Spring Cleaning: Put Your Financial House In Order

As you file away your forms and schedules at the end of the tax season, it’s a good time to take a closer look at the big picture of your financial structure and tidy up where needed. Here’s a checklist of key considerations to help you get started.

Lay a Balanced Investment Groundwork

Does your current asset allocation — the mix of securities in your investment portfolio — still match your risk tolerance and time horizon? Stock market performance over the past few years may have altered the value of your stock holdings above or below the level you had originally intended. If so, consider rebalancing, either by selling some of your stock or bond investments or by purchasing more stock, bond or cash investments.

Create a Nest for the Future

Rather than just hoping you’ll have enough for a comfortable retirement, take some time to calculate how much you’ll need — and how much you’ll need to save. Your financial professional can help you establish a realistic accumulation goal and ensure that you’re on course to reach it.

Check Your Family’s Security System

Insurance can help protect you and your loved ones from the costs of accidents, illness, disability, and death. It’s an important part of any sound financial plan. However, your individual need for coverage will depend on your personal circumstances, including your age, family, and financial situation. A young, single person, for example, may not need much life insurance. A person with a growing family, on the other hand, may need to ensure adequate financial protection for loved ones.

Preserve the Assets You’ve Accumulated

You may not enjoy thinking about what will happen after you’re gone, but failing to plan could cost your family and loved ones. A sound estate plan can help preserve your assets and keep them from being unnecessarily reduced by taxes. In 2013, taxpayers can exclude up to $5.25 million of an estate’s assets from federal estate taxes. While that may sound like a limit you’ll never approach, if you tally the appreciated value of your retirement assets, your home, and your other holdings, you may find otherwise. Your estate plan should include an up-to-date will and may make use of tools for charitable giving and joint ownership of property.

Debt Can Threaten the Foundation

While you’re putting the rest of your financial plan in order, don’t neglect credit card balances or other outstanding debt. Consider ways to either reduce your debt or manage it better. For example, you might be able to save on interest charges by consolidating and transferring your credit card balance or by refinancing your mortgage.

Your financial house is a complex structure that needs regular upkeep. By staying on top of things and keeping you financial house in order, you’ll be well on your way to reaching your goals.

Kyle Hurt CFP, MBA

Partner-Financial Advisor

Lifetime Capital Management

 

 

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Is There a Role for Growth in Your Portfolio Strategy?

Market returns in recent years have highlighted the cyclical nature of equity investing styles. Regardless of the latest trends, however, many investors continue to ask themselves, “What is the role of growth in my portfolio?”

Shades of Growth

When deciding how much of a portfolio to allocate to growth or value stocks, it’s important to understand how they differ. Generally speaking, growth stocks have often produced higher earnings and have prices that have typically risen faster than the overall market.

Depending on their objectives, growth-oriented investors may take different approaches to security selection. Aggressive growth investors, aiming to maximize capital gains, may invest in companies with the potential for especially rapid earnings growth, which could include corporations in developing industries or small but fast-moving companies. Because these stocks may be volatile in the short term, they may be appropriate for investors with a longer-term time horizon. More traditional growth funds also strive for capital appreciation, but attempt to temper short-term ups and downs by focusing on established companies. Some growth managers, proponents of a strategy called growth at a reasonable price (GARP), try to blend strong earnings and good value.

Value stocks, in contrast, typically sell for prices that are lower than comparable securities, often because the issuing companies have experienced an earnings disappointment or other setback or simply haven’t been widely followed by the market. In other words, value stocks are those judged by investors to be bargains with unrealized potential. Value stocks may be more likely to pay dividends.

A Long-Term View

Growth and value stocks historically have taken turns outperforming one another, partly because they react differently to economic and market developments. And the conventional wisdom about when each outperforms doesn’t always hold up. Because no one knows for sure what will happen next, many financial advisors recommend owning both growth and value funds.

The growth/value decision does not have to be either/or. Your financial advisor can help you decide on an allocation that balances the two styles and suits your risk tolerance and time horizon.

