax consequences associated with the gift, and
d. Creating current or future income tax benefit to the grantor by reason of the gift

8. Grantor Trusts – Tax-Free Gift of Income Tax to Donee: Trusts can be designed to benefit both children and grandchildren, all without gift or estate tax consequences or income tax consequences to the donee. The grantor of the trust incurs the income tax generated by the transferred assets, thereby creating an additional tax-free gift to the trust. If the grantor sells assets to the trust, the grantor could retain a stream of payments, income tax free, while heirs enjoy the gift and estate tax benefits. This type of trust is a grantor trust.

9. Life Insurance and Leverage: Life insurance is a method to leverage your gift tax exemption. If single premium life insurance policy is purchased for (say) $5 million, depending upon the age and health of the insured, multiples of $5 million (in the form of insurance proceeds) can pass to trusts for children and grandchildren by utilizing the $5 million lifetime exemption and avoiding estate and generation-skipping transfer (GST) tax on the enhanced insurance proceeds.

Check with your CPA, tax Attorney or Financial Advisor more information.

CBlakely CFP®  CTFA      Sept. 2012

Source: Fox Rothschild, LP.

Stocks are Dead; Long live Stocks!

The S&P 500 is setting multiyear highs right now. It’s the economy right? Not really, the U.S. economy grew 1.7 percent in the second quarter, creating about 140,000 jobs a month on average this year. That is less than half of the monthly hires needed to bring the unemployment rate back to pre-crisis levels by 2015. Well then, it’s due to our government averting the so-called fiscal cliff—the spending cuts and tax hikes that could stall the economy next year. Not so fasr, our government has not addressed that issue yet – hey, they still have 100 days. Europe’s financial crisis is resolved! That’s not it, Europe’s problems, while getting better, remain unresolved.

So how is it that the Standard & Poor’s 500-stock index is up 25 percent over the past 12 months? Stocks have reached levels not seen since Lehman Brothers and Bear Stearns existed.

Over the long term, through all the noise, stock prices actually move relative to corporate earnings. S&P 500 profits estimates (Bloomberg) suggest earnings growth of 11 percent next year, and 12 percent in 2014; this may send the S&P 500 to record levels if earnings come in at or near expected.
Corporate America is lean and mean - think of great comapnies like Apple and Wells Fargo. We are also counting on help from the Federal Reserve, which is widely expected to start a third round of bond purchases to boost the economy.

With that said, the threats to the market remain (actually they never quite go away). Chief among them is the fiscal cliff. Under a law passed last year the failure of lawmakers to agree on some combination of spending cuts and tax increases would result in $1.2 trillion of automatic cuts and accompanying tax hikes in January 2013. That combination could shave 2.9 percent off economic activity in the first half of 2013, according to the Congressional Budget Office. While many economists believe the impact to be good for the economy long-term, in the short-term the market would likely hiccup, frankly creating a chance to buy on the dips.

Europe also remains a potent threat, Greece has yet to ratify the spending cuts necessary to receive life saving bailout funds and there is no guarantee that Spain, which is suffering through an economic depression, will agree to more austerity in exchange for the European Central Bank’s financial aid.

Individual investors could also decide to get with the program. While prudent managers have been suggesting to add equities to portfolios where appropriate, do it yourself investors have pulled money from U.S. equity mutual funds for a fifth straight year in 2011, moving $75 billion out of stocks this year alone. If these dollars come back to stocks it could raise stock prices even further – as individual investors usually buy high.

As always, talk things over with an accreditied investment manager or financial planner to see what proportion of high-quality equities make sense for you.

CBlakely CFP®, CTFA     Sept. 2012

Sources: Bloomberg LP.

The Financial Problem of Living Too Long - Solved!

If you are one of the 10,000 baby boomers retiring today (or in the next several years) then this post may be of some interest to you because for many, traditional asset allocation is inadequate at confronting retirement risk. Let me explain.

