Many investors have accumulated stacks of savings bonds in their safety deposit boxes over the years, and often, they’re not quite sure what to do with them.
‘Sell in May and go away and don’t come back ‘til St. Leger’s Day,” is a somewhat tarnished pearl of stock market wisdom, one that’s sometimes known as the Halloween indicator. It purports to help investors increase their return and avoid losses by staying out of the markets from May through Oct. 31. Since St. Leger’s Day in mid-September marks the last day of the British racing season (about which we in America are mostly clueless), investors on this side of the Atlantic have substituted Halloween.
In what is almost certainly an apocryphal explanation of this chestnut, it is said that the first Lord of the Admiralty, when preparing his flagship for battle with the French in 1865, telegraphed the phrase, “Sail in May — we go, aweigh!” to his assistant, who erroneously relayed instructions to sell the Lord’s substantial financial holdings.
When to venture inside the tricky, twisty world of contrarian investing
Most investment analysis involves some degree of fundamental research — the study of individual companies, sectors or markets and the economic forces that drive them higher or lower. Other strategies involve market timing — trying to discern where the markets are going and acting accordingly — or technical analysis, the process of studying price and volume changes in order to make near- and longer-term judgments on individual company stocks or the broader markets. You often hear investors say “Don’t follow the crowd,” but you’ll also hear them say “The trend is your friend.” We know there is safety (or at least comfort) in numbers. However, the discipline known as contrarian investing, which builds a sophisticated philosophy and strategy out of going against the grain, has considerable resonance for many investors.
In his State of the Union address, President Obama issued a challenge to America to produce 80% of its electricity from clean energy sources by 2035. This ambitious initiative would require an almost unprecedented partnership between government and the private sector and will certainly be controversial.
More recently, the interior department announced a $50 million program to expedite the development of wind farms off the coast of the mid-Atlantic states, as well as a $25 million program to support new and existing wind turbine technologies. While these stately turbines are good in theory, the reality is much more controversial. It took eight years for final approval of the nation’s first wind farm off the coast of Cape Cod, over opposition from environmentalists, Indian tribes and the tourist industry.
The majority of IRA account owners are invested in CDs, stocks, bonds, mutual funds and annuities, but it turns out these aren’t your only choices. If properly handled, nontraditional retirement investments (NTIs) such as limited partnerships, private placements, trust deeds/notes and real estate can be legally held in IRAs and certain retirement accounts.
Real estate is the most popular non-traditional investment for IRAs, although many of the investment advantages of owning real estate are not available or applicable when real estate is held in an IRA. Also, it is possible to get real estate diversification simply by purchasing publicly traded real estate investment trusts, or the mutual or exchange traded funds that invest in them.
What the Emergency Economic Stabilization Act means for you and the IRS this year.
The Emergency Economic Stabilization Act signed into law in October 2008 made some dramatic changes to the way investors will report gains and losses to the IRS — or rather, how they will no longer report them. Beginning with stock purchased after Jan. 1, 2011, and gradually taking effect in stages through 2013, the act means that you will no longer be the responsible party to report the cost basis, as well as gains or losses, on securities you sell.
Without knowing how Congress will resolve the issue of taxes for 2011 and beyond, end-of-year investment and tax planning will be a challenge to say the least. Still up in the air are not only the all-important income tax rates and brackets, but also the capital gains tax rate, dividend tax rates, itemized deduction phaseouts, the alternative minimum tax, the estate tax and more.
But regardless of the uncertainty, there are some important end-of-year items investors can attend to, while keeping an eye on whatever compromises Congress will adopt.
As of 2010, the $100,000 modified adjusted gross income limit for conversion of IRAs to Roth IRAs has been waived. This presents an opportunity for thousands of investors whose income made them ineligible for Roth conversions in the past. In addition, the taxable income resulting from a Roth conversion (in 2010 only) can be spread out over two tax years. Half of the income can be recognized in tax year 2011, due by April 15, 2012 (or Oct. 15 with extensions), and the other half can be recognized in 2012, due April 15, 2013 (or Oct. 15 with extensions). Alternatively, the income can be recognized in 2010, the year of conversion.
