Hill's Personal Finance

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Thank you ladies and gentlemen for reading Hill's Personal Finance. I have been changing my business into the  partnership University Retirement Specialists. We will continue posting our strategies at the new website. These articles can be found in the Blog associated with our partnership website.

Again thanks for your support and I look forward to serving your needs at our new website.

The Importance of a Life Insurance Audit

Is it time to review your policy?

Life insurance is hard.

 

It’s hard to know if you have the right kind.

 

It’s hard to know if you have enough.

 

And it’s hard to know if you need any at all.

 

The insurance companies have made it even harder by coming up with bewildering names: whole life, term life, universal life. Some life insurance policies have a cash value while others don’t. Some invest that cash value in the stock market while others pay a fixed rate of interest.  Some insurance policies combine all of these ideas.

 

This may be one reason why a recent study by the National Association of Insurance Commissioners found that about 40% of people don’t review their life insurance annually.¹ In my experience, that number seems to be even higher. But no matter what the exact number, a large portion of Americans may simply be paying for insurance that’s not right for them.

 

That is why it’s important for you to sit down annually with an insurance professional to review how your policy works and how it will help you to protect your family.

 

When you’re young, a certain type of policy is needed. As you raise a family and take on more responsibilities, your needs change again. At some point - when the nest is empty or other life changes occur - there may come a time where you don’t need life insurance at all or you may desperately need it to protect your estate. Reviewing your life insurance policies is one way to make sure you have the coverage that is right for you and your family now, today – not when you bought it.

 

When is the last time you thought about your life insurance?

 

Is it time to take another look?

 

 

1 http://www.pregnancytoday.com/articles/life-insurance/the-facts-of-life-insurance-4315/ [02/18/10]

 

 

Small Business' Need A Plan

A retirement plan, that is. Without one, business owners
may miss out on attracting the most qualified employees.

 Do you own a small business? If so, what do you think of your staff? Do you have the best and the brightest working for you? A good rule of thumb is this … take good care of your employees, and they’ll take good care of you. If you value your employees, you should give some thought to their futures. Have you considered their retirement needs? And on the flip side, if you DON’T feel you have a superior staff, have you thought about why that might be?

 Often, it comes down to benefits. Today’s employees are more conscientious than ever about their retirements, and how today’s decisions could affect their future. Many Americans begin planning their retirement as soon as they graduate college (or even sooner!). That means if you aren’t offering a retirement plan, you may be missing out on the kind of highly motivated, self-directed employees you’ve been looking for. That’s right, your 401(k) can be used as a recruiting tool!

 What about taxes? Well, a 401(k) can provide tax benefits. You can get a tax deduction based on salary deferral and employer contributions; your employees get tax-deferred growth of their assets. Many other retirement plans also offer significant tax breaks.

 So you want to offer a 401(k). Now what? The first thing to consider is how much current interest there would be at work in having a 401(k) plan. Poll your current employees and find out two things: 1) how interested they are, and 2) what (if anything) would be a deciding factor for them that would make them enroll or not enroll. Next, you’ll want to determine the cost (both in terms of money and time) to implement your 401(k) retirement plan. And finally, with any plan you’ll want to carefully consider what investment options are available.

 How do you compare? If you’re hoping to use your 401(k) as a recruiting tool, be sure to consider the total benefits package you’re offering to your employees, and how the 401(k) will fit into that package. It may be worthwhile to try and find out what your competition is offering.

 Getting started. The first step toward offering great retirement benefits is learning all you can about what options are available. I would recommend that you speak with a qualified financial professional who can help you sort through the choices and determine which options will work best for your business.

 

Rules Change for 401K In-Service Rollovers

401(k)-to-Roth rollovers are now possible before age 59½.

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead.

 

As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.¹

 

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not.

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.²

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.³

Obviously, this IRA rollover possibility is not a big hit with the national and regional retirement plan providers, who would like to see you keep participating in their 401(k) programs rather than partly or fully bail out. But many employees would like a broader and more diverse range of investment options - and some would like the chance to direct their money into vehicles designed to produce future income streams.

