2012 07 Smart Money Newsletter


Published on

Clear View Wealth Advisors and Steve Stanganelli, CFP(R) present the July 2012 newsletter featuring information on retirement income investing, dividend-paying stocks, tax planning for the pending Medicare surtax and college financial aid tips.

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

2012 07 Smart Money Newsletter

  1. 1. Smart Money InsightsJuly 2012 Vol. No. 1 Investment UpdatesDividends and Inflation As an investor, you may ask if an allocation to dividend stocks in your retirement portfolio will help keep up with inflation. Examining stock returns during periods of high inflation may answer this question. Dividend-paying stocks may offer benefits such as stability through income return and inflation protection. While stock prices tend to be volatile, dividends may serve as a stable component of total return and may provide better inflation protection compared with bonds. Between 1974 and 1980 (high inflation period), the average rate of inflation was 9.3%, much higher than the historical rate of 3%. During this time, bonds yielded 7.9% from income, but prices declined by 2.7%, resulting in a total return of 5.6%—way short of inflation. On the contrary, stocks returned a total of 10%: 5.0% from dividend income and 4.8% from price return, outpacing inflation for this time period. Personal Note from Steve Stanganelli My Core Values and value having a reliable Let’s make a plan together to second opinion or need help improve your bottom line. I strive to run my practice and my getting on track, then I look life on the core principles best forward to being a part of your summed up in Don Miguel Ruizs team. The Four Agreements: I want to help you make sense of Be Impeccable with Your Word your money. Dont Take Anything Personally Steve Stanganelli, MSF, CFP® Dont Make Assumptions Please call me and we can set up Fee Only Planner & Tax Coach Always Do Your Best a time for a no pressure chat to steve@clearviewwealthadvisors.com explore the ways that we may be 978-388-0020 If you are like me and appreciate able to work together. www.ClearViewWealthAdvisors.com this approach to life and business
  2. 2. Clear View Wealth Advisors LLC Investment Updates July 2012 2 media scare you into making poor investmentHow to Cope with Financial Anxiety decisions. Times of great uncertainty are usually bad times to be making major decisions. What is healthy is knowing how the human mind works and factoring that into your investment decision-making process. Researchers and academics in the field of behavioral No one likes uncertainty. We want to maintain at least finance attempt to better understand and explain how the illusion of control. But thats almost impossible to emotions and perceptions influence investors and their do today, given the volatility of the stock market and decisions. If you are interested in learning more, there employers belt-tightening. Even the steadiest hand is are plenty of publications devoted to this relatively new shaking just a little. It is imperative to avoid letting field. your emotions get in the way of making smart investment decisions. In times of doubt, it might be in Consider all of the complex financial decisions faced your best interest to follow these steps for re- by investors today. Without experience in different examining your current financial strategy. market environments or knowledge of market history, how might investors make such decisions? Potentially Reassess Your Risk Tolerance: Todays investor is through their perceptions or based on their emotions. living those “hypothetical” questions that appear on Thus, it is imperative that investors understand and risk-tolerance questionnaires. If you havent checked combat the myriad of illusions to which they might be your risk tolerance (the degree of uncertainty that you prone. can handle in your investment portfolio) in more than a year, youre most likely due—especially if youre When the markets are doing well, people tend to uncomfortable right now. Maybe youve taken on think the trend will continue indefinitely. During the more risk than is prudent. If so, it might be in your recent crisis when the market was struggling, we best interest to change your asset mix. If you find that witnessed overreaction: Investors were running away youre taking on the appropriate amount of risk for from the stock market. However, if you think U.S. your goals, just sit tight. companies are still fundamentally strong and will profit in the next five to 10 years, then you should still If You Have to Do Something, Review Your have a stake in the stock market. Just make sure you Expenses: When dealing with uncertainty, some set your asset allocation policy first, and then stay the people feel compelled to act. Instead of trying to time course with an appropriate mix of stocks, bonds, and the market (which even the professionals cant do with cash. Investing is a long-term proposition—don’t let any consistency), focus on things you can control with your emotions overpower your sense of reason. certainty: expenses. Identify where you can tighten your belt. Try to identify unneeded or underused Stocks are not guaranteed and have been more volatile services. After such cuts, you’ll have some extra cash to than bonds. Past performance is no guarantee of future invest each month. Expenses also matter in investment results. Diversification does not eliminate the risk of accounts. Do you know what you’re paying in expense experiencing investment losses. ratios, 12b-1 fees, front- or back-end loads? Burn up some of your nervous energy by making sure those expenses aren’t eating up what little positive returns you might have. Create a Shopping List of Investments: Research stocks or funds that would complement your portfolio, then see where they are currently trading. This could be a great opportunity to pick up some of your favorite picks at rock-bottom prices. However, make sure they are trading at historical lows because of investor overreaction and not because they are no longer financially sound. Win the Psychological Battle: Dont let the financial
