Taxes & Alternatives 2 27-10 aaii dc


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Taxes & Alternatives 2 27-10 aaii dc

  1. 1. Taxes & Alternatives to Shape Your Investment Planning<br />What do you do now?<br />February 27, 2010<br />
  2. 2. Understanding where we are today in investments <br />—Lewis Carroll<br />Why did God create economists?<br />To make weathermen feel good about themselves! <br />
  3. 3. Where are we today on investments?<br />Starting the decade Started with $100<br />Jan 2000 – Sept 2002 Down 42% $58<br />Oct 2002 – Dec 2006 Up 88% $109<br />Jan 2007 – March 2009 Down 45% $60<br />March 2009 – Dec 2009 Up 55% $92<br />Jan 2010 – Feb 2010 Down 5? $88<br />Net return really stinks (technical term)<br />We are expecting a 20% pullback from 1/1/2010<br />
  4. 4. The issues in the economy<br />Ballooning federal deficits<br />Overheated China<br />Inflation and higher interest rates<br />High unemployment and debt-laden populace<br />Poor administration policies<br />Hostile business environment<br />Nuclear Iran – continued issues in Afghanistan and Iraq<br />
  5. 5. What the economy is telling us<br />Economy is growing – very slowly off the bottom <br />Job growth is starting – really slowly<br />Earnings – stabilized and are growing <br />Possibility of explosive growth in recovery<br />Inflation – low and likely to stay low for a long time<br />Wages are two-thirds of costs and there is excess<br />Interest rates – long-term rates are not low (only short-term rates are low) … they will be kept that way for two years to support housing the market mortgage reset, but then they will rise in the long-term <br />Risks are still high – see prior slide<br />
  6. 6. Current Income Tax Update and What is Going to Happenin the Future<br />
  7. 7. Current tax issues and expected changes<br />The estate tax has phased out for 2010, but it might come back with more of a vengeance than anyone ever guessed<br />More taxes on business; bank tax is first of many<br />Healthcare reform will fail (thankfully)<br />Stimulus will keep backing automotive industry and the housing market <br />State taxes, fees, etc. are likely to increase further<br />
  8. 8. Convert regular IRA to a Roth IRA: Opportunity or trap? The rules …<br />100% of growth is tax-exempt<br />No required minimum distributions (RMD) at age 70½<br />Spouse can convert your Roth to theirs and not have RMD<br />RMDs are required on inherited Roth IRAs <br />$100,000 modified adjusted gross income (MAGI) limit<br />Starting in 2010, the $100,000 MAGI no longer applies<br />The taxable income recognized on a Roth IRA conversion in 2010 (only) may be spread over the following two tax years (i.e. 2011 and 2012)<br />
  9. 9. Convert regular IRA to a Roth IRA: Opportunity or trap?<br />Good idea <br />Have excess assets to pass without ever needing to spend the money<br />Have a large estate tax liability – estates over $10MM <br />Have a net loss or other deductions you can use to offset conversion income<br />Must be able to pay the tax from non-Roth funds<br />Take advantage of deferred tax payment option (elect to report the income half in each of 2011 and 2012)<br />IRA with significant nondeductible contributions<br />
  10. 10. Convert regular IRA to a Roth IRA: Opportunity or trap?<br />Bad idea … for most people, despite what you might hear<br />If your income is going to decrease in retirement<br />If you need to use the IRA in retirement<br />Question: Are you sure that a Roth will never be taxed?<br />Planning – option to recharacterization back to regular IRA<br />Make the election now and decide later if you want to leave it <br />If values go down<br />Investment options – multiple accounts <br />Non-working spouse contribute to nondeductible IRA and convert<br />If over 59½ – you can do this from company 401(k) (if allowed)<br />
  11. 11. Ideas on “Savvy” Investing <br />
  12. 12. Asset allocation Recommendations<br /><ul><li>Traditional asset allocation
  13. 13. 60% stocks and 40% bonds
  14. 14. January 2009 – we said when you see the light at the end of the tunnel (and you are sure it is not a train coming your way),
  15. 15. 40% stocks, reduce high-quality bonds to 30% and increase lower-quality bonds to 30%
