Six Simple Ways to Value a Stock

Six quick and easy ways to determine stock values

Investors are always searching for methods to help them determine whether a company is worth investing in. There are many means of stock valuation, some simple, some more complex.1

Why is stock valuation so important? If the market price of the company’s stock is greater than the company’s intrinsic value, an investor might choose to stay away. If the market price of the company’s stock is less than the company’s intrinsic value, the investor may choose to buy the stock.

Here are six key valuation methods:

• Price-to-Earnings Ratio (P/E)

The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current share price with its per-share earnings. Its formula is calculated by dividing its market value per share by its earnings per share. The P/E is one of the most widely used ratios, and it is used to compare the financial performance of different companies, industries, and markets. The company’s forecast P/E (its P/E for the upcoming year) is generally considered more important than its historical P/E.

• Price-to-Earnings Growth Ratio (PEG)

The P/E ratio is a snapshot of where a company is, and the PEG ratio is a graph plotting where it has been. The PEG ratio incorporates the historical growth rate of the company’s earnings. This ratio also tells you how your stock stacks up against another stock. The PEG ratio is calculated by taking the P/E ratio of a company and dividing it by the year-over-year growth rate of its earnings.

• Price-to-Book Ratio (P/B)

The price-to-book ratio measures a company’s market price in relation to its book value. Its formula is calculated by dividing the company’s stock by its book value per share. Book value can be found in the company’s balance sheet, usually listed as “stockholder equity.” It represents the value of a company’s total assets subtracted by its total liabilities. The P/B does not consider the actual value of the assets, only the nondepreciated portion of the assets. Like most ratios, it’s best to compare P/B ratios within industries. For example, tech stocks often trade above book value, while financial stocks often trade below book value.

• Price-to-Sales Ratio (P/S)

The price-to-sales ratio helps determine a stock’s relative valuation. Its formula is calculated by dividing the company’s price per share by its annual net sales per share. Price-to-sales ratio is considered a relative valuation measure because it’s only useful when it’s compared with the P/S ratio of other firms. The P/S ratio varies dramatically by industry, so when comparing P/S ratios, make sure the firms are within the same industry.

• Return on Equity (ROE)

The ROE is calculated by dividing a company’s earnings per share by its book values per share. The ROE is a measure of how well the company is utilizing its assets to make money. Understanding the trend of ROE is important because it indicates whether the company is improving its financial position or not.

• Dividend Payout Ratio

This ratio is calculated by dividing the dividends paid by a company by its earnings. The dividend payout ratio can also be calculated as dividends per share divided by earnings per share. A high dividend payout ratio indicates that the company is returning a large percentage of company profits back to the shareholders. A low dividend payout ratio indicates that the company is retaining most of its profits for internal growth.

Looking for Income? Consider REITs

Income from REITs is still quite attractive

Income from REITs is still quite attractive

For most Americans, an investment in real estate begins and ends with the purchase of a home. Yet investments in commercial real estate — including shopping centers, office buildings, and hotels — may be available to investors.
Real estate investment trusts (REITs) allow individuals to invest in large-scale, income-producing real estate. REIT performance has varied historically, with a total annualized return of 11.78% over the past 10 years, and a 19.70% return in 2012

Types of REITs

There are more than 100 publicly traded REITs, according to the National Association of REITs (NAREIT).
•   Equity REITs, which directly own real estate assets, make up most of the market.
•   Mortgage REITs loan money to real estate owners or invest in existing mortgages or mortgage-backed securities.
•   Hybrid REITs combine the investing strategies of both equity and mortgage REITs.

REITs resemble closed-end mutual funds, with a fixed number of shares outstanding. REITs are also traded like closed-end funds, offering a price per share. Unlike a closed-end fund, however, REITs measure performance by funds from operations (FFO) rather than by net asset value. FFO is defined as net income plus depreciation and amortization, excluding gains or losses from debt restructurings and from sales of properties. REITs’ growth benchmark is FFO growth, while valuation is reflected in an FFO multiple (share price divided by FFO) rather than in a price-to-earnings ratio.

The REIT Appeal

REITs offer a number of potential advantages, including the following.
•    Diversification: REITs can help to diversify an equity portfolio weighted to stocks in other industries. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
•     Built-in management: Each REIT has a management team, sparing investors the effort of researching each property’s management team.
•    Liquidity: Because REIT shares are traded on the major stock exchanges, they are more readily converted into cash than direct investments in properties. Like direct property investments, REITs may lose value.
•    Tax advantages: REITs pay no federal corporate income tax and are legally required to distribute at least 90% of their annual taxable income as dividends, eliminating double taxation of income. Investors can also treat a portion of REIT dividends as a return of capital, although those classified as dividends are taxed at ordinary rates.

