Wink Tax Services
IN THIS ISSUE . . .
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:
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:
Please call us at 800-878-4036 if you’d like to discuss these topics in more detail.
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.
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.
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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