How (and why) should you review your investments for Tax Deductions?!

Today my monthly reminder popped up to: Review my portfolio for tax deductible losses, IRA, SSA benefits, and more".  And I was just thinking how many people would know exactly what to look for.  My guess is: many.  But not all would be 100% certain they are looking at the right thing.  So to accomplish # 1 on the list of things to do in December I would:

Check my investment portfolio for loss-harvesting candidates:

Which means look for positions that have an "unrealized" loss.  You can deduct as much $$$ in capital losses as you have in capital gains and an additional $3,000 can be tax deductible.  So if you had a lot of positions that you sold at a gain you can and should look through your portfolio to sell off some less desirable stocks with an unrealized loss to realize the loss.  This loss will allow you to offset your capital gains and will save you the capital gains tax on your winners. 

As you "rebalance back" to your strategic, long-term asset allocation - means if you traded out of positions your portfolio may no longer reflect the asset mix of 20% in equities, 20% in bonds, and 60% in futures (just kidding) but you understand that after trading out of certain positions you may have a different investment mix than prior to your trades.   This provides an opportunity to sell out of loser positions and use the extra cash to fill in the gaps in the securities that align to your planned portfolio mix.

Always remember not to buy into the same positions within 30 day of the sale because that will render the trade useless for tax purposes.

This Forbes article How to Pay Taxes Like Mitt Romney is a good reference: http://www.forbes.com/sites/financialfinesse/2012/01/25/how-to-pay-taxes-like-mitt-romney/

Here is the remainder of the December to do items on my Financial Calendar:

2) If you want to establish an Individual 401(k) or other QRP (qualified retirement plan) this year for your small business, the account must be opened by December 31.

3) If applicable, don't forget to take the annual required minimum distribution from your IRA by December 31.  - If you are 70 and 1/2.

4) Request your annual Social Security benefit statement from ssa.gov. Compare your earnings record against your old tax return info for accuracy.  - Yep, Social Security Administration may make mistakes.  It also will help to have this document for your updated plan for next year.

Whole life insurance versus Term. You could be mising out on thousands in savings!

Let’s review the following situation.  Mike, a young man in his 20s bough a whole life insurance policy for $1,600/year.  Fast forward ten years, the policy’s current value is $1,300 and policy coverage is $95,000 in the event of death.  This policy was sold as a supplement to disability insurance, i.e. the value of the policy could be used as a savings bond/savings account in the event of the insured’s disability.

Let’s revaluate an alternative scenario.  What if Mike bought term life insurance at $250/year and allocated the remaining $1,350 to a savings account that earned 2.5%.  He would still have his insurance coverage of $95,000 but his savings value would be at $15,503.

Whole Life v Term Life Insurance

Comparative table

	Whole Life	Term Life Insurance
Annual Premium	$             1,600	$                 250
Death Benefit	$           95,000	$           95,000
10 Year Cash Value of Insurance	$             1,300	$                    -
10 Year Savings	$                    -	$           15,503

In this example, over a ten year period Mike could have saved $12,200 more if he opted to buy Term Life insurance.  If your whole life insurance coverage is more than $95,000 and your annual premium is higher you could be saving more!!!  There is a limited number of circumstances in which whole life policy is a better solution than a simple term life policy.  You should discuss the advantages of whole life insurance with a financial professional that is not commissioned for selling insurance products.

Five Factors that affect Your Credit Score

Recently I reviewed a book by Joe Lance Letizia "The complete Guide to a Higher Credit Score" and was surprised by this interesting statistic: "studies indicate that individuals with 6 or more (recent) inquiries on their credit reports are 8 times more likely to declare bankruptcy than those with no inquiries on their report".  Here is a brief Summary from the Chapter on Credit scores and the Five Factors that affect them:

Component	%	Details
Payment History	35%	Payment information on all types of accounts: credit cards (visa, AmEx, Home Depot), installment loans (mortgages, auto, student).  Public Records and Collection items: bankruptcies, foreclosures, lawsuits, etc.  Details of delinquencies: late or missed payments, etc.  The number of accounts with no late payments: timely payment history will increase your credit score.
Length of Credit History	15%	The length of time your credit accounts existed.  And history of use on certain types of accounts.
Credit Mix	10%	The types and Quantities of credit accounts.
Amounts Owed	30%	Amount you owed on all your credit accounts.  Overall amount you owe on credit cards and other accounts.  The types of loan balances.  The number of accounts with a balance.  The amount of credit line used on credit cards and other revolving accounts.  The amounts still owed on installment accounts.
New Debt/New Credit	10%	The number of New accounts you have.  How recently they were opened (a lot of new cr5edit accounts indicates higher risk).  How many recent credit requests you've made.  Certain studies indicate that individuals with 6 or more inquiries on their credit reports are 8 times more likely to declare bankruptcy than those with no inquiries on their report.

What's at risk when you only invest in very safe Bonds?

Most consumers have heard the story about buying bonds to be more secure, to avoid market fluctuation, and a whole slew of benefits.  But are they getting only part of the information?  Possibly.

Here is how bonds respond to upward shifts in interest rates:

This chart illustrates what has happened to bonds as interest rates slowly climb up and there is an expectation of more aggressive rate increases. (You can run this chart on yahoo Finance).

I pulled this chart today as the market expects a new direction for the Fed's monetary policy due to changes in FOMC's leadership with an accelerated shift into higher interest rates. Higher rate expectations devalue lower yielding (particularly longer maturity) bonds.

Based on this chart Vanguard total bond (BND) portfolio's versus Dow (DJI) to date performance, a professionally managed bond portfolio lost about 5% of its value, while a portfolio mirrored after Dow gained 15%. That's a 20% difference in value!              

