Archive for the ‘Investment Planning’ Category

For those of you who have procrastinated in the past about doing financial planning, Now is a “perfect time” to map out your strategy.

What follows is a brief outline of the areas you need to address:

1. Determine your spending habits.

• Look at your expenditures from last year.
• Break them out between necessities (food, utilities, transportation, mortgage payments, rent, etc.) and non-necessities (vacations, hobbies, entertainment, recreation etc.).
• Make sure you have three to six months of cash available in case of an emergency, such as an unexpected job loss, in order to cover the necessity type of expenditures.
• Also, set aside amounts for planned expenditures such as a vacation or the purchase of a new car.
• Finally, determine if you can cut back on any of your expenses.

2. Determine your net worth.

• Begin by adding up the value of your assets (house, car, boat, investments, 401(k), etc.).
• Next, subtract the amount of your liabilities (mortgage balance, credit card debt, loans, etc.).
• The result is your net worth.

3. Prepare a credit plan.

• As a result of determining your net worth, you know the exact amount and nature of your debt.
• Begin by checking your credit score report (www.myfico.com).
• If you have too much credit card debt, create a realistic pay-down plan.
• Find a credit card company that offers the most favorable terms on balance transfers, and use the new account to consolidate your debt balances, but consider any negative impact on your FICO score first.
• Make sure that you stick with your pay-down plan.

4. Determine your philosophy relative to investing.

• Write down your long term and short-term goals (why you are investing).
• Determine you risk tolerance (what mix of investments will allow you to sleep at night).
• Consider your tax situation and how often you want to rebalance your mix of investments.
• Remember, investments are only a vehicle to help you attain your goals and objectives.

5. Do tax planning throughout the entire year.

• Maintain good records. Keep receipts.
• Analyze your current social security statement for accuracy.
• Consider the tax implications of any major expenditure.
• Review your prior year tax returns to become more familiar with the type of income and deductions you typically incur.
• Educate yourself relative to the tax nuances for your income and deductions.

6. Make sure you have adequate insurance (property, health, life and disability).

• Appropriate insurance coverage is critical to any financial plan. This is not area where you want to skimp.
• Make a list of all coverages.
• Determine your deductibles, over all limits, co-payments, premiums, etc.
• This should be reviewed annually and discussed with your insurance agent.

7. And finally, resolve to save more.

Asset allocation is your target mix of stocks, bonds, and cash. Without periodic monitoring, your allocations may stray considerably from your target allocation.

For you to maintain your asset allocation and risk-control strategies, you should:

• Check your asset class weightings semi-annually, or minimally annually.

• Rebalance whenever any asset class has strayed more than 5% from your target allocation.

• Time your rebalancing to coincide with a memorable date, such as a birthday or an anniversary.

It is best to rebalance tax-deferred accounts (401(k) or IRAs) first, since there are no tax consequences. Also, you should determine the amount of any related transaction costs.

By now you should have received your stockbroker’s Form 1099-B. This form is also sent to the IRS and indicates the dollar value of the stock you sold last year. We use this as the minimum amount that is reported on your Form 1040. Any amount less, may generate an IRS Notice. Depending on the broker, the information contained with the 1099-B may be all we need to prepare your tax return. Many brokers are now including not only the proceeds from the sale of stock, but also the basis (cost of your stock) in the stock sold. Unfortunately, they do not always include the basis. As a result, you need to provide us with the information. When you provide your basis, it makes our job easier and less expensive for you. Here are some rules in determining your basis:

• With regard to mutual fund shares, the most common method in determining basis in your shares is the “average cost” method. This means you take the cost of all your shares purchased, including dividend reinvestments, and divide the total by the number of shares on the date of sale. The result is the average cost of shares (your basis). Alternatively, you can use the double-category method, whereby you total the cost of shares held more than one year and total the cost of shares held one year or less. You then figure the average cost per share for each group.
• Under the specific identification method, you specify which shares have been sold. Your basis is what you paid for those shares when you acquired them. In order to use this method you must give written notification to the fund as to which shares you are selling
• If you do not specify a method for calculating basis, the IRS assumes that you use the FIFO method, where the shares sold are the ones you have held the longest, which usually results in the largest capital gain.
• With regard to individual stocks, you may also use the specific identification method and you also must give written notification to your broker to identify the shares that you are selling.
• As with mutual fund shares, if you do not identify the shares sold, the IRS assumes that you use the FIFO method.

These are just a few of the complex rules with regard to purchasing and selling securities. If you have any questions, please call.

A study of 17,000 stock mutual fund share classes by Standard & Poor’s, determined that fund expenses are a critical factor in fund performance.

The study found that over a ten-year period, stock funds with lower than average expense ratios performed better than funds with higher than average expense ratios in all investment style categories except one. The exception was the mid-cap blend category.

It is important for you to keep fund expenses in the forefront of your analysis when selecting funds for your portfolio.

Based upon a study conducted by Lipper, Inc., owners of stock funds in taxable accounts give up an average of 1.98 to 2.50 percentage points in total returns to taxes annually.

There are some steps that you can take in order to mitigate the impact of taxes on your investments:

• Invest in index funds, particularly in taxable accounts. They usually have a buy and hold strategy, resulting in low turnover of fund holdings (lower capital gain distributions).

• Consider investing in tax-managed funds. These funds take an index-oriented approach and employ additional techniques, such as loss harvesting, and selecting higher cost-basis holdings when selling.

• Hold your less tax efficient funds, such as actively managed funds and taxable bond funds in tax-deferred accounts.

The new tax rates raise questions as to how your investments should be allocated between your taxable accounts and your tax-deferred retirement accounts (401(k), IRA). Under the new law, the highest marginal rate for qualifying dividends is 15% and also 15% for most long-term capital gains (owned for more than one year). The highest rate for ordinary income items (interest, short-term capital gains, wages) is 35%.

Previously, the conventional wisdom was to hold equities (stock) in taxable accounts and debt (bonds) in tax-deferred accounts. The new tax rates further strengthen this position for most investors. The reason for this is that qualifying dividends and most long-term capital gains will be taxed at a top rate of 15% and interest income from bonds will be taxed at a top rate 35%. As a result, you get the biggest savings by having your bonds in tax-deferred accounts.

With the new law in mind, you should decide on the allocation of stocks and bonds that are appropriate for your goals, time horizon, and risk tolerance. Then determine the allocation between taxable and tax-deferred accounts. Always keeping in mind that investment decisions should not be driven solely by tax considerations. Also, the lower rates on dividends and long-term gains are effective only through the end of 2008. What happens after that nobody knows at this time.