Trying to rebuild a retirement portfolio in a low return investment landscape has many challenges. Importantly there are two risks that really have taken center stage, investment-performance risk and longevity risk. Equity market returns have been lousy for about a decade, prompting new phrases into our vernacular such as, “the new normal” and “stocks suck.” Over the last generation life spans have increased to the point that the fastest growing segment of Americans is the over 100 age group – aka the Willard Scott gang. The odds of at least one spouse reaching the age of 86 is 25 percent.

Since the great recession of 2008 income losses for those nearing retirement, specifically households led by people between the ages of 55 and 64 have taken the biggest hit, a decline of 9.7 percent. During retirement, the income flowing from a portfolio made up of stocks and bonds is sensitive to market fluctuations.  This can significantly increase an investor’s longevity risk, or outliving one’s assets.

Creating a portfolio that confronts and diminishes these risks requires adding longevity insurance into the mix. Yep, you guessed it, I’m talking about annuities.  But wait, Ibbotson Associates research shows that investors can mitigate both longevity and investment performance risks with a carefully constructed combination of a guaranteed income stream and traditional assets such as mutual funds and ETF’s.

Annuities can be expensive (guarantees normally cost more) and hard to understand. Determining how and when to use them can be confusing too which is why few investments are as polarizing, but it is wise to set aside preconceived notions in response to this current challenging environment.  Many retirees should consider ways to turn a portion of their portfolio into pension- like income streams.

A fairly recent innovation in deferred variable annuity (VA) products is the guaranteed minimum withdrawal benefit (GMWB) rider. The GMWB rider for life gives you the ability to protect your retirement investments against downside market risk by allowing you the right to withdraw a fixed percentage of the benefit base each year until death. The benefit base can step up and resets to the high-water mark of the contract value on the rider anniversary date when the market has performed well. The remaining contract value at death will be paid to your beneficiaries, which removes concern about giving up liquidity to your heirs (i.e. if I die early, my family loses).

After deciding whether longevity insurance has a place in your retirement portfolio the next challenge is how much to allocate to this product versus traditional assets. The easiest way is for your advisor to follow up the strategic asset-allocation decision with a secondary “product-type” optimization.  Barring that, a recent Ibbotson study using  Monte Carlo simulation based optimization to find an optimal product-type mix of traditional products and a VA+GMWB by maximizing a utility function at the life expectancy  offers helpful guidelines to product allocation. See the major findings (below):

Ø  The higher the risk tolerance, the lower the VA+GMWB allocation;

Ø  The longer the life expectancy (subjective), the higher the VA+GMWB allocation;

Ø  The higher the age, the lower the VA+GMWB allocation;

Ø  The higher the ratio between wealth and income gap, the lower the VA+GMWB allocation; and

Ø  The preference for bequest has almost no impact on the VA+GMWB allocation.

By adding products that offer guaranteed income for life to your portfolio (if appropriate) you can avoid an extreme outcome (i.e. outliving your assets) and better enjoy your retirement. But, as case studies show investors and advisors must be careful when determining which products and allocation percentages.

CBlakely CFP®, CTFA          Auggie 2012

Sources: The New York Times; Allocation to Deferred Variable Annuities with GMWB for Life, Xiong, Idzorek, Chen (Ibbotson); The Impact of Skewness and Fat Tails on the Asset Allocation Decision, Xiong, Idzorek (Financial Analysts Journal, Vol. 67 #2)

Sizing Up The American Dream

Browse more Lifestyle infographics.

  

CBlakely  CFP, CTFA      07/2012

Source: visual.ly

Two Summer Tips to Save Your Life

So you think you want to look at alternative investments for individual investors and invest like many institutions do. Well look no further than DirexionShares mutual funds. This is a fine example of the proliferation of leveraged exchange traded funds (ETF’s) – these funds are supercharged in that they give you two (2X) and three times (3X) the return on an index. Take for example, the fund with the ticker symbol GASX - it's an ETF that is 3X short natural gas stocks. In other words if the index is down 10 percent the fund should be up about 30 percent. Our predilection for doubling up to catch up in this market is being exploited by many funds – but remember, slow and steady wins the race.

