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Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts! INVESTMENTS AND WEALTH MANAGEMENT • The Market is Biased Toward Cash Flow Heavy Stocks in the Financial and Utilities Sectors. • Heads Up Consumers: It Doesn't Pay to Fight The Fed -- And the Fed Wants You to Buy Equities. • Using Tools to Protect Assets. • October is Open Enrollment Month – A Time When Employees May Change Their Benefit Decisions: “What-If” Scenarios are the Best Way Through the Confusion. • Kill Two Birds with One Stone — The 529 Accelerated Funding Play • Education Planning for Unmarried Couples Gets Complex When Things Don't Work Out Between Partners. • The Dichotomy of Current Living Standards Versus Future Child Education Costs is Daunting for Most Parents. • Estate Planning is Complicated When Your Spouse is Not a U.S. Citizen. • ALERT
from FOREFIELD, INC. -- Cash Balance Plans
Involved in Much Litigation and Legislation. INVESTMENTS AND WEALTH MANAGEMENT The Market is Biased Toward Cash Flow Heavy Stocks in the Financial and Utilities Sectors. The current market is a good one from the point of view of shareholders in financial and utility stocks. These traditionally more stable dividend stocks should be of particular interest to investors in the current market environment because the tax rate on dividends is no longer at ordinary income levels as high as 38 1/2 % but at the new level of 15%. As a result, the tax on dividends can be less than half the old rate. Fixed income and REIT investments are still taxed at ordinary income rates. The cash flow heavy, dividend rich stocks are traditionally in the financial industry and in utilities. Hot growth companies generally do not declare dividends. Three large value funds that have more than 20% allocated to the financial sector and may be poised to take advantage of this market bias are:
Look at the companies held in your mutual fund portfolios. See whether your managers are poised to take advantage of this market and its bias to stocks that regularly declare dividends. To reach Tim Clift, Chief Investment Officer, FundQuest, Boston, call Joanna Flynn at 617-526-7307. FundQuest is the leading provider of customized Web-based managed account platforms for financial institutions interested in moving their representatives from commission-based to fee-based product sales.
Heads Up Consumers: It Doesn't Pay to Fight The Fed -- And the Fed Wants You to Buy Equities. Consumers did not pay attention at the end of the last leg of the bull market when the Fed raised interest rates to slow down "investor exuberance." Even worse, consumers are again not paying attention as both the monetary policy and tax policy point to a government committed to an economic recovery, no matter how slow, which will benefit carefully chosen equity investments. Of course, there are no guarantees, but the government generally gets what it wants --and the government wants economic recovery particularly as the election for November 2004 heats up. Interest rates are still at or near a 40-year low. Recent income tax changes have dropped long-term capital gains and dividends to 15%. All this has been done at a time when bond and interest income is still taxed at much higher ordinary income tax rates. The same investors who bought high and sold very low in the last economic cycle are still sitting on the fence. They are making the same mistake they made the last time, that is, not paying attention to the "writing on the wall.” Rather than miss the next expansionary phase of the economy and subsequently, higher equity prices, investors need to commit long term investment capital to equities. After all - it does not pay to fight the Fed or an income tax policy that favors economic expansion. Patrick J. Horan, CFP™, ChFC, is the founder and managing partner of Horan & Associates Financial Advisors, Ltd., providing asset management and financial planning for executives and closely-held business owners through management of wealth accumulation and wealth preservation with minimal tax consequences. Worth Magazine recognized Horan & Associates in 2001 as one of the “Top 250 Financial Advisers in America” for the third consecutive year. He can be reached at 800-592-7534 or path@horan-associates.com, www.horan-associates.com.