Kyle Hurt MBA, CFP

Lifetime Capital Management, Inc.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Creating a Plan for Effective Wealth Transfer

Investors often concentrate on accumulating assets, but how much time and energy is spent on preserving those hard-earned assets for future generations? Not nearly enough. Have you considered any of the following strategies to help pass along more of your estate to your heirs?

Nuts and Bolts of Estate Planning

Many people don’t begin thinking about transferring their assets until retirement. In reality, effective estate planning is an ongoing process — often best begun at a much younger age. At the very least, you should have a will to ensure that your final wishes are known. If you have dependent children, also consider naming a suitable guardian for them. After determining the value of real estate, cash-value life insurance policies, and assets held in retirement and investment accounts, a more encompassing plan may also be necessary.

Giving Less to the Tax Man

What can you do to avoid drastically reducing your estate to meet tax obligations? Life insurance may be a tax-efficient way of transferring accumulated wealth. Some types of policies offer current tax benefits and also reduce or eliminate taxes for beneficiaries. And life insurance may also increase the amount passed on to your heirs. Plus, it may also help owners of highly appreciated property or small businesses retain their assets, rather than be forced to sell those assets to pay Uncle Sam.

Trusts may also be appropriate, and there are many types from which to choose. A grantor retained annuity trust (GRAT), for example, allows you to transfer assets to an irrevocable trust and then receive a yearly annuity for a specific number of years. Once the GRAT is dissolved, the remaining assets pass to the beneficiaries, usually free of estate and gift taxes. Charitable remainder trusts are also popular. They can be arranged so that you — and, if you desire, a named beneficiary — receive tax benefits and, in some cases, income during life. What’s more, the trust also benefits a charity of your choice. If appropriate, trusts are a key part of the estate planning process.

This article just scratches the surface of effective wealth transfer. Contact your financial advisor or lawyer about these and other suggestions to make the most of your assets — for both you and your heirs.

Kyle Hurt CFP, MBA

Lifetime Capital Management, Inc.

 

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Classifying Stocks

The Major Classification of Stocks

If you want to understand the stock market, you should understand the different ways in which people classify and identify stocks.1 Here is a summary of some different stock types.

Stock Sectors

A sector is a group of companies that loosely belong to the same industry and provide the same product or service. Examples of stock sectors include airlines, software, chemicals, oil, retail, automobiles, and pharmaceuticals, to name just a few. Understanding sectors is important if you want to make money in the stock market. The reason is simple: No matter how the market is doing and no matter what the condition of the economy, there are always sectors that are doing well and sectors that are struggling.

It’s a lot harder to pick successful sectors than many people think. Nevertheless, it’s worth taking the time to understand and identify the various sectors and to be aware of which sectors are strong and which are weak. This could give you a clue as to where the economy is headed.

Income Stocks

Income stocks include shares of corporations that give money back to shareholders in the form of dividends. Some investors, usually older individuals who are near retirement, are attracted to income stocks because they live off the income in the form of dividends and interest on the stocks and bonds they own. In addition, stocks that pay a regular dividend are less volatile. They may not rise or fall as quickly as other stocks, which is fine with the conservative investors who tend to buy income stocks. Another advantage of stocks that pay dividends is that the dividends reduce the loss if the stock price goes down.

There are also a number of disadvantages of buying income stocks. If the company doesn’t raise its dividend each year — and many don’t — inflation can cut into your profits. Finally, income stocks can fall just as quickly as other stocks. Just because you own stock in a so-called conservative company doesn’t mean you will be protected if the stock market falls.

Value Stocks

Value stocks are stocks of profitable companies that are selling at a reasonable price compared with their true worth, or value. The trick, of course, is determining what a company is really worth — what investors call its intrinsic value. Some low-priced stocks that seem like bargains are low-priced for a reason.

Value stocks are often those of old-fashioned companies, such as insurance companies and banks, that are likely to increase in price in the future, even if not as quickly as other stocks. It takes a lot of research to find a company whose price is a bargain compared with its value. Investors who are attracted to value stocks have a number of fundamental tools that they use to find these bargain stocks.

 

Growth Stocks

Growth stocks are the stocks of companies that are expected to grow faster than the competition. The price of growth stocks can be very high even if the company’s earnings aren’t spectacular. This is because growth investors believe that the corporation will earn money in the future and are willing to take the risk.

