Tax Wise Advisor

Does the old stock market cliché have any credibility in 2012?

An old stock market dictum says that spring is for profit-taking, or at least a time to reduce your exposure to equities. In the classic market psychology, you “sell in May and go away” with the belief that stock prices will plateau or retreat in spring and summer, and then you return to stocks in the fall, taking advantage of bargains and factors that will encourage a hot fourth quarter.

In the last several years, we have seen all kinds of stock market behavior, some of it extraordinary. So is there any credence to this approach now?

The argument for “going away”. Over the last 12 months, investors who held to this belief made out pretty well. From May 1-November 1, 2011, the Dow lost 6.7%. From November 2011 through April 27, 2012, it gained 10.7%.

If we open a historical window – specifically, The Stock Trader’s Almanac – back to 1926, we see the S&P 500 rising 4.3% on average during May-October and gaining an average of 7.1% from November-April.

Unsurprisingly, STA editor-in-chief Jeff Hirsch is an advocate of the “sell in May” approach. So is Sam Stovall, who is of course the chief equity strategist at S&P Capital IQ. As Stovall just noted to Forbes, since 1945 the S&P 500 has gained just 1.2% during the average May-October run yet advanced 6.9% during the average November-April period.

While these numbers are pretty compelling, you know what they say about statistics.

Is the argument principally flawed? If you do sell in May, where do you put your money after dumping those stocks? The strategy assumes you know of a better place – an alternative to equities offering greater yield and less risk.

Larry Swedroe, director of research for Buckingham Asset Management, recently told CBS MoneyWatch that the “sell in May” approach amounted to “pure randomness”. He made his claim by running numbers in calendar years from 1950-2007 with the hypothesis of reinvesting money pulled out of equities into 30-year Treasuries during the assumed 6-month market lull. According to his research, the “buy and hold” crowd would have outperformed the “sell in May” crowd in the time frames 1950-2007, 1980-2007 and 1990-2007, with the “sell in May” adherents triumphing in the time frames of 1960-2007, 1970-2007 and 2000-2007.

The case for staying in the market. Even if the performance numbers mentioned in the third,  fourth, and fifth paragraphs of this article were absolutely predictable annually, what would the compelling argument be for ditching stocks? Gains would still occur in spring and summer; they would just be lesser gains.

Let’s go from hypothesis to reality, specifically what is occurring right now. An investor wanting a divorce from risk for the next six months could decide to bail from stocks and put the assets into short-term Treasuries and money market accounts. Would it be worth it? Maybe not. According to Bankrate.com, 6-month Treasuries were yielding 0.14% as of April 27 and money market accounts were yielding 0.46%. Throw in brokerage charges and taxes you might incur from selling, and getting in and out of equities may look less attractive.

Once you’re out, when do you get back in? What if mid-October brings a rally? Do you jump in and buy? What if the bears show up at the start of November? How long do you wait for what might be the market low?

Moreover … who’s to say that U.S. economic indicators (or even global ones) might be better than expected this summer? What if the EU arranges a manageable fix for Spain’s debt dilemma? What if the real estate market shows signs of heating up in the coming quarters? What if the Fed opts for more easing?

If the “sell in May” strategy sounds more like market timing to you than anything else, it does have some history supporting it – history worth considering. The fact remains, however, that history is no barometer of future stock market performance.

Your personal financial consultant - Monty
(707) 576-8700

What do you do if your portfolio isn’t generating a decent return?

Do you wish you had more money these days? You aren’t alone. Many retirees find that their income streams are insufficient.

Right now, interest rates are at rock bottom – and it appears they will stay there for the near future. With the federal funds rate near 0%, some of the classic conservative retirement investments – such as money market funds and CDs – aren’t even earning returns to keep up with 2%-3% inflation.

Today, a little adjustment to your portfolio might lead to a better yield.

Growth investing is important even when you are retired. It makes sense to be conservative with your hard-earned retirement money. The dilemma is that you can be too conservative when investing it.

Some retirees adopt an extremely risk-averse investment approach. A trade-off comes with that decision: if your goal is to minimize risk, you may also risk minimizing your portfolio returns. If you owned a longer-term CD when the recession began in December 2007, the income from that CD has dropped by two-thirds since then.