Using Tools to Protect Assets. There are many tools available for investors to help them make investment decisions. The better tools are those that can help determine when the odds are in favor of equity investing. An investment manager's job is a lot like the job of a pilot. They have extensive tools (instruments, gauges, radar, etc) at their disposal to make flying decisions and they have a remarkable success rate at safely getting travelers to their intended destination. Travelers take tremendous comfort in the fact that pilots do know the correct function of all of those tools, but more importantly they know how to use those tools to make good flying decisions. There is an incredible amount of information about the financial markets that can be used to make investment decisions. The manager must determine what is the valuable information, and most importantly, how to use that information to make sure investors safely reach retirement with as little turbulence as possible. One of the most valuable tools available for a decision model based on probabilities is the "dominant index indicator", which describes the relative strength between the Nasdaq and the New York Stock Exchange, or the NYSE. By comparing the relative strength of the Nasdaq and the NYSE, managers gain a better understanding of the risk level in the market. When the perceived risk of investing in equities is high, investors tend to sell the stocks of smaller more aggressive companies (those that tend to comprise the Nasdaq) and move to larger, blue chip stocks (which tend to make-up the NYSE. Conversely, when conditions are improving, investors are more willing to commit their assets to smaller, growth-oriented companies. Historically, the majority of painful events in the market occurred when the NYSE was the dominant market. Keep in mind that this is a relative measure. Both markets could be declining, but if one is declining more slowly than the other, it is still relatively stronger. To test the validity of this indicator, note below how the market performed historically under periods of both NYSE and NASDAQ dominance. Historical data shows the following: When the NYSE is dominant,
When the NASDAQ is dominant,
When the NYSE was dominant the risk/reward ratio was poor, volatility was high, and it was hard to make money. On the other hand, when the NASDAQ was dominant, the risk/reward ratio was better, volatility was lower, and it was relatively easier to make money. Choose a manager who makes decisions designed to measure when the odds of equity investing are in the investor's favor. PMFM, Inc. principals are Tim Chapman and Don
Beasley, with offices just outside Athens, Georgia. Jud Doherty,
CFA, manages the marketing and distribution of 401k Toolbox, a service
that provides discretionary management as part of its advice
product. PMFM provides money management services for its
own clients, for the asset held by plan participants in their 401(k)
plans, as well as for the clients of other asset managers.
The firm has a lengthy history of good risk-adjusted performance
and has preserved the value of client accounts over the difficult
last three years. October is Open Enrollment Month – A Time When Employees May Change Their Benefit Decisions: “What-If” Scenarios are the Best Way Through the Confusion. Every October, many corporations have what is called "open enrollment" in their benefit plans. Employees are informed that for a limited amount of time they may choose to make changes in their benefit selections. Some employees fear the impact of any change on their take home pay - their regular paycheck -- and therefore choose not to make changes. HR Departments or payroll offices are often inundated with requests to work out the "What-if" scenarios, such as: "What if I increase my 401(k) deferral (contribution)?", "What if I sign up for less life insurance?", "What will it cost to add my new child to my health plan?", or "What happens to my paycheck if I choose to make a contribution to the cafeteria plan to pay for childcare expenses with pre-tax dollars?", or "What can I eliminate in benefits to increase my weekly pay because my parents need more support?" Each one of these scenarios can impact the regular paycheck. Corporations can direct their employees to http://www.paycheckcity.com for free, on-line calculators that assist the employees in answering these questions themselves. By going online to PaycheckCity.com, the employees can change the amounts in any category and come out with an accurate, realistic look at the impact of desired changes on their paycheck. PaycheckCity.com offers unequalled employee self-service tools for paycheck management. The FREE PERSONAL FINANCE CALCULATORS at this site are used by individuals and organizations of every size to quickly and accurately answer paycheck-related questions and to compute paychecks under a variety of circumstances. Over a million page views take place each month on the PaycheckCity.com site and visitors stay an average of 10 minutes each. It is the most visited site for payroll-related support on the Internet. Contact Jon Bohnert, jon@paycheckcity.com, 480-596-1500 x. 103. Kill Two Birds with One Stone — The 529 Accelerated Funding Play What do estate planning and sending your grandchildren to college have in common? Answer: they can both be accomplished through a state-sponsored 529 Plan, a tuition savings vehicle that allows both tax-deferred growth and tax-free withdrawals as long as the latter are used to fund qualified educational expenses (e.g., tuition, room and board, etc.) The rules regarding 529 Plans permit an individual or individuals, say the proud grandparents, to accelerate the funding of five years of annual federal gift-tax exclusions into a 529 Plan. The result: a gift that can reach $110,000 in a single year ($22,000 annual gift-tax exclusion x 5 years), a handsome sum tucked away to grow tax-deferred until your chip-off-the-old-block enters Harvard Yard. Additionally, keep in mind that the tax-deferred growth feature of 529 Plans means that it will take a smaller initial contribution vis-à-vis a taxable savings vehicle to reach your education funding goal. And lest you think that you must choose between grandchildren in a Solomon-like dilemma, rest assured that accelerated 529 Plans can be funded for multiple grandchildren in the course of a single year. Did you sell your closely-held business this year or field a similarly-sized windfall? Use the 529 Accelerated Funding Play to both further your estate planning objectives and impart the gift of learning to those who will follow in your footsteps. Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com.