  3. 3. Clear View Wealth Advisors LLC Investment Updates July 2012 3 be under foreclosure; their prices may also be low inRetirees: Non-Traditional Investment absolute terms. As with investing in any other security type, seeking low valuations is a key way to bringRisks down your risk, but distressed real estate investing is far from a low-risk endeavor. Distressed properties may require substantial additional investment before Volatile markets pose several challenges for retirees they can be rented or resold, and there is no guarantee who rely on receiving a livable income stream from that a seemingly low-priced property wont fall further their investments. Interest rates are low and likely to still. Finally, real estate can be illiquid, and for smaller stay low for the foreseeable future, making cash and investors can be cost-prohibitive to build a diversified high-quality bonds a safe parking place for now. Amid portfolio of properties. such a challenging environment, its hard to blame retired investors for looking beyond traditional Private Mortgages: The troubled housing market has investments like stocks, bonds, and cash, or the mutual given rise to another real estate-related investment, the funds and exchange-traded funds that invest in these private mortgage. In contrast to a loan extended by a securities. bank or financial institution, a private mortgage is funded by individuals, groups of individuals, or a Many investors have flocked to gold and other corporation that specializes in making such loans. A precious metals, while others have gravitated toward private mortgage holder may be able to earn a investment types like life settlements, distressed real substantially higher interest rate than he or she can estate investments, and private mortgage investments. earn on cash or high-quality bond investment. At the Such non-traditional investments might hold the same time, the risks of a private mortgage loan are also promise of higher returns compared with traditional a lot higher than cash or bonds, even though the loan asset classes, but there is often a trade-off of higher is secured by the property. Individuals usually turn to risks and/or costs. Moreover, investors in non- the private mortgage market because they cant secure traditional investments might not benefit from the bank financing; thus, they might have poor credit or same liquidity, transparency, and regulatory oversight limited down payments. Those risks can be that investors in traditional assets have. The following exacerbated because it can be difficult to diversify in three asset types have picked up traction, but it is the private mortgage market. important to understand the risks before entrusting your hard-earned cash to them. Retirees should exercise caution when investing in non -traditional assets. It is important to understand that Life Settlements: A life settlement originates when a investors in these non-traditional assets might have to life insurance policyholder, often an elderly or give up transparency, liquidity, and regulatory terminally ill person, sells his or her interest in the oversight. policy to a third party, usually at a level that is well below the policys stated death benefit. The third party then resells, often by issuing securities, that interest to investors who in turn must keep the policy in effect by paying its premiums. When the originally insured person dies, the owner of the security collects the death benefit. The rate of return on a life-settlement investment will hinge on when the originally insured person dies. If death occurs within his or her estimated life expectancy, the return will be relatively high. But if the original policy owner lives well beyond the expected time frame, a life settlement can be a poor investment. Not only will it take a while to pay off, but the investor will have to fork over premiums on a regular basis. Distressed Real Estate: Distressed properties typically sell at prices lower than what the owners paid and may
  4. 4. Clear View Wealth Advisors LLC Investment Updates July 2012 4 Remember, the act only applies the surtax toPlanning for the New 3.8% Medicare investment gains when the total adjusted gross income on a return exceeds $250,000 for couples andSurtax $200,000 for single taxpayers. If your adjusted gross income is less than those amounts, the surtax will not apply. If you’re above those thresholds, then it applies If you are a business owner, real estate investor, or an only to the lesser of the net investment income or AGI investor with potential adjusted gross income above above the mark. $250,000 in 2012, then you need to consider planning for the new Medicare surtax. Here are some examples to consider. This surtax is a new provision contained in the Health If you had zero investment income but had salary Care and Reconciliation Act of 2010 that amended income above $250,000, then you would expect to pay the Patient Protection and Affordable Care Act of zero additional tax. (So capital losses from previous 2010. Now that the US Supreme Court has ruled that years or passive activity losses are valuable and can be the health care law is constitutional, this new provision used to reduce your investment income). takes effect in 2013. A married couple with combined salaries of $200,000 Officially, the surtax is known as the Unearned and net investment income of $150,000 would pay the Income Medicare Contributions Tax ["UIMCT"]. surtax on $100,000 of income since it is the lesser of $150,000 of net investment income or the excess over The UIMCT broadens the Medicare tax base for the MAGI threshold of $250,000. higher-income taxpayers by imposing a 3.8% surtax on the lesser of: (1) “net investment income”; or (2) the IRS Guidance excess of adjusted gross income [AGI], increased by any foreign earned income otherwise excluded from AGI, over the taxpayer’s threshold amount. Net Without additional guidance from the IRS, it appears investment income does not include income from a that the surtax applies to dividends, royalties, short- trade or business, distributions from IRAs or qualified and long-term capital gains,passive income from plans or tax-exempt municipal bond interest. partnerships, the taxable portion of annuity payments received and gains on home sales above the exclusion limits. While it is difficult to provide specific recommendations to investors without knowing the total composition of their income, there are certain While a lot in personal investing is not controllable, planning tips to consider when speaking with your tax you certainly can find ways to reduce the impact of or financial planning professional. Based on the these external factors. With some proper tax planning definitions of this new law, it appears that anything ahead of time, you can minimize your tax bill and keep that can be done to reduce your AGI will be helpful. more in your pocket. So, avoid foreign earned income that is not otherwise By Steve Stanganelli, CFP(R), CRPC(R) exempted. Consider municipal bond income. You may consider contributing more to your qualified plans at work (maximum $17,000 in employee contributions plus any applicable catch-up if you are over age 50). You may consider annuities and cash-value life insurance as other places to put cash. If you have the opportunity to defer bonus income into another tax year, consider that as well. If you can operate or start a side-business (schedule C-type income), you may be able to use the start-up costs to reduce your net profit and subsequently your AGI.