Weighing the REIT Risks

As with all investments, REITs have specific risks that are worth considering.
•    Lack of industry diversification. Some REITs limit diversification even further by focusing specifically on niche developments such as golf courses or medical offices.
•    Potential changes in the value of underlying holdings. These changes can potentially be influenced by cash flow of real estate assets, occupancy rates, zoning, and other issues.
•    Concern about performance metrics. Critics contend that FFO could be misleading because it adds depreciation back into net income. NAREIT counters that real estate values fluctuate with the market rather than depreciate steadily over time, making FFO a realistic performance measure. Also, REITs may average the rent they will receive over a lease’s lifetime rather than report actual rent received, which critics say can further cloud performance figures.
•    Interest rate sensitivity. If rates and borrowing costs rise, construction projects with marginal funding may be shelved, potentially driving down prices across the REIT industry.
•    Environmental liability. Companies in the real estate industry are subject to environmental and hazardous waste laws, which could negatively affect their value.

REITs can be a way to add total return potential to a diversified, long-term portfolio. Your financial advisor can help you decide whether an allocation to a REIT could help you pursue your financial goals.

The information in this communication is not intended to be financial or tax advice and should not be treated as such. Each individual’s situation is different. You should contact your financial and/or tax professionals to discuss your personal situation.

Tips for Improving Your Credit Scores

Yes, responsible behavior with a CC works well

Americans have become more informed about certain aspects of their credit scores, but many still don’t know enough about the risks associated with low scores and alleged “credit repair” services.
While a majority of consumers know some of the basics about credit scores, many are still unclear about some of the most important facts. For example, a majority of respondents in a recent survey knew that mortgage lenders and credit card issuers use credit scores. However, less than 40% knew that many other service providers also use these scores, including landlords, home insurers, utility companies and cell phone companies. A sizable minority also falsely believe that credit scores are influenced by their age (43%) and marital status (40%).

What You Can Do

A typical credit score will range between 300 and 850 points. Although all lenders make decisions based on the particulars of the lending situation, generally speaking, the higher your score, the lower the perceived risk to the lender, and the more attractive the interest rate you will be offered. A score of 680 or lower will make it more difficult for you to get approved for credit and will probably increase the interest rate you are offered.

Here are some tips for raising or maintaining a higher credit score:
¥    Pay your accounts on time. Lenders are looking for a proven track record of making timely payments. Payment history determines about 35% of your credit score.
¥    Keep your balances low. About 30% of your score is determined by what the industry refers to as your “credit utilization ratio,” which is the amount you owe in relation to the amount of credit available to you. If that percentage is more than 50%, your score will be lower.
¥    Open a credit card account. While many Americans are turning to prepaid credit cards or debit cards to help them better manage their finances, this can work against your credit score. Without any credit history, you could be considered “unscoreable” and may have difficulty in obtaining credit.
¥    Don’t open too many credit lines in a short period of time. Each time you apply for a loan or credit card, the lender will make an inquiry into your credit score, which typically knocks points off of your score.
¥    Hold on to older, unused accounts. The longer an account has been open and managed successfully, the higher your score will be.
¥    Don’t default on your payments. If you default on a loan — such as when you file for bankruptcy or a bank forecloses on your home — it can knock up to 100 points or more off of your credit score.
¥    Maintain a diversified credit mix. If you hold an auto loan, a home mortgage, and credit cards that are well managed, you will generally have a higher credit score than someone whose credit consists mainly of finance companies.
¥    Beware of credit repair companies. The Consumer Federation of America warns consumers away from these companies, saying that they over promise, charge high prices, and perform services, such as correcting credit report inaccuracies, that consumers could do themselves by simply contacting the lender and the credit bureaus.

What Are Your Rights as the Beneficiary of a Trust?

Put the Magnifying Glass on the Small Print

If you have been named as a beneficiary of a trust, you probably have many questions about what comes next. Trust beneficiaries are usually entitled to income from the trust. The trustee who is in charge of the trust is responsible to make sure that assets from the trust are invested well and productively.

The following are some of your rights as a beneficiary.

¥ The right to an accounting of investments: Trustees typically decide how the principal of the trust will be used. As a result, the law requires that trustees act prudently with investments, diversifying so that all the assets of the trust are not in one place, which would put them at risk and could limit returns. If you have questions or concerns about the trustee’s decisions for the investments, you have the right to request an accounting of investments. This accounting report will detail every investment and its gains and losses.

¥ The right to receive annual trust reports: Trust reports contain information that includes the income that was produced by the trust and expenses and commissions paid out. Traditionally, these reports should be mailed out annually.

¥ The right to request a new trustee: If a trustee is being difficult, uncooperative, or refusing to do the job, you can request a new trustee. This typically requires a legal filing and a ruling by the court. If the reason for the request is because of large losses of principal, the trustee also may be required to repay the trust if he/she was found to be liable.

¥ The right to sue the trustee: The trustee can be held liable for loss of trust assets and for income that would have been earned but for the wrongful conduct by the trustee. The trustee has a fiduciary duty to manage the trust with due care and caution and must be loyal and impartial to the beneficiaries.

¥ The right to terminate the trust: If all the beneficiaries on a trust are “adults of sound mind,” the trust can be terminated if the court determines that the intent of the creator of the trust has either already been accomplished or cannot be accomplished for reasons such as impossibility. All the trust beneficiaries must agree, including those beneficiaries of the trust that are entitled to the remainder of the trust assets after the trust would have naturally ended. Some trusts are difficult to terminate, such as spendthrift trusts where the settlor clearly intended that the trust assets be withheld and protected from the beneficiaries and their creditors.