The benchmark index for this fund was down just over 22 percent for the last 12 months ended March 31, 2012. Therefore, the GASX fund should be up about 66 percent, which sure helps. But alas, the fund is up 10.6 percent over the same period. Up is good, but what happened to about 56 percentage points of return?

Fund Objective

“The Direxion Daily Natural Gas Related Bear 3X ETF seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the ISE Revere Natural Gas Index ^TM. There is no guarantee the fund will meet its stated investment objective.”

The answer is underlined. The fund is not beholden to its own objective. From its inception nearly two years ago, GASX is down 38.5 percent. The benchmark index is up 17 percent for the same period. If you bet against natural gas companies two years ago, you would have been right, but this ETF would have lost you close to 40 percent.

What makes this even more interesting is that its mirror image, GASL, the 3X long natural gas index ETF is down about 57 percent for the year ended March 31, 2012 (only about 10 percent away from where it should be at 3X the index). And it’s down 48 percent for the period since inception about two years ago (where it should be up around 50 percent).

What gives? This is what's known as leveraged ETF slippage. The concept of “tracking error” or “slippage” is now front and center. ProShare Advisors, one of the top structured ETF firms just got hit with a lawsuit. From the Wall Street Journal:

A lawsuit seeking class-action status claims that ProShare Advisors and others violated a securities act by failing to disclose risks inherent in its ProShares UltraShort Real Estate fund, an inverse leveraged exchange-traded fund, including the risk of a "spectacular tracking error."

Now if you want to find alternative ways of losing money in alternative investments, try some of the other Direxion ETFs. Indian equities, long-term treasuries, semiconductors - whatever. Who said that derivatives and leverage was just for the big guys? With these sloppy funds over time you lose either way. And the higher the volatility the more you lose.

It is in fact remarkable that this is a retail product. But no worries, there is proper disclosure.

Fact sheet disclosure: - Investing in the funds may be more volatile than investing in broadly diversified funds. The use of leverage by a fund increases the risk to the fund. The Funds are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment. The Funds are not designed to track the underlying index over a longer period of time.

Well, duh!

As always, consult an accredited financial advisor before diving in, there are sharks in the water. Also, wait at least one hour after eating before going swimming.

CBlakely CFP ®, CTFA     06/2012

Sources: Sober Look, WSJ, Bloomberg, LP.

The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s

I normally write something I feel can help most investors. Occasionally you run across something that just needs to be shared. This eye opening new report from the Demos Organization, authored by Robert Hiltonsmith, is compelling. Highlights below, link to the report at the end.

Though your retirement or bank accounts statements contain no evidence of it, everyone who has an IRA, 401k, or any other individual retirement savings account pays a variety of fees every year. But because these fees are taken “off the top” of investment returns or share prices accountholders generally have no idea how much all of this is costing them.
These fees can be substantial: over a lifetime, fees can cost a median-income two-earner family nearly $155,000 and consume nearly one-third of their investment returns. Worse, these fees are often excessive and financial services companies can get away with charging higher-than-necessary fees for a number of reasons, namely: the savers’ lack of information, the inefficiency of financial markets and individualized investing, and the substantial costs—both in money and time—associated with switching between investment brokers.
This brief sheds light on the hidden costs of 401(k)-type individual retirement plans, details the different types of fees paid by the consumers, and uses an example investment from Demos’ own 401(k) plan to illustrate these fees’ heavy burden on the average account-holder. Using industry data on fees, the brief estimates the high costs of 401(k) fees to a model family over a lifetime of saving for retirement. The brief also explains the causes of the nearly universal excessive fees that investment firms charge to savers, and argues for a wholesale reform of this country’s broken private retirement system.

