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A Monthly Newsletter Source of Financial Sources • How the Benefits of Tactical Asset Allocation are Confirmed by the Pattern of Secular Bull and Bear Markets Withdrawals in a declining market can devastate a portfolio. • Bright Spot in Real Estate Investing: Private Student Housing Supported by Demographics and Living Preferences • Be Wary of Core Untruths or Myths of Mutual Fund Investing Media review copies of “The Sleep Well At Night Investor” now available by e-mailing beth_chapman@inkair.com with Sleep in the subject line. Provide a mailing address. • Year End Financial Planning and Investment Opportunities • 16 Strategies for Saving Estate Taxes #3 • What Happens When Execs Get Lazy About Managing their Non-Qualified Deferred Compensation? • Communicating About Child Support With Your Co-Parent After Divorce Media review copies of "We Need to Talk – Money & Kids After Divorce" by Linda Leitz, CFP, will be available shortly. E-mail to beth_chapman@inkair.com with the word Divorce in the subject line. How the Benefits of Tactical Asset Allocation are Confirmed by the Pattern of Secular Bull and Bear Markets Withdrawals in a declining market can devastate a portfolio. The issue is clear. Cyclical investment losses are extremely difficult to recoup, and particularly dangerous for retirees who must draw down their investment accounts to cover living expenses. A tactical asset allocation strategy that protects investors against severe losses, and yet still participates in gains, is better over time than a strategy that shoots for the moon during bull markets. It’s a matter of beating inflation over time (the average couple will spend 25 plus years in retirement) and avoiding losses that cannot be recovered. Historically, cyclical bear markets come along about every 3.5 years, last about 18 months, and wipe out more than 30% of the market’s value. (The current cyclical bull market is 61-months-old – a very long run.) When the media talks about bull and bear markets it’s almost always from a short term perspective. There is hardly a mention of “secular” or long-term market moves. Good and bad markets, while interspersed with cyclical markets can last for a decade or more. The last secular bear market, (assuming we are not in one now) was during the time period from 1966 to 1982, a 16-year span when the Dow Jones Industrial Averages were basically flat. Even though the Dow spent 16 years going nowhere there were several cyclical bull and bear markets within that time frame. In October of 1966, a 26-month bull market began that produced more than a 32% gain. In May of 1974, a cyclical bull market lasted almost three years and was up almost 67%. In December 1974, there was a sharp bull market rally that produced a 75% gain over 22 months. But none of those nice cyclical bull market gains mattered if you were simply a buy-and-hold investor. The bull markets were all followed by cyclical bear markets that wiped away all the gains. No one knows for sure if March 2000 was the start of another secular bear market, but to many investors it feels like it could be. The S&P 500 broke even in July of 2007, seven years after the previous high, but since that time, the market has been unable to hold that level. The following illustration represents the results of a $1 million investment in PMFM Managed Growth account on 12/31/95 and withdrawals of 6% per year (adjusted for 3% annual inflation rate) beginning 1/1/96 through 9/30/07. PMFM Managed Growth follows a tactical asset allocation
If, however, you invested with a firm that sought to meet or exceed the S&P 500 index, and you retired on 1st of January 2000, a worst case scenario did occur to many investors as the market experienced a severe downturn. Investors who required withdrawals from their accounts for living expenses had to draw down on their capital significantly as the chart below shows. WORST CASE SCENARIO…RETIRED 1/1/2000
Is Diversification the Answer?
The following chart shows the impact of relative returns when withdrawals had to be made from this company’s portfolio by an investor for living expenses. Can You Stomach “Relative” Performance?