Most of the time, growth stocks won’t pay a dividend, as the corporation wants to use every cent it earns to improve or grow the business. Because growth stocks are so volatile, they can make sudden price moves in either direction. This is attractive to short-term traders, but may be unnerving for many investors.

Source/Disclaimer:

1Investing in stocks involves risk, including loss of principal.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Income Generation in a Low Interest Rate Environment

How to create portfolio income in a low interest rate environment?

Remember the good ‘ole days when FDIC insured CD’s with a 5 year maturity might yield anywhere from 4-6%?  As an investor in need of income production from your portfolio, wouldn’t you love to be able to go back in time and buy a staggered CD ladder that might produce an average rate north of 5% and be locked in for anywhere from  5-10 years?  Your income production goals might be met, you would have been invested in insured CD’s with little worry of default or subject to the extreme swings in the stock market, and you might have avoided much of the disaster of the 2008 financial crisis and subsequent trauma beyond that.  You might possibly still be holding good yielding investments in comparison to something of similar safety today.

Bonds have traditionally been the butter on the bread of income investors, providing decent income flows with little risk.  The financial crisis of 2008 made us all rethink the old adage of “riskless bonds”.   I believe investors, advisors, and other investment professionals may have under estimated the risk carried by bonds and now the pendulum might have swung too far the other way.   People are looking for bond investments that carry little default risk but a good yield, ever heard of having your cake and eating it too?  It unfortunately doesn’t work so easily.  Investors need to be rewarded for the risks their investments carry and having the safety of a Government backed bond, FDIC insured CD or AAA rating means that you are going to get less reward on average.

Where to look now?

Investors who rely on their portfolio to make much of their day-to-day income are now turning to other investment options outside the realm of bonds or fixed income.  People have, somewhat skittishly, looked  to non-traditional income investments like stocks, real estate investment trusts (REITs), master limited partnerships(MLP’s), and options to name a few.

The first thing to keep in mind when considering some of these income alternatives is to remember the point mentioned above, there is a risk vs. reward trade off.  Historically, stocks, REITS, LP’s, and options come with more price volatility when compared to fixed income or bond investments.  That point being made, if you have an asset allocation plan in place, your portfolio may have room for some or all of those types of investments.  Even very conservative investors need to give consideration to investments like stocks and REITs to actually reduce the long-term risk of their portfolio.   The other point to be made about the income alternatives we will discuss is that they have historically done better battling inflation compared to bonds. Bonds have traditionally been a poor investment against inflation, which has the potential to become a real issue sometime in the not-too-distant future.

Stocks

Your parents, or you yourself for that matter, may remember buying stocks for the very long-term and loved the dividends these big, blue-chip companies paid its shareholders.  It used to be you could buy a good company, hold it for many years, take in the dividend payments and watch the stock steadily appreciate in value (sometimes splitting many times over to increase the number of shares actually held).   Holding times for stocks has dramatically decreased in the last 40 plus years.  According to the NYSE Factbook, the average holding period for stocks in 1960 was 100 months (8 years).  By 1970 it had dropped to 63 months (5 years). By 1980 it had dropped to 330 months, by 1990 to 26 months, by 2000 to just 14 months and in 2010 just 6 months!

With bond yields being so low, dividend paying stocks have come back in favor.  Look at buying fairly valued companies that seem to be in favorable sectors that traditionally return a portion of earnings back to its shareholders.  There are plenty of stocks out there that would fit that criteria and pay from 2.5-5% dividend yields.  If the stock market was to have even modest gains, you have the potential for your stock to appreciate in value all the while producing income from the investment.  If you build a diversified basket of these types of companies for a portion of your portfolio, you can mitigate away some of the stock specific risk and build in some income payments from those stocks.  The tax status of dividends paid from corporations is often times considered qualified and subject to a lower rate than other income such as bond interest.