Don’t forget to talk to the professionals. Retirement plan administrators and participants should talk to the financial consultant that has helped them with their 401(k) program before making a move. This article is simply an overview, and there will be different details to attend to with each employee. So be sure to touch base with the financial professional you trust.

 

Citations.

¹ articles.sun-sentinel.com/2009-08-16/business/0908140293_1_roth-ira-roth-conversions-simple-ira [8/16/09]

² smbhr.benefitnews.com/news/rolling-the-dice-with-a-roth-ira-rollover-2682826-1.html [1/22/10]

³ macpa.org/Content/22372.aspx [2/1/10]

 

The Potential of the BRIC Nations

Why emerging market equities have the world’s attention.

 

Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.^1,2

Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.

Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.³

Look at the last decade. The Dow and the S&P 500 underperformed in the 2000s compared to previous decades. How did benchmark indices in the BRIC nations do?

Are you sitting down? Brazil’s Bovespa gained 301% across the 2000s. India’s stock market gained 249%. China’s Shanghai Composite was the laggard, only rising 72% over that stretch. Russia’s RTSI gained 863% in the past decade.³

BRIC, or BRIMCK? Some economists would modify BRIC to BRIMCK, arguing that Mexico and South Korea belong in this collective powerhouse. The key market indices in Mexico and South Korea respectively advanced 44.87% and 49.65% last year.³

The (corporate) opportunity of a lifetime? Wall Street bulls see wisdom in giving more and more weight to the BRICs in portfolios. They draw a line between the impressive, sustained growth of these nations to higher returns and rising demand for capital. They look at these nations and see a rapidly growing middle class and upper middle class and a corresponding rise in spending … translating to a momentous opportunity for global companies who leap into the right place at the right time … translating to great corporate profits down the line.

Of course, this vision assumes that the BRIC nations will a) keep economic policies in place that drive growth, b) avoid political and social upheaval, and c) escape the worst of global economic crises.

A new alliance? A decade ago, “BRIC” was simply Wall Street slang – a term coined by Goldman Sachs economist Jim O’Neill. Today, the BRIC nations appear to be heading toward some form of coalition. In recognition of their power, BRIC leaders have scheduled annual economic summits – the first one was in Russia in 2009, the 2010 summit is in Brazil. The presidents and prime ministers of these countries entered into dialogue to determine how their economies can work together and maintain their fantastic growth.

In sum, the BRIC nations are responsible for about 15% of global GDP, and about 40% of the gold and hard currency reserves on earth are in their possession.⁴

Does the BRIC demand your attention? Some financial consultants think that any well-diversified portfolio should have a toe (or a foot or a leg) in emerging markets – the gains of recent years are simply too spectacular to ignore. Others counter with the argument that past performance is no guarantee of future results, and cite the remarkable volatility that can affect the stock markets of these nations. If you are interested in learning more, have a chat with the financial professional you know and trust.

Citations.

¹ realclearmarkets.com/blog/Omnivest_1-4-10.pdf [1/4/10]

² cnbc.com/id/34645043 [12/31/09]

³ cnbc.com/id/34643111 [12/31/09]

⁴ nytimes.com/2009/06/17/world/europe/17bric.html?_r=1&pagewanted=print [6/17/09]

Recession Recoveries: 2001

What happened, how the markets came back, and the rewards for the patient investor.

 The numbers. According to the National Bureau of Economic Research (which has made a point of chronicling all U.S. recessions), this downturn lasted from March to November of 2001.¹ It is one of the milder recessions on record; in fact, real consumer disposable income actually grew during this eight-month period. Gross domestic product fluctuated across the year: GDP was -0.5% in the 1Q, +1.2 in the 2Q, -1.4 in the 3Q, and +1.6 in 4Q 2001.² The Dow Jones Industrial Average fell 7.2% across 2001.³ Unemployment rose from 4.3% to 5.5% during this period, eventually cresting at 6.3% in June 2003.⁴ By the first half of the year, inflation had more than doubled from a 1998 low of 1.5%.⁵ It was the housing sector that kept the economy going – and in many respects, sparked growth and recovery. The Federal Reserve cut the federal funds rate 11 times during the year; it fell from 6.5% to 1.75%.⁶

 

The reasons. The tragedy of 9/11 had an effect on the markets, but it was just part of the economic story behind this downturn. The dot-com bust and the subsequent recoil of the NASDAQ had opened the door – that index continued its descent, dropping from 2,341 at the start of 2001 to 1,577 at the end of the year.⁷ Accounting scandals (most notably at Enron and WorldCom) didn’t help either.

