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Taxes & Alternatives 2 27-10 aaii dc


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