The following article was contributed by Jim Parker of Dimensional Fund Advisors. It explains why it has been foolish to try to gamble with timing the U.S. and international markets so far in 2012.
"And you thought 2011 was tough?" So went the headlines in December
as media and market pundits, reflecting on a miserable year, saw no
respite for investors in 2012. But markets have a funny way of
confounding expectations.
To be sure, the reasons to be anxious were piling high as the year
turned, with European politicians dithering over how to tackle a
tottering mountain of sovereign debt, policymakers in the US running
short of options, and emerging markets not providing the cushion that
many investors had hoped for.
The general view, as expressed through the media, was that there would
be more muddling through in early 2012. "Buckle up!" warned the
respected Barron's magazine. "For investors frightened by the
stock market's volatility in the past six months and tired of worrying
about places in Europe once given little thought, 2012 promises scant
comfort—at least in the first half."1
As an investor, if you had taken that advice, you might be ruing it
now, as global equity markets—as measured by the MSCI World Index—have
registered their best start to a calendar year in twenty-one years. The
index was up by just over 10% in US dollar terms as of the end of
February. You have to go all the way back to 1991 to find a better
start.
Added to that is that much of the leadership for the turnaround is
coming from the US, an economy that many observers just two years ago
were writing off in favor of the emerging powerhouse economies in Asia.
The US benchmark S&P 500 was up by 9.0% at the end of February. This
is also its best start since 1991 and returns the index to the levels
of June 2008, before the Lehman collapse.
The US market's strong start followed a standout 2011 in which it was
one of the best-performing markets in the world. And that included most
of the emerging markets.
Even Europe, the epicenter of concerns for much of the past year, has
exploded out of the blocks in 2012. The Euro Stoxx 50 was up by nearly
12% over the first two months of the year, with the German market rising
by close to 20% in US dollar terms.
The renewed buoyancy extended to Asia, where the MSCI Asia Pacific
Index has registered ten consecutive weeks of gains, its longest
uninterrupted winning streak since 1988, and powered by strength in
energy stocks. Australian stocks have firmed as well, to be up 12.5%
year to date in US dollar terms—although in local currency terms, the
gain has been less stellar at just over 7%.
Why the change in mood? There are several catalysts for the turnaround in markets so far in 2012.
First, by the end of last year, market participants were discounting a
lot of bad news, including a couple catastrophic scenarios. Fears of
mass defaults in Europe and a possible breakup of the euro were seen as
entirely possible.
While Europe can hardly be described as being out of the woods yet,
the agreement by creditors on a new round of official funding for Greece
has eased nerves, as has the European Central Bank's provision of
another half-trillion euros in cheap funding to financial institutions.
Second, there have been signs of a turnaround in the US economy, at
least compared to the view the market was taking a few months ago. At
that time, another recession was seen to be in the cards. Since then,
data has shown an improvement in the labor market, a rise in
manufacturing orders, and a climb in consumer confidence.
Third, central banks are pumping out massive amounts of cheap
cash—essentially printing money—to provide liquidity to the financial
system and to support the recovery. As well as the ECB's latest cash
injection, Japan and Britain have recently extended their so-called
"quantitative easing" programs, while China has cut the reserve
requirements for its banks.
Of course, just as it was wrong to extrapolate the pessimism of last
year into 2012, it would be foolish to forecast that the rest of this
year will resemble the first two months in tone. No one knows how
markets will perform going forward, because that requires an ability to
forecast news. You can always guess, of course, but we tend to think
that's not a sustainable investment strategy.
The point of this is to highlight the virtues of discipline and the
tendency of markets to absorb news very, very quickly and to look
forward to the next thing. Unless you know what the next thing will be,
you are wise to stay in your seat.
Twitter Updates
Saturday, March 10, 2012
Friday, March 9, 2012
Clear Financial Quoted in SmartMoney - Fix Your 401(k)
SmartMoney has several pieces this month on how to fix your 401(k). Chief among them from my perspective is to get a second opinion, and speak to your human resources department if your 401(k) isn't meeting your needs.
Monday, March 5, 2012
Saturday, March 3, 2012
Financial Tips for Living Solo
Living the single life no longer is an anomaly: According to
the U.S. Census Bureau, 45% of households nationwide are maintained by a single
person.1 Being single affects many areas of financial planning, including
retirement, financing health care later in life, and other key issues.