The goal is to find the middle ground – a level of risk that you can comfortably assume in pursuit of a return that translates to a better income stream.

While some retirees would like to bail out of equity investing, that may pose a risk in itself. As stocks and funds may return 10-15% (or better) in a good year, it is pretty hard to walk away from their potential. If you want improved cash flow, fixed-rate investments may not have the ability to provide it.

This is why you don’t want to abandon growth investing – the kind of investing with a foot in the equities markets, the kind you used to build your retirement savings. Many people in their 50s, 60s and even 70s are still in the accumulation phase – they still need to build up their retirement fund even as they need to withdraw income from it.

Remember the “Rule of 72”. You may have heard of this financial rule of thumb, often used to project inflation. At 4% inflation, the cost of living will double in 18 years, at 8% inflation it will double in 9 years, and so forth – whatever multiplies to 72. Inflation is about 3% right now, but there’s no guarantee it will stay there for the balance of your retirement. It wasn’t so long ago when consumer prices would rise by 5%, 8%, even 12% or 15% a year.

Your retirement income has to keep pace with this inflationary advance. If it doesn’t, you will be left with less and less purchasing power as the years proceed.

Imagine trying to live today on the amount of income you earned 15 or 20 years ago. Wouldn’t that be depressing? Wouldn’t your lifestyle suffer? Well, that is the outcome you risk having if your retirement income doesn’t increase with the times.

Factor in medical costs and life’s little emergencies, and the message is clear – you need more income for the future, not the same or less.

Where might a conservative investor find a better yield? The classic bearish move is to shift money from stocks into bonds, but bonds aren’t providing great yields today and their value will fall when interest rates eventually start to rise. There are other yield sources that may be worth a look.

*Real estate investment trusts (REITs) allow you to enter the commercial real estate sector without the hassles of property management. They give you a fractional ownership share of a major-league real estate portfolio, with potential for dividend payments and excellent returns. Private REITs are not publicly traded.

*Dividend stocks stood out during the recession, as investors turned to them for cash flow. Commonly, they are issued by established corporations in essential industries.

*Utilities. Investors often look to the utilities sector for a hedge as utilities stocks have the potential for nice dividends in good and bad market climates.

*Commodity futures. These include precious metals, oil and gas investments, green energy resources, crops and necessities such as timber and livestock.

*Currencies. When the dollar is weak, funds investing in foreign currencies get a boost as most funds out there are dollar-denominated.

You can invest in many of these asset classes not only via stocks and futures contracts, but via managed funds and exchange-traded funds (ETFs). ETFs are nice, as they don’t cost an arm and a leg to enter. They are tax-efficient, and as they trade on exchanges during the market day, they offer great liquidity and flexibility.

Ask about your options. In fact, ask me. I have helped other retirees assess and revise their portfolios, with the goal of rebuilding and/or growing their incomes and savings. Call me or email me today with your questions, or to arrange a time to meet. What you learn might make you feel better about your financial future.

Your personal financial consultant – Monty
(707) 576-8700

What could that money do for you?

Is a tax refund coming your way? If you have already received your refund for 2012 or are about to receive it, you might want to think about the destiny of that money. Here are some possibilities:

• Start (or add to) an emergency fund. Many people don’t have a dedicated rainy day fund, only the presumption that they might have enough cash in case of a financial tight spot. • Invest in yourself. You could put the money toward education, career training, personal improvement, or some sort of personal experience with the potential to enhance your life. • Use it for a down payment on a car or truck or real property. Real property represents the . . . → Read More: Tax Advice Santa Rosa – WAYS TO PUT A TAX REFUND TO WORK

How does the President want to modify tax rates?

The wealthiest taxpayers could be hit hard if the tax hikes in President Obama’s 2013 federal budget proposal become law. The good news is that the tax changes outlined by the President in mid-February may be softened by eventual bipartisan compromise. As currently proposed, they would impact the wealthiest Americans on several fronts.

The Bush-era tax cuts could expire for the rich. As envisioned, the top tax rate would reset to 39.6% for individuals earning more than $200,000 a year and couples earning more than $250,000 a year. The EGTRRA/JGTRRA cuts would be extended for the vast majority of taxpayers.