KEY FACTS

LIFETIME FEES

• According to our fee model, a two-earner household, where each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns.
• A higher-income dual-earner household, one where each partner earns an income greater than three-quarters of Americans each year can expect to pay an even steeper price: (as much as) $277,969.

OTHER FEE FACTS

• The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010.
• Trading costs vary from year to year, but have been estimated to average approximately 1.2 percent a year as well.
• In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.
• Smaller 401(k) plans have higher average fees than larger ones. The median expense ratio for plans with less than 100 participants was 1.29 percent, while for plans with more than 10,000 participants, it was 0.43 percent.

TYPES OF 401(k) or IRA FEES

• Expense Ratio Fees: This ratio incorporates the administrative, investment management, and marketing fees charged to savers. Because these fees do not vary much from year to year, they are reported as a static expense ratio and listed both in a retirement plan’s summary documents and the individual prospectuses of each mutual fund in the plan.
• Trading Fees: The costs incurred by a mutual fund when buying and selling the securities (bonds, stocks, etc.) that comprise the fund’s underlying assets. Investment managers of mutual funds pay a fee each time they buy or sell one of the securities that comprise the underlying assets of the fund, and they pass these on to savers via the funds’ share prices. Trading fees vary from year to year depending on the frequency with which fund managers buy and sell the funds’ assets.

Download the report here!

As always, talk to your advisor to find out what you can do to minimize the impact of fees on your retirement nest-egg.

CBlakely CFP®, CTFA           05/2012

Emerging Markets Debt – Not as Risky as You Think

Over the next several years the challenges of collecting sufficient income, due to low current interest rates, may be somewhat lessened by taking a more tactical approach to fixed income investing. Current yield is a big component of investing for income investors and there are opportunities available for investors to achieve attractive current and total returns.

The perception for years has been that emerging markets debt as an asset class had been one of high volatility of returns. But look back to the crash of 2008 and remember that emerging markets experienced less of the effect of the crash and moved out of it faster than the U.S. did.

Looking back at 10-year annualized returns for major markets, the average annual total return for emerging markets debt was over 10 percent, while its standard deviation of returns was less than 10 percent. Contrast that with long-term U.S. Treasuries with had comparable returns but with a standard deviation of about 12 percent and Large Cap Domestic Equities with a 10-year average annual return of less than 5 percent  but a standard deviation of over 15 percent.*

Another factor is that valuations for this asset class remain attractive. A typical valuation metric for bonds is to look at the yield of the security compared to the yield of a U.S. Treasury security with a like maturity date – called the spread. The median spread of high-yield debt over the past 30 years has been about 500 basis points (five percent). Currently, that spread is around 600 basis points. If the economy recovers, during good economic times that spread generally narrows to 300-400 basis point range. This is positive for the price of the bonds.

Many emerging economies benefit from a younger demographic and a fast growing middle class. Also, many of these countries live within their means and have reached a point where they are self-funding.

 Talk to an advisor for detailed information and to see whether adding this asset class to your portfolio makes sense. There are real risks associated with emerging debt, this is not a “set it and forget” it strategy.



CBlakely CFP®, CTFA 05/2012





Source: Morningstar data as of 12/31/2011
Standard deviation is a statistical measure of historical volatility, the higher the standard deviation, the greater the volatility.

Finding Income Without Adding Significant Risk

The current priority at the Federal Reserve is to keep rates low to help the broad economy, especially housing and the money center banks, get healthy again. However, this has a deleterious effect over the long-term on savers and income investors. With short-term interest rates near zero and the Fed committed to keeping rates low for the next couple of years what is an income investor to do? Do you throw out your risk tolerance parameters and plow into stocks?


The short answer is no. You can maintain your risk profile while adapting to the current environment by embracing creative solutions in small percentages in your portfolio. Many solutions used in the past are probably not the solutions that will serve you best over the coming decade. Remember a successful portfolio funds an investor’s current and or future needs or liabilities, anything short of this is a failure.

