Mid-Summer 2001 Newsletter
IN THIS ISSUE . . .
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The volatility in the stock market over the past several months has left many investors uncertain about how to handle their stocks. Now may be a good time to reassess your portfolio, looking for ways to increase your comfort level. Consider the following tips:
Develop a stock investment philosophy. Approach investing with a formal plan so that you can make informed decisions with confidence.
Remind yourself of why you are investing in stocks. Write down your reasons for investing in each stock, indicating the long-term returns and short-term losses you expect. When market volatility makes you nervous, review your written reasons. That reminder should help keep you focused on the long-term.
Monitor your stock investments so that you understand the fundamentals of those stocks. If you believe you have invested in a good company with good long-term prospects, you are more likely to hold the stock during volatile periods.
Review your current asset allocation. Revisit your asset allocation strategy, comparing your current allocation to your desired allocation. Due to the strong bull market of the past several years, your portfolio may be over weighted with stocks. Now may be a good time to re-balance your portfolio.
Determine how risky your stocks are compared to the overall market. You can do this by reviewing betas for your individual stocks and calculating a beta for your entire stock portfolio. Beta is a statistical measure of the impact stock market movements have historically had on a stock’s price and can be found in a number of published services. The Standard & Poor’s 500 (S&P 500) has a beta of 1.* A stock with a beta of 1 means that, on average, the investment will move parallel with the S&P 500 — if the S&P 500 rises 10%, the stock should rise 10%; while the stock should decline 10% if the S&P 500 declines 10%. A beta greater than 1 indicates that the investment should rise or fall to an even greater extent than the S&P 500, while a beta less than 1 means that the stock should rise or fall to a lesser extent. Calculating a beta for your entire portfolio will give you a rough idea of how your stocks are likely to perform in a market decline or rally. If your stock portfolio is riskier than you realized, you can take steps to reduce that risk by reallocating.
Invest new funds in stocks that are less volatile than the market. When investing new money in stocks, first check the beta of that stock. Consider investing in stocks with betas lower than 1.
Keep in mind the tax aspects of selling. While you may be tempted to lock in some of your profits, you may have to pay taxes on your gains if the stocks aren’t in tax advantaged accounts. If your gains are substantial, it may take longer to overcome the tax bill than to overcome a downturn in the stock market.
Consider selling stocks if you have short-term cash needs. If you are counting on your stock investments for short-term cash needs, look for an appropriate time to sell some stock. With short-term needs, you may not have time to wait for your stocks to rebound from a market decline.
Don’t time the market. During periods of market volatility, investors can get nervous and consider timing the market, which typically translates into exiting the market in fear of losses. Remember that most people, including professionals, have difficulty timing the market with any degree of accuracy.
Remember that you are investing for the long term. Even though short-term setbacks can give even the most experienced investors anxiety, remember that staying in the market for the long term, through different market cycles, can help you manage the effects of market fluctuations. For instance, during the 74-year period from 1926 to 1999, the S&P 500 experienced a loss in 20 separate years. Yet, if you held the S&P 500 for any 15-year period during that time, you never would have lost money.*
Please call us at (800) 878-4036 if you’d like help implementing strategies that may make you more comfortable with your stock holdings.
*Source: Stocks, Bonds, Bills, and Inflation 2000 Yearbook. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot invest directly in an index. Past performance is not a guarantee of future results.
If you’re serious about achieving your financial goals, you need to make sure your finances are in order. Some tips to help in that process include:
Get organized. It’s difficult to assess how much progress you are making towards your goals if you don’t know things like how much your net worth has increased in the past year, how you are spending your income, how your investment portfolio is allocated, or how well your investments have performed. Organizing your finances will assist you in tracking this data.
Budget your expenditures. While many people dread the process of analyzing and budgeting expenditures, inefficient and wasted expenditures are often major obstacles to saving for financial goals. Analyzing your expenses will help you find ways to reduce spending.