Your IRA or 401k and how escaping reality is just more fun!!!

 

A few days ago was an anniversary of our marriage.  My husband got me a very beautify ring.  And I got him, what I though was a very thoughtful gift, the game of Shogi (Japanese Chess) and a book with details on the game.  He looked at the game and said he'll think about the value of learning a new set of rules and symbols and suggested to try and play regular chess first.  My reply was "We both played chess before!  What's the challenge?!"

I was disappointed, I wanted us to learn a new hobby that would replace our current pass time of watching TV series and going to the movies.  Fast forward a few days, the box with Shogi is now carefully placed out of sight and we are back to watching True Blood, Dexter, Orange is the New Black, and the Walking Dead.  This might be because the default for de-stressing is to escape reality by watching something entertaining on TV.  Another, component is the routine or inertia of what we have been doing.  Change is usually hard if not impossible for most people.

This leads me to believe that many private investors who set their investment accounts to a specific set of funds never look back because they are in the same state of mind as our state of mind when it comes to spending evenings by watching TV.  While not getting into the game of Shogi will not effect our immediate retirement plans, I think we will miss out on learning something new and complex, which they say is good for brain exercise and overall well being.  What the investors are missing by not revisiting their retirement portfolio, are the changes in the market that directly effect their ability to maximize the return of their invested money. 

Many people I speak with about their IRAs or 401ks note to me that their balances seem to be the same as they were a few years ago.  If I left my IRA balanced the same way that it was balanced a few years ago I would be in a loss. Because a few years ago bonds and CDs were stronger than most stocks while now most bond saturated portfolios are flat or in the negative. 

In order for an investment portfolio to do well it is key to introduce new information in the management and review your investments regularly.  It is also key not to become complacent.  As seen in commercials, where a couple is realizing their 401K has disappeared and they don't know why, it's a valuable skill to break up the routine. 

To maximize your return, instead of setting the portfolio and forgetting it, YOU MUST:

1. review it quarterly or more frequently
2. make sure it is returning as much as the Dow Jones (DIA), NASDAQ(QQQ), S&P 500 (SPY), or another index(es) that you chose for your investment plan
3. make certain you are maximizing your tax savings by allocating the maximum to this tax deferred investment account
4. review your diversification (do not have more then 5 or at most 10) to be certain you allocate the higher percentages to sectors that are positioned to do well in the next quarter
5. trade!  Yes, you can sell positions to reinvest the proceeds in what you perceive will be a stronger sector.  Remember your gains in this account are not taxable* (if you comply with IRS rules)

How often do you check on your money?

They say that quarterly is enough. However, if you don't report an error on your bank/credit card statement within a 60 day window (after getting the statement) you would have missed your boat and will have to "eat" any unauthorized transactions. When it comes to your portfolio (investments under management, 401k, IRA, 403b, TSP, or other) should you give it the same level of attention? After all, you are working very hard to accumulate this money for a comfortable lifestyle at retirement.
 
Don't feel bad if you haven't been looking at your portfolio for over a quarter. Some people just throw the money in and don't review (forget re-balance) their retirement savings for years.  Here are a few reasons for looking at your money more often: 1) markets change, what once was a hot stock or sector no longer is, 2) bonds are not risk free, 3) mutual funds can underperform, 4) there are new investment opportunities each year (for example MLPs).
 
If you have a difficult time reminding yourself to look at your portfolio you can engage an investment advisor to do it with you. Even if you spend several hundred dollars each quarter (for an hourly fee advisor) you will end up gaining thousands over time in healthy investment portfolio returns.  Here is a few hints for your review:
 
1) If you don’t know how your portfolio performed compared to market or a specific benchmark you haven’t looked at the right performance indicators.
2) If your portfolio is simply following the market you are overpaying for management. If you pay a professional manager to diversify your portfolio they should earn their fees.
 3) If your money is in mutual funds, how much do you pay for mutual fund management fees (known as expense ratio, which is money spent on paying the fund's managers and for transactions, if actively trading)? Are the fees higher than 1%? Do you know of less expensive alternatives (ETFs, which usually have lower expense ratios)? If the management fee/expense ratio is 2.5% your money has to make 2.5% to break even forget outperforming the market.

Is your money secure at the Bank?

As many risk averse high net worth investors you might've been parking your money in a non-interest bearing deposit account but the unlimited FDIC coverage for those accounts ended on January 1, 2013. 
Now what? You could find out how your bank is doing by reviewing the Uniform Bank Performance Reports (published by the FDIC) or reading an analyst report (but we remember the recent credit crisis and the limited value that should be placed on analyst ratings). Unfortunately banks' regulatory ratings are not public but if the banks are in real trouble you can generally find Formal Agreements, Memos of Understanding and other similar communication published on the regulatory websites (FDIC.gov, OCC.gov, etc).
If you think "better be safe than sorry" and would like an alternative, a safety net can be a CDARS program. This program is offered only by some banks; it allows up to $50,000,000 (fifty million -- but the coverage may be different depending on availability) FDIC insurance coverage through member banks swap of deposit money. The rates on these deposits are generally lower than the general CD rates at the banks because the banks have to pay a spread (a small fee) to the administrator.
You can secure your money in the bank! CDARS can provide significantly more FDIC coverage for your money. To find a bank in your area that participates in this program visit CDARS.

Global portfolios are the only way to go.

Chinese export surge lifts shares, commodities

Full Article: http://reut.rs/ULneGP

World shares, commodities and growth-linked currencies rose on Thursday as stronger-than-expected Chinese exports raised hopes of a more robust recovery in the global economy this year.