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A Monthly Newsletter Source of Financial Sources • Workers Should Ask Employers to Allow Re-Enrollment into a QDIA in their 401(k) Plan that includes Managed Accounts: • Without Proper IRA Beneficiary Designations, Inheritances Will Run Amuck: • New Miller Convertible Fund (MCFAX) is Top Performer: • A Well-Managed Bond Ladder Can Reduce Interest Rate Risk: • Where to Live Regionally May Not Be An Easy Financial Decision for Unmarried Couples: ---------------------------------------------------------------------------------------------------------------------------- Workers Should Ask Employers to Allow Re-Enrollment into a QDIA in their 401(k) Plan that includes Managed Accounts: Employees concerned about the performance of their 401(k) plan options should begin to talk to the Retirement Plan Committee at their place of employment to request the right to re-enroll into Qualified Default Investment Alternatives (QDIAs) in their 401(k) plan. Re-enrollment allows participants the opportunity to reconsider their investment choices now that more sophisticated investments and services have become available in new QDIA programs. The QDIA also offers the plan sponsor "safe harbor" fiduciary protection to re-enroll participants whose previous investment choices are not as appropriate as new choices available in the QDIA. The Pension Protection Act of 2006 says employers may default the employees into QDIA investments that are either managed accounts or target date funds Managed accounts that are tactically managed have a better performance record than target date funds. While it's important to make money when the market is good, the real key to building wealth over time is avoiding large losses when the market is bad. And not only is that critical to investment success, it is important for employees who may not have the temperament to endure the broad fluctuations of most passive (re: target date funds) portfolios. As an example, look at 401k Toolbox’s Capital Preservation 70+ - a managed account strategy focusing on preserving capital, comparing it to two of the largest target date funds -- Fidelity Freedom 2010 fund T Rowe Price 2010 fund. All three of these funds should be the most conservative in their company’s lineup because, presumably, the investor is going to need the assets within a short time frame, and therefore they should have the least potential to lose assets. But two of the three funds have experienced an almost 7% to 9 % loss. The only one that is nearly break even in a severely degraded market is 401k Toolbox’s Capital Preservation 70+ fund.
Instead of leaving employees to make investing decisions they are reluctant to make, (or not doing it as the case often may be), tactically managed accounts as part of the QDIA makes certain that the employee can receive the best investment management possible inside the 401(k) plan. PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 12/31/07, PMFM manages more than $1 billion. The firm has increased its assets under management by nearly 25 percent in the last year. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia. PMFM offers 401k Toolbox, it’s investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors. You can reach Senior Vice President, Tim McCabe, at 800-222-7636 or tim.mccabe@401ktoolbox.com. Without Proper IRA Beneficiary Designations, Inheritances can Run Amuck: John Jeffreys died leaving no children or wife. His brother was the recipient of his estate in carefully crafted estate planning documents. Then the financial advisors helping John’s brother, Jason, settle the estate came upon an unexpected hurdle. John had never filled out the beneficiary designation section for his very fat IRA plan valued at $800,000. Jason is now in a mess with the custodian to see if anything can be done about this. The quick answer is “probably not.” Now instead of distributing assets of John’s IRA over Jason’s life expectancy of approximately 25 more years, he must pay Federal and state income tax on the inheritance over five years. If Jason had received the IRA as a beneficiary, a provision in the tax code would have made it possible for Jason to open an “Inherited IRA” and leave the money invested tax-deferred until he had to begin taking distributions at 70 and ½. The best guess is that John opened a retail brokerage account at a branch of a large company. That the selling broker did not require beneficiary designations to be added at the time of the application process may have happened from inexperience or neglect. It’s hard to say. Jason did not want to start taking distributions while he is in full career mode, but he must. With each distribution, he loses ground on the growth potential of his brother’s IRA. Jason is consulting with his accountant about the best way to pay the tax – each year for five years, or wait until 2013 and pay it in one lump sum. The answer is a function of Jason’s tax bracket and the anticipated return on investment if the full amount is left untouched until 2013. Bottom line, everyone should check the beneficiary designations on every possible financial account they have. Whether it is a taxable investment account, a pension plan or 401(k), or savings and checking accounts, the importance of getting the right beneficiaries on the right documents cannot be overstated. Stonegate Wealth Management’s, highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients. They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling. The firm manages $175 million in assets under management. tomg@stonegatewealth.com, office, 201-791-0085