Develop explicit written financial goals. Goals help you set your financial priorities and should provide motivation to reduce spending and save for the future.
Pay yourself first. If you wait until the end of the month to see how much money is left over for saving, you’ll probably find that the answer is nothing. It’s often easier to pay yourself first, and then find ways to reduce spending to pay the rest of the bills.
Establish an emergency cash reserve. This will give you funds to deal with short-term emergencies. How much you need in that reserve will depend on your age, health, job outlook, and ability to borrow.
Get your debt under control. Take steps to reduce your consumer debt as much as possible - any interest payments are just reducing the amount available for savings.
Invest automatically. One of the best ways to invest consistently is to make investing automatic. Make arrangements to have a specific amount deducted from your checking or savings account every week or month and automatically transferred to an investment account. (Keep in mind that an automatic investing plan, such as dollar cost averaging, does not assure a profit or protect against loss in declining markets. Because such a strategy involves periodic investment, consider your financial ability and willingness to continue purchases through periods of low price levels.)
Develop an investment strategy. Your strategy will depend on a variety of factors unique to your situation, including your risk tolerance, return expectations, investment period, and preferences.
Assess all your insurance needs, including life, health, disability, long-term care, homeowners, automobile, and personal liability. Over time, your insurance needs are likely to change. Insurance companies offer innovations and riders that might be applicable to your situation.
Take active steps to reduce your taxes. There are a variety of strategies that may help you reduce your income taxes, thus freeing money for savings. The key is to review those strategies now, while you still have time to implement those that can impact your 2000 tax bill.
Review your estate plan. If it’s been a few years since you’ve reviewed your estate plan, take time to go over your documents to make sure they still reflect your wishes for your estate’s disposition.
If you’d like help putting these tips into practice, please give us a call at (800) 878-4036.
During the past several years, the U.S. stock market has generated above-average returns while international markets have generally experienced below-average returns. Thus, it’s been difficult to convince investors of the benefits of international investing.
The primary benefit cited for investing internationally is to diversify your portfolio, helping to reduce its volatility. The theory is that when the U.S. stock market is declining, investments in other parts of the world may counter that trend. During recent periods of crisis, however, it appears that stock markets throughout the world have moved in the same general direction. While short-term trends may be similar, the long-term correlation of stock markets is more important.
On a scale where 0 means the markets move randomly and 1 means they move together perfectly, the correlation between the Standard & Poor’s 500 and the Morgan Stanley Europe, Australia, and Far East index was .6 for the five years ended in 1998 (Source: Investment Policy, 1998). From 1974 to 1998, that correlation was .45. Thus, international investments can provide some diversification benefits.*
Besides diversification benefits, a substantial number of the world’s investments exist outside the United States. In a number of industries, the world’s strongest companies are not U.S. based. Also, since different countries are at different development stages, you may find opportunities to invest in trends in other parts of the world that you missed in the United States.
Before investing in the international arena, assess how much of your portfolio you want allocated to this asset class. This will depend on personal factors, such as your risk tolerance, time horizon for investing, and comfort level with foreign investing. Keep in mind that international investing may not be suitable for everyone. In addition to the risks associated with domestic investing, international investing has unique risks, including currency fluctuations, political and social changes, and greater share price volatility. Please call us at (800) 878-4036 if you’d like to discuss how to incorporate international investing into your investment plan.
* The Standard & Poor’s 500 is an unmanaged weighted index generally considered representative of the U.S. stock market. The Morgan Stanley Europe, Australia, and Far East index is an unmanaged index of 1,000 foreign stocks generally considered representative of stock markets outside the U.S. Past performance is not a guarantee of future results. This information is presented for illustrative purposes only. Investors cannot directly purchase an index.