For high net worth individuals the use of charitable trusts can create a satisfactory income stream. Tax breaks for some charitable trusts can help high net worth investors divest highly appreciated assets tax-free. The trust income goes to the investor and eventually the remainder goes to the charity. For the majority of investors this is not a prudent option.

There are several opportunities for investors not interested in trusts. First, mortgage backed securities funds are an option. These funds contain AAA/Aaa rated mortgage securities backed by the guarantee of Fannie Mae, Freddie Mac and Ginnie Mae. There are many low cost funds available that offer access to mortgage backed securities. The yields are in the 4.0 to 4.5 percent range.

Next, income investors might consider adding a small percentage of high dividend equities to the portfolio. One example might be adding a select dividend fund or a utility fund to your portfolio for the current income. Both types of funds offer a current dividend yield of 3.5 to 4.0 percent depending on the fund family and fund makeup.

Finally, the fundamentals within the high-yield bond market are strong. That is reflected in yields which are currently around 6.5 percent and approaching historical lows. The main risk to the health of corporate fundamentals would be a meaningful slowdown in the U.S. economy. Base case is that the economy does not come off the rails. The most probable economic outlook is for a slow-growth environment with reasonably steady interest rates. However, the economy is not robust enough, nor are yields high enough, to protect high-yield investors against certain macroeconomic shocks. Macroeconomic driven events - such as, the European debt situation, China's slowing economy, and geopolitical events in other parts of the world - will cause short-term gyrations in the funds value.


If your portfolio is predominately fixed income, adding a small percentage in each of the three types of income investments to your portfolio may actually decrease the overall risk profile through diversification. Minor adjustments can add value to your portfolio.

As always, to see the impact this strategy would have on your investments and cash flow discuss this with your (accredited) financial advisor.

CBlakely CFP®, CTFA, CMFC     05/2012

Sources: Morningstar, iShares

401(k) Reform?

Defined contribution [DC] plans - 401(k)s, 403(b)s, 457s, much as they have grown to be dominant, have for many, been a failure. Recent statistics indicate 97 percent of Baby Boomers have not saved enough for retirement. Many, though not all people like the illusion of control, and seeing their balances — it makes the DC plan tangible, even if you don’t get what is really needed at retirement. Our cultural obsession with consumerism may keep us well dressed and living in nicely furnished homes, but it is quietly killing our financial future.



Retirement plan reform has to face three realities. First, people don’t know how much to put away for retirement. The general answer is, for almost all people, put away 15 percent of your gross pay. Next, most people don’t know how to invest, so should be handed off to advisors who will do it for you, being very mindful of costs. Finally, given that many people are poor investors or not interested in investing, offering a low cost annuity option at retirement makes sense as an option. Managing a lump sum on your own as you retire is not advisable for many. Annuitization currently is an option only for defined benefit [DB] plans.


Given the above changes and assuming heavy doses of mandatory participant education yield increased savings rates, this likely leads to much better results for plan participants. This is the sort of plan that would yield better results for most, given that DB plans are out of favor, and participant-directed DC plans lead to high expense/poor results. It may be time to consider a hybrid plan: A trustee-directed DC plan for accumulation and a DB plan for distribution.


In the meantime do yourself a favor and pay off credit cards every month. Put away 15 percent of every paycheck and take advantage of employer 401(k) matching plans. If you can, retain and use the services of an accredited financial planner to help you navigate the retirement investment landscape.


Christopher P. Blakely, CFP®, CTFA, CMFC 03/2012

Diversify Your Holdings (or not - That's Cool Too)

 Should you put all of your money in one stock or should you spread your bets across many investments? If it is the latter, how many investments should you have in your portfolio? The debate is a good one at one end is the advice that you get from the efficient markets camp: maximum diversification across asset classes, and within each asset class, across as many assets you can hold: the proverbial “market portfolio” held in proportion to its market value. At the other is the “all in” investor, who believes that if you find a significantly undervalued company, you should put all or most of your money in that company, rather than dilute your upside potential by spreading your bets.