Being named as a beneficiary of a trust is indeed a welcome event, but not without its complications and, if handled improperly, unfortunate consequences. For help understanding your rights and protecting your inheritance, it may be wise to engage the services of an experienced trust attorney.

The information in this communication is not intended to be legal advice and should not be treated as such. Each individual’s situation is different. You should contact your legal professional to discuss your personal situation.

Divorcing Later in Life? What to Know

Who gets to cut up the divorce cake?

Who gets to cut up the divorce cake?

Divorce can be a complicated and challenging process in which details are easily overlooked. It is important to know the laws that shape divorce proceedings and to understand the impact they have on your assets. This is especially true for those aged 50 and older. Why? Because this group is getting divorced at a greater rate than other age groups. In fact, according to a recent study, the divorce rate for those aged 50 and older has doubled since 1990.


Typically, everything you and your spouse acquired from the day you were married is subject to division. Exceptions include individual inheritances, gifts to an individual spouse, and assets acquired before marriage. When assets are divided, the court considers each spouse’s earning potential, the length of the marriage, and each spouse’s contribution to building household assets.
The exception to this is the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under the laws of these states, almost all assets are divided equally.


If you live in a community property state, debt, like your assets, will be divided with your former partner. You will be responsible for half of all debt in jointly held accounts and, in some cases, half of a former spouse’s debt as well.
If you do not live in a community property state, you remain responsible for your individual debt (but not your spouse’s) and any debt in jointly held accounts. Many couples include debt payment as part of the settlement.
If you and your spouse own a home that has appreciated in value, consider whether you want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.

Retirement Assets

Money in your defined contribution or pension plan may legally be divided during a divorce. The divisible amount begins to accumulate on the day you are married and ends on the day you are divorced.
To claim a share of a spouse’s plan benefits, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO) and provide it to your spouse’s plan sponsor before distributions are completed. You and your spouse have the option of deciding to not divide retirement plan assets. Note that traditional and Roth IRAs do not have to be covered by a QDRO, but should be addressed in any settlement.

Estate Planning

You may want to review you will as it may be beneficial to review and amend your estate plan at the same time you commence a divorce proceeding. Also review beneficiary designations for pensions, retirement plans, and life insurance policies.

Social Security

A divorced person is eligible for Social Security benefits based on his/her ex’s earnings record if he/she meets all of the following requirements:
•    He/she is at least 62 years old.
•    He/she was married for at least 10 years.
•    He/she didn’t marry someone else before age 60.

In order for a person to file for spousal benefits before his/her ex does, he/she must be at least 62 years old and they must have been divorced for at least two years.
If you find yourself faced with divorce, it is essential to protect your financial future. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you will not need to revisit the proceeding at a later time.

Income from Real Estate as a Lazy Landlord

Income from Real Estate as a Lazy LandlordThe purchase of a family home represents a typical investment in real estate for most Americans, but one that rarely generates income. Others may purchase second homes and rent them out to earn extra income, but they endure the hassle and challenges of life as a landlord in return. Some real estate investors prefer to invest in commercial real estate, that is, shopping centers, office buildings, etc. While the average investor may not have the cash or credit line to purchase an entire shopping center or apartment building, there is a simpler – and cheaper – way to invest in those types of properties and benefit from the income they generate, without having to endure the headaches a landlord may face.

According to independent Certified Financial Planner™, Mark Dennis of A1A Wealth Management, Inc., “Real estate investment trusts, or ‘REITS,’ operate similar to mutual funds and enable the average Joe or Jane to invest in large-scale real estate projects relatively inexpensively. A typical REIT pools the money of many investors in order to purchase these properties outright, or to invest in mortgages or even lend money outright to property owners.”

The National Association of Real Estate Investment Trusts (NAREIT) reports more than 100 REITS are traded publicly, with annualized returns of 11.78% over the last 10 years, and return of 19.70% in 2012. Dennis further states that REITS can be an attractive addition to one’s investment holdings because each REIT comes with a built-in management team, provides additional diversity among investments, and unlike individual real estate, they are highly liquid. Shares of REITS are traded on stock exchanges, making them much easier and quicker to sell than direct investments in real estate. Of course, like direct real estate, REITS can, and do, lose value, as with any investment. “REITS allow you to be a ‘lazy landlord’ without being an irresponsible landlord,” says Dennis. REIT investors enjoy the ownership and income from the real estate investment without the burden of maintenance, excessive amounts of paperwork, and dealing directly with tenants.

REITS may also offer tax advantages to investors. According to the tax code, REITS are required to distribute at least 90% of their annual taxable income as dividends to shareholders, which means the REIT pays no tax itself. This avoids the double–taxation of dividends that occurs with corporate stock dividends, which are taxable to the corporation first, and again to stock investors when dividends are distributed. Investors may also treat a portion of REIT income as a return of the individual investment, which reduces the potential tax burden. Otherwise, dividends are taxed as ordinary income to the investor, and REIT investors should consult with their tax advisors for specific tax advice. Before investing in REITS, individuals should also consult with their personal financial planners regarding the suitability of these investments for their investment portfolios.

