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While the Standard & Poor’s 500 has still a total return of 37.4% in 1995, 23.1% in 1996, and 31.0% in 1997 (Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook and Wall Street Journal),* the volatility in the market during the past several months has many investors nervous about its future direction. Many are becoming increasingly worried about losing some of the spectacular gains they have earned during the past three years.

Unfortunately, it is impossible to predict when a substantial bear market will occur. But to help make sure that you can handle a potential downturn calmly, take time to reassess your investment portfolio now:

REVIEW YOUR CURRENT ASSET ALLOCATION. Due to the strong bull market, your asset allocation percentages may be out of line with your original allocation, subjecting your portfolio to more risk than you realize. Now may be a good time to rebalance your portfolio.

REMIND YOURSELF OF WHY YOU ARE INVESTING IN STOCKS. When the market becomes volatile, it is easy to concentrate on market risk and forget that other investments are subject to risk as well. For instance, inflation risk can be very threatening to a portfolio. After 25 years of 3% inflation, $1 will only be worth forty-eight cents.

DON’T REVIEW THE VALUE OF YOUR INVESTMENTS TOO FREQUENTLY. That will just convince you that the market is volatile. Don’t allow yourself to review the value of your investments more than once a month.

DETERMINE HOW MUCH OF A LOSS YOU CAN WITHSTAND. Calculate the total value of your stock portfolio and reduce it by 24%, the average decline in all bear markets since 1950 (Source: U.S. News & World Report, August 11, 1997). If that loss is more than you can comfortably bear, consider shifting some assets from stocks to other types of assets. Be realistic about how much loss you can withstand and keep in mind that other types of investments are associated with various types of risk. It is better to sell your stocks before a market decline than it is to find out at a market bottom that you feel compelled to sell. If your investment horizon is 10 or 20 years, a bear market now shouldn’t have much impact on your long-term strategy, since history has shown that it takes approximately 13 months for the market to recover from the average bear market (Source: U.S. News & World Report, August 11, 1997). Of course, what has happened in the past is not a guarantee of what will occur in the future.

KEEP IN MIND THE TAX ASPECTS OF SELLING. While it is tempting to lock in some of your profits before a bear market strikes, you may have to pay taxes on your gains if they aren’t in tax-advantaged accounts. Even with the recent tax cuts, you will have to pay at least 20% tax on your long-term capital gains. If your gains are substantial, it may take longer to overcome the tax bite than to overcome a bear market.

Hopefully, this review of your portfolio will allow you to stick with your plan even if a market decline occurs. Some additional tips to consider include:

Continue investing according to your asset allocation plan, even during a bear market. Remind yourself that you are purchasing stocks at low prices, which should be a goal of every astute investor.

While you may think you know how you will react in a market downturn, it is easy to have second thoughts when faced with the reality. Don’t rethink your plan, just proceed.

Set realistic return expectations. After the past three years, it is easy to forget that the average annual return of the Standard & Poor’s 500 from 1926 to 1996 has been 10.7% (Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook).*

Remember that you are investing for the long term. Short-term fluctuations should be an expected part of investing in stocks.

Call if you’d like help reassessing your investment portfolio.

* 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 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.


We live in an age where computers make it possible for companies to gather incredible amounts of information about our financial situation. Companies you do business with assemble information so that they can target those most likely to purchase their products - and then sell this information to other companies. Credit reporting agencies gather massive amounts of information, while marketing firms also gather consumer data so that they can sell targeted mailing lists to companies.

On the plus side, this means that companies are becoming more sophisticated in determining which services to offer their customers. On the negative side, with so much information being accumulated, errors and misuses are sure to occur.

Where do companies get all this information? A surprising amount of it comes from you. Information on credit applications is maintained on databases by companies and is routinely reported to credit agencies. Many product warranty cards request information about your lifestyle and interests. Magazine subscriptions often ask personal information. In addition, many governmental agencies sell public records in a computerized format to commercial companies. Anyone can gain access to property tax rolls, motor vehicle registrations, workers’ compensation filings, police reports, and address changes.

There are several steps you can take to protect your financial privacy and to ensure that information available about you is accurate:

Check your credit report annually. For an $8 fee, the three main credit reporting bureaus will provide you with a copy of your credit report. You can contact Experian (formerly TRW) at 1-800-682-7654, Equifax at 1-800-685-1111, and Trans Union at 1-800-888-4213. All credit bureaus will provide you with a free copy if you were denied credit based on their report and make your request within 30 days of denial. Review your report carefully for errors. It is not uncommon to find information on people with similar names or other family members in your credit file. If you find errors, report them immediately in writing either by letter or on dispute forms provided by the credit bureau. The credit bureau must then reinvestigate the item and remove those that can’t be verified. If the matter is not resolved to your satisfaction, you can submit a "statement of dispute" explaining your position, which must be included in your report.

Anyone with a legitimate business need can obtain a copy of your credit report, which generally includes creditors, landlords, insurance companies, and employers or potential employers. Also, credit bureaus frequently sell lists of individuals to companies that offer pre-approved credit cards or other lines of credit. You can call the credit agencies and request that they not sell your name to these companies.

