Every day I use tools that save me time, keystrokes and secure my data. In this article, I will share some of my favorite cool tools. You will find them easy to use and big efficiency boosters. The best part is most of them are free or cost very little and are free of spyware.
To continue reading, please click on the following link to the full article on NAIFA’s Advisor Today web site: http://bit.ly/JGBTs
I recently wrote about avoiding investment fraud (How to Avoid Being Madoff’ed) but the subject keeps coming up. In the most recent news from Wall Street, securities fraud has affected individual investors, pensions and charitable organizations. At the risk of being a bit repetitive, here are five key safety tips that may help you prevent this from happening to you:
1. Know your advisor.
Most advisors (like me) are registered with government organizations. You can research registrations and review any past complaints with the Securities and Exchange Commission (www.sec.gov), or with the respective state regulatory agency. If a firm is a Broker-Dealer, you can research it with the Financial Industry Regulatory Authority (www.finra.org). You should also be aware of what you have authorized your advisor to do. For example, if you have granted your advisor discretion over your investments, then you have given her permission to buy and sell investments to meet your stated objectives without your approval for each individual trade. The authority you have granted your advisor should be stated in your client services agreement (you do have one, right?)
2. Know your investments.
Consider stocks, bonds, exchange traded funds (ETFs), and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute by minute, when the exchange is open. You can check their reported returns against your own portfolio. If you can’t look up the prices and performance of what you own in the newspaper or on the Internet-that’s a red flag, so ask more questions. If you choose to invest in complex securities like private placements, then you have much more additional homework to do.
3. Use an independent custodian.
By utilizing an independent custodian, there is objective, unbiased pricing of underlying securities. Investment performance can look better if the prices reported to clients are manipulated, showing winning performance year after year despite the ups and downs of the market. For example, our custodian, TD Ameritrade, receives security prices through well-known third-party pricing vendors or directly from issuers. In many cases, prices are provided on a real-time basis for most securities. We have no input on asset pricing or valuation. Clients get statements directly from TD Ameritrade. In addition, your advisor’s independent custodian should have a business continuity plan and a privacy policy to provide access to your investments in the event of a disaster and to protect your personal information.
4. Check on protection.
Your advisor’s custodian MUST be a member of the Securities Investor Protection Corporation (SIPC); if not, find one that is. If it is, the securities in your account are protected up to $500,000, of which $100,000 may be applied to cash. For additional information, please visit www.sipc.org and see the Account Protection Sheet. Our custodian, TD Ameritrade, also provides additional coverage through London insurers of up to $149.5 million per customer of which $900,000 may be applied to cash (and an aggregate of $250 million for all customers). Please see the Evidence of Excess SIPC Coverage for additional details. SIPC protection and Excess SIPC insurance protect against losses from brokerage failure, not from market value decline.
For additional information, please see TD Ameritrade’s FAQ for Investors on Protection against Market Fraud.
5. If it Sounds Too Good…
One final thought: If it sounds too good to be true, it probably is. Beware of consistent annual returns that are out of line with established benchmarks. Remember, there is no return without risk, so never believe anyone who says that they can get you a high return with little or no risk. There’s always a “gotcha” hiding somewhere (e.g., excessive fees, commissions, early termination penalties) when they tell you this, so you should be very suspicious.
If you or someone you know has been affected by investment fraud, or if you have any questions, please comment below.
The biggest benefit from the $787.2 billion federal stimulus package will hopefully be a noticeable improvement in the nation’s economy. But on an individual level, it’s wise to check if you might be eligible for benefits in health care, education, various tax credits, and housing.
A visit with a tax expert or a financial adviser such as a Certified Financial PlannerTM professional can help you determine the best ways to use the following provisions that may affect you. It’s also a good idea to get a financial checkup in an uncertain economy such as we are experiencing for the following reasons:
Here’s a quick summary of the stimulus plan provisions that may affect your finances:
Educational provisions:
College student aid: The package awards $15.6 billion to increase maximum individual student Pell grants by $500.
American Opportunity Tax Credit: This credit temporarily provides taxpayers with a new tax credit of up to $2,500 of the cost of tuition and related expenses, though it phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the available credit is refundable, which means that you could receive a refund even if you have no tax liability.
529 Plans: The scope of allowable education expenses expands to now include computers and computer technology.
Tax credit provisions:
One more cap for the Alternative Minimum Tax (AMT): Lawmakers put one more patch on the AMT to protect a wider number of people from getting hit. This latest break for potential AMT targets increases the exemption amounts to $46,700 ($70,950 for married couples). The bill would also exclude interest on all private activity bonds issued in 2009 and 2010 from the AMT. Normally, interest on private activity bonds is added back as an AMT “preference item,” thereby increasing the AMT .
“Making Work Pay” Tax Credits: This is the refundable tax credit of up to $400 for individuals and $800 for families for 2009 and 2010 that phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples). This isn’t a lump sum payment, but instead is reflected in reduced payroll taxes starting in April or May of this year.
