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Taxes & Alternatives 2 27-10 aaii dc

Taxes & Alternatives 2 27-10 aaii dc






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    Taxes & Alternatives 2 27-10 aaii dc Taxes & Alternatives 2 27-10 aaii dc Presentation Transcript

    • Taxes & Alternatives to Shape Your Investment Planning
      What do you do now?
      February 27, 2010
    • Understanding where we are today in investments
      —Lewis Carroll
      Why did God create economists?
      To make weathermen feel good about themselves!
    • 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
    • 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
    • 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
    • Current Income Tax Update and What is Going to Happenin the Future
    • 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
    • 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)
    • 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
    • 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)
    • Ideas on “Savvy” Investing
    • Asset allocation Recommendations
      • Traditional asset allocation
      • 60% stocks and 40% bonds
      • 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),
      • 40% stocks, reduce high-quality bonds to 30% and increase lower-quality bonds to 30%
      • Today …
      • 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
      Examples: FPNIX, IPFIX, STSMX, EMUNX
    • 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
    • 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
    • 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
    • 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
    • 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)
    • 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
    • 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)
    • Questions?
      David Goldner, CPA, CFP, CVA
      410.685.5512 main
      410.900.1305 direct