For more information about this topic, contact Mark Dennis at 904-491-1889 or email ( .

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When Should You Collect Social Security?

Social Security, when to start collecting

Even timing the start of social security payments requires expertise

A growing number of Americans have been forced to delay their planned retirement date due to job and savings losses suffered during the most recent recession. According to a survey, nearly one-quarter of workers said they have resolved to retire later due to concerns about outliving their savings and fears of rising health care costs.1

Postponing retirement not only means working longer, but also delaying when you start collecting Social Security. Currently, workers can begin collecting Social Security as early as age 62 and as late as age 70. The longer you wait to start collecting, the higher your monthly payment will be. Your Social Security monthly payment is based on your earnings history and the age at which you begin collecting compared with your “normal retirement age.” This normal retirement age depends on the year you were born.

Here is a handy schedule to determine the Normal Retirement Age

Those choosing to collect before their normal retirement age face a reduction in monthly payments by as much as 30%. What’s more, there is a stiff penalty for anyone who collects early and earns wages in excess of an annual earnings limit ($15,120 in 2013).

For those opting to delay collecting until after their normal retirement age, monthly payments increase by an amount that varies based on the year you were born. For each month you delay retirement past your normal retirement age, your monthly benefit will increase between 0.29% per month for someone born in 1925, to 0.67% for someone born after 1942.

Which is right for you will depend upon your financial situation as well as your anticipated life expectancy. Consider postponing taking your Social Security benefits if:

• You are in good health and can continue working. Taking Social Security later results in fewer checks during your lifetime, but the credit for waiting means each check will be larger.

• You make enough to impact the taxability of your benefits. If you take Social Security before your normal retirement age, earning a wage (or even self-employment income) could reduce your benefit.

• You earn more than your spouse and want to ensure that spouse receives the highest possible benefit in the event that you die before he or she does. The amount of survivor benefits for a spouse who hasn’t earned much during his or her working years could depend on the deceased, higher-earning spouse’s benefit — the bigger the higher-earning spouse’s benefit, the better for the surviving spouse.

Consider taking your benefits earlier if:

• You are in poor health.
• You are no longer working and need the benefit to help make ends meet.
• You earn less than your spouse and your spouse has decided to continue working to help earn a better benefit.

Whenever you decide to begin taking your benefit, keep in mind that Social Security represents only 36% of the average retiree’s income. So you’ll need to save and plan ahead — regardless of whether you collect sooner or later.

Custodial Accounts: A Way to Transfer Wealth

story from A1A Wealth Management.

A custodial account invloves giving money to minors.

Setting up a custodial account can be a savvy move for adults who want to gift their assets and help their children become financially independent. They are simpler to set up than trusts. But there are many considerations — and consequences — to weigh before opening an account. Here are some key points to keep in mind.


The two types of custodial accounts you can use to gift assets to your youngster are called a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Which one you use will depend on your state of residence. Most states — with the exception of Vermont and South Carolina — have phased out UGMA accounts and now only offer UTMA accounts. UTMA accounts allow the donor to gift most security types, including bank deposits, individual securities, and real estate. UGMA accounts limit gifts to bank deposits, individual securities, and insurance policies.
•    There are no contribution limits. Parents, grandparents, other relatives, and even non-related adults can contribute any amount to an UGMA/UTMA at any time. Note that the annual federal gift tax exclusion is currently $14,000 per year ($28,000 for married couples). Gifts up to this limit do not reduce the $1 million federal gift tax exemption.

•    The assets gifted are irrevocable. Once you establish an UGMA or UTMA, the assets you gift cannot be retrieved. Parents can set themselves up as the account’s custodian(s), but any money they take from the account can only be used for the benefit of the custodial child. Note that basic “parental obligations,” such as food, clothing, shelter, and medical care cannot be considered as viable expenses to be deducted from the account.

•    Taxes are due — potentially for both you and your child. Some parents may initially find custodial accounts appealing to help them reduce their tax burden. But it’s not that simple. The first $1,000 of unearned income is tax exempt from the minor child. The second $1,000 of unearned income is taxable at the child’s tax rate, which could trigger the need for you to file a separate tax return for your child. Any amounts over $2,000 are taxable at either the child’s or the adult’s tax rate, whichever is higher. Note that state income taxes are also due, where applicable.

•    Your child will eventually gain complete control. Once your child reaches the age of trust termination recognized by your state of residence (usually 18 or 21), he or she will have full access to the funds in the account. Be warned that your child could have different priorities for the assets in the account than you do. Money that parents had earmarked as paying for college tuition could instead be used to purchase a sports car or fund a suspect business venture.

