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FALL 1998

Wink Tax Services




Your tolerance for risk is an important factor in how you allocate your investment portfolio among different types of investments. While investments are subject to many different types of risk, risk tolerance typically refers to your ability to stay with an investment when the return is either less than you expect or the investment declines in value. You should only assume a level of risk that you are comfortable with, so that you aren’t tempted to sell an investment when it is at a low point. Unfortunately, it is difficult to quantify your tolerance for risk. And even if you think you understand your tolerance for risk, you generally won’t know for sure until you are actually faced with a significant downturn in an investment.

There are at least two factors that impact your risk tolerance. One is the level of investment risk that is appropriate for you based on your personal situation. Key factors to consider include your time horizon for investing, income level, asset levels, amount of debt, liquidity, and family responsibilities.

The other element is your emotional tolerance for risk. Even though your personal situation may indicate that you could assume a high level of risk, that may not be prudent if you are uncomfortable with that risk. To get a feel for your emotional tolerance for risk, it is important to ask yourself questions such as: How much would I be willing to lose in a one-year period without being tempted to sell the asset? For what length of time would I be willing to sustain a loss before selling the investment? What types of investments am I comfortable with and which make me uncomfortable?

Keep in mind that there are strategies to reduce the total risk in your investment portfolio. One of the most important is diversification, which means investing in more 6than one investment category, such as cash, bonds, and stocks, as well as within investment categories, such as owning several stocks rather than just one. A properly diversified portfolio should contain a mix of asset types whose values have historically moved in different directions or in the same direction with a different magnitude. The theory is that when one asset class is declining, other asset classes may be increasing in value.

Another form of diversification is time diversification — staying in the market through different market cycles. Remaining in the market over the long term helps to reduce the risk of receiving a lower return than you expected. This is important for investments that are more volatile, such as stocks, where prices can fluctuate significantly over the short term.

Other strategies that can help you become more comfortable with risk include:

Become familiar with different investments and the types of risk they are subject to. Over time, your comfort level with risk will increase as your understanding increases.

Maintain reasonable return expectations. If your return expectations are too high, you will become disappointed if the asset does not perform as you expected, another name for risk.

Don’t stockpile your cash and then invest a large sum. Many investors find that it feels less risky to invest smaller amounts of money rather than one large sum.

If you want to invest in more aggressive vehicles but aren’t sure you can handle the risk, start out by investing a small amount. You can increase your exposure as you become more comfortable.

If you’d like to discuss your tolerance for risk and how it could affect your portfolio, please call.


You’ve followed all the conventional advice — contributed as much as possible to your 401(k) plan, maximized your employer’s match to the plan, invested aggressively, and left the money alone to grow over the years. Now you’re ready to retire and realize you have a large nest egg that you must utilize wisely to ensure that it lasts for the duration of your retirement. What should you do now?

Don’t withdraw money unless you need it to support yourself. Just because you are retired and can withdraw funds without penalty does not mean that you have to withdraw the funds. You can continue to let the funds grow on a tax-deferred basis until you reach age 70 ½. At that age, if you are retired, you must start taking out at least minimum withdrawals.

Carefully calculate how much you can withdraw on an annual basis. Don’t just decide how much you need and withdraw that annually. And don’t rely on simple rules of thumb, such as only spending the income generated by investments. These approaches may result in serious mistakes, such as running out of money or living an unnecessarily frugal lifestyle. Instead, calculate how much you can withdraw based on your expected life expectancy, the targeted long-term rate of return on your investments, your expectations about the long-term rate of inflation, and how much of your nest egg you want to leave to your heirs. Also reevaluate your calculations periodically to make sure that the amount you are withdrawing is still reasonable.

Review your investments. Make sure that your allocation among asset classes is reasonable as you approach retirement. Since your funds may need to last for 25 years or more, make sure that you are not over-concentrated in fixed-income securities, which may not provide adequate protection against inflation. Stocks, while subject to more volatility, may need to remain a significant component of your investment portfolio until well into your retirement years.

Determine whether you want to leave your funds in your employer’s 401(k) plan. You can roll over the funds to an individual retirement account (IRA), which can offer a wider variety of investment alternatives. Or you can use the money to buy an annuity that will make guaranteed payments for your life.

Get advice. The decisions you make regarding your 401(k) funds will have a major impact on the quality of your retirement. Call so that together we can review your options.


At least annually, you should reevaluate your entire investment portfolio. Even if you decide to leave your portfolio intact, this analysis will ensure that your investments are still appropriate for your financial goals. Several steps you should consider include:

Re-analyze each individual investment. Take a fresh look at each investment you own, making sure that the reasons you chose to initially invest still remain valid. Also reassess the future prospects of each investment.

Review your current asset allocation. Calculate what percentage of your portfolio each asset type represents. Then decide whether that allocation makes sense for your situation or if should readjust the assets.

Measure the performance of each component of your portfolio, comparing it to an appropriate benchmark. Many of your investments will provide you with performance information on a periodic basis, while you will have to calculate the return yourself for other investments. This review should help you identify parts of your portfolio that may need to be changed or that you should start monitoring more closely.

Calculate your rate of return for your entire portfolio. You can then compare whether your actual return is on track with the return you estimated when designing your investment program. If your actual return is not what you targeted, you may have to increase the amount you are saving, invest in more aggressive alternatives, or settle for the possibility of less money in the future.