Fact 1: Great Relative Returns Fact 2: By the beginning of 2003 the account is down $355,000 Fact 3: Requires a 55% return to get back to $1,000,000 PMFM proved the value of tactical asset allocation 2000-02 when PMFM clients enjoyed a positive absolute return while the average investor suffered losses of 20 to 30%. The winning-by-not-losing approach has been beneficial in 2007 also, as the PMFM model has been able to limit losses in the July and October corrections. As a result, the year-to-date performance is more than double the S&P 500 with only a fraction of the overall market volatility. PMFM’s success is not dependent upon a single indicator or a single person. Tim Chapman is the co-founder of PMFM/401kToolbox, Watkinsville, Georgia, The firm has more than $1 billion in assets under management.and provides tactical asset allocation money management and managed account services for client and 401(k) plan participants PMFM has a lengthy history of good risk-adjusted performance, preserving the value of client accounts in uncertain markets, consistently posting positive returns in each of their investment strategy composites since inception. Tim can be reached at 800-222-7636 or tim.chapman@pmfm.com Bright Spot in Real Estate Investing: Private Student Housing Supported by Demographics and Living Preferences The bright spot of private student housing is worth a look by investors who will consider an alternative niche play to stay fully invested in the real estate portion of their portfolio. Well-managed private student residences built by companies with strong records and expertise could increase an investor’s yield, reduce the volatility of their real estate portfolio, and even, perhaps, increase the typical internal rate of return of a real estate play. There are reasons for this optimism. In the last five to ten years the housing product that attracts students has evolved. Far more of the student housing put on line has been single student bedrooms, in suites and apartments, most with private bathrooms and many with fully equipped kitchens. Cash strapped universities have focused their own resources on improving faculty and classrooms, but increasingly turned to private developers to realize a number of benefits: off-balance and off-credit financing with no contributions or guarantees from the school; turnkey development services that relieves the Universities’ typically over-burdened administrative staff; expedited development and delivery schedules; more innovative and market-driven designs and amenities; and lower costs that provide reasonable rental rates for self-supporting projects. These privately-financed properties contrast with most existing University-operated housing that is 30 years old or older. Much old housing stock has small double occupancy bedrooms, limited storage space for all the current student’s computers and paraphernalia, barracks-like bathrooms, little or no privacy, and significant challenges for setting up and using electronic equipment such as computers, music systems, and electronic games. Students are demanding more and their parents are obliging them. This preference for single bedroom housing will soon collide with demand prompted by the demographics of the echo Boomer cadre now just hitting college age. College enrollments are expected to increase over the next 20 years and between 2002 and 2012, enrollments are expected to increase by 13.2 %. More high school graduates are going to college, most plan to attend full time, and typically will take five years to finish, not four. By 2012, 60% of college students will be women and the design of dormitories must respect this increase. Parents of all college students will value walking distance to campus, good security, and management that values relationships with its students. The proliferation of private student housing has provided a substantial data base, allowing industry experts to establish informed guidelines for development, construction and operating costs, as well as appropriate reserves for capital replacement, financing and operations. Millennium Credit Markets, LLC, an affiliate of United Group of Companies, Troy, New York, offers a product line of private equity opportunities in commercial real estate with a predictable / durable income stream and superior total returns to investors including brokerage houses, investment advisors, individual investors, and institutions. Michael Dowd, 781 264 2678, dowdboston@aol.com, www.ugoc.com Be Wary of Core Untruths or Myths of Mutual Fund Investing Wall Street’s legacy to consumers is the development of high cost systems that purport to help investment professionals beat the market. The idea that mutual funds provide control in an unpredictable environment is reinforced and expanded by the massive marketing efforts that started in the 1980s, and then ballooned throughout the 1990s. IN the beginning, stock brokerages channeled the message through advisors who worked on 100% commission, but through the years the message has boiled down to five falsehoods: Myth #1: Mutual funds are long-term investment vehicles. Fact: In 2005, over 200 funds were merged (130 funds merged in 2004). Often mutual funds are created to capitalize on fly-by-night trends in public preference. When the trend dies, so may the funds, according to Dustin Woodward, in his book Mutual Fund Mergers. Myth #2: Mutual fund money managers are long-term investors. Fact: The average fund traded 15 to 20% of the stocks in its portfolio in 1950. Over the past twenty years, ending in 20066, they turned over their fund portfolios at a stunning average rate of 91 percent per year – a holding period of barely 13-months for the average stock in their portfolios, reflecting a trading strategy that is far more akin to short-term speculation than long-term investing. For the most part, fund money managers are short-term speculators, according to John Bogle, legendary mutual fund manager and industry leader. Myth #3: Mutual fund shareholders are long-term owners. Fact: The average fund investor stays with a fund for just under three years. Today’s rapid rate of redemption – 75% higher than the average rate throughout the 1970s – violates the most fundamental principle of investing success. Buy and hold for the long term. Myth #4: Mutual fund costs are declining Fact: In 1950, the average stock fund charged roughly three-quarters of a percentage point. By the beginning of the year 2005 that figure had more than doubled. Myth #5: Mutual fund returns are meeting the reasonable expectations of investors. Fact: In the greatest of all bull markets, funds of all sizes