Financial Aid Considerations

For financial aid purposes, custodial assets are considered the assets of the student. If the assets in the account could jeopardize your child’s chances of receiving financial aid, speak to your tax and/or financial professional. One of your options could involve liquidating the UGMA/UTMA and establishing a 529 account.
Before making any decisions about establishing a custodial account, be sure to talk to your tax and financial professionals.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

The Tax-efficient Retirement

Planning a tax-efficient Retirement

Planning a tax-efficient Retirement

Why would anybody pay taxes when they really don’t have to?
This is a question that financial advisors are hearing from their retired clients, who are taking their living expenses out of taxable and tax-deferred accounts like IRAs.

The whole idea of tax planning during retirement is a relatively new one in financial planning circles, and it has created some debates.  No doubt you’ve heard the conventional wisdom from magazines and online web commentators: when you retire, take money out of your taxable accounts first, which allows the money in your conventional IRA and Roth IRA to compound on a tax-free basis for the longest possible time.

When the taxable account finally runs out, start taking money out of your conventional IRA, which will cause you to pay ordinary income taxes, and let the money compound in the Roth IRA.  If there’s any money left over, the Roth IRA is the best vehicle to pass investment assets on to heirs, since the money won’t be taxed when it is taken in distributions that can be deferred over their lifetime.

The conventional wisdom, alas, is much better in theory than in actual practice.

If you take all your income out of taxable accounts, you might end up in a 10% (less than $8,925 in taxable income) or 15% (less than $36,250) marginal tax bracket.  What’s wrong with that?  Retirees who have a significant amount of money in their IRA–and who are growing that pool of assets during the first decade of retirement–will have to start taking mandatory distributions at age 70 1/2, even if they don’t need the income.  Those distributions could push them into significantly higher tax brackets.  And the tax brackets in the future might possibly be higher than they are today.

Raise your hand if you think tax rates are going to go down in the next 10-15 years.  That question was recently posed by an industry speaker to an audience of tax experts and senior financial advisors, and very few hands went up.

Another problem is that retirees who are working with a financial advisor will have very different investments inside and outside their IRA accounts.  Depleting the taxable account first means, for them, selling their stocks first, leaving them with a portfolio comprised mainly of real estate investment trusts, bond funds and commodities futures funds during their later years–which basically means they will fail to get the full benefits of diversification and rebalancing.

A better approach is to gradually let some of the air out of the IRA in the years before mandatory distributions come due–at the lowest possible tax rates.  That might mean taking out enough IRA money to offset your standard deduction and personal exemption and fill up the 15% tax bracket, meanwhile taking the rest of your living expenses from the taxable account.  Paying at a 15% rate today could mean not paying at a 28% or 33%–or higher, depending on the whims of Congress–rate in the future.

Alternatively, for people who don’t need the income, you could make a partial conversion of assets from the IRA account to a Roth IRA–just enough to offset the various deductions and fill up that 15% bracket.  You pay taxes on some of those converted assets at 15% today in order to avoid any future taxation on them down the road.  Since Roth IRAs don’t have any mandatory distributions for the original owner, you’re free to take the money out tax-free or not as you desire in the later retirement years–or leave that money to your heirs.

An advisor who looks at the retiree’s total tax picture might also use your lower tax bracket to sell some stocks that have significant appreciation, taking the capital gains at a 10% rate, and avoiding a 20% or 23.8% (if the Medicare tax is applicable) tax rate if the asset were sold when mandatory distributions are pushing you into the upper brackets.

So the answer to the question: “Why would anybody pay taxes when they don’t have to?” is simple: When they can pay at a lower rate today than they would have to pay in the future, or when they can pay at a low rate today and avoid all future taxation on those assets altogether. Every situation is different, every year is different for every situation, and many professional advisors are beginning to realize that planning for a tax-efficient retirement is more complicated than most of us realized.  But careful planning can also be more beneficial for people who want to get the most value out of their retirement assets.

Asset Location: Handle With Care

Is a Piggy Bank a good asset location

Smart Asset Location Plan

An old question has resurfaced lately.  You have tax-deferred accounts like IRAs and Roth IRAs, and you have accounts that pay taxes every year on the income they receive.  Where do you put different types of assets?

The answer is that you want to put the most tax-inefficient investments inside the tax-deferred accounts.

The most notoriously tax-inefficient investments, historically, have been bond funds, commodities futures funds and real estate investment trusts (REITs), which all generate ordinary income that can be taxed at 39.6% plus the 3.8% Medicare tax for higher-income taxpayers.  The Roth IRA, which shelters all future returns from taxes of any sort, can be a great place for mutual funds that invest in small cap stocks, since they tend to have high turnover and historically have provided the highest gains.

In taxable accounts, you might put growth stocks which, if you hold them for more than a year, will have their price appreciation taxed at a maximum rate of 20% (or 23.8% with the Medicare surtax).  Of course, you can choose to hold individual securities for much longer periods, which gives you tax deferral on its own–and, if the stocks are held until death, the heirs get a step-up in basis, which basically means any rise in value is never taxed.  Municipal bonds which qualify for an exemption from federal taxes are also good candidates for the taxable portion of your investment accounts.

What makes this Asset Location debate new again?