Which Gospel? Mark or John
These arguments got media attention recently, because two high-profile investors took opposite positions. The first salvo was fired by Mark Cuban, who made his substantial fortune (estimated at $2.5 billion), as an entrepreneur. Cuban's profile has increased since, largely from his ownership of the Dallas Mavericks, last year's winners of the NBA championship. With typical understatement, Cuban claimed that diversification is for idiots and that investors, unless they have access to information or deals, should hold cash, since hedge funds have such a tremendous advantage over them. In response, John Bogle, the founder of Vanguard, countered that "the math (for diversification) has been proved over and over again. It's not just the first thing an investor should think about, but the second, the third and probably the fourth and the fifth thing investors should think about."

So, should you diversify? And if so, how much should you diversify? The answers to these questions depend upon two factors: First, how certain your assessment of value and second, how certain you are about the market price adjusting to that value within your specified time horizon.

At one limit, if you are absolutely certain about your assessment of value for an asset and that the market price will adjust to that value within your time horizon, you should put all of your money in that investment. Though this may seem like the impossible dream, there are two possible scenarios where it may play out:

1. Finite life securities (Options, Futures and Bonds): If you find an option trading for less than its exercise value: you should invest all of your money in buying as many options as you can and exercise those options to make a sure profit. In general, this is what falls under the umbrella of pure arbitrage and it is feasible only with finite lived assets (such as options, futures and fixed income securities), where the maturity date provides a endpoint by which time the price adjustment has to occur.
2. A perfect tip: On a more cynical note, you can make guaranteed profits if you are the recipient of inside information about an upcoming news releases, but only if there is no doubt about the price impact of the release (at least in terms of direction) and the timing of the news release. The problem, of course, is that you would be guilty of insider trading and may end up in jail.

At the other limit, if you have no idea what assets are cheap and which ones are expensive (which is the efficient market hypothesis), you should be as diversified as you can get.

Most active investors tend to fall between these two extremes. If you invest in equities, at least, it is inevitable that you have to diversify, for two reasons. The first is that you can never value an equity investment with certainty; the expected cash flows are estimates and risk adjustment is not always precise. The second is that even if your valuation is precise, there is no explicit date by which market prices have to adjust; there is no equivalent to a maturity date or an option expiration date for equities. A stock that is under or over priced can stay under or over pced for a long time.

How Diversified?
Building on the theme that diversification should be attuned to the precision of your valuations and the speed of market adjustment, the degree to which you should diversify will depend upon how your investment strategy is structured, with an emphasis on the following dimensions:

A. Uncertainty about investment value: If your investment strategy requires you to buy mature companies that trade at low price earnings ratios, you may need to hold fewer stocks , than if it requires you to buy young, growth companies (where you are more uncertain about value). In fact, as a general rule, your response to more uncertainty should be more diversification.


B. Time horizon: To the extent that the price adjustment has to happen over your time horizon, having a longer time horizon should allow you to have a less diversified portfolio. As your liquidity needs rise, thus shortening your time horizon, you will have to become more diversified in your holdings.


In summary, then, there is nothing crazy about holding just a few stocks in your portfolio, if they are mature companies and you have built in a healthy margin of safety, and/or you have the power to move markets. By the same token, it makes complete sense for other investors to spread their bets widely, if they are investing in young, growth companies, and are unclear about how and when the market price will adjust to value.


Bottom Line
Most investors are better off diversifying as much as they can, investing in mutual funds and exchange traded funds, rather than individual stocks. Many investors who choose not to diversify do so for the wrong reasons (ignorance, over confidence, inertia) and end up paying dearly for that mistake. Some investors with superior value assessment skills, disciplined investment practices and long time horizons can generate superior profits from holding smaller, relatively undiversified portfolios. Even if you believe that you are in that elite group, be careful to not fall prey to hubris, where you become over confident in your stock picking and market assessments and cut back on diversification too much.