seriously under performed the stock market. The inability of 75 to 85% of all fund managers even to match the performance of the market overall is the result of fees, operating costs, short-term investment horizons and transaction and tax costs. It was not always this bad. Mutual funds and their shareholders began as two parties making money together. Now, sixty years later, the wild popularity of mutual fund investing have allowed fund company goals to shift – from making money for clients to capturing as much of a share of the massive market of mutual fund shareholders as possible. The alternative is to invest but not gamble. Speculating is thrilling, but it is, literally, to flirt with disaster. Myth #6 The myth of control. Fact: Many investors believe that the constant finessing of a portfolio by a fund money manager gives investors an optimal level of control. Investors assume: “If I take my savings out of mutual funds, then I would have to manage everything myself. That would be impossible.” To remove yourself from the mutual fund speculation machine the alternative is NOT to manage the money yourself. People who talk this way have confused investing with actively trading stocks. It is a costly mistake. Warren Buffet rejects active money management for his hugely successful investment firm. He believes that investing inactivity is an intelligent behavior. Likewise John Bogle believes that market timing has been a singular failure and that rapid turnover of investment portfolios (in mutual funds) has been ineffective. What most advisors are offering is a high-cost system designed to beat the market, and it rarely does. What most consumers really need is an advisor who will help them capture the returns of the markets, and do so in a low-cost, tax-efficient manner. 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. Media review copies of “The Sleep Well At Night Investor” are available by e-mailing beth_chapman@inkair.com with Sleep in the subject line. Provide a mailing address. Year End Financial Planning and Investment Opportunities As the year comes to a close, it is important to review last minute planning and investment opportunities. • Many mutual funds will be having significant capital gains distributions this year. It is very important to avoid making a mutual fund purchase in a taxable account right before a capital gains distribution. • Most funds are willing to provide the record date and, at least, an estimate of the distribution. Year-end purchases should be delayed until after the distribution is paid out. • If a client has an investment in a taxable account with an unrealized loss or just a slight gain, you have the opportunity to sell that investment before any capital gain distribution is made so you can harvest the loss and avoid the tax consequences of the distribution. • You can reinvest the proceeds in a different mutual fund (taking care to make sure that the new fund isn't about to make a distribution) or leave the assets in a money market account for at least 30 days to satisfy the Wash Sale Rule. • Clients over 70 1/2 may still have to satisfy the required minimum distribution (RMD) from their IRA or other qualified account by year end. It is important to keep on top of this issue since the penalty to the Client is severe. The IRS will penalize a Client to the tune of 50% of the amount they failed to withdraw, and they still have to make the withdrawal. For example, if a Client has a $10,000 RMD for 2007 and doesn't take it in time, the Client will have to make the withdrawal in 2008, pay the $5,000 penalty to the IRS and satisfy the normal IRA distribution for 2008. The $10,000 make up distribution does not count toward the 2008 RMD. • Currently, 2007 is also the last year in which Clients can make charitable donations directly from their IRAs to satisfy their RMD. Distributions made payable directly to qualified charities do not count as taxable income for the donor account holder. This tax benefit applies only to people who must take required minimum distributions. Investors with questions about year end opportunities should contact their financial advisor immediately. 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. pfshim@usinternet.com.
16 Strategies for Saving Estate Taxes #3 Shielding assets from legal liability and providing a way to appreciate those assets to a much greater amount (while still meeting the requirements of the generation-skipping tax exemption) benefits you and your family no matter how old or young you are. It should go without saying, that as capricious as life can be, its end is often even less predictable. Scare tactics won’t get you to establish your trust today, but what good is there in waiting? The key to any wealth transfer plan is to begin during your lifetime – the sooner the better. Remember, if you don’t use your exemption you will lose it. Norma and John Monroe, a couple in their early sixties with children and grandchildren, transfer their assets into two trusts. The trusts hold their two homes valued at $1.2 million total, and about $1 million in other investments averaging about 7.2 percent a year in growth. That’s a total of $2.2 million. By the time the Monroes are in their early eighties, those assets increase in value to $8.8 million. Good thing they took action when they did! If the Monroes had waited even ten years to establish their trusts, no doubt the value of their homes and investments would have exceeded the four-million dollar exemption ($2 million each generation skipping transfer tax exemption). But by putting their assets in trust sooner, the Monroe upped their exemption from four million dollars to cover the $8.8 million in appreciated assets – a two hundred percent increase! Even if you don’t expect your assets to grow beyond the allowable exemption in your lifetime, you can still use the dynasty trust while you are alive to make your assets lawsuit-proof and estate tax free-forever. Once your assets are in the “value” of your dynasty trust, they are literally untouchable, except by you. Moreover, if you establish the trust now, it does not have to be funded until after your death. You can hold all your assets for as long as you like and transfer ownership to the trust only when you are ready. There is literally no downside to acting sooner than later. Pearson Financial Services, Dennis, MA, is the author of "The Two 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. What Happens When Execs Get Lazy About Managing their Non-Qualified Deferred Compensation? It all sounds good. Because highly compensated senior managers’ 401(k) deferrals are limited to a lower