Why consider converting? Well, the advantages of a Roth IRA can be compelling. The Roth is funded with after-tax dollars, and all future growth and income, subject to a five-year holding period, can be withdrawn completely tax-free. Roth IRAs are not subject to required minimum distributions at age 70 1/2, and a spousal beneficiary can take over a Roth IRA, make it their own and allow it to continue to compound. Distributions are required only after a non-spousal beneficiary inherits the account. A Roth IRA can provide a multigenerational shelter from taxes, no matter how high tax rates might rise in the future.
Investors are anxiously awaiting the results of November’s midterm for varying reasons and with a wide range of expectations. Some are hoping that a decisive change in the congressional status quo will reignite enthusiasm for the stock market in the coming year. Others are counting on a relatively strong showing by the Democrats, which would revalidate the current economic strategy and boost investor confidence. Elections influence markets — and the other way around — and now is a good time to look at the intersection of markets and politics.
Looking first at the overall average returns of the market during the election cycle since 1940, the Dow has gained 5.6% in the second year of presidential terms, 16.5% in the third year, and 3.7% in the fourth year. Statistically meaningful conclusions, especially in the case of tightly contested midterm votes, can be hard to come by; over the last 80 years, control over Congress has only shifted five times. In the quarters following these five elections, the only year stocks lost ground was 1994, when the Republicans took control of both the house and the Senate, (and then the loss was less than 1%.) However, the market went on to gain 18% in the first half of 1995.
The surge of borrowing in both the United States and abroad has raised serious interest rate and inflation concerns for many investors. The government will have to offer higher and higher interest payments in order to keep our bonds competitive and attractive, they reason, and this will inevitably push interest rates up. Although the current high unemployment rate makes core inflation — driven by wage increases and rising commodity prices — seem a somewhat distant worry, longterm investors have legitimate concerns about inflation in the future and the damage it can do to investments and purchasing power.
So, what investment policy or strategy is most effective in an inflationary environment? Gold is often considered an inflation hedge, although in the short term it can be pretty imprecise. One very effective means of hedging against inflation became available to investors when the government began issuing Treasury Inflation Protected Securities, or TIPS.
Estate planning for the pets we love
We love our pets, and we aren’t afraid to lavish money and care on them. According to the American Pet Product Association, Americans are projected to spend an estimated $45.4 billion in 2009-2010 on their pets, up from $34.4 billion dollars in 2004. The trouble is, our pets sometimes outlive us.
Publicity surrounds the embattled estates and the unusually large trusts created for the furry companions of Leona Helmsley and Miami heiress Gail Posner. For some, it is difficult to imagine and somewhat frivolous to leave a $12 million trust for a dog named Trouble or even a $3 million trust and an $8.3 million mansion for Conchita the Chihuahua. That said, many faithful companions, often elderly animals difficult to adopt, end up being taken to the pound or abandoned by heirs. It is possible and important to make arrangements for care of your pet should something happen to you.
Get your savings plan back in action
This past year will go down in history as the year in which the Wall Street financial crisis became a Main Street nightmare. Real estate values plunged; more than a fifth of all American homeowners now owe more than their home is worth.
Retirement plans for many investors in their 50s and 60s have been thrown into disarray, and a generation of younger investors has lost confidence in the financial markets. Out of necessity, many have lowered or stopped contributions to their retirement and 401(k) plans, and many employers have stopped matching contributions as well.
Take control of your finances
It can all seem overwhelming, but there are ways to take control of your finances. According to John Wills of the nonprofit Consumer Credit Counseling Service, which has offices in Savannah and Beaufort, people need to take several steps to make sure their financial house is in order.
Here’s a step-by-step process:
“First, you need to know where you’re going and what you want to achieve,” said Wills. “Do you want to pay off debt? Do you want to save for a home? A vacation? Retirement? It really comes down to a question of needs versus wants.”
For investors, January can be a month of resolution, reflection and rejuvenation. Certainly there is sober reflection on the past 16 months, one of the most difficult and challenging periods in our financial history.
But there can also be resolutions and rejuvenation. We can put the lessons we’ve learned into useable investment strategies and constructive behavior.
Here are a few of our resolutions that can help you get started on your own list.