If you have large individual retirement account (IRA) balances that you won’t deplete during your life, you should carefully review the best way to pass those assets to your heirs. How your heirs must take distributions from your IRAs is based on your age at death, who your beneficiary is, and how you calculated required minimum distributions. The tax laws in this area are very complex and making a wrong choice can be very costly for your heirs. While you should consult an expert in this area, some general points to consider include:
In many cases, it may make sense to name your spouse as beneficiary since spouses have the most options for handling an inherited IRA.
For charitably inclined individuals, naming a charitable organization beneficiary can be a good alternative. The IRA balance is then excluded from estate tax calculations and the organization may not have to pay income taxes on the balance since it is a tax exempt organization.
Instead of naming a charity and an individual as joint beneficiaries, separate the IRA into separate accounts. Otherwise, your individual beneficiary must take distributions as if he/she were a non-individual.
If you have several non-spouse beneficiaries, consider separating the IRA into separate accounts, especially when there is a wide discrepancy in the beneficiaries’ ages. Distributions are then based on each beneficiary’s life expectancy, rather than the oldest beneficiary’s life expectancy.
Take care if you are naming your grandchildren as beneficiaries for an account balance that is over $1,030,000 in 2000. You don’t want the IRA to be subject to the 55% generation-skipping transfer tax.
Consider rolling over assets from other qualified retirement plans, such as 401(k) plans, to your IRA. Typically, the rules governing IRA distributions are more flexible than a plan’s rules.
Evaluate whether you should convert a traditional IRA to a Roth IRA. While you may have to pay a large current income tax bill to do so, your heirs then generally receive the proceeds federal income tax free. (Keep in mind that earnings will be taxed where the five-year holding period is not met.) Additionally, any income taxes paid reduce your taxable estate and thus lower the ultimate estate tax paid. At age 70 ½, you are not required to take distributions from your Roth IRA as you are with a traditional IRA. This means you could potentially leave a much larger balance.
Make sure your heirs understand the implications of inheriting your IRA, including the best way to take distributions and the advantages of letting tax deferral work for them as long as possible.
Since the ramifications of a wrong choice can be significant, call us at (800) 878-4036 if you’d like help reviewing your options.
In this fast-paced world, we often wonder how we will get everything done. One strategy is to delegate tasks to others who have the knowledge and experience to help you get the job done.
That’s why we’re here. When it comes to financial matters, we have the training and experience required to help you develop a financial plan that is tailored to your individual situation. We will first take the time to explore your lifestyle, goals for the future, and comfort level to create a plan tailored to you. After working with you to establish realistic investment objectives and asset allocating guidelines, we will help select investments and/or find money managers. We will then monitor your portfolio to help ensure all parts are working together in the way we designed. If there are changes you need to be aware of, we will notify you so we can discuss a plan of action. We’ll also stay in touch to see if there are any changes in your life or goals that would necessitate changing your financial plan.
The financial world can be complex and confusing. We are happy to use our knowledge and resources to help you make informed decisions regarding your finances. Please call at (800) 878-4036 if we can help.
If you are like many people, you get up every day, eat breakfast, get in your car, and go to work. We take these things for granted — a place to live, food to eat, a car to drive, and , most importantly, our ability to work. Imagine for a minute what would happen if you were disabled and couldn’t work. How would your family survive without your income? What would happen to the assets you’ve worked so hard to accumulate?
Although we don’t want to spend our lives worrying about becoming disabled, we should consider the ramifications if that should happen. The odds of suffering a long-term disability at some time during your life are 44% at age 25, 42% at age 30, 41% at age 35, 39% at age 40, 36% at age 45, 33% at age 50, and 27% at age 55 (Source: Investors’ Business Daily, July 23, 1999). Therefore, you should plan ahead to help ensure your family will be secure financially if you’re unable to work.
The cost of disability income protection varies depending on a number of factors, including your age, occupation, and benefits.
Don’t hesitate to plan for your family’s financial future. Give me a call at (800) 878-4036 if you would like to obtain a policy of disability income protection to fit your situation.
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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Wink Tax Services / Wink Inc.