Higher ordinary income tax rates, and potentially higher capital gains tax rates (up from 15% to 23.8% for tax filers who have to pay the new Medicare surtax) have introduced some gray areas, as have the historically low rates on bonds.  When bonds were delivering upwards of 10% on the investment dollar, putting them in an IRA was a no-brainer.  But what if you’re cautious about rising rates, and you’ve shortened maturities in a yield-starved market, finding your return now to be closer to 1%?   Suddenly, these funds are no longer a huge tax concern.

At the same time, REITs offer tax benefits like depreciation, which becomes more valuable at higher ordinary income rates.  And persons in retirement may see their tax rates fall from above 39% down to 15%, which decreases the benefits of astute asset location, and might raise the value of rebalancing each year across all accounts.

Another consideration for retirees is the mandatory withdrawals they have to take from their IRA account after they reach age 70 1/2.  If the IRA is holding all the income-generating investments, then systematically liquidating those holdings means creating a higher exposure to stocks and a generally more volatile portfolio as you age–which may be the opposite of what is desired.

Saving taxes through asset location strategies is one of those rare opportunities to get additional dollars without taking additional risk–but a mindless focus on taxes without looking at the bigger picture can result in unintended consequences.  The rules of thumb need to be informed by your tax bracket and other aspects of your individual circumstances–with an eye on the ever-changing tax and interest rates that Congress and the markets throw at us.

How to Calculate Your Retirement Needs

Calculating the monies needed for retirement

How to calculate how much you need to retire.

Calculating a retirement savings goal is one of the most important steps investors can take to help determine if they are on track to meet that goal. However, less than half of American workers have tried to figure out how much money they will need to accumulate for retirement.1 And the wide majority of those who did admit doing so either guessed or did their own calculations. What about you?

Planning Matters

What’s important to realize is that the exercise of calculating a retirement savings goal does more than simply provide you with a dollars and cents estimate of how much you’ll need for the future. It also requires you to visualize the specific details of your retirement dreams and to assess whether your current financial plans are realistic, comprehensive, and up-to-date.

Action Plans for Retirement

The following five strategies will help you do a better job of identifying and pursuing your retirement savings goals.
1.    Double-check your assumptions. Before you do anything else, answer these important questions: When do you plan to retire? How much money will you need each year? Where and when do you plan to get your retirement income? Are your investment expectations in line with the performance potential of the investments you own?
2.   Understand your projected life span. The average life expectancy for a 45-year-old man today is 78. For a woman, it’s 82. According to pension mortality tables, at least one member of a 65-year-old couple has a 72% chance of living to age 85 and a 45% chance of living to age 90.2
3.    Use a proper “calculator.” The best way to calculate your goal is by using one of the many interactive worksheets now available free of charge online and in print. Each type features questions about your financial situation as well as blank spaces for you to provide answers. An online version will perform the calculation automatically and respond almost instantly with an estimate of how much you may need for retirement and how much more you should try to save to pursue that goal. If you do the calculation on a paper worksheet, however, you might want to have a traditional calculator on hand to help with the math. Remember that your ultimate goal is to save as much money as possible for retirement regardless of what any calculator might suggest.
4.    Contribute more. Do you think you could manage to save another $10 or $20 extra each pay period? If so, here’s some motivation to actually do it: Contributing an extra $20 each week to your plan could provide you with an additional $130,237 after 30 years, assuming 8% annual investment returns. At the very least, you should try to contribute enough to receive the full amount of your employer’s matching contribution (if offered). It’s also a good idea to increase contributions annually, such as after a pay raise.
5.    Meet with an advisor. A financial professional can help you determine a strategy — and help you stick to it.

Retirement will likely be one of the biggest expenses in your life, so it’s important to maintain an accurate price estimate and financial plan. Make it a priority to calculate your savings goal at least once a year.

Official Inflation Rates Keep Falling: How Long Can it Last?

When the metal in a coin values higher than the purchasing power

Economists and market watchers have been warning investors about the prospect of increased inflation since the housing bubble burst in 2007. But the inflation rate keeps going lower, not higher.
As of April 30, 2013, the Official Consumer Price Index (CPI) as published by the government stood at a paltry 1.1%, under the Federal Reserve’s target of 2% annually.

Why is low inflation troubling?

For a number of reasons:
•    When companies don’t have any leeway to raise prices, they’re more apt to cut costs, which could mean a cutback in hiring.
•    When inflation is low, it doesn’t offer a large buffer against deflation if an economic shock occurs. Deflation — when prices fall — often freezes up spending. Why would you buy an item now if you expect it to be cheaper in a few months?
And it’s not just the United States that is dealing with lower inflation — or even deflation — rates. Many of the world’s top industrialized nations are in the same boat.