New Miller Convertible Fund (MCFAX) is Top Performer: According to Morningstar, the Miller Convertible Fund (MCFAX) has hit the street running. As of 6/30/08, just two quarters since its launch, the fund was one of the top XX convertible funds out of 82 with xx performance. "It's never a good thing to have the kind of bear market we are experiencing, but I'm a convertible securities advocate because of their ability to limit risk to portfolios. In an envoronment where investors and financial advisors are looking for ways to add stability to their portfolio, the long-term bond play in our fund's portfolio speaks for itself, says Miller. When convertible bonds are placed under the microscope and they have many benefits for the investor. In volatile markets, they can offer stability. They may not always achieve the same growth of a bull market stock, but they benefit from a rise in a stock issued by the same company. In a down market, the converts have put options embedded in the instrument itself. These options can provide investors with a “safety net” or floor -- allowing the bond to be redeemed at a certain price (often part) on a certain date. The put option may be exercised, and unless there is a credit failure on the part of the company, investors are thus provided with a guaranteed minimum. The very existence of the put “guaranty” will tend to support the bond’s price, making it easier for an investor to hold the bond in volatile times. Miller and his co-founder, Darlene Murphy, CPA, have been managing convertible securities in individual client accounts for 17 years and sub-advising portfolios of other financial advisors. Greg Miller, CPA, and Darlene Murphy, CPA, co-partners of Wellesley Investment Advisors, Inc., Wellesley, Mass, offer convertible bond strategies to investors through separately managed accounts, and through the Miller Convertible Fund (ticker: MCFAX). Founded in 1991, the firm manages convertible assets for retail clients in New England, and in a sub-advisory capacity for other investment managers around the country. Greg Miller x 122 Darlene Murphy x 123 -- 781-416-4000 gregmiller@wia.cc, dmurphy@wellesleyinvestment.com.Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com, 508-479-1033 A Well Managed Bond Ladder Can Reduce Interest Rate Risk: Successful investors have used the bond ladder strategy to reduce the interest rate risk of bonds. A bond ladder is a portfolio of bonds, each with different maturities. A GNMA Government bond has guaranteed principal payments every month spread out over the “average life” of the bond. If interest rates go up, you will receive principal each month to reinvest in bonds paying a higher rate, increasing the overall yield to maturity. If interest rates fall, all of the bond that doesn’t mature each month continues to earn the higher rate which would also protect the overall yield of the bond ladder. In other words, it is a strategy that can add value no matter which way rates move. Worried about bonds with all the dire news lately. Here’s an overview. A U.S. Government bond is a direct obligation and since the government can literally print money to pay back investors at maturity, it is generally considered a risk-free asset. However, as interest rates rise, the price of a bond falls so a sale of the bond before maturity could result in a loss. To avoid any loss of principal, you simply hold it until it matures and continue to collect the fixed interest payment that is also guaranteed by the U.S. government. When you invest in a government bond, it is very important to know the yield to maturity so there is no doubt about what you will receive in interest and ultimately in principal at maturity. The Government National Mortgage Association (GNMA) also known as “Ginnie Mae” is a U.S. Government-owned corporation. They are the only mortgage-backed securities guaranteed by the U.S. Government. GNMA securities have the same credit rating as the Government of the United States. The interest payments and the return of principal at maturity are guaranteed by the full faith and credit of the U.S. Government. Ginnie Mae has no relationship at all to Fannie Maes or Freddie Macs, which are stockholder corporations traded on the New York Stock Exchange, and that have absolutely no guarantee of principal or interest from the government. A well-managed bond ladder can stabilize your portfolio and your income. Ask your advisor to discuss this option with you.
Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net. Want to Know About the Next Investing Bubble? Watch Wall Street: Despite how most investors can easily tell you that the goal is to buy low and sell high, Wall Street knows that greed and fear cause quite the opposite to happen. For the past six months, Wall Street firms and mutual funds have been launching new ETFs and new funds that specialize in commodities and gold. And they are doing this when both are at their historic highs. Where were these investors when oil was $30 a barrel and gold was $300 an ounce? This spate of new ETFs and funds has an eerie feel to industry observers who remember the real estate limited partnerships of the mid-80s that tanked when tax law changed. They also remember very well the late 90s run up in tech stocks. More recently, they can point to real estate ETFs and mutual funds, most of which have taken a huge hit during what has been called the “sub prime crisis.” Wall street will always come to market with the product that will whet the appetite for those who feel compelled to invest at the top. These “toppers” are ignoring how the market really works. They should be investigating market sectors, such a financial services firms whose stocks are 50% off their highs. But the news is filled with fallout from the financial services firms and no one is rolling out new financial services ETFs or mutual funds. In fact, how can the world exist without strong, big, multi-national financial services companies to provide capital for all global expansion that is taking place around the Globe. Don’t consider buying high. Over time, it almost never works. Look at what is happening in the world. Bide your time, and stick with what you know in your gut is correct. Keep your ammunition dry so you can buy low and sell high. Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He is the author of the soon to be released book “The Sleep At Night Investor”. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers. Is the question Location, Location, Location or People, People, People? Real estate is bricks and sticks. Investors mostly like it (in the periods when they do) because it is the ultimate hard asset. Buy it and it’s going no place. Hold it and eventually it will go up. Land is the one thing they aren’t making more of. (OK Dubai is an exception to that.) Investors tend to focus on fixed factors like the location of a particular property: “Is it on the 100% corner?” They analyze things like long-term growth in demand, the slow movements of population that drive that demand, and look for evidence of new building permits and oncoming potential supply growth over the next few years. They look at architect’s renderings and floor plans. They cogitate. When they look at people, the ones who select the places to build or buy, and then manage the properties, they tend to look at statistics. How long has the company been around? How much money have they made for their previous investors over that period? What’s the net worth of the real estate company owners? These are good analyses points, but paper analysis is not enough. Manager’s and developer’s past investment returns is a guide but it is the past. Maybe their market intuition about what to develop or acquire was once good but isn’t any longer. Maybe they were in hot market that has cooled. All architectural renderings look clean and bright. The real pay-off in looking at a developer/owner is how good is his judgment? The payoff for a manager is how good are his properties? Commercial developed real estate typically is an investment with a five-to-ten year time line. Real estate historically has had about a seven-year business cycle. You have to buy it right, finance it with some remaining margin for error, keep it for at least five years and then if you want to sell it. find someone who sees it doing well for another seven to ten years and beyond. A lawyer/developer who financed low-income housing developments in the 1970s focused on what were essentially tax-loss driven properties, and he had the expertise and the political clout to get deals financed and developed. You might not think he needed to care about the quality of the real estate too much. After all with deep rental discounts you can pretty much always fill an apartment property. But his first two questions on every deal were: Would you let your mother live there? He’s semi-retired but still doing a land office business selling and refinancing the good properties he did in the 1970s and 1980s. Nursing homes are a tough business to run well. Another developer who does run them well said, when asked what to look for, that it’s a bit embarrassing but take a deep breath when you go in the door. If the staff is keeping the patients clean the place will smell clean. Then you can look at all the normal due diligence, but if they haven’t got the smells right, turn around and walk away. He, too, is retired but his investors did very well. During the great real estate crash of the late ‘80s, hotels were particularly hard hit. The Resolution Trust Company foreclosed on the Palm Beach Hilton in West Palm Beach. At a national auction, televised to major markets throughout the US, the Hilton sold for a price equal to just above $15,000 a room. Less than the average value of the cars in the parking lot. A great