  5. 5. Clear View Wealth Advisors LLC Investment Updates July 2012 5 name cache.College Funding Corner The factors that seem to conspire to keep young people in college - and debt - forever are: Financial Aid Question of the Month: * Parents let them * Students dont go to class everyday * Students change their majors too much and too late * Students go to too many schools, or Q. When is the best time to start preparing for the they transfer and lose credits * A lack of adequate financial aid forms? funds or a family crisis may keep a student away for a semester or more * Working during college also can A. This is a great question and one that is easy to delay the process of getting out as can postponing answer AND that answer is right now. Imagine you required courses for ones major because a class is were doing tax planning. You wouldnt wait until oversubscribed * Schools make it difficult to get April 15th. Youd start earlier than that. Strategies required classes must be created, tactics executed. Completing your tax return is merely a step in the process. The same is true This has become such a concern that the Dept. of Ed. of the financial aid planning process. Your planning is requires colleges to at least report their six-year reflected in the financial aid forms. graduation rates. Another factor that drives down graduation rates are the number of Pell Grant Doing everything possible to present a favorable recipients who are right out of high school and either financial aid picture requires planning, familiarity with arent prepared for the rigors of independent study or the rules, regulations, proper completion of the they just cant receive enough money to finish. financial aid forms and of course, meeting deadlines. These days, applying for financial aid is a minefield NOTE: The older the Pell Grant recipient (non- designed to lessen your chances of getting money. The traditional student) the more likely they are to only way to make it safely through a minefield is to graduate than their younger counterparts. follow someone with the map...and we have the map.______________________________ My suggestion is to have a head-to-head talk with your student about what youre willing to do and what Graduation Rates Interpreted theyre willing to do. Having a game plan to be successful in college is just as important as applying to You may or not be aware that based on U.S. college. Department of Education data, only 53% of college students graduate in six years. Can you afford for your ______________________________ student to have a 53% chance of success in six years. Dont you want your son or daughter to have a 100% chance of success in four years? More College Funding Strategies at www.CollegeCashPro.com. And about a quarter of freshmen dont return for their sophomore year. So half the problem occurs by the end of the first year. What the data actually says is that of first-time college students, only 53% graduate from the institution where they begin their studies within six years. Many will graduate from other institutions. A good college fit goes a long way toward reducing the 25% failure rate between the freshman and sophomore year. So choosing the right college for the student is important - not just the school with the right brand or
  6. 6. Clear View Wealth Advisors LLC Investment Updates July 2012 6 your current account value. If the current value of yourAnnuities: Beware of Excess investment sub-accounts is, say, $80,000, you now get 5% of $80,000: only $4,000. The examples presentedWithdrawals herein are for informational purposes only. They are not representative of any specific annuity and do not constitute investment advice. Annuities are suitable for It’s extremely important to understand the impact of long-term investing, particularly retirement savings. withdrawals on a living benefit attached to an annuity Withdrawal of earnings will be subject to ordinary contract. The most widely used living benefit today is income tax and, if taken prior to age 59½, may be the lifetime guaranteed minimum withdrawal benefit subject to a 10% federal tax penalty. Additional fees (Lifetime GMWB). These usually allow you to make apply for living-benefit options. Investment withdrawals from your account up to an annual limit restrictions may also apply for all living-benefit (usually 4–6% of your investment). If you withdraw options. Violating the terms and conditions of the more than that percentage, future payments may be annuity contract may void guarantees. Read your reduced. Sometimes, an excess withdrawal triggers a prospectus carefully for all the fees and expenses that reset of the base on which your guaranteed amount is may apply to your variable annuity contract. It is also calculated. These withdrawals can also negatively recommended that you consult with a financial advisor impact the account value and death benefit. Example: and tax advisor before purchasing an annuity. You purchase an annuity for $100,000 that allows you a guaranteed 5% annual withdrawal until you start receiving your monthly payments for life. You may withdraw $5,000 every year. If you take out more than $5,000, your annual guaranteed withdrawal amount may decrease, and you won’t be able to take out as much the following year. An excess withdrawal of, say, $5,500 will trigger a reset of your benefit base to equal ©2012 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. Steve Stanganelli, MSF, CFP® Clear View Wealth Advisors LLC steve@clearviewwealthadvisors.com Tel:978-388-0020 Fee Only Planner & Tax Coach 12 Amidon Avenue www.ClearViewWealthAdvisors.com Amesbury, Massachusetts 01913