REITs

A real estate investment trust (REIT) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes.  In order to avoid the taxes, the REIT is required to distribute 90% of their income, which may be taxable, to the shareholders.  Different REITs can hold different types of properties including, but not limited to, commercial and office properties, malls and strip malls, healthcare facilities, hotels, apartments, mortgages, etc.  Just like traditional stocks, these investments are not free of risk and can actually experience quite a bit of price volatility.  If you build a diversified basket of REITs (or use a mutual fund or exchange traded fund to do it for you), you manage away some of the risk and still take part in the good yield potential these investments offer.  The tax status of REIT income is not as favorable as corporate dividends should be sheltered in an IRA or other tax deferred/free account if possible.

Master Limited Partnerships (MLP)

MLPs are limited partnerships that are publicly traded on an exchange like a stock is.  Many of the MLPs pertain to certain business enterprises like natural resources (petroleum, natural gas, coal, timber) and the extraction and transportation of these commodities.  While many MLPs pay handsome distributions to investors, the taxes on these holdings can become somewhat cumbersome.  Some of the payout to investors is considered a return of capital and could reduce your cost basis and a portion could be considered k-1 income.  These investments could be another way to further diversify a portfolio and reap the income as well.

Options

Basic options strategies could be another way to generate extra income for an investor.  A couple of basic strategies (even basic strategies can be tough to grasp for someone inexperienced in options) would be writing covered calls or selling puts.  Writing covered calls is probably the most popular option strategy for investors.  You essentially agree to sell your stock at a certain price in the future and for that agreement, you take in income.  That option may never be exercised (have the stock “called” away from you) and you get to keep the stock and the income you generated.  Selling a put works in much the same way.  You will agree to pay a certain price for a stock and in return, you take in income.  If the stock moves higher, you will not likely be required to buy that stock but will get to keep the income you generated.   We could spend many hours discussing options and how they work but just understand that could be one more tool in the income investors’ tool belt.

Putting it all together

In summary, the use of the four aforementioned securities in combination can be an effective way to increase income generated from an investment portfolio.  In times of low interest rates we have to be a little more creative on options to boost overall yield.  One other side note, if you are an income investor that needs cash flow to live on, make sure all of your dividends and interest are paid to cash and not reinvested.  For non-income investors I am a proponent of reinvesting dividends and interest but for those who actually need the cash should take them in that form.

Kyle Hurt CFP®, MBA

Partner-Financial Advisor

Lifetime Capital Management

 

Opinions and views expressed by our Financial Advisors are provided for informational purposes only and should not be construed as investment or tax advice. Content on this website is not a recommendation to buy or sell any security or financial product, or investment strategy. The ideas expressed on this site are solely the opinions of the Financial Advisor(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Consult your investment and/or tax adviser before making any investment decisions for its appropriateness in your personal situation.

Understanding Correlation

investments to help reduce risk.But less discussed is an equally important measurement: correlation, which is a way to measure how closely related two types of investments are. In theory, you could be invested in multiple securities of differing types and classes, but if they are all closely correlated, your portfolio may not be as diverse as you think — and could open you up to more risk than you intended.

Correlation is expressed as a number between 1.00 and -1.00.

  • A “1.00” indicates an absolute positive correlation (that is, the assets under comparison always move together in the same direction).
  • A “0” correlation indicates there is no relationship between the assets.
  • A “-1.00” indicates an absolute negative correlation (the assets always move together in opposite directions of each other).

Very few assets have a pure 1.00 to 1.00 or -1.00 to -1.00 relationship. Generally, most experts consider a correlation value between 0 and 0.50 as a weak correlation, while a value of 0.50 and higher is progressively stronger. The farther from a 1.00 correlation two investments are, the more diversification you may realize.

If you’d like to determine the correlation of your portfolio, the easiest way may be to contact your financial professional. You can also search the Web for an investment correlation calculator — a number of brokerage firms and other financial sites have tools, but few are free to use.

The Markets March in Unison

One important consideration for investors to keep in mind is that the financial markets are increasingly marching in unison, making correlating your investments increasingly difficult. A variety of factors are causing this trend, including:

  • Globalized economies: The growth of global trade and the proliferation of worldwide investment firms mean that the fortunes of both large corporations and the investors who own their stock are tied together as never before.
  • Reliance on U.S. dollars: Many foreign governments and global financial institutions rely on U.S. dollars as a reserve currency to pay debts or to influence exchange rates. Given this situation, the health of the U.S. economy and the actions of the Federal Reserve reverberate globally, as do events in Europe and beyond.