If you are single, or expect to be as a result of a pending
divorce, consider the following as you plan your finances:
Retirement
An increasing percentage of preretirees are planning for
retirement on their own. According to the January 2012 issue of Financial
Planning magazine, one-third of preretirees between the ages of 55 and 64 are
single. What steps should solo planners take to shore up their finances for a
comfortable retirement?
•
Set long-term retirement savings goals. If you
have access to an employer-sponsored retirement plan, contribute as much as you
can afford. For 2012, the maximum employee contribution is $17,000, and workers
aged 50 and older can contribute an additional $5,000 catch-up contribution.
•
If you can save even more for retirement,
consider maintaining an IRA. For 2012, the maximum contribution is $5,000, and
investors aged 50 and older can contribute an additional $1,000.
•
Investing as much as you can afford for
retirement over the long-term is beneficial because you will not have the
luxury of falling back on a partner's pension. In addition, your household will
have one Social Security check to fund retirement expenses.
Parenting
•
If you have children, your financial planning
could be especially challenging because you may be required to fund tuition,
child care, and other costs on one salary. As you raise your family, be sure
not to shortchange your needs. Put away something for retirement, even if it is
only a small amount each week. Over time, this amount may compound and serve as
the basis of your retirement nest egg. Be sure to appoint a guardian for your
children in the event that you are not able to care for them.
Insurance and Health
Care
•
Review your options for disability insurance and
long-term care insurance. It is critical to purchase these types of insurance
while you are healthy and the premiums are affordable. These insurance
purchases increase the chances that you will have adequate cash flow if you are
not able to work because of a disability, or if you require assistance with
activities of daily living later in life.
•
Make sure your plans include preparing for
health care expenses. You may need to direct a lawyer to draft a health care
proxy in which you designate a loved one to make medical decisions on your
behalf if you are not able to do so yourself.
Housing
•
Think carefully about the type of housing
situation that suits your needs. Carrying a single-family home, especially in
an expensive housing market, frequently is difficult on one income. Be sure
that your home is affordable enough to permit you to invest for retirement and
other financial goals.
Your situation may present additional considerations, but the
suggestions mentioned here can help you manage your finances successfully.
Source/Disclaimer:
1Source: U.S. Census Bureau, Unmarried and Single
Americans Week, September 18-24, 2011.
###
January 2012 — This column is provided through the Financial
Planning Association, the membership organization for the financial planning
community, and is brought to you by Robert Schmansky, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by
McGraw-Hill Financial Communications or its sources, neither McGraw-Hill
Financial Communications nor its sources guarantees the accuracy, adequacy,
completeness or availability of any information and is not responsible for any
errors or omissions or for the results obtained from the use of such
information. In no event shall McGraw-Hill Financial Communications be liable
for any indirect, special or consequential damages in connection with
subscriber's or others' use of the content.
© 2012 McGraw-Hill Financial Communications. All rights reserved.
Friday, February 24, 2012
Tax Strategies for Retirees
Nothing in life is certain except death and taxes. - Benjamin Franklin
That saying still rings true roughly 300 years after the
former statesman coined it. Yet, by formulating a tax-efficient investment and
distribution strategy, retirees may keep more of their hard-earned assets for
themselves and their heirs. Here are a few suggestions for effective money
management during your later years.
Municipal bonds, or "munis" have long been
appreciated by retirees seeking a haven from taxes and stock market volatility.
In general, the interest paid on municipal bonds is exempt from federal taxes
and sometimes state and local taxes as well (see table).1 The higher
your tax bracket, the more you may benefit from investing in munis.
Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.
It's also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because in 2003, Congress reduced the maximum federal tax rate on some dividend-producing investments and long-term capital gains to 15%. In light of these changes, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.
Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.
It's also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because in 2003, Congress reduced the maximum federal tax rate on some dividend-producing investments and long-term capital gains to 15%. In light of these changes, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.
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Another major decision facing retirees is when to liquidate
various types of assets. The advantage of holding on to tax-deferred investments
is that they compound on a before-tax basis and therefore have greater earning
potential than their taxable counterparts.