The rebound. The stock market struggled through 2001 and 2002, but proved its resilience. After the closure of the stock market following 9/11, the Dow fell 685 points to 8920 on September 17 and lost 14.26% in a week to close at 8,235 on September 21. But the DJIA closed 2001 at 10,021 – a 21% rebound in less than three months. On October 9, 2002, the Dow closed at 7,286. But then the index closed October at 8,397 – a 15.25% gain from the October 9 trough in 22 days, and a 10.6% rise for the month.⁸ Those who got out of stocks soon wanted back in: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.⁹

The lesson. The markets do recover, often dramatically – and historically, the persistent investor has been rewarded for his or her optimism and perseverance. In the current economy, it helps to take a satisfying look back and see how the markets have rebounded and prospered after a downturn.

Citations. ¹ nber.org/cycles.html            [8/28/08]

²bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2001&LastYear=2001&3Place=N&Update=Update&JavaBox=no#Mid        [8/28/08]

³ the-privateer.com/chart/dow-long.html  [8/08]

⁴ sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/24/BUM3UKED0.DTL                    [1/24/08]

⁵ realtor.org/intlprof.nsf/1c8e38bf483f911d8625681100462df1/b171ee782198e89e86256b10006a8c3c?OpenDocument                     [2002]

⁷ the-privateer.com/rates.html [8/5/08]

⁷ finance.yahoo.com/q/hp?s=%5ENDX&a=00&b=1&c=2001&d=11&e=31&f=2001&g=m     [8/28/08]

⁸ the-privateer.com/chart/dow-long.html  [8/28/08]

⁹ upi.com/Business_News/2003/12/31/UPI_NewsTrack_Business/UPI-75601072911443/        [12/31/03]

 

Survivor Options on Bonds

A popular estate planning feature.

Have you heard of the “survivor option”? How about a “death put”? These rather bleak terms reference a very useful choice for beneficiaries who inherit certain kinds of corporate bonds. This option has become increasingly common.

What does a death put do? If a bondholder dies before a bond reaches maturity, a death put lets the beneficiary sell the bond back to the bond issuer at face value. If your children inherit a corporate bond from you, a death put may be a much better choice than keeping the bond until maturity or selling it in the secondary market.

Why has it become so attractive? Look at the current interest rate environment. If rates go up and beneficiaries decide to sell a corporate bond before maturity, they may have to take a loss. With a survivor option, that problem is off the table. If your heirs exercise the death put feature, they will be able to redeem the bond at par value even if it is trading at a steep discount.

Of course, this feature comes at a price. It is a “sweetener” – one of those things you pay for up front or indirectly via a lesser return rate on the security.

Are there limits on survivor options? Most certainly. Most retail bond issuers will only take back a small amount of their bonds in a year (in the neighborhood of 1-2% of the original retail issue). There is also usually a per-estate limit ($200,000 par value per estate is a typical figure).¹

 ^{Often issuers require a minimum holding period before a survivor option can be used – a year from the original issue date is common. If a bondholder dies before those 365 days go by, his or her estate must hold the bond until the one-year window closes.2}

One more detail to note: the beneficiaries of the bond have to implement the survivor option before they take possession of the bond. For the option to be used, the bonds must be held in the deceased bondholder's account.² 

 Do your bonds have a survivor option? Do your loved ones know about that feature? You and your beneficiaries will want to acquaint yourself with the details. If you don’t own bonds with a survivor option, ask a financial consultant for information on them.

Citations.

¹ cfainstitute.org/memresources/communications/privatewealth/2009/august/article_3.html [8/09]

² incapital.com/index.cfm?fuseaction=newsArticles.viewArticle&NewsID=100223 [7/19/05]

 

Preferred Stocks

A special category of securities worth exploring.