Inflation Rates Around the World (as of April 30, 2013)

China    2.40%
France    1.00%
Germany    1.15%
Italy    1.10%
Japan    0.90%
South Korea    1.20%
Spain    1.40%
United Kingdom    2.80%
United States    1.10%

Stay Diversified

For investors, whether inflation continues to remain low or starts to rise, a well-rounded portfolio may be your best weapon. The key is to consider your time frame, your anticipated income needs, and how much volatility you are willing to accept, and then construct a portfolio with the mix of investments with which you are comfortable.
•    CDs and Other Cash Instruments — The Fed is still keeping a tight lid on interest rates, forcing investors who hope to keep pace with inflation by investing in cash instruments face a harsh reality. Average rates on a 1-year CD are hovering around 0.25%, while a 5-year CD is yielding an average of 0.78% nationwide, according to Money market accounts are averaging a microscopic 0.11%.3
•    Bonds — Historically, investors have turned to shorter-term corporate and high-yield bonds for protection in rising-rate environments.4 There are two types of bonds that receive a lot of investor interest when inflation starts to rise: Treasury Inflation-Protected Securities (TIPS) and I Savings Bonds. Both TIPS and I bonds are types of fixed-interest rate bonds whose value rises as inflation rates rise.
•    Domestic Stocks — Although past performance is no guarantee of future returns, historically, stocks have provided the best potential for long-term returns that exceed inflation.5 An analysis of holding periods between 1926 and December 31, 2012, found that the annualized return for a portfolio composed exclusively of stocks in the S&P 500® index was 9.90% — well above the average inflation rate of 2.98% for the same period. The results are almost as good over the short term as well. For the 10 years ended December 31, 2012, the S&P 500 returned an average of 7.10%, compared with an average inflation rate of 2.41%.6
•    International Stocks — During the same 10-year span that ended December 31, 2012, the Morgan Stanley Capital International (MSCI) EAFE, which is composed of established economies such as Germany and Japan, outpaced the S&P 500 with an average return of 8.70%. The MSCI Emerging Markets index — which tracks developing world economies such as Brazil and China, and is even more risky than MSCI EAFE — was even more stellar, returning an average of 16.89%.8

Remember, diversification does not ensure a profit or protect against a loss. Consult a financial professional to discuss your specific needs and options.

A Long-Awaited European Recovery?

Is Euro enjoying an economic recovery

Is Euro enjoying an economic recovery?

You may be enjoying this long respite from reading about the European debt problems, which just a year ago still scared many observers into thinking that the world was on the edge of a deep economic malaise.  The last time Europe made headlines, Greece was going bankrupt, France had its pristine AAA credit rating downgraded, Spain was wrestling with unemployment north of 20%, Italy was insolvent and everybody south of Germany was mired deep in economic recession.

So where are we now?  The Financial Times of London recently took a hard look at the current situation in Europe, and found that the reports of Europe’s demise may have been exaggerated.  In fact, it says that when the Eurozone’s gross domestic product data are released in the coming week, we will see positive figures after 18 months of gloomy negative growth rates.

Among the hopeful signs: manufacturers in the 17 countries that use the euro currency have reported their biggest increase in output since 2011, and Greece, the epicenter of the original crisis, has qualified for its next batch of rescue loans totaling 5.8 billion euros as it sells off (or privatizes) government-owned corporations to pay its debtors.  Spain’s unemployment rate has recently fallen for the first time in two years and even troubled Portugal, where political opposition to austerity threatened its ability to receive a global bailout, now seems to be back on the tracks of economic reform.  Perhaps the best news is that France’s finance minister recently announced the end of recession in the Eurozone’s second-largest economy, with second quarter 2013 growth of 0.2%.

Of course, there are still problems that could derail this still-fragile recovery.  Perhaps the biggest is the continent’s banking industry, where banks are still avoiding having to fess up to their losses on sovereign debt, still cleaning up their balance sheets and are slow to make much-needed loans to regional businesses.  Greece and Spain are still burdened with 27% jobless rates, and Italy is still mired in recession after a 2.4% GDP decline in 2012.

Those of us who have read more about the Greek economy can finally dare hope that the break from scary headlines continues.  Interestingly, most of the reports that talk about rays of hope in Europe also mention, in passing, that the U.S. economy has been the sole engine of growth in an otherwise troubled global economy.  That, in itself, is something to cheer about.

Six Tips on How to Manage an Inheritance Well

Six Tips to Manage an Inheritance

A sizeable inheritance can represent a life-changing opportunity. Here are six tips to help you prudently manage your windfall.

Tip 1: Consult With a Financial Professional and Tax Professional
Depending on the type of inheritance (e.g., investments, life insurance, retirement account), you could be dealing with substantial federal and/or state inheritance taxes. Working with a financial advisor and/or a tax professional could help you plan the sale of any assets and deal with the tax implications. For example:

•    If your inheritance was from your spouse, there may be no taxes due.
•    Life insurance proceeds are usually tax free.
•    Non-retirement assets are taxed when sold, and those assets typically receive a “step up” in cost basis. That means that any capital gains tax you owe will be based on the asset’s fair market value at the date of death of the benefactor.

If you inherit an annuity or traditional workplace retirement account or IRA, you will have to pay taxes on the distributions. Be very careful when taking your distributions. For example, if you cash out your uncle’s IRA and roll the money over into your own IRA, the entire amount of the rollover will be subject to ordinary income taxes.