On the other hand, you'll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 35%, while distributions -- in the form of capital gains or dividends -- from investments in taxable accounts are taxed at a maximum 15%. (Capital gains on investments held for less than a year are taxed at regular income tax rates.)
On the other hand, you'll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 35%, while distributions -- in the form of capital gains or dividends -- from investments in taxable accounts are taxed at a maximum 15%. (Capital gains on investments held for less than a year are taxed at regular income tax rates.)
For this reason, it's beneficial to hold securities in taxable
accounts long enough to qualify for the 15% tax rate. And, when choosing
between tapping capital gains versus dividends, long-term capital gains are
more attractive from an estate planning perspective because you get a step-up
in basis on appreciated assets at death.
It also makes sense to take a long view with regard to tapping
tax-deferred accounts. Keep in mind, however, the deadline for taking annual
required minimum distributions (RMDs).
The IRS mandates that you begin taking an annual RMD from
traditional IRAs and employer-sponsored retirement plans after you reach age
70½. The premise behind the RMD rule is simple - the longer you are expected to
live, the less the IRS requires you to withdraw (and pay taxes on) each year.
RMDs are now based on a uniform table, which takes into consideration the participant's and beneficiary's lifetimes, based on the participant's age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you'll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.
Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.2 In fact, you're never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.2 For this reason, you may wish to liquidate investments in a Roth IRA after you've exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.
RMDs are now based on a uniform table, which takes into consideration the participant's and beneficiary's lifetimes, based on the participant's age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you'll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.
Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.2 In fact, you're never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.2 For this reason, you may wish to liquidate investments in a Roth IRA after you've exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.
There are various ways to make the tax payments on your assets
easier for heirs to handle. Careful selection of beneficiaries of your money
accounts is one example. If you do not name a beneficiary, your assets could
end up in probate, and your beneficiaries could be taking distributions faster
than they expected. In most cases spousal beneficiaries are ideal, because they
have several options that aren't available to other beneficiaries, including
the marital deduction for the federal estate tax.
Also, consider transferring assets into an irrevocable trust if you're close to the threshold for owing estate taxes. In 2012, the federal estate tax applies to all estate assets over $5.12 million, but this threshold is scheduled to revert to $1 million in 2013, unless Congress elects to extend it. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.
Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed - or gains tapped - at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild's higher education expenses.
Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.
Also, consider transferring assets into an irrevocable trust if you're close to the threshold for owing estate taxes. In 2012, the federal estate tax applies to all estate assets over $5.12 million, but this threshold is scheduled to revert to $1 million in 2013, unless Congress elects to extend it. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.
Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed - or gains tapped - at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild's higher education expenses.
Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.
1. Formulating a tax-efficient investment and
distribution strategy may allow you to keep more assets for you and your heirs.
2. Consider tax-efficient investments, such as municipal
bonds and index funds, to help reduce exposure to taxes.
3. Tax-deferred investments compound on a
before-tax basis and therefore have greater earning potential than their
taxable counterparts. However, qualified withdrawals from tax-deferred investments
are taxed at income tax rates up to 35%, whereas distributions from taxable
investments held for more than 12 months are taxed at a maximum 15%.
4. You must begin taking an annual amount of
money (known as a required minimum distribution) from some tax-deferred
accounts after you reach age 70½.
5. Review how your assets fit into a
comprehensive estate plan to make the most of your money while you're alive and
to maximize the amount you'll pass along to your heirs.
Source/Disclaimer:
1Capital gains from municipal bonds are taxable and may be
subject to the alternative minimum tax.2Withdrawals prior to age 59½ are subject to a 10% penalty.
###
February 2012 — This column is provided through the Financial
Planning Association, the membership organization for the financial planning
community, and is brought to you by Robert Schmansky, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by
McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial
Communications nor its sources guarantees the accuracy, adequacy, completeness
or availability of any information and is not responsible for any errors or
omissions or for the results obtained from the use of such information. In no
event shall McGraw-Hill Financial Communications be liable for any indirect,
special or consequential damages in connection with subscriber's or others' use
of the content.
© 2012 McGraw-Hill Financial Communications. All rights reserved.
© 2012 McGraw-Hill Financial Communications. All rights reserved.
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