Car Buyers Tax Credit: This allows a deduction for state and local sales and excise taxes paid on the purchase of a new vehicle through 2009. This deduction is phased out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return).
Expanded Child Credit: This increases the eligibility for the refundable child tax credit in 2009 and 2010 by reducing the minimum income for eligibility to $3,000.
Earned Income Tax Credit: This provision will create a temporary tax credit increase for working families with three or more children.
Housing provisions:
Refundable First-Time Home Buyer Credit: First-time home buyers (generally, someone who hasn’t owned a home in the last three years) can claim a credit worth $8,000 – or 10 percent of the home’s value, whichever is less – on their 2008 or 2009 taxes. The added bonus is that the credit is refundable, which means that filers will see a refund of the full $8,000 even if their total tax bill is less than that amount. Note that the term “first-time home buyer” has several conditions, so you may be qualified even if you have actually owned a home in the past.
If you’ve already filed your 2008 income tax return, and you’ve completed a qualified purchase in 2009, then you can amend your 2008 return or claim the credit on your 2009 return. Alternatively, if you are contemplating a home purchase by October 15, then you may want to request an automatic extension by filing form 4868 with the IRS by April 15.
Married couples do not qualify for the first-time home buyer credit if either spouse has owned a home in the last three years.
Unemployment and Healthcare-Related Benefits:
Extension of Unemployment Benefits: The package provides 33 weeks of extended benefits through Dec. 31, 2009.
Unemployment Compensation: The first $2,400 a person receives in unemployment compensation benefits in 2009 won’t be taxed.
Short-Term COBRA Subsidy for Involuntarily Terminated Workers: This provides a 65 percent subsidy for COBRA premiums for up to 9 months, which will put a dent in the considerable cost of COBRA health benefits for the unemployed. The subsidy phases out for high income individuals.
Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc.,a registered investment advisory firm. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice.
This column is based on content provided by the Financial Planning Association, the membership organization for the financial planning community, and is provided by YDream Financial Services, Inc., a local member of FPA.
The markets that we’ve seen during the past several months are unlike any others I’ve seen in my lifetime. In fact, they’re probably unlike the markets most of us have ever seen. This market upheaval has caused me to re-examine everything that I thought was “sacred” about investing and the markets. This in turn has led me to begin questioning many basic premises about how financial planners think about investing, proper diversification, and trading. Specifically in this article, I’m looking at the future of saving and investing in mutual funds.
I’m by no means an expert in this area. But I have taken to reading and researching as much as I can about what works and what doesn’t work while saving and investing for the long and short term. Between listening to tons of podcasts, attending numerous webinars and conferences, reading books, newsletters, magazines and newspapers, I’ve become intimately familiar with the arguments advanced by “buy and hold” crowd and their counterparts, the “market timers.” I’ve learned that both approaches have their merits, and each has its time and place in the right types of markets. This article is not about those merits or which method is superior.
While re-examining and researching mutual funds in client and prospect portfolios, and seeing how much some of them suffered in this awful bear market, I keep asking myself if there is a better way to invest their money. Even though most mutual funds were down 35-50% over the past twelve months, I shook my head in disbelief that many of the same funds, even as late as January 2009, were still ranked as four and five star funds by the investment rating firm Morningstar. Really? Four and five stars were given to funds ranked in the bottom 35% of their category? Funds that had double-digit negative annualized returns for 1, 3, and 5 years still earned three or four stars?
Just to be clear, as an advisor, I don’t rely on Morningstar “Star” rankings to rate and choose funds for my clients and prospects. I dig much deeper into the details and third party information for comparison, research and evaluation purposes. But I know that many consumers do rely on star rankings. And I have to wonder how much of a favor Morningstar is doing for consumers when managers who are paid handsomely to manage mutual funds missed the whole financial crisis and didn’t steer their funds away from the financial or the big oil stocks in the second half of 2008.
In a secular bear market like the one we’ve been in, buying and holding mutual funds (or any investment for that matter) can be a money losing proposition. But mutual funds have a few characteristics that make them even riskier, if not downright inappropriate for certain market conditions.
One characteristic that makes mutual funds riskier is the once-a-day, end-of-day pricing; you can’t get intra-day pricing on a mutual fund like you can on a stock. If the market is trending down, there’s no way to cut your losses when the writing’s on the wall and the market’s headed for a big daily loss. Wouldn’t it have been nice, on an 8% down day, to cut your losses in half? Well, sorry, you can’t; you have to ride it all the way down. Of course, on an up day, you may benefit from the extra upside. Exchange traded funds (ETFs), which trade just like stocks, don’t suffer from this disadvantage and can be bought and sold at intra-day prices.