Simplify your investments. You may find that you own several stocks within one industry or several investments with similar objectives. Reducing the number of investments owned will make it easier to monitor those investments.

Consider other types of investments. If you’ve been meaning to invest in international stocks, real estate investments, or other types of investments, but haven’t found the time to do so, take time now to evaluate those possibilities.

Evaluate your tax situation. Although you shouldn’t make investment decisions based solely on tax considerations, your tax situation is an important component of your investment strategy. As you move into higher tax brackets, you may find that certain investments, such as municipal bonds, become more suited to your situation. Or, by not selling an investment for a couple of months, you may be able to reduce the capital gains tax rate applied to the gain on that investment. Selling an investment at a loss may offset other gains or may be deductible on your tax return.

Reevaluating your investment portfolio requires considering a variety of factors. Need help going through this process? Feel free to call us at (800) 878-4036.


Program trading is the coordinated, simultaneous trading of a portfolio of stocks. These orders are placed through computers which are programmed to enter trades when certain criteria are met. The New York Stock Exchange defines program trading as any trade that involves 15 or more stocks with an aggregate value in excess of $1 million.

The term program trading is used to describe three different types of trading strategies:

Market index arbitrage involves the simultaneous purchase of stock index futures and the sale of stock portfolios (or vice versa). The objective of this strategy is to take advantage of price discrepancies between stock index futures and the prices of the underlying stocks.

Portfolio insurance or hedging is a strategy designed to hedge stock holdings from loss by either selling stock index futures or buying stock index put options.

Trend-based computer trading is a strategy that initiates an automatic buy or sell order when a rise or fall of a certain size occurs in a stock index. Pension fund and other institutional investors often use trading programs.

For the last several years, program trading has averaged 20% of the volume on the New York Stock Exchange (Source: Investor’s Business Daily, August 26, 1997).

Program trading was considered at least partially responsible, through increased volatility and acceleration of the market decline, for the stock market crash in October 1987. As a result, two of the four New York Stock Exchange trading restrictions now imposed on the market are aimed at controlling program trading. (Past performance is no guarantee of future results.)


When you change jobs, you must often make decisions about what to do with your 401(k) funds in your former employer’s plan. One choice you can make is to take the funds, pay taxes and possibly penalties, and utilize them for something other than your retirement. However, by doing so, you lose any additional tax-deferred growth you could have accumulated on those assets and you won’t have the funds available at your retirement. It may be a far wiser choice to keep your funds in a tax-deferred vehicle until you retire. You generally have three options for these funds:

Leave the funds in your former employer’s 401(k) plan. Generally, if your balance is at least $5,000, you can leave the funds in your former employer’s plan until you retire. However, you will not be able to borrow from your account. You may want to leave the funds with your former employer temporarily until you consider your other options.

Transfer the funds to your new employer’s 401(k) plan. Find out if your new employer’s plan accepts rollovers. If so, you can generally make the rollover even before you become eligible to participate in the plan. Be sure to get the appropriate paperwork from your new employer and to make sure the funds go directly to the trustee of your new employer’s plan. Otherwise, your former employer will withhold 20% of the funds for taxes. You will then have to replace the 20% from your own funds within 60 days or the 20% withholding will be considered a distribution, subject to taxes and the 10% early withdrawal penalty.

Roll over the funds to an Individual Retirement Account (IRA). Rather than transferring to an existing IRA, however, you will probably want to set up a separate IRA, called a conduit IRA. First set up the conduit IRA and then have your former employer transfer the funds directly to the IRA trustee to avoid the 20% tax withholding described above. If the funds are transferred to a conduit IRA, you can roll over the funds into another employer’s 401(k) plan in the future. If the funds are commingled with an existing IRA, you won’t be able to roll it over later.

If you’re changing jobs and would like help with your 401(k) funds, please call us at (800) 878-4036.



Real estate investment trusts (REITs, which rhymes with streets) pool the funds of many people into a portfolio of commercial real estate investments. REIT shares are publicly traded on the major stock exchanges and can have fluctuating principal and returns based on changing market conditions. There are three basic types of REITs:

Equity REITs own income-producing property such as apartment buildings, shopping centers, and office buildings.

Mortgage REITs own long-term mortgages and construction loans on commercial properties.

Hybrid REITs own income-producing property and mortgages.

REITs receive special tax treatment — as long as several requirements are met, they do not have to pay corporate income taxes on their earnings. One of the major requirements is that 95% of earnings must be distributed to shareholders.

Before investing, the most fundamental decision to make is whether you should even consider REITs, which depends on your unique investment objectives. Some items to consider if you are interested include:

Examine the types of properties in the REIT’s portfolio, paying attention to diversification among property types and geographic location. Review the vacancy rates at the properties. Find out how much leverage is used in the REIT.

Review the history of dividend payments and the percentage of cash flow the dividend represents, keeping in mind that past performance is no guarantee of future performance.

Examine the relationship between the market price and book value of the REIT.

Carefully review the management team’s qualifications and experience. Examine the fees charged.

Please call if you’d like to discuss REITs in relation to your investment objectives.



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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

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Last modified: January 30, 2017