Note too that there are considerations for spouses rolling over their deceased spouse’s retirement account.

Tip 2: Park the Cash
Before you make any plans or major purchases, stop. Deposit the inheritance or investments in a bank or brokerage account. If you are married, you need to determine whether to put the account solely in your name or jointly with your spouse. Note that inheritances are considered separate property, in case of divorce. However, once they are commingled in a joint account, those assets lose that protection.

Tip 3: Cut Down/Eliminate Your Debt
Your inheritance may allow you the ability to pay off your debt, including your mortgage. But first consider paying off those loans with higher interest rates, such as credit cards, personal loans, and car loans. Then consider paying off your mortgage. Also fund an emergency account with at least six months’ worth of living expenses.

Tip 4: Think About Your Other Goals
Identifying your financial goals can help you determine what types of investments to make or other types of accounts to open. These goals could include:
•    Contributing to charity
•    Setting up a trust or foundation
•    Paying for a family member’s education
•    Helping out loved ones
•    Adding to your retirement savings

Tip 5: Review Your Insurance and Estate Planning Needs
If you’ve inherited a significant sum, it may be wise to increase the liability limits on your homeowners and automotive policies. If you inherited jewelry, artwork, or real estate, you may need to increase your property and casualty coverage. Consider an umbrella policy. Does the inheritance inflate the size of your estate so that it will be subject to estate taxes? Are you thinking about setting up a trust to provide for family or charity?

Tip 6: Do Something Nice for Yourself
Set aside a small percentage — no more than 5% to 10% — of your inheritance for “splurges.” Take a trip. Buy a new car. Just be sure to keep it small. After all, inheritances don’t grow on trees.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

Dividends: A Bird in the Hand

A Bird in the Hand is certainty

A Bird in the Hand Spells Certainty, or does it?

There’s a lot of focus on the dividend component of investment returns these days–for a variety of reasons.  First, dividends represent money in hand, which is more of a sure thing than stock price appreciation.  Many investors still have a wary eye on the 2008 meltdown, and are having trouble convincing themselves that today’s record stock values represent real money in their portfolios.  As the old saying goes, a bird in the hand is worth two in the bush.

On the other hand, there are taxes to consider.  Since the passage of the new tax law last January, higher-income taxpayers (those in the 39.6% tax bracket) have to pay 20% on the money that is paid out by the corporations in our taxable accounts–up from 15% for tax years 2003 to 2012.  The new Medicare tax will pile on an additional 3.8% tax burden for people with more than $200,000 (individuals) or $250,000 (joint) of taxable income.  You can forestall the tax bite by putting dividend-paying stocks in your IRA, but in doing so, you eliminate another tax-saving measure: the ability to harvest capital losses whenever any of your stock holdings decline in value, share the pain with Uncle Sam and shelter some of your gains.

As recently as last year, dividend investing strategies were considered to be something of a fad, as mutual funds and ETFs that invested in stocks paying the highest dividend percentages were raking in record investor inflows.  But naively investing in companies giving the most money back to their shareholders has not proven to be the ideal strategy.  For one thing, because these rates are calculated as the dividend divided by the share price, the highest dividend payers are sometimes companies that have recently experienced the highest drop in share value.  If a stock valued at $100 is paying a 4% dividend before it plummets to $67, the dividend is suddenly up to 6% of the share price–and becomes a screaming buy at a time when you might worry about the health of the company.  Meanwhile, companies whose dividend rates look low may have recently experienced a surge in their stock value.  Buying simply based on dividend rates may result in a portfolio that resembles a kennel.

In addition, some stocks, like utilities, act more like bonds than stocks; that is, they are built more for income than growth.  Buying the highest dividend stocks could lead to lower overall growth in share value.

Finally, it should be remembered that the dividend rate is never guaranteed, and in fact is paid at the whim of the company’s board of directors.  In 2012, after suffering through an earnings decline, the J.C. Penney company stopped paying its 4% dividend altogether.  Looking in the other direction, late in 2012, anticipating higher taxes on dividends, more than 175 companies made the list of highest dividend payers when they sent “special dividends” out to their shareholders–which were to be paid out of future earnings this year.

When you sort out all the various issues, the best lesson is not to ignore dividends–they have, after all, provided 34% of the monthly total return on the S&P 500 since the beginning of 1927–but not to get carried away by them either.  You’re probably being paid to hold the stocks you own regardless of your strategy.  Just over 82% of the stocks in the S&P 500 are now paying some form of dividends to their shareholders, which is the highest rate since September of 1999.

Instead of looking for the highest dividend yields, a more workable strategy is to identify funds or ETFs that invest in stocks that have a track record of growing their dividends consistently over time, and which are only paying out a portion of their earnings in the form of dividends–what is called the “dividend cover ratio.”  The historical average of earnings paid out as dividends is 52%, but that may go up in the months and years ahead.  Companies are sitting on record amounts of cash–an estimated $1.1 trillion in the 500 stocks making up the S&P 500–and are still reporting record earnings.  That money has to go somewhere, and some of it will eventually find its way into the pockets of patient investors.

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