net percentage of salary (due to the $20,000 cap on contributions) as compared to line employees, they can only defer a small percentage of their income in a pension or 401(k) plan. To allow corporate execs to defer more income, non-qualified deferred compensation plans were created. These plans, that may be held in “rabbi” trusts, became a strategy that allowed a portion of senior exec compensation to be held and not received by the exec. The thinking has been that if a senior employee puts off accepting the compensation now and pays taxes on that compensation when they are retired, that their tax bracket will be lower after retirement, when they are earning less. The employee's funds held in the non-qualified deferred compensation trust are subject to claims from creditors. Under these circumstances, the IRS says that the employee has avoided "constructive receipt" so that the money is deferred from taxes. Only, things may not be working out as planned. Molly is a CEO earning $800,000 a year. She has nearly $2 million stashed in her company’s deferred comp plan representing nearly 30% of her net worth. All of these assets, as she withdraws them, will be taxed as ordinary income. Her advisors think she is very top heavy in the amount of deferred compensation that she has and she agrees with their advice not to elect to defer further. Now, Molly is faced with two issues: how long should she keep her money with her corporation (particularly after she retires and no longer has a hand in the fortunes of that company) and how fast should she withdraw the assets as they are now going to be taxed as ordinary income. Money left at Molly’s firm after she retires is then subject to the firm’s creditors, so a five-year payout spreads the tax bite and such a schedule does not leave the assets at risk for too long a period after she leaves the company. There is great uncertainty surrounding tax laws. Molly stands a good chance that tax rates will never be lower than they are today, so paying taxes on her income until retirement and diversifying assets in an investment portfolio that pays specific attention to investments with very low taxable events unless she sells, such as exchange traded funds, is a good move. Additionally, the investment options are not always good in deferred compensation plans. Even with income taxes, a good investment portfolio may outweigh benefits of deferring payment of taxes in a deferred compensation plan with poor choices of investments. Molly has a lifestyle that she can afford in retirement based on her savings. Her withdrawals will keep her in a higher tax bracket than she might have envisioned when she began deferring compensation into her company’s plan, so waiting until retirement to take the income may not be a net benefit. Molly is pleased to have a strategy now for managing her non-qualified deferred compensation. 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. Steve Craffen, stevec@stonegatewealth.com, office, 201-791-0085, cell: 973-248-9888. Communicating About Child Support With Your Co-Parent After Divorce Communication with your ex changes when you are divorced. How you communicate – phone, e-mail, in person – and what you feel you need to communicate will all change. It is helpful to agree with your ex on what you need to discuss and how you’ll contact each other. For co-parents who are not able to establish regular communication – whether they feel they get along well or not – a consistent communication system can often be established for important issues. Perhaps one of the most misunderstood financial issues that may need discussion is child support. All states have a child support calculation formula. There is a general consensus that child support is for the support of the children, not to supplement the lifestyle of the parent who receives it. Practical ramifications, however, are more subjective than you might think. The strict legal implications can vary state-to-state, but generally, it’s not realistic to believe that each dollar of child support is tied specifically to an expense for the child. For instance, if the parents were still marked and each had income, the child would be supported by that income. But some expenses associated with the child are blended with joint expenses. If the family bought a three-bedroom house because they needed enough bedrooms for each child to have their own room, they could not look at a specific amount of the mortgage as tied to having a child in their home. Similarly, they would not allocate a particular part of their food budget to their child. The same is true after divorce. IN many child support calculations, the assumption is that both households provide for the financial support of the child. That includes specifically identifiable expenses – such as school supplies and clothing – an d some that are more enmeshed in the expenses for the home – such as housing, food, and utilities. The child support as calculated is generally an attempt to make a fair adjustment between the households to cover basic expenses. It is not automatically intended to cover all discretionary expenses for the child. So often, the person paying child support feels he or she should not contribute anything toward the costs for extra-curricular activities, out of pocket costs for school, or summer activities. That is not always a valid assumption and communication around this point may be necessary for the well being of the child or children. It is not always reasonable to believe that child support is only to cover the basics. The payer and the recipient both need to look realistically at the amount of child support and what the cash flow of each household is to see what is reasonable for the allocation of child support and discuss with one another the potential need for additional sharing of extra expenses Linda Leitz, CFP and EA, is an author and financial planner working with divorced and divorcing couples in Colorado Springs, CO. She is the author of the soon to be published “We Need to Talk – Money & Kids After Divorce”. Her earlier book "The Ultimate Parenting Map to Money Smart Kids," published in 2006, was the first in a series of books planned by Leitz. She can be reached at Linda@brightleitz.com or 719-260-9800. Media review copies of "We Need to Talk – Money & Kids After Divorce" by Linda Leitz, CFP, will be available to the media shortly. Please send an e-mail to beth_chapman@inkair.com with the word Divorce in the subject line and provide a mailing address. Your copy will be mailed as soon as it is available from the publisher |
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