Portfolio Maintenance Check-Up – Taxes

In a challenging investment climate where market returns are expected to be low and potentially volatile, investors should be looking for ways to minimize the impact of global, macro-economic forces [slow growth, massive budget deficits, European sovereign debt] and maximize total return on one’s investment portfolio.  One way to maximize the total return on an investment portfolio is to focus on the after-tax rate of return.  After all, what one is able to pocket after paying the tax man, is what truly matters.

Tax efficiency in portfolio management, like maintaining your house, car, health, etc…, should be routine, never-ending and although not particularly interesting, one that is critical for preserving value.  The end of the year is a good time to review portfolio holdings, not only for performance but also for ways to lower the tax liability.  If you realize capital gains before the end of the year, you can soften the tax bite by selling positions for some losses to offset them.  This strategy is known as Tax-Loss Harvesting and can minimize one’s tax liability.  Hence, maximizing a portfolio’s after-tax performance.

Tax-loss harvesting works like this:  If you have sold any stocks during the year, tally your capital gains and losses from those sales.  If you booked a big gain, you may want to take some losses to offset it.  If you have losses in your portfolio, you may want to harvest short-term gains to shield the gains from taxes.  Example:  under the current tax code a $10,000 short-term gain could generate a tax bill of as much as $3,500!   If you happen to have more losses than gains, you can use up to another $3,000 of losses to offset income from other sources, such as salary.  Any excess losses can be carried forward to offset gains in future years.

There are differences in types of gains/losses, i.e., short-term vs. long term, that must be noted as well.  If you realized any short-terms losses in 2011, they must first be used to offset any short-term gains you have that would otherwise be taxed at the higher ordinary income tax rate. Any extra short-term losses can then be used to offset long-term gains, which would otherwise be taxed at a lower rate.

Although the goal of investing is definitely not to lose money, tax considerations can have significant impact on the composition and return of an investment portfolio.  But if you decide to sell some stocks, you must do so by December 30 — the last trading day of 2011 —to record losses or gains for this year’s tax return.

Merry Christmas!

Quality and Caution

Saving people’s money is what I do.  I cannot say this is always simple and to be honest, to simplify investing, would do my audience/clients a great disservice.

However, a strategy of holding multi-national, investment grade companies emphasizing dividends, taking stock market gains, purchasing when the stock market retreats and owning high-quality, fixed income with a short duration seems to be a wise strategy.  It is my belief that portfolios based on quality, diversification and income keep themselves pointed in the right direction by taking the greed, fear, speculation and derivatives out of the equation.

Another fundamental key for investors, professional or otherwise, is knowing when to adjust your positions before taking heavy losses as wealth preservation is critical during periods of volatility and uncertainty.

The best advice I could give is simply, exercise caution and emphasize quality.

Denouement [Comedy or Tragedy?]

Per our friends at Wikipedia, the comedy ends with a dénouement (a resolution) in which the protagonist is better off than at the story’s outset.  The tragedy ends with a catastrophe in which the protagonist is worse off than at the beginning of the narrative.

So, what to make of the current debt ceiling issue? 

We are fine as long as the markets allow us to continue borrowing.  The concern I have with forcing a government shutdown is that it makes a lot of news, can get people riled up and potentially spark a whole other level of concern and anxiety that could become very disruptive.

So far we have gone merrily down this path with a lot of our country thinking we are doing just fine, not realizing that their standard of living is steadily declining with the dollar.  The “orderly decline” of the dollar doesn’t seem to matter too much to the global investment community.  However, what does get people concerned is the sharp, disorderly declines.  I wonder if a shut-down would trigger disorderly declines that could precipitate a crisis? 

Hopefully people listen to Paul Ryan and get serious about debt reduction while we still have a chance.  What is discouraging to me is that people understand that spending cuts will slow the economy and they don’t want that pain now, even though the markets are still relatively calm and we could start cutting on our own initiative.  The problem is that the pain is inevitable and the longer we delay, the more profound it will be and we will eventually come to a point where the markets will insist upon it.  Additionally, my fear is that nothing substantial will happen from lawmakers until we reach that point.  It is amazing how big of a role government spending plays in so many sectors of the economy and some seem to want to preserve it.

Personally, my ultimate comfort is knowing that our true citizenship is in heaven.  However, it would be nice to see things get better in the USA in the meantime.

I. O. USA

“Don’t expect great things and you won’t be disappointed.” – Mom

Life is [was] good.  First quarter earnings for the S&P 500 exceeded estimates and current valuations are reasonable, interest rates are steady if not falling again, and oil prices have not sky rocketed as one would expect from the turmoil in the middle east.  However, after a strong, seven month rally from July 2010 to February 2011 giving some reason for optimism reality is beginning to set in.