Stocks that tend to pay sizable dividends. Institutional and individual investors buy preferred stocks because they offer fixed dividends – in fact, dividend yields are typically greater than those of common shares.¹

Preferred stocks are occasionally called hybrid securities, because they have characteristics of debt instruments as well as equities. Let’s review some of their features and pitfalls.

Priority dividend payouts. As the “preferred” adjective implies, these shares are a step above common stock. If you own preferred stock in a company, you will get your dividend first; all the common shareholders will get theirs second. You also have preference if a corporation declares bankruptcy or liquidates and sells assets. In that instance, debt holders are paid first, then the preferred shares, and finally the common shares.

Dividend determination. Dividends paid out on preferreds are akin to coupon payments on a bond. A preferred stock obviously doesn’t have a maturity date like a bond, but it does have a par value, which is used to figure out the payouts. (A good stock research website can help you find the par value and preferred dividend rate of return.) You determine the preferred dividend by multiplying the preferred dividend rate percentage by the par value.

If you need to figure out the market value of a preferred stock, you can do that simply. Divide the dividend amount by the yield (required rate of return stated by the issuer). A visit to a stock research website will give you the yield percentage on a preferred.

Similarly, the price of a preferred stock equals the preferred dividend divided by the yield percentage.

Accumulating dividends. Sometimes a corporation can’t pay dividends to preferred shareholders. If that’s the case, the company will often let the preferred stock dividends accumulate until cash flow improves.

The five kinds of preferreds. Most preferred stocks are cumulative – that is, any missed dividend payments accumulate for an eventual payout. Most preferreds are also callable – that is, the stock issuer has a chance to call (redeem) the shares at par value. Yields on preferred shares sometimes include premiums in recognition of this risk.

Some preferred stocks are convertible, with embedded options allowing you the chance to exchange preferred shares for common ones. (Sometimes a provision is allowed that gives the issuer the chance to call for the conversion.)

Some preferreds are participating – when a company does well, the dividends from these shares may be greater than the published yield. Finally, when a corporation issues multiple rounds of preferred stock, there may be preference-preferred shares; if you own shares from the first issuance, your preferreds take priority over preferreds issued later.

Possible pitfalls. So what is the downside of owning a preferred stock? Well, they do present potential and actual disadvantages. When a market sector heats up and common shares take off, preferreds often lag behind. Interest rate hikes can reduce the value of preferred shares. Additionally, you have no voting rights as a preferred shareholder.

Ratings. There is no “official” rating system for preferred stocks; however, the big credit agencies that rate bonds rate preferreds as well. Standard & Poor’s and Moody’s do, and when they downgrade, it can hit a preferred stock hard. Preferred stocks rated beneath BBB- at Standard & Poor’s or beneath Baa3 by Moody's are considered junk preferreds.² If you have to go outside of S&P or Moody’s to find a preferred stock’s rating, that’s a red flag – it might mean that it couldn’t get a decent rating from S&P or Moody’s.

A preferred stock investor would do well to research a company’s financial ratios and cash flow, and its interest coverage ratio (higher is usually better).

Consider the variables. Preferred stocks have looked attractive to retirees and others seeking consistent dividends. Rather than explore them alone, you should see a financial consultant who can help you thoroughly understand your options in this area and compare them to other choices you may have. 

Citations.

¹ mercurynews.com/columns/ci_14249188 [1/23/10]

² kiplinger.com/magazine/archives/2003/10/preferred.html [10/03]

Recession Recoveries: 1990-91

What happened, how the markets came back, and the rewards for the patient investor.

The numbers. This one lasted eight months (about average for U.S. recessions), and it compares interestingly with the economic downturn today. Unemployment hit 7.8% during this recession, home prices in the nation’s ten largest metropolitan areas sank an average of 8.3%, and the stock market dropped 21%, with the decline bottoming out in October 1990.¹ As for GDP, the numbers were 0.0% for 3Q 1990, -3.0% for 4Q 1990, and -2.0% for 1Q 1991.²

 

The reasons. Some trace the roots of this recession all the way back to Black Monday in 1987. But most historians and economists point to falling real estate values, a decline in the commercial real estate market, and a credit crisis (featuring the infamous savings and loan collapses of the late 1980s). Oil prices also rose in early 1990 thanks to Iraq’s invasion and conquest of Kuwait, so consumer and investor confidence fell as a result of supply disruption and months of war in the Middle East.