Request a copy of your Earnings and Benefits Statement from the Social Security Administration at least once every three years to ensure that your earnings are recorded properly.

Realize that you don’t have to provide personal information when you fill out surveys and product registration or warranty cards.

Be protective of your Social Security number. Only give it out in situations where it is required, such as on tax forms, employment records, and for banking, stock, and property transactions. Request a personal identification number instead of your Social Security number to be used for phone access to financial information. Don’t print your Social Security number on checks. Since so much financial information is linked to your Social Security number, you must be careful that it is not readily available to individuals who could use it fraudulently.

Please call us at 800-878-4036 if you’d like to discuss these topics in more detail.


The new Roth IRA is available with the 1998 tax year. While contributions are not tax deductible, earnings will be distributed tax-free as long as the distribution is qualified. A qualified distribution is one that is made:

at least five tax years after the first contribution to a Roth IRA and

after the individual attains age 59 ½ or due to death, disability, or for qualified first time home buyer expenses up to $10,000.

Early withdrawals before the age of 59 ½ will be permitted on a tax-free basis as long as the taxpayer withdraws only contributions, not earnings. Early withdrawals of earnings will be subject to income tax but not the 10% penalty tax if withdrawn to pay for qualified higher educational expenses, medical expenses in excess of 7.5% of adjusted gross income (AGI), or medical insurance when a person has received unemployment compensation (if certain conditions are met).

Total contributions to Roth IRAs, deductible IRAs, and nondeductible IRAs cannot exceed $2,000 per individual in any given year. Eligibility to contribute to the Roth IRA is phased out at AGI amounts of $95,000 to $110,000 for single taxpayers and at $150,000 to $160,000 for married taxpayers filing jointly, regardless of whether the taxpayer participates in an employer-sponsored plan. Distributions do not have to begin after age 70 ½ and contributions can be made even after age 70 ½.

Singles and couples filing jointly with AGI not exceeding $100,000 can roll over balances from deductible or nondeductible IRAs into Roth IRAs. Transferred amounts must be included in income if they would be taxable when withdrawn, but are exempt from the 10% early penalty tax. If the transfer is made in 1998, that income is spread over four years.

Those eligible for both the Roth and the deductible IRAs should carefully evaluate which is best for their circumstances. If you have a fixed amount available for investing in an IRA, the end result from both types of IRAs will be similar if you expect your current marginal tax rate to equal your rate when the funds are withdrawn. If you expect your marginal tax rate to decline over time, a deductible IRA may be a better alternative, while the Roth IRA may produce better results if your marginal tax rate increases over time. Please call if you’d like to discuss which alternative would be best for you.


Dollar cost averaging involves investing a set amount of money at regular intervals. It can be used in two different situations: 1) to systematically invest new funds on an ongoing basis or 2) to gradually invest a large sum of money, such as an inheritance or a bonus. Few would debate the merits of dollar cost averaging as a disciplined approach to investing new funds on an ongoing basis, but recent studies indicate that an investor may earn a higher return by investing a lump sum immediately in the market, rather than over time.

A 1993 study of the period 1926 to 1991 found that lump-sum investing significantly outperformed dollar cost averaging two thirds of the time (Source: AAII Journal, June 1993). Another study found that during the period 1950 to 1993, dollar cost averaging outperformed a lump-sum investing strategy only once in those 40 five-year intervals (Source: Bank Investment Marketing, May 1997). Mathematically, these studies make sense in our current environment. Of course, past performance is no guarantee of future results.

Despite the potential increase in return, lump-sum investing may be a difficult strategy for some investors. They fear investing at a market high, with subsequent declines causing them to lose a significant portion of their investment. This fear can result in taking significant amounts of time to invest, waiting for that perfect time. Investing small amounts over a period of time through dollar cost averaging can give the investor time to get used to the market and its fluctuations. Which method will be appropriate for your circumstances will depend on your risk tolerance and views about the market.

It is important to keep in mind that dollar cost averaging does not ensure a profit nor protect against loss in declining markets. Before starting a dollar cost averaging program, you should consider your ability and willingness to continue purchases through periods of low price levels.


Will you get your share of the 150 Billion in tax breaks provided in the Tax Act of 1997?

What is the catch? - The mind numbering complexity of this new law, over 1109 changes to our already complex tax system.

IRA’s, we now have 7 different IRAs, up from 4 along with changes to the original 4. Should you rollover your current IRAs into a new Roth IRA?

Capital Gains, now taxed at 4 different rates with new holding periods, but only if you qualify.

Tax Credits, 3 new credits on top of the one which can affect every family, but could they actually increase your taxes?

Etc. etc. etc. (1,095 times)

Need help? - Let the professionals at Wink Tax Services sort things out with you. With over 24 years of experience, we can help. Come to our office for a FREE, no obligation review. Call 248-816-1220 or 800-878-4036.


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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.

Copyright © 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017