A new kind of AMT could emerge. President Obama would like to see a “Buffett . . . → Read More: Tax Advice Santa Rosa – OBAMA’S PROPOSED 2013 BUDGET & THE TAXPAYER

A noted economist disputes that generalization.

True or false? You may have heard this claim before (or something like it): “Many Americans are being forced to retire later because their savings and investments took a hit in the Great Recession.”

Recently, a big-name economist disputed that belief. In a commentary for Bloomberg, former White House budget director Peter Orszag wrote that some of the statistics don’t seem to back up this conventional wisdom, but perhaps it all depends on which statistics you cite.

A fact that can’t be ignored. In mid-January, a widely reprinted Washington Post article mentioned that since the start of the recession, the population of U.S. workers older than 55 has increased by 12% to 3.1million.

Examining this Labor Department finding, . . . → Read More: Tax Advice Santa Rosa – ARE PEOPLE REALLY RETIRING LATER?

A look at some financial changes & the opportunities they may present.

Every year brings some financial change, so here are some relevant changes relating to investment, tax and estate planning for 2012.

Retirement plans. 401(k), 403(b) and 457 plan annual contribution limits rise slightly to $17,000, and you can contribute an additional $5,500 to these accounts if you are 50 or older this year. IRA contribution levels are unchanged from 2011: the ceiling is $5,000, $6,000 if you will be 50 or older in 2012.

As you strive to contribute as much as you comfortably can to these accounts this year, you will probably notice some changes with the retirement plan at your workplace. In 2012, retirement plan sponsors (i.e., employers) will have . . . → Read More: Tax Advice Santa Rosa – GETTING OFF ON THE RIGHT FOOT IN 2012

What do you do when an account owner passes away?

If your loved ones have invested, saved or insured themselves to any degree, you may be named as a beneficiary to one or more of their accounts, policies or assets in the event of their deaths. While we all hope “that day” never comes, we do need to know what to do financially if and when it does.

Legally, just who is a “beneficiary”? IRAs, annuities, life insurance policies and qualified retirement plans such as 401(k)s and 403(b)s are set up so that the accounts, policies or assets are payable or transferrable on the death of the owner to a beneficiary, usually an individual named on a contractual document that is filled out when . . . → Read More: Tax Advice Santa Rosa – WHAT BENEFICIARIES NEED TO KNOW

It only makes sense – yet many retirees live without one.

You won’t be able to withdraw an unlimited amount of money in retirement. So a retirement budget is a necessity. Some retirees forego one, only to regret it later.

Run the numbers before you retire. Often people need about 70-80% of their end salaries in retirement, but this can vary. So years before you leave work, sit down for an hour or so (perhaps with the financial professional you know and trust) and take a look at your probable monthly expenses. Online calculators can help.

The closer you get to your retirement date, the more exact you will need to be about your income needs. You first want to look for changing expenses: . . . → Read More: Tax Advice Santa Rosa – BUDGETING FOR RETIREMENT

In this volatile market, perspective is valuable.

2011 will not be remembered as a banner year on Wall Street. No silver bullet has emerged to take care of the European Union’s debt problems, and after two strong years for U.S. equities, it appears stocks will make minimal annual gains or finish the year in the red.

If your pessimism increased this year, you aren’t alone. This is a very challenging environment, even for fund managers. A recent Wall Street Journal piece referenced that some traders are reluctant to make a decisive move for fear of triggering a big price swing on a particular stock. Liquidity has also been reduced in this market.

While this sounds gloomy, a little perspective is helpful. When it comes . . . → Read More: Tax Advice Santa Rosa – IT’S ABOUT THE LONG TERM

Bond yields climb dangerously high. It looks like the EU may forego a bailout.

The Eurozone has another mess on its hands. On November 9, the yield on Italy’s 10-year bond soared to 7.46% – an interest rate clearly unthinkable in the long run, a danger signal EU leaders had to address immediately.

Bond yields above 7% have served as a kind of litmus test for the European Union. When 10-year yields topped 7% in Portugal and Ireland, those countries got bailouts, but a bailout for Italy is unlikely. Quite simply, Italy is too big to be rescued; it appears the nation will just have to save itself.

“Financial assistance is not in the cards.” So said one Eurozone official (who preferred to remain . . . → Read More: Tax Advice Santa Rosa – UNCERTAINTY OVER ITALY