Another risky characteristic of mutual funds in bear markets, closely related to the above characteristic, is the inability to put a stop-loss order on a mutual fund. If the market is crashing, and you’re unable to monitor your investments every minute that the markets are open, you could lose big or give up a good chunk of your gains. Stocks and ETFs don’t have this disadvantage; you can have a standing stop-loss order on them with your broker for up to 6 months. As soon as the stock or ETF drops to the sell-stop price, a sell is triggered and voila, you’re in cash, protected from further downside. This gives you time to assess market conditions and decide on your next investment.
The inability of most mutual funds to deviate from their stated investment objectives prevented many mutual funds from cashing out on money losing stocks (almost all of them in 2008) and being able to sit on the sidelines with significant amounts of cash. Funds with more flexibility in their cash positions, and those with the ability to take inverse (e.g., short) positions fared better than most in this bear market. To be fair, many ETFs are index-based and have the same problem.
Mutual funds also suffer from a lack of timely disclosure of their investment holdings. While they all publish their stock and bond holdings, most holding lists are usually at least three months old. Mutual fund managers don’t like to publish their holdings more frequently so they don’t have to tip their hand to the competition. It’s important to know what investments your funds are holding so you don’t duplicate or overlap your holdings with funds carrying the same stocks or bonds. And if your fund was still holding, say Washington Mutual when it was sold for pennies on the dollar to JP Morgan Chase, maybe you would have known better to avoid the fund. ETFs are much more transparent and publish their holdings on a daily basis.
Many will argue that ETFs have commissions that must be paid to buy and sell them, thereby making them a more costly option than mutual funds. To that I say three things: 1) commissions at most big brokers are about $19.95 or less; 2) the potential higher-gain or lower-loss on an ETF may pay for the commission in multiples; and 3) many desirable mutual funds have transaction fees much higher than ETF commissions at many brokers.
So will the mutual fund industry eventually die? I don’t think so. Mutual funds are so ingrained in institutional settings and retirement plans that they likely have a long future ahead of them. But I have a feeling that the mutual fund industry is already trying to reinvent itself. Many of the big mutual fund companies have gotten into the ETF business because of the net (negative) out-flows from mutual funds and the net (positive) in-flows to ETFs. Perhaps mutual funds will get some of the nice advantages that ETFs have like intra-day pricing, sell-stops and timelier holdings disclosures.
What I also hope for is that more 401(k) and self-directed retirement plans embrace ETFs and give employees the option to invest in them. That way, they’re not sitting ducks when the markets come crashing down.
Do you think that mutual funds are headed for extinction? Do you think that employees should have more choices (e.g., ETFs) when it comes to their 401(k) investment choices? Please let me know what you think.
We had a pretty good streak going in the markets this week until Friday’s profit taking spoiler. The technology laden NASDAQ index was even in the black year-to-date, if only for one day. Despite the 20% plus gains over the last few weeks, all indexes remain in negative territory year-to-date and we remain in a treacherous bear market despite this rally. Continued caution remains the advice on investing.
Are we at a bottom yet? Read on for one theory.
The severity of this bear market is a crisis in confidence more than anything else. What started out as a crisis in subprime mortgage loans quickly spread to leveraged instruments including credit default swaps and subsequently evolved into a more generalized crisis in confidence.
Over the past few months, recession pressures and a gloomy consumer mood have propelled financial markets lower. That’s why consumer expectations, usually considered an indicator of future spending, is an important gauge to watch. The consumer outlook for the future, as measured by the University of Michigan/Reuters sentiment survey, fell in February before improving in early March. The Conference Board also releases a monthly consumer survey; in February, expectations fell to a 40-year low.
With massive government stimulus now in place, the consumer mood could brighten in the months ahead. New data for the University of Michigan/Reuters survey of consumer sentiment released Friday came in at 57.3 for March; that’s up slightly from February’s 56.3. It was also slightly better than expected, but still near the worst reading in 30 years.
The Conference Board results will follow next Tuesday. If a market bottom is truly in place, we may see an upturn in this measure as well, according to analysts.
I remain skeptical of government estimates of personal spending and income, home sales increases, and unemployment. First, they are estimates that ultimately get revised unfavorably when the real data becomes available. Second, the pundits as well as the administration are content to “spin” any good news to suit their current agenda and to take credit for any positive news. Finally, contrary to CNBC “entertainer” Jim Cramer’s assertions, the fundamentals of the economy still don’t support a solid upturn yet. First and second quarter 2009 earnings reports will likely bear this out, so I’m pretty sure that we’re not out of the woods just yet; and not for awhile anyway. Hopefully I’m wrong and this bull market will continue, but I continue to urge caution when investing.
Do you agree or disagree? I’d love to hear what you think.