CBlakely CFP®, CTFA 02/2012

Source: New York University Stern/Damodaran

Giving Back to Your Community - Charitably

Charitable Giving is back on the rise after a two year decline according to Giving USA; charitable giving was up over 2 percent in 2010. While giving is values based it is also a smart move financially (as long as you stay within your means). But how do you make the most of your donations. A little planning can make a small amount go further – and make you feel better about the money you can give.

 

Follow these six simple steps to guide you through the process.

 

1. Start with your interests. To help focus your giving, begin with your own interests and experiences. Be clear on why you want to support them.

 

2. Look to your community first, every community has programs and projects that need financial help.

 

3. Not all gifts are financial, you can give your time to which for some charities is more valuable than money.

 

4. Do your research: is the charity effective, do they fulfill their mission. Check out sites like charitywatch.org and give.org – there you can find tips and research on how to evaluate charities.

 

5. Give yourself a break – tax break that is!

 

      The IRS allows you to deduct up to 50 percent of your adjusted gross income for most donations 
         to qualifying public charities
      If you plan to deduct charitable contributions, you’ll need to itemize deductions on your tax return
      Receipts are needed on donations of $250 or more to a single charity – also you’ll need a receipt       
         or bank record for cash donations
      If you have appreciated securities, consider donating that instead of cash. If you donate appreciated
         securities to a charity you pay no gains tax, plus the charity gets the full value of the stock and you get
         to deduct the full value of the gift – truly a win win!

 

6. Fulfill your mission – and take pride in knowing your generosity is promoting the greater good.

 

CBlakely CFP, CTFA 1/2012

Viewer Discretion is Advised!

2012 seems like it could be the year prognosticators of doom and end of days theorists will be in the spotlight. Full disclosure: – I have a 2012 Mayan calendar and the kitten pictures are just too cute. But seriously, there is one prognosticator in particular that actually does scare me. Not because I think it is true, nope, that’s not even a consideration. It’s that it is loaded with exaggeration using scaremonger tactics to frighten investors into actually buying into this baloney.

Dis-infomercial

I was watching TV and saw an ad for an online video with the following warning label: “The following presentation is controversial and may be offensive to some audiences. Viewer discretion is advised.” “OK,” I said “you got my attention.” The production values are pretty high and I thought it made sense to at least skim the thing before passing judgment. So I watched this video proclaim the end of America and the dollar as we know it. Interestingly, it carried the requisite language ‘may’ and ‘likely’ added to avoid absolutes. This keeps the investment regulators at bay but makes for strange narration with phrases like – “there is absolutely no doubt that this may happen.”

What the video contains is about 45 minutes of hyperbole followed by thirty minutes of a really cheesy sales pitch for investor newsletters authored by the team at Stansberry Investment Research. Really?

Back in 2007 this group was substantially fined by the SEC for securities fraud. Now they make an end of the America as we know it pitch using scare tactics and specious charts and graphs (why are they not properly sourced or labeled?) to goad people into buying their newsletter.

While we are all entitled to our opinion a person who acts in a fiduciary capacity is held to a higher standard. Fiduciary law, putting others interests in front of your own, may be the highest law in the land. And to treat it lightly is to breach that duty. While I have read forecasts that are indeed dire, none of the pieces close by trying to sell you a way to actually make money, while the economy and the dollar and our standard of living collapse around us.

To give one example, at one point during the video Mr. Stansberry talks about something called the 100% Strategy. He claims you can make money without ever having to own a stock. OK, sure, that’s true. Then he makes the statement that you might be forced to buy a stock at less than its current value if something goes wrong with the 100% Strategy. These two positions are so obviously at odds with one another. This is one of myriad examples of how crafty yet misleading this report is.

Fool me once…….

Successful investing is difficult enough with an advisor that is working with you in your best interests, it is nearly impossible otherwise. My advice is to avoid this wolf in wolf’s clothing.

Chris Blakely, CFP® 01/2012