What Investors Can Do

If climbing correlations concern you, consider the strategies that may help you balance risk and return, including:

  • Combining stocks with other types of assets. Adding exposure to bonds, real estate, and commodities may help you to balance returns over the long term.2

Kyle Hurt MBA, CFP

Lifetime Capital Management

 

 

Source/Disclaimer:

1Asset allocation does not ensure a profit or protect against a loss in a declining market.

2Investing in stocks involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Exposure to the commodities market may subject investors to greater volatility as commodity-linked investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity.

Required Attribution:  Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

Supreme Court Expands Access to Tax, Retirement, and Other Benefits for Same-Sex Couples

Same-sex couples celebrate, but many questions remain in the wake of the Supreme Court ruling.

The Supreme Court decision to strike down the Defense of Marriage Act (DOMA) — ruling key aspects of the law as unconstitutional — immediately opens the door to a raft of federal benefits that previously have been denied same-sex couples. In addition, by declining to rule on California’s Proposition 8, which bans same-sex marriage, the Court effectively cleared the way for California to join the other 12 states and the District of Columbia in recognizing same-sex marriage.

The historic decision will immediately extend many federal benefits to couples in those states where same-sex marriage is legal, and will strengthen the president’s ability to broaden other benefits through executive orders.1

Many questions remain unanswered, however. For instance, the ruling did not address how the government should treat civil unions between same-sex couples. Nor does the decision compel states that currently do not recognize same-sex marriage to do so. This could create issues (and diminished rights) for couples who are married in a state that permits same-sex marriage but move to one that does not.

While it will take time for the government’s various constituents (e.g., the Department of Labor, the Internal Revenue Service, Social Security, and Medicare) to issue concrete guidance on benefits and how they will be implemented, some areas that are sure to be affected include the following:

Big Picture Benefits

Income taxes: Same-sex married couples will now have the option of filing their federal tax returns jointly, which may mean lower tax bills. Married couples filing jointly can take better advantage of certain credits and deductions for children, mortgage payments, and other items that can generate significant tax savings. They can also share capital gains and losses, receive a larger exclusion if they sell a home (up to $500,000 for married couples, compared with $250,000 for an individual), among other tax breaks. In addition, couples who were forced to file separate federal tax forms in the past may be eligible to claim refunds on any amounts they overpaid by filing amended returns as a married couple.2 (Generally, the IRS allows up to three years for amended returns to be filed.)

Estate taxes/planning: Transferring wealth will now become greatly simplified for same-sex couples. Like traditional couples, same-sex couples will be able to pass assets directly to their spouses after death. Where trusts have been created, same-sex couples will want to review and/or update their arrangements with an estate planning attorney to ensure the surviving spouse has tax-free access to trust assets (income and principal) — a benefit that previously has only been available to traditional couples.

Health and retirement benefits: While more employers have been allowing same-sex partners to be added to an employee’s health plan in recent years, in many cases that has been treated as a taxable benefit. Now that taxes should no longer be an issue, couples may want to review their health insurance choices, evaluating the quality and affordability of each other’s options.

In addition, under the ruling, employees will have expanded access to the following employer-sponsored health and retirement benefits. Depending on plan design, this may include:3

  • Health savings and flexible spending accounts.
  • COBRA continuation coverage.
  • HIPAA special enrollment rights.
  • Ability to pay for health benefits with pre-tax dollars and receive an employer contribution toward a same-sex spouse’s coverage without being taxed on such coverage (also referred to as taxation on “imputed” income).
  • Mandatory 401(k) beneficiary status absent spousal consent.
  • The right to be covered by a joint and survivor annuity in defined benefit plans.

These are some of the very preliminary implications of the historic high court ruling. More details will be provided as the framework for the law takes shape.

Source/Disclaimer:

1Source: The New York Times, “Supreme Court Bolsters Gay Marriage With Two Major Rulings,” June 26, 2013.

2Source: MarketWatch.com, “Same-sex couples: Celebrate, then call a CPA,” June 26, 2013.

3Source: Aon Hewitt news release, June 26, 2013.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.