Market Update For Week Ending 3/27/2009
| Index |
Close |
Net Change |
% Change |
YTD |
YTD % |
| DJIA |
7,776.18 |
+497.80 |
6.84 |
-1,000.21 |
-11.40 |
| NASDAQ |
1,545.20 |
+87.93 |
6.03 |
-31.83 |
-2.02 |
| S&P500 |
815.94 |
+47.40 |
6.17 |
-87.31 |
-9.67 |
| Russell 2000 |
429.00 |
+28.89 |
7.22 |
-70.45 |
-14.11 |
| International |
1,083.64 |
+29.04 |
2.75 |
-153.78 |
-12.43 |
| 10-year bond |
2.76% |
+0.14% |
+0.52% |
||
| 30-year T-bond |
3.62% |
-0.04% |
+0.93% |
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
Sam H. Fawaz CFP®, CPA is president of Y.D. Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions. No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions.As you are probably aware, Bernard Madoff, former NASDAQ Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, has recently pled guilty to all charges against him and will be in jail for a very long time. Incredibly, I’ve recently spoken with several individuals and they seemed to not be aware of Madoff’s most egregious offenses.
What did he do? Madoff collected money to invest from clients, made up false statements to show that they were doing well, and used new clients’ money to pay interest and withdrawals to existing clients. This is known as a Ponzi scheme and is estimated to involve more than a $50 billion loss for his investors.
Bernard Madoff’s Ponzi Scheme stands as an example of how the financial services industry has failed to protect the best interests of consumers. It highlights the increased need for consumers to proceed cautiously when working with an advisor and the importance of asking pointed questions before hiring a professional.
His clients didn’t see this coming. Could they have? Let’s look at three key safety tips that would have prevented this from happening:
Know what you own. Stay with traditional investment vehicles such as stocks, bonds, Exchange Traded Funds (ETFs) and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute-by-minute, while the exchange is open. With the exception of common trust funds, you should be able to access pricing and performance of your individual investments in the newspaper or the Internet.
Use an independent custodian. Madoff held his clients’ assets, managed them, and priced them via internally generated investment statements. Naturally the investment performance will look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil.
For example, as a registered investment advisor, we have selected TD Ameritrade Institutional as the custodian for our client accounts. TD Ameritrade Institutional, as an independent third party, prices the investments owned and provides monthly statements to clients. We have no control or input on investment pricing.
Each money management client of ours signs a Limited Power of Attorney on their TD Ameritrade accounts. This limited power of attorney only allows us to:
While we can request a distribution on a client’s behalf (which must be mailed to their home address or transferred to another account in their name), our ability to withdraw funds from client accounts is limited to the payment of our financial planning and investment management fees. Clients are always free to pay their fees by check and are never obligated to use direct deduction from their accounts.
Inquire about insurance. Our clients benefit from fraud insurance. Each client is insured with the Securities Investor Protection Corporation (SIPC) with coverage of $500,000 per account. Keep in mind that fraud insurance does not protect against market declines; but it does protect against theft of securities or related fraudulent transactions.
Now as the post-Madoff era begins and the federal government and industry regulators decide the best course of action to protect consumers, people need to ask the right questions of an existing or potential advisor.
As a member of the National Association of Personal Financial Advisors (NAPFA), the country’s leading association of Fee-Only financial advisors, I encourage consumers to take the time to get to know an advisor and gauge his or her commitment to placing clients’ interests first.
Find out how the advisor and his or her firm are compensated. Fee-Only compensation has the fewest conflicts of interest, but there are other acceptable methods as long as full disclosure takes place up front. It’s important to know if an advisor will make additional money if you follow certain recommendations.
You should always know where your money and securities are actually held. As discussed above, most reputable advisors will use an unaffiliated custodian for the safe keeping of your assets. This simple check and balance could have saved the Madoff investors millions by bringing the problem to the forefront earlier.
Legally, all clients are entitled to a copy of the firm’s Form ADV Part II or brochure. It’s a compliance document that can be pretty dry reading, but it contains a lot of important information and ultimately shows that the firm is registered with the SEC or the state(s). For an example, see our Form ADV Part II.
NAPFA and the Fee-Only advisor community are hopeful that the new administration, the SEC and other regulatory bodies will enact thoughtful regulations to protect consumers.
Consumers can access a Financial Advisor Checklist and Financial Advisor Diagnostic on the NAPFA website by visiting www.NAPFA.org and clicking on the Tips and Tools button in the Consumer Information section. The Diagnostic tool includes an answer key to help consumers understand NAPFA’s recommendations for the most appropriate answers to the questions.
One final thought. One of the statements most widely used in basic investment course work is “if an investment sounds too good to be true, it probably is.” Reportedly, Madoff claimed consistent annual returns of 10-12% with little volatility and no quarterly or annual losses. I am not aware of any legitimate and reputable portfolio manager that can make that claim. There simply is no investment available that doesn’t carry risk; certainly, any investment that pays those levels of return have inherently high risk.
Have you or anyone you know been a victim of Madoff? Please share your story and comments below.
It was a roller-coaster ride on the markets this week. First we were down, then we were up, then we were down again. As I wrote earlier this week, volatility is here for a while in the markets and, although we were up overall for the week, the fundamentals just aren’t there to push things in a consistent upward direction.