The rebound. The DJIA was at 2,900.97 on June 1, 1990. It fell 21% in the subsequent downturn, but it hit a new milestone close (3,004.46) on April 17, 1991.³ The broad stock market returned 28% from October 1990 to March 1991.⁴ In November alone, stocks gained 6%.⁵

The real bull run was just ahead. Unbeknownst to stock market investors, the Dow would pass that 3,000 milestone and crest at 11,722.98 in less than nine years.⁶ The S&P 500 actually gained more than 5% during the recession; three years after the recession ended, it was up 26% and ten years later it was up 302%.⁷ The NASDAQ, of course, enjoyed a banner year in 1991 after going public, gaining nearly 57%; the tech stock boom was underway.⁸

The lesson. The markets do recover, often more quickly than we imagine – and historically, the persistent investor has been rewarded for his or her optimism. In the current economy, it helps to take a satisfying look back and see how the markets have rebounded and prospered since.

Citations. ¹ money.cnn.com/2008/02/08/pf/recession_proof.moneymag/index.htm               [2/27/08]

²bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1990&LastYear=1991&3Place=N&Update=Update&JavaBox=no#Mid        [8/08]

³ answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average            [8/08]

⁴ usnews.com/articles/business/your-money/2008/04/11/recession-investing-is-it-time-to-buy.html                          [4/11/08]

⁵ smartmoney.com/common-sense/index.cfm?story=20080401-lessons-of-recession               [4/1/08]

⁶ answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average            [8/08]

⁷ investmentscientist.com/2008/01/25/recession-and-stock-market-performance/    [1/25/08]

⁸ news.cnet.com/2100-1023-235024.html               [12/29/99]

Recession Recoveries: 1981-1982

What happened, how the markets came back, and the rewards for the patient investor.

 

 

The numbers. This 15-month recession represented the biggest struggle for the Reagan administration during its first term. People often remember this deep recession in terms of unemployment: in 4Q 1981, 10.5% of Americans were out of work; 28% of teenagers and 20% of African-Americans were without jobs.¹ That was the highest unemployment rate since the Great Depression; to top it off, 17,000 businesses failed during the downturn.² A bear market was firmly in place: the Dow Jones Industrial Average hadn’t topped the 1,000 mark in five years.³ GDP fluctuated from quarter to quarter – between 2Q 1981 and 3Q 1982, it ranged from 4.9% to -6.4%.⁴

 

The reasons. While a brief recession did occur in 1980, historians commonly attribute the 1981-82 recession to the “tight money” policy adopted by the Federal Reserve. During the late 1970s, the U.S. was experiencing double-digit inflation. Fed chairman Paul Volcker spearheaded a policy decision to slow the growth rate of the money supply to combat inflationary pressures. The Fed set interest rates higher and higher –by December 1980, the prime rate had hit its all-time high, 21.5%. Volcker’s radical stance was painful for the banking sector, the real estate sector, and the overall economy.⁵ But there would be a spectacular upside.

The rebound. In March 1980, inflation approached 14.8%. By July 1983, it was under 2.5%, and it would stay in single digits for the next quarter-century.⁶ The Dow would gain 1,500% over the next 17½ years, rising from an August 1982 low of 777 to 11,722.98 in January 2000.⁷ The S&P 500, which had last topped 100 in 1968, would hit 200 for the first time by Thanksgiving of 1985.⁸ The NASDAQ Composite Index, which had reached the 200 mark in 1980, would reach 300 for the first time in May 1983 and 400 in May 1986.⁹ By the mid-1980s, unemployment levels had notably dropped and GDP was back in the positive column.

The lesson. After almost a decade of gloomy economic headlines and a staunch bear market, Americans were quite pessimistic about stock market investment and the future of the economy at this point. But the markets do recover, often more quickly than we imagine – and as this example shows, historically the persistent investor has been rewarded for his or her optimism. Today, it helps to take a satisfying look back and see how the markets have rebounded and prospered since economic downturns and detours like these.

 

Citations.

