September 1994 Newsletter
Wink Tax Services
IN THIS ISSUE . . .
Where the stock market is headed is subject to great debate, and on any given day it is easy to find someone who will predict a major rally, a major decline, or no significant movement. With so much debate and so little agreement, most investors are left with the feeling that stocks are risky and unpredictable. But does history support this conclusion?
Over the very long term, from 1926 to 1993, stocks earned an average annual rate of return of 10.3%, compared to 5.6% for long-term corporate bonds and 3.7% for U.S. Treasury bills.* (Keep in mind that each of these investments have differing investment characteristics. Stocks can have fluctuating principal and returns based on changing market conditions. Corporate bonds have fixed principal value and yield if held to maturity. Treasury bills are guaranteed as to the timely payment of principal and interest.) Although the stock market has shown major declines in certain years, over the long term investors have been rewarded with higher returns.
When you own shares of stock, you become an owner of the company that issues the stock and can share in the wealth of the company. There are many types of stocks, but many securities firms and stock analysts classify them according to the following categories:
ARE STOCKS FOR EVERYONE?
No investment is for everyone, including stocks, but they should be considered for several reasons. First, stocks are capable of earning substantial returns during some periods and steady returns over the long term. Second, many investors find it rewarding to own a portion of a company and share its growth. Third, stocks can play an important role in ensuring that your portfolio is properly diversified.
Stocks are riskier than other investments because, on a year-to-year basis, the annual rate of return fluctuates more than less risky investments. However, there are ways to reduce the effects of these fluctuations.
Invest for the long term. Most people lose money when they attempt to earn substantial returns in a short period of time.
Use a systematic method to invest in the stock market.
Diversify your portfolio of stocks to at least five or ten issues, preferably in different industries. Then the poor performance of one particular stock will not substantially reduce the value of your entire portfolio.
Diversify the types of assets you hold as well as the number of stocks in your portfolio. In addition to stocks, consider investments like corporate bonds, municipal bonds, annuities, life insurance products, real estate, etc.
Donít purchase so many stocks that you have a difficult time monitoring them.
If you donít have sufficient amounts to adequately diversify, consider investing in a stock mutual fund.
Donít procrastinate. Investors are often so uncertain about where the market is headed that they kept a significant portion of their assets in cash equivalents, not realizing that they are still facing a significant risk ó that inflation will outpace the return on their investments.
Thoroughly review a stock before you purchase. Avoid hot tips unless you are convinced of the stockís merits.
Donít overlook stocks just because they have the potential to decrease in value. Over the long term, they have proven their ability to produce above average returns for investors. Please call us at 800-878-4036 to discuss how to incorporate stocks in your investment portfolio.
* Source: Stocks, Bonds, Bills, and Inflation ó 1994 Yearbook. The common stock return is based on the Standard & Poorís 500 index, an unmanaged index generally considered representative of the U.S. stock market. The return for long-term corporate bonds is based on the Salomon Brothers Long-Term High-Grade Corporate Bond Index.Past performance is no guarantee of future performance. The returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment vehicle.
One of the most valuable lessons parents can teach their children is how to responsibly manage money and a regular allowance is one way to teach this lesson. Although many child experts feel that allowances should not be used as a reward for performing chores or withheld as punishment, many parents feel otherwise. How you treat an allowance depends on what your goals are. You can use an allowance to teach your children how to manage money or to teach them that they must earn the money they receive. A way to teach both lessons would be to give your child a certain amount each week with no conditions and then allow your child to earn additional money by performing extra chores.
To ensure that your children learn how to handle money, you must be willing to give them control over their allowance. They are bound to make poor purchasing choices on occasion, but hopefully they will learn from their mistakes. That doesnít mean you canít discuss their options with them or encourage them to make other choices, but in most cases the final decision should be theirs.
You can also use an allowance to teach your children the value of saving for the future. Ways to do that include requiring your children to save a certain percentage for long-term goals or offering to match any portion they set aside for saving.
The money management lessons should become more sophisticated as your child matures. Some basic guidelines follow:
In a society that has difficulty managing money, teaching your children how to do so is a lesson that will benefit them for a lifetime.
Selecting a mutual fund is not an easy process. With so many mutual funds available covering a wide variety of investment objectives, it will take some time and effort to decide which mutual fund is best for you. The following steps will guide you in that process:
Like any investment, mutual funds arenít for everyone. Feel free to call us at 800-878-4036 if youíd like to discuss whether mutual funds will help you achieve your investment objectives.
Most individuals understand that in order to achieve significant financial goals, they must learn to make saving a significant part of their lives. As a nation, however, how successful are we at saving?
SHOULD YOU PUT COLLEGE SAVINGS IN YOUR NAME OR YOUR CHILDíS NAME?
When setting up a college savings program, you need to decide whether the savings should be in your name or in your childís name. Under current tax laws, you can transfer $10,000 per year ($20,000 with your spouse) to each child with no gift tax implications. Taxation of income earned on those assets is based on the childís age. For children under 14, the first $600 of income is tax-free, the next $600 of income is taxed at the childís 15% tax bracket, and the remaining income is taxed at your marginal tax rate. All of the income for children over 14 is taxed at their tax rate. Thus, if your child is under 14, they will pay $90 of tax on the first $1,200 of income, compared to $180 if youíre in the 15% tax bracket, $336 in the 28% tax bracket, $372 in the 31% tax bracket, $432 in the 36% tax bracket, and $475 in the 39.6% tax bracket. Thus, saving in your childís name will reduce your total income tax bill; however, other factors should be considered before selecting this option.
Your childís chances of qualifying for financial aid will also have a significant impact on your decision. Under present financial aid formulas, 35% of your childís assets must be used for college education costs, while only 5.6% of your assets must be used. Thus, saving funds for college in your name may allow your child to qualify for more financial aid. It is also important to keep in mind that once you transfer funds to your child, the money legally belongs to them, even if you are the custodian of the funds. Once your children reach legal age, they can use the money as they wish, which may not include a college education.
For many people, this is a tough decision. Should they take certain tax savings available today if they save in their childís name or are they better off saving in their own name, hopefully qualifying for more financial aid at some point in the future? Please call us at (800) 878-4036 if youíd like help making this decision.
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.