Congress’ distraction with the AIG bonus debacle meant that they were focusing on that instead of moving along the plan for dealing with the financial crisis. As a result, companies are equally distracted by concerns of whether accepting further government help means more meddling in their business affairs. So instead of lending money, for example, financial institutions become more concerned about paying back the government and operating independently, thereby negating the whole benefit of the bailout. In addition, much needed talented employees may consider joining firms with no government restrictions on compensation or potential exorbitant taxes on their bonuses. I’d be interested in your opinion here-please feel free to leave comments below.
I predict that we will continue to see some up days, some down days and generally sideways movement in the markets for some time. In the short-term, although we may see some net positive gains, there seems to be more risk than reward out there. Caution is still the approach we encourage.
My advice remains the same: consistent saving is your best defense against volatile markets. Keep contributing to that 401(k), IRA and your “dream” accounts. Pay down your debt as much as possible and make sure that you have a liquid emergency fund of at least 3-9 months of salary. And, as financial guru Dave Ramsey says, “refuse to participate in this recession” by enjoying every day, taking those vacations, and keeping in touch and sharing time with your loved ones.
Enjoy this first weekend of spring 2009. And remember, if the first robin of spring sees its shadow, you can expect at least twelve more weeks of crabgrass (at least according to “Magic” Matt Alan of Sirius-XM 70’s on 7.)
I’ve provided a weekly summary of the markets below:
Market Update For Week Ending 3/20/2009
|
Index |
Close |
Net Change |
% Change |
YTD |
YTD % |
|
DJIA |
7,278.38 |
+54.40 |
0.75 |
-1,498.01 |
-17.07 |
|
NASDAQ |
1,457.27 |
+25.77 |
1.80 |
-119.76 |
-7.59 |
|
S&P500 |
768.54 |
+11.99 |
1.58 |
-134.71 |
-14.91 |
|
Russell 2000 |
400.11 |
+7.02 |
1.79 |
-99.34 |
-19.89 |
|
International |
1,054.60 |
+74.07 |
7.55 |
-182.82 |
-14.77 |
|
10-year bond |
2.63% |
-0.26% |
|
+0.38% |
|
|
30-year T-bond |
3.65% |
-0.02% |
|
+0.96% |
|
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice.Last week’s continued rally on Wall Street was welcome news for weary investors. The 10%+ rise in the stock market was not sufficient to erase year-to-date losses, but any upside is welcome. The catalysts for the rally included positive reports from the financial institutions taking government help, talk about changing trading rules for short sellers, and the possibility of an accounting change in how assets are valued on company balance sheets. Also, the markets were heavily compressed on the downside, so just like a spring, they had to give a little to the upside.
Unfortunately, the fundamentals of the economy still do not support a long term rally, so this secular bear market is not over. What we’ve seen this past week is likely not the bottom and we are therefore approaching the markets very carefully. There is more bad news to come from 1st and 2nd quarter poor earnings reports as the weak economy hits more and more companies. From exporting companies to the big international firms, the global slowdown is hitting almost everyone. Even hospitals are being challenged, and unemployment is sure to rise. We’ve seen the effects of the sub-prime mortgage mess, and I don’t think we’re nearly done as more of the next tier of (higher quality) adjustable rate mortgages adjust upward. Add to that the lagging commercial real estate markets which are no doubt feeling the effects of lower property prices and lower occupancy.
A lot of you have stayed in the market the whole time it has been falling and are wondering what to do. If you have a ten-year time horizon, you can probably buy now and not worry. But I wouldn’t make any big moves right now based on this short-term upturn. If you are making regular contributions to your IRA or 401(k), you should continue to do so to help offset some of the past losses and buy companies at ½ off (or 2 for 1 depending on your favorite shopping term). As I’ve said before, there is just no substitute for regular and big savings. We could see this real bear market rally lure investors back in, just to crush their hopes soon thereafter. As always, each person’s individual situation and goals are different, so you should talk with your own financial planner about what makes the most sense for you.
I believe that we have awhile to go in the current secular bear cycle. While we will see a “bottom” in stock prices at some point, maybe even this year, many believe that stocks are still overpriced relative to their future earnings potential. No doubt, there is another bull market in our future But I would rather be patient and rely on a cautious style of investing for now. If I see opportunities to make short-term profits with some tactical moves for my clients, I will make them while limiting our downside risk. But if I miss the first part of this run-up, so be it. I see more risk than reward in this latest run-up.
And if you thought this posting was all bad news, then I’ll remind you that (my favorite season) spring officially arrives this Friday at 7:44 AM Eastern Time. I know that most of you have had enough of the snow and cold and welcome the anticipated change in weather. Me too.
Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. All material represents the opinions of Sam H. Fawaz. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice. You can find out more information about YDream Financial Services at http://ydfs.com.
Some comments in this article were based on author John Mauldin’s recent and fine “Thoughts from the Frontline” newsletter. You can subcribe to it by clicking on the above link.