Education Planning for Unmarried Couples Gets Complex When Things Don't Work Out Between Partners. Some unmarried couples spend their whole lives together. Others think that they will have an enduring relationship, but it just doesn't work out. When one partner opens a 529 Educational Savings Account for a child who is not the legally adopted child of the policy owner, the 529 savings may depart the relationship at the same time the unmarried partner leaves. The owner of the account has the right to pen in a different beneficiary, or the right to take the penalty and use the money for non-educational purposes. Parties in an unmarried relationship can use a number of investing strategies to create a college fund, but be careful about ownership of those assets. It is unlikely that college savings, in and of itself, would be the tail that would wag the adoption dog, but it should be considered for many reasons including education funding
The Dichotomy of Current Living Standards Versus Future Child Education Costs is Daunting for Most Parents. The challenge of paying for a child’s education is thrust onto parents as they think and plan enthusiastically for back-to-school schedules and activities. Current costs related to both public and private schools for one child or more escalates parents forward to think about the costs of post-secondary education. The reality is difficult for most parents to conceive, and indeed for many financial planners. These are financial/life style planning issues long before they become investment decisions. Many parents prefer to turn their backs on reality when they discover how difficult the choices are between current lifestyle and future educational costs. Financial planner Henry I. Montgomery, CFP, counsels that no single discussion will solve this dilemma, but rather a series of discussions are necessary over a prolonged period of time. In truth, he says, the ultimate decisions are made around the kitchen table between parents as they look at the reality of current and future family income. Henry I. Montgomery, CFP -- 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 Estate Planning is Complicated When Your Spouse is Not a U.S. Citizen. Married couples have an unlimited marital deduction; upon death, the remaining spouse may receive all assets with no taxes due. If the spouse receiving the estate is not a U.S. citizen, the transfer of assets upon death will not qualify for an unlimited deduction. Any gifts in excess of $100,000 to a non-U.S. citizen will be subject to a federal gift/death tax unless it passes to a qualified domestic trust (QDOT). A QDOT must have at least one trustee who is a U.S. citizen. No distributions other than income may be made from this trust unless the trustee has the right to withhold any additional estate tax imposed on the trust. The U.S. government is trying to keep inherited assets from leaving the country, thereby giving the IRS no means to tax those assets. If you and your spouse fall into this category, you need to get professional advice to set up your estate plan appropriately. Dee Lee, Harvard Financial
Educators, Harvard, Mass. 978-456-3778. Educator and speaker,
Dee has authored four books: “The Complete Idiot’s
Guide to 401(k) Plans”, Let’s Talk Money”, Everywoman’s
Money: Financial Freedom”, and “The Complete Idiot’s Guide
to Retiring Early”. ALERT from
FOREFIELD, INC. Recent court cases involving both IBM and Xerox cash balance plans have served to refocus attention on this type of pension plan. It is the IBM decision, however, that is causing the greatest amount of uncertainty given that it stands in direct contrast to the recently proposed IRS regulations. Further complicating matters is the possibility of legislation on the issue. Employers who have or are considering a cash balance pension plan for their business should proceed very cautiously, and only with competent legal advice. Financial professionals should be prepared to address questions about these recent developments from both business owners and individuals currently participating in cash balance pension plans. Go to www.forefield.com/cashbalance Jim Walsh, Forefield, Inc., Marlboro, Mass.jwalsh@forefield.com,
508-630-1125.
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