• Growth is still weak in the domestic economy [1.8% GDP growth in the first quarter]
• New housing starts were weak in April and prices are at all-time lows
• Consumer spending and industrial production is flat
• Unemployment is rising

Everyone wants faster economic growth, but the keys to that are fiscal and other reforms [much lower spending and tax reform, freer trade, fewer new regulations, an end to foreclosure mitigation and banker harassment, and repealing government job-killing taxes and mandates] that would reverse the policies of not just the past few years but, rather the last thirty years.  

Inflation?  Deflation?  Stagflation? 

If you watch and listen to Mr. Bernanke’s actions and statements, inflation will be transitory.  We can only hope he’s right.  But does anyone recall his confidence back in 2007 when he stated that, “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”  How did this turn out?

Around the world, investors are reaching for investments—gold, silver, emerging market stocks,Iowafarmland—to hedge against the decline in the value of dollar assets or to bet on booming commodity prices.  Whether the deflation inherent in an aging population and government that must deleverage prevail or the printing of enough money by the Fed to prevent deflation will prevail is uncertain.  However, regardless of the outcome there appears to be a lot of financial pain ahead.

Sandwiched!

At Lewis Lacey Capital Management, most of the conversations we have with our clients focus on investment and risk management to meet their personal, current or future cash-flow needs.  If it were only this simple – worrying about oneself.  However, a growing number of individuals and families worry not only about their own financial security, but they are also paying for children’s education and caring for their parents at the same time.  They are “sandwiched” between financially dependent children and parents.

Per our friends at Wikipedia; “The Sandwich Generation” is a generation of people who care for their aging parents while supporting their own children.

Your first thought may be to provide for others first and take of yourself last.  But this way of thinking may jeopardize your family’s overall financial health and continue the “Sandwich Generation” cycle.  By planning ahead, you can make this often bumpy road a little smoother.   

BUDGET!

Budgeting helps you set and achieve your goals and track where you spend your money.  By following a budget, you will better understand your spending habits to make sure you are spending your money carefully. 

PRIORITIZE!

Your retirement vs. your children’s education?  Your retirement vs. your parent’s retirement?

You may be tempted to cut back on your retirement savings to save for your children’s college education.  However it may be wise to explore other available options first.  Financial aid and scholarships may be available for college, but not for retirement.

If your parents do need assistance, you may want to have a frank discussion with them about their finances.  Discuss all available sources of income and expenses, as well as assets and liabilities.  Once you have an idea of their cash flow, budget and net-worth, you can then help them with their options.  Many state and local governments have programs available to help seniors., so be sure to check your state’s Department of Social Services website for more information.

DETERMINE FINANCIAL OBLIGATIONS!

As, a family, discuss how much each member can expect to receive from you and budget accordingly.  Children need to to know up-front how much help they may recieve.  The same holds true for aging parents.  Use the list below to help you get started:

 Your Needs:

• Household expenses
• Paying down debt
• Retirement
• Health and insurance expenses 

Your Children’s Needs:

• College
• Wedding
• Student loans
• First home
• Car
• Other

Your Parent’s Needs:

• Retirement income
• Life and long-term care insurance
• Health care concerns and expenses
• Living arrangements

The main thing I hope you take from this: it is easier to plan now for your ”dependents” future needs rather than later.

Any Advice for First Time Investors?

“I’m a University business student looking to invest in stock markets and I’m not entirely sure where I should start, what I should be reading.

Does anyone have any advice on where I can learn more about investing?

I want to get rid of this student debt as soon as I can and I love money so I want to learn more about this, maybe even pursue a career in it. I love the competitiveness in it.”

-Randal

The question above comes from a university student concerned with his student debt and what he can do to pay off his debt as soon as possible. I believe “Randal” is not alone in respect to both paying off debt and where to begin…here is my response.

Investment management is a disciplined skill that can be improved with education and experience-but don’t leave out the realism of everyday common sense. The basic realities of risk and return, of cost vs. value, and the importance of integrity and self-knowledge do not change because the topic is money management.

I would agree with the previous advice given per healthy investment behavior – advocating a disciplined unemotional approach to investing. Decisions based on emotions can be very costly, as they all too often lead investors to buy high and to sell low. A primary lesson I have learned these past few years [along with many others], is the severity of leverage and to be in a comfortable position to buy when markets go down.

I also agree there is no miraculous strategy that will allow you to get rich quick or erase your student debt within a matter of months. The secret to wealth creation is a disciplined approach to saving and to have a plan.

Another publication you may want to take a look at is The Economist.

Good luck!

Regards,

Jason

Short and Sweet

One thing that is quickly becoming a reality is that the next generation will inherit a stagnant economy and diminished economy and the need for smaller government.

Indeed, for all the efforts of the governments and central banks, many of our economy’s long-term problems have yet to be solved. The banks are weak, housing has not recovered, and global imbalances have not gone away.

The need for the extraordinary measures of the continuation of fiscal stimulus, monetary policy, and further quantitative easing is an indication of how weak the economy continues to be.

More government involvement does not work as:

• Governments are run by politicians not businessmen.
• Politicians need headlines.
• Governments use other peaople’s money.
• Governments do not tolerate competition