The following are highlights of the tax provisions included in the House and Senate conference agreement on H.R. 1, the American Recovery and Reinvestment Act of 2009. Among numerous provisions, the agreement includes a one-year Alternative Minimum Tax (AMT) patch for 2009. This will once again help middle-income households avoid the impact of the AMT in 2009 without having to wait for a last minute law change at year end. The House will vote on the final agreement today and the Senate vote will follow this weekend. If the legislation passes both bodies as expected, the President intends to sign the legislation on Presidents Day, next Monday February 16. The below summary was compiled and provided by the Financial Planning Association.
AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009
PARTIAL SUMMARY OF TAX PROVISIONS FROM CONFERENCE AGREEMENT
Full 19 page summary available at: http://finance.senate.gov/press/Bpress/2009press/prb021209.pdf
TAX RELIEF FOR INDIVIDUALS AND FAMILIES
Extension of AMT relief for 2009. The bill would provide more than 26 million families with tax relief in 2009 by extending AMT relief for nonrefundable personal credits and increasing the AMT exemption amount by $70,950 for joint filers and $46,700 for individuals. This proposal is estimated to cost $69.759 billion over 10 years.
Exclude Private Activity Bonds from the Alternative Minimum Tax. The alternative minimum tax (AMT) can increase the costs of issuing tax-exempt private activity bonds imposed on State and local governments. Under current law, interest on tax-exempt private activity bonds is generally subject to the AMT. This limits the marketability of these bonds and, therefore, forces State and local governments to issue these bonds at higher interest rates. Last year, Congress excluded one category of private activity bonds (i.e., tax-exempt housing bonds) from the AMT. The bill would exclude the remaining categories of private activity bonds from the AMT if the bond is issued in 2009 or 2010. The bill also allows AMT relief for current refunding of private activity bonds issued after 2003 and refunded during 2009 and 2010. This proposal is estimated to cost $555 million over 10 years.
Sales Tax Deduction for New Vehicle Purchases. The bill provides all taxpayers with a deduction for State and local sales and excise taxes paid on the purchase of new cars, light truck, recreational vehicles, and motorcycles through 2009. This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return). This proposal is estimated to cost $1.684 billion over 10 years.
Plug-in Electric Drive Vehicle Credit. The bill modifies and increases a tax credit passed into law at the end of last Congress for each qualified plug-in electric drive vehicle placed in service during the taxable year. The base amount of the credit is $2,500. If the qualified vehicle draws propulsion from a battery with at least 5 kilowatt hours of capacity, the credit is increased by $417, plus another $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours up to 16 kilowatt hours. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter in which the manufacturer records its 200,000th sale of a plug-in electric drive vehicle. The credit is reduced in following calendar quarters. The credit is allowed against the alternative minimum tax (AMT). The bill also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits. This proposal is estimated to cost $2.002 billion over 10 years.
Parity for Transit Benefits. Current law provides a tax-free fringe benefit employers can provide to employees for transit and parking. Those benefits are set at different dollar amounts. This provision would equalize the tax-free benefit employers can provide for transit and parking. The proposal sets both the parking and transit benefits at $230 a month for 2009,
indexes them equally for 2010, and clarifies that certain transit benefits apply to federal employees. This provision is estimated to cost $192 million over ten years.
Computers as Qualified Education Expenses in 529 Education Plans. Section 529 Education Plans are tax-advantaged savings plans that cover all qualified education expenses, including: tuition, room & board, mandatory fees and books. The bill provides that computers and computer technology qualify as qualified education expenses. This proposal is estimated to cost $6 million over 10 years.
“American Opportunity” Education Tax Credit. The bill would provide financial assistance for individuals seeking a college education. For 2009 and 2010, the bill would provide taxpayers with a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this new tax credit, taxpayers will receive a tax credit based on one hundred percent (100%) of the first $2,000 of tuition and related expenses (including books) paid during the taxable year and twenty-five percent (25%) of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent (40%) of the credit would be refundable. This tax credit will be subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). This proposal is estimated to cost $13.907 billion over 10 years.
Refundable First-time Home Buyer Credit. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The bill eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to $8,000, and removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit for homes purchased before December 1, 2009. The provision would retain the credit recapture if the house is sold within three years of purchase. This proposal is estimated to cost $6.638 billion over 10 years.
TAX INCENTIVES FOR BUSINESSES
Small Business Capital Gains. Under current law, Section 1202 provides a fifty percent (50%) exclusion for the gain from the sale of certain small business stock held for more than five years. The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or $10 million gain from stock in that small business corporation. This provision is limited to individual investments and not the investments of a corporation. The non-excluded portion of section 1202 gain is taxed at the lesser of ordinary income rates or 28 percent, instead of the lower capital gains rates for individuals. The provision allows a seventy-five percent (75%) exclusion for individuals on the gain from the sale of certain small business stock held for more than five years. This change is for stock
issued after the date of enactment and before January 1, 2011. This provision is estimated to cost $829 million over 10 years.