number of other hotel investors and owners were wiped out. In the mid 1990s, The International Society Of Hospitality Consultants did a study of which owners of hotels had done the best. The conclusion was that the ones who had done the best had been those who had invested the most in repairs, refurbishment, and maintenance. Typically hotel analysts suggested that owners should deposit an amount in reserves equal to 4% of gross revenues. The ISHC data indicated the owners who had made the best returns on investment had spent double that – 8% of revenues. How hard must it be in bad times when investors are scared witless to stop distributing cash flow and maintain the asset? To get a fix on a real estate developer’s vision and ability to ride out the cycles, do some site visits to his older properties and check out the following issues: • Get a list of everything he did over that period and make some random visits. The average rental apartment in the US runs close to 50% annual tenant turnover. There are managers of senior housing who get their turnover down to 20%. That in turn hits the bottom line in decreased marketing expense, less repainting, less carpet replacement, less down time without rent while apartments are being redone for new tenants, a greater sense of community so tenants do not want to leave. Your mother might be happy there, you won’t mind driving by it in the daytime, and in the long run you’ll make more money. Contact: Michael Dowd, Senior Vice President, 781 264 2678, mdowdmcm@aol.com, www.ugoc.com Millennium Credit Markets, LLC, headquartered in Rockefeller Center, New York is an affiliate of United Group of Companies. Address Your Investing Concerns With Your Advisor: It is appropriate to ask your advisor to analyze any weaknesses or gaps in your portfolio during market volatility that gives you concern. The two things to ask about are asset allocation and rebalancing. When certain asset classes have lost value, such is the case with a global allocation of about 20%. Investors must assess whether they can stay true to their thoughtful asset allocation before the market volatility. If they can handle the losses of about 5%, it is time to reallocate to that sector with 5% of assets from a more successful investment. This is non-intuitive for most investors, but buying low is generally a successful long-term strategy. Ask your advisors what they think about you selling out of your struggling equities. Most will advise against it, as no advisor wants to be put on the spot for the exact right time to buy back in. Some investors may want to pour money into struggling stocks. This aggressive posture may need to be discussed, as it may be too soon in a market cycle to do that. If you are too exposed or too aggressive, you would have cause to worry and consider a different allocation. Another thing to look at is your overexposure to favorite stocks or funds that you continue to hold because you thought the stock would go up. If the downward movement of your favorite stocks is more than can be tolerated, it is time to look at your allocation. Another gap is whether you have enough bonds to anchor your portfolio in tough times. A bond allocation is hard for some investors to keep when the market is in a growth cycle, but bonds are essential to try to even out the losses of a bear market. Treasury Inflation Protected (TIP) Bonds are interesting class that has done well this year. Past performance is not a guarantee of future results. The swift June/July 2008 market decline and the concomitant talk of 1929 type market and bank failure was a real-time test of a your tolerance for risk. If you were watching your account and market results with stomach upset on a daily basis, you may be overexposed to risky assets. Even a plain vanilla stock index fund may appear aggressive in these circumstances. If that was the case, it may be time to tone it down and resolve to be less greedy the next time around. Bill Bartin, CFP ® offers financial planning services through US Financial Advisors, LLC, a registered investment advisor, and investment products through US Wealth Advisors, LLC, Member FINRA/SIPC. Bill has been a wealth advisor for twenty years and focuses on retirement planning. He especially enjoys helping clients assess how their financial behavior and decision making is impacted by attitudes about money, emotions, and family background. He can be reached at 781-849-9200 x 227, or bbartin@uswealthcompanies.com. Put Your Fears About Increases in the Capital Gains Tax in Perspective by Evaluating Your Entire Taxable Portfolio: As the Presidential election campaign continues relentlessly towards its conclusion, many clients are raising concerns about what may happen to the capital gains tax. Some clients have advocated selling long-term holdings this year to avoid the potential higher taxes next year. This reaction is shortsighted and taken more out of fear than reason. Capital gains will be realized only when you sell the security. If you do not sell the security, it does not matter what the capital gains rate is. Also, if you sell a security that you have held for less than 12 months, you will not get the benefit of the long-term capital gains rate. You' will pay tax on the gains at your ordinary income tax rate. Investors should look at their entire taxable portfolio. You can offset potential gains with unrealized losses eliminating the fear of the capital gains tax. This conversation is appropriate in any year, but certainly may be more appropriate in a year where you may have more losses to harvest and use them to offset long-term gains. The key issue for investors is that you should not allow the tax tail to wag the investment dog. Concerns about taxes may encourage you to make irrational investment decisions. No one enjoys paying taxes, but if you are a successful investor, taxes are almost inevitable. You should not fear the taxes, but use the available rules to legally minimize taxes to be paid. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. 952-835-9000 - pfshim@usinternet.com. Where to Live, Regionally, May Not be an Easy Financial Decision for Unmarried Couples: “The best question for all unmarried couples to ask in any region where two to three jurisdictions are near a major metropolitan area is whether or not their ‘house’ is their ‘home’,” says JT Hatfield Smith, CFP®, CHFC, CLU, CLTC of SPC Financial, Inc. in Rockville. When planning and advising unmarried couples, we need to be aware of the extra steps needed to ensure that this group of clients is getting the best value for their dollar tax wise, as well as ensure desired protections in the event of a life changing event, such as dissolution of a relationship, disability, or death. Ensuring that our clients’ “house’, (a term that refers to any legal documents or other items that are used to gain recognition for how clients live,) matches their “home”, (that is, how their personal relationships are structured,) is crucial. Too often unmarried couples live in a world where they feel secure, but aren’t aware of the tax savings they are leaving on the table or the challenges they might face in the event of incapacity or death. Without the same legal protections as married couples, unmarried couples find that they are not as safe as they had hoped. For example, while true that Maryland and the District of Columbia might have better recognition of unmarried couples, they have higher income and sales taxes. It may seem more advantageous to live in Virginia from the tax perspective. However, Virginia taxes personal property such as automobiles. To the naked eye, the tax advantages may favor Virginia, but some or all of those savings may be lost because Virginia provides no benefits or flexibility to unmarried couples. http://www.tax.virginia.gov/Web_PDFs/indForms/currentyear/762.pdf The Domestic Partner provisions of the District of Columbia are far more supportive of unmarried couples, whether heterosexual, gay or lesbian, than either of its neighboring states of Virginia and Maryland. Unfortunately, unmarried couples in D.C. are exchanging domestic partner protections for higher taxation. Where to live if you are in an unmarried relationship is not an easy decision because of tax law and the nuances within the different jurisdictions. VIRGINIA: Sales Taxes Personal Income Taxes http://www.retirementliving.com/RLtaxes.html
DISTRICT OF COLUMBIA: Sales Taxes Personal Income Taxes
http://www.retirementliving.com/RLtaxes.html
MARYLAND: Sales Taxes Personal Income Taxes http://www.retirementliving.com/RLtaxes.html The District is more favorable to unmarried couples through its municipal regulations that provide financial benefits for domestic partners, but that doesn’t get most couples very far when it comes to their financial bottom line. The Federal government does not recognize domestic partnerships. Unmarried couples with assets and property must understand how to protect their assets under the laws for MD, DC and VA. “Unmarried couples cannot play head in the sand about what the states and the District recognize regarding municipal regulations and state laws,” says Hatfield Smith. “To do so is to almost guarantee lack of control over a partner’s health care in case of serious illness or whether a surviving partner will actually continue to own a jointly-held home or other joint assets in a legal transfer.” Many national firms recognize domestic partnerships for employee benefits and in a limited number of cases in pension plans. Every unmarried couple must look at how the law impacts what they are assuming will be their lifetime security. “A common horror show is lack of proper titling of assets, including real estate and taxable investment accounts. Many advisors ignore the impact of improper titling of assets and the equally disastrous impact of incorrect or improper beneficiary designations,” says Hatfield Smith. The following chart shows the significant differences the rights of unmarried couples between the District and the states of Virginia and Maryland.
“Choose your state or municipal residence carefully, and know the nuances of your particular situation with regard to the local laws that may impact you,” advises Hatfield Smith. State Tax rates: http://www.taxadmin.org/fta/rate/sales.html Misc information: States with the highest sales tax (when you include weighted averages for county and city rates) are: Tennessee (9.4%), Louisiana (8.7%), Washington (8.5%), New York (8.25%), Arkansas (8.15%), Alabama (8.05%), Oklahoma (8.05%), and California (8.0%). (See individual state pages for just the state sales tax rate.) |
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