  16. 16. Today …
  17. 17. High-quality short-term bonds 30%, high-income vehicles 10%, equities 30%, alternatives 30% </li></li></ul><li>Fixed income investment thoughts<br />Get your money out of money market funds – no return<br />MMF had grown from $7B to $10B during drop and decreased by $300MM over last 9 months <br />Invest in high-quality short-term corporate bond fund or similar quality short-term municipal bond fund <br />Yields are 3%+ in tax free and 4%+ in taxable funds<br />Do the income tax rate analysis; don’t be lazy<br />Risk spreads have returned to below long-term averages and the economy is not yet fixed <br />Examples: FPNIX, IPFIX, STSMX, EMUNX<br />
  18. 18. Fixed income investment thoughts <br />Credit spreads back to normal … WHY????<br />Sell junk/low-quality bonds; 2200 spread now 600, below LT average <br />Defaults are increasing but have not hit a high<br />Sell long-term bonds; rising interest rates within the next 2 years<br />Sell closed-end bond funds where the discounts have closed <br />International bonds being hit by sovereign risk – stay away for now; watch out for continuing run in dollar off its lows <br />Buy municipal bonds – ratio of muni yield to Treasury is at 92%<br />Stay away from Florida and California <br />Use national funds, not MD <br />
  19. 19. Fixed income investment thoughts <br />For the aggressive portion of your portfolio – income oriented <br />Buy residential mortgage REITs<br />Yields are very high and leverage is low vs. historical averages <br />The companies mostly own government-guaranteed mortgages <br />Look for rising short-term interest rates as the signal to sell<br />Ex: Annaly (ANH), MFA, PennyMac (PMT) Chimera (CIM)<br />Look for increasing spreads in closed-end funds during market pullbacks and times of stress <br />
  20. 20. Equity investment thoughts<br />All equity market classes move together <br />Lowest correlation is 73%, meaning you get little protection from diversification,<br />But the right sector does add return; <br />International stocks are not diversification<br />Valuations are high but not expensive; <br />The problem is no growth<br />
  21. 21. Equity investment thoughts<br />Where are we from the low and the high in the market and where are they valuation wise (current P/E 20 yr avg., PE & %)?<br />Large Growth up 66% net down 18% 18.6/24.1 78%<br />Large Value up 73 net down 30 16.9/15.4 109%<br />Small Growth up 81 net down 23 19.0/21.4 89%<br />Small Value up 88 net down 23 15.4/15.4 100%<br />International up 74 net down 27 on historic averages<br />Emerging Markets up 109 net down 27 on historic averages<br />
  22. 22. Equity investment thoughts<br />Wait to buy half at 10% drop and second half at next 10% <br />Buy high-quality large cap companies<br />Energy, healthcare, consumer staples, technology<br />Buy emerging markets funds<br />Buy small growth companies<br />Buy closed-end funds with high dividend returns<br />Alpine Dynamic Dividend (ADVDX) or ING Global Equity Dividend (IGD)<br />Buy business development companies<br />First Street Capital (FSC) & Ares Capital Corp (ARCC)<br />
  23. 23. Alternative investment thoughts<br />Includes REITs, commodities, long/short, hedged equity, merger funds, arbitrage, gold, option and multi-strategy approaches <br />Alternatives are the only non-equity correlated class of investment – correlation factor of .35<br />Goal: make 8-12% a year with much less risk than traditional long equity<br />
  24. 24. Alternative investment thoughts<br />Gateway Fund (GATEX) options strategy<br />Merger Fund (MERFX) invests in spreads in traditional acquisitions<br />Diamond Hill Long Short Fund (DHLSX) uses the long short approach to control market risk<br />Calamos Market Neutral Fund (CVSIX) is a multi-strategy income oriented fund<br />Osterweis Strategic Income Fund (OSTIX) is a multi-strategy income and appreciation fund <br />I hate gold and think oil is high right now; buy commodity funds every time oil gets into the $50s – Ivy Global (IGNYX) or ING managed resources (IRR) <br />
  25. 25. Questions?<br />David Goldner, CPA, CFP, CVA<br /><br />410.685.5512 main<br />410.900.1305 direct<br /><br />
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