Temporary Reduction of S Corporation Built-In Gains Holding Period from 10 Years to 7 Years. Under current law, if a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for ten years in order to avoid a tax on any built-in gains that existed at the time of the conversion. The bill would temporarily reduce this holding period from ten years to seven years for sales occurring in 2009 and 2010. This proposal is estimated to cost $415 million over 10 years.
Extension of Enhanced Small Business Expensing. In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Until the end of 2010, small business taxpayers are allowed to write-off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation). Last year, Congress temporarily increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The bill would extend these temporary increases for capital expenditures incurred in 2009. This proposal is estimated to cost $41 million over 10 years.
5-Year Carryback of Net Operating Losses for Small Businesses. Under current law, net operating losses (“NOLs”) may be carried back to the two taxable years before the year that the loss arises (the “NOL carryback period”) and carried forward to each of the succeeding twenty taxable years after the year that the loss arises. For 2008, the bill would extend the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less. This proposal is estimated to cost $947 million over 10 years.
Extension of Bonus Depreciation. Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off fifty percent of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 for use in the United States. The bill would extend this temporary benefit for capital expenditures incurred in 2009. This proposal is estimated to cost $5.074 billion over 10 years.
Delayed Recognition of Certain Cancellation of Debt Income. Under current law, a taxpayer generally has income where the taxpayer cancels or repurchases its debt for an amount less than its adjusted issue price. The amount of cancellation of debt income (“CODI”) is the excess of the old debt’s adjusted issue price over the repurchase price. Certain businesses will be allowed to recognize CODI over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011. This proposal is estimated to cost $1.622 billion over 10 years.
Incentives to Hire Unemployed Veterans and Disconnected Youth. Under current law, businesses are allowed to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups. The bill would create two new targeted groups of prospective employees: (1) unemployed veterans; and (2) disconnected youth. An individual would qualify as an unemployed veteran if they were discharged or released from active duty from the Armed Forces during the five-year period prior to hiring and received unemployment compensation for more than four weeks during the year before being hired. An individual qualifies as a disconnected youth if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months. This proposal is estimated to cost $231 million over 10 years.
ASSISTANCE FOR FAMILIES & UNEMPLOYED WORKERS
“Making Work Pay” Tax Credit. The bill would cut taxes for more than 95% of working families in the United States. For 2009 and 2010, the bill would provide a refundable tax credit of up to $400 for working individuals and $800 for working families. This tax credit would be calculated at a rate of 6.2% of earned income, and would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly). Taxpayers can receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns. This proposal is estimated to cost $116.199 billion over 10 years.
Economic Recovery Payment to Recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Compensation Benefits. The bill would provide a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit. This proposal is estimated to cost $14.225 billion over 10 years.
Refundable Credit for Certain Federal and State Pensioners. The bill would provide a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit. This proposal is estimated to cost $218 million over 10 years.
Increase in Earned Income Tax Credit. The bill would temporarily increase the earned income tax credit for working families with three or more children. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to forty percent (40%) of the family’s first $12,570 of earned income. This credit is subject to a phase-out for working families with adjusted gross income in excess of $16,420 ($19,540 for married couples filing jointly). The bill would increase the earned income tax credit to forty-five percent (45%) of the family’s first $12,570 of earned income for families with three or more children and would increase the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) by $1,880. This proposal is estimated to cost $4.663 billion over 10 years.
Increase Eligibility for the Refundable Portion of Child Credit. The bill would increase the eligibility for the refundable child tax credit in 2009 and 2010. For 2008, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $8,500. The bill would reduce this floor for 2009 and 2010 to $3,000. This proposal is estimated to cost $14.830 billion over 10 years.
Tax Credits for Energy-Efficient Improvements to Existing Homes. The bill would extend the tax credits for improvements to energy-efficient existing homes through 2010. Under current law, individuals are allowed a tax credit equal to ten percent (10%) of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the taxable year. This tax credit is capped at $50 for any advanced main air circulating fan, $150 for any qualified natural gas, propane, oil furnace or hot water boiler, and $300 for any item of energy-efficient building property. For 2009 and 2010, the bill would increase the amount of the tax credit to thirty percent (30%) of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the taxable year. The bill would also eliminate the property-by-property dollar caps on this tax credit and provide an aggregate $1,500 cap on all property qualifying for the credit. The bill would update the energy-efficiency standards of the property qualifying for the credit. This proposal is estimated to cost $2.034 billion over 10 years.
Temporary suspension of taxation of unemployment benefits. Under current law, all federal unemployment benefits are subject to taxation. The average unemployment benefit is approximately $300 per month. The proposal temporarily suspends federal income tax on the first $2,400 of unemployment benefits per recipient. Any unemployment benefits over $2,400 will be subject to federal income tax. This proposal is in effect for taxable year 2009. This proposal is estimated to cost $4.740 billion over 10 years.
Increase in Unemployment Compensation Benefits. The bill increases unemployment weekly benefits by an additional $25 through 2009. This provision is estimated to cost $8.8 billion.
Extension of Emergency Unemployment Compensation. Through December 31, 2009, the bill continues the Emergency Unemployment Compensation program, which provides up to 33 weeks of extended unemployment benefits to workers exhausting their regular benefits. This provision is estimated to cost $26.96 billion.
Premium Subsidies for COBRA Continuation Coverage for Unemployed Workers. Recession-related job loss threatens health coverage for many families. To help people maintain coverage, the bill provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. With COBRA premiums averaging more than $1000 a month, this assistance is vitally important. To qualify for premium assistance, a worker must be involuntarily terminated between September 1, 2008 and December 31, 2009. The subsidy would terminate upon offer of any new employer-sponsored health care coverage or Medicare eligibility. Workers who were involuntarily terminated between September 1, 2008 and enactment, but failed to initially elect COBRA because it was unaffordable, would be given an additional 60 days to elect COBRA and receive the subsidy. To ensure that this assistance is targeted at workers who are most in need, participants must attest that their same year income will not exceed $125,000 for individuals and $250,000 for families. The Joint Committee on Taxation estimates that this provision would help 7 million people maintain their health insurance by providing a vital bridge for workers who have been forced out of their jobs in this recession. This provision is estimated to cost $24.7 billion.
Two of the most hated words in the English dictionary are “diet” and “budget”. Whether you call it a diet, counting calories or eating smart, you know deep down what that means. When you think about it, the first three letters of diet spell “die”, so how could it be a good thing?
Similarly, whether you call it a budget, fiscal responsibility or a spending plan, deep down you know it means that you have to cut back on spending. Fortunately, you don’t have to go hungry just because you are on a spending plan. And just like weight loss, developing a spending plan can yield significant financial and non-financial benefits:
Here are some ideas you may want to incorporate into that process:
Don’t be afraid to ask for help: Do you know where you need to be? A financial planner can ask the right questions and develop a customized plan to help you figure out your starting point and where you’ll finish based on your age, earnings potential and the new habits you’ll develop.
Start tracking every dollar you spend: Whether you do it with a pen and a notebook or a computer program (like Quicken or Microsoft Excel), make a concerted effort to track your everyday spending. Physicians say that overweight people should track every morsel of food they eat; with money, it’s a similar thing. Knowing where every dollar goes gives a quick picture where certain dollars can be saved or invested. Some say that you should track each and every penny, but that’s not always necessary unless you want to. What is mandatory is that you write it all down somewhere. Doing it in your head doesn’t work.
Prioritize… When it comes to spending, there are needs and wants. Try this exercise: You can do this on a big 2009 desk calendar (or an electronic calendar that allows space for lots of notes to yourself). Mark down at the appropriate dates and times of the year items for which you need to spend and those for which you want to spend.
What are needs? In part, food (not carryout or restaurant meals), the monthly mortgage, tuition, auto or rent payments; monthly utilities; home, auto, life or disability insurance; retirement savings; property taxes and credit card payments (for past purchases).
What are wants? Wants are non-essential items like vacations, non-essential home improvement projects, restaurant meals (you can cook at home, cant you?) or treats like clothing splurges, jewelry or electronics. Compare these total expenditures to your total income. What will this crowded calendar tell you? That by attacking debt, making certain sacrifices and spending and saving smarter, you can eventually “un-crowd” that calendar and take control of your financial life.
…then zero in each month: There has to be a living, breathing side to budgeting that accommodates change. Do this: Near the end of each month, make a list of the specific “needs” and “wants” you’ll face next month and figure out how much money you’ll have for wants after needs are addressed. For example, if your car needs a necessary repair, that’s certainly going to boost the “needs” side of the page. If you find, due to a one-time event (paying off a particular credit card, for example), that you have more to spend in the “wants” column, then it’s time to decide whether it’s time for a treat or to throw more into savings, investments or attacking any other debt. Every treat that you put off gives you much satisfaction of getting closer to your financial goals, but, just like a diet, you don’t want to deprive yourself and get so frustrated that you go on a spending binge.
Identify and plan for long-term goals: You must think about the things that you really want to do with your life and what those things will cost. Putting goals in writing gives them a formality and a starting point for the planning you must do. If these goals require saving, make sure that you put those savings dates on the financial calendar you made.
Build failure and recovery into the plan: How many diets have evaporated with the words, “I blew it?” The fact is, with food or money, everyone goes off course at times. The important thing is to have a plan for corrective action. If you’re about to make an impulse purchase, implement a three-day spending rule. That means you should give yourself three days to check your budget and think through the purchase before you make it. If you can minimize the damage and get back on course, your progress will continue.
My experience with those who adopt a spending plan is that they feel a certain sense of freedom that mirrors the feeling of fitting into a pair of jeans that haven’t fit in years. Anytime you take control of important life decisions makes you feel empowered and ready to tackle new challenges. Good luck with it!