 

¹ blogs.moneycentral.msn.com/topstocks/archive/2008/05/12/could-a-2008-2009-recession-wipe-out-seven-million-jobs.aspx     [5/12/08]

 ² pbs.org/wgbh/amex/reagan/peopleevents/pande06.html           [8/08]

³ the-privateer.com/chart/dow-long.html         [8/08]

⁴bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1981&LastYear=1982&3Place=N&Update=Update&JavaBox=no#Mid  [7/31/08]

⁵ marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7D [8/22/07]

⁶ inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2         [8/08]

⁷ answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average        [8/08]

⁸ answers.com/topic/s-p-500              [8/08]

⁹ quotes.nasdaq.com/aspx/StatisticalMilestones.aspx                  [8/08]

 

 

Some Financial New Year's Resolutions

Things you might want to consider doing in 2010.

 

Okay. It’s that time of year - the time for New Year’s resolutions. They can include financial resolutions. Here are some possibilities for 2010.

Control non-mortgage debt. Experian says the average American carries about $17,000 in debt unrelated to home loans. Too much of this is simply credit card debt. So how about paying down, paying off and maybe getting rid of some cards?¹

How much financial ground can you lose to plastic? Well, if you have a credit card with a $17,000 balance and 10% APR and you pay $200 monthly on it, it will take you 12 years to pay it off.¹

You may have so-called “good debts” as a consequence of your business or your professional career. Yet ultimately, debt is debt. You can certainly plan to build wealth and control debt at the same time, and why not plan to do both?

Play catch-up if you’re older than 50. All of us over 50 have the chance to make a catch-up contribution to our IRAs and 401(k)s. If you have a 401(k), you can defer up to $22,000 of your 2010 salary into it if you’re over 50 (an extra $5,500 above the usual limit). You also have the chance to contribute an extra $1,000 to your IRA (or among multiple IRAs if you have more than one). And if you’ve got an IRA, there’s no point in waiting until April 15, 2011 to make your 2010 contribution – if you wait that long, you’ll potentially lose 15 months of interest.²

Look into the possibility of a Roth IRA conversion. 2010 presents investors with a prime opportunity to convert traditional IRAs into Roths. The IRS has removed the income limitations on Roth conversions this year, and it will let you spread the taxes due on a 2010 Roth conversion across 2011 and 2012. However, you should definitely talk to a tax professional before you make this move. As income tax rates could be raised for 2011 or 2012, you may want to take the tax hit on a Roth conversion in 2010 instead.³

Keep important documents where you can access them. Tax returns, wills, trust documents, deeds, insurance policies – you don’t want to have to hunt for this stuff, and neither should your heirs in a crisis. You may not want to keep these documents out in the open, but you should know where they are. Resolve to put them all together in a central place in 2010. Another option: you may want to store copies online. Some financial advisors offer their clients firewall- away from home if needed.

Understand how your portfolio assets are allocated. A new FINRA survey finds that 79% of Americans regularly contribute to retirement savings plans. That’s the good news. The bad news? About a fifth of those people had no idea how those assets were invested.⁴

When stocks do well, it is easy to become less vigilant about your investments. It is also easy for your portfolio to get out of whack and become overweighted in this or that asset class. So the first part of 2010 is a very good time to check in with your financial advisor. After all the volatility in the market the last couple of years, it is prudent to review your investments and see if your portfolio needs rebalancing to bring it back in line with your risk tolerance and investment horizon.

More people abide by financial resolutions than you might think. In late 2009, Fidelity surveyed a group of about 1,000 Americans and found that 60% of them had kept financial resolutions they made at the start of the year.⁵ So it can be done. Resolve to change your financial habits for the better – and follow through on it.

 

Citations.

¹ walletpop.com/blog/2009/12/28/put-the-solution-in-resolution-10-steps-to-financial-sanity-i/ [12/28/09]

² washingtonpost.com/wp-dyn/content/article/2009/12/18/AR2009121804699.html [12/18/09]

³ latimes.com/business/la-fi-roth-iras1-2010jan01,0,3862158,full.column [1/1/10]

⁴ foxbusiness.com/story/markets/americans-nearly-flunk-financial-literacy-test/ [12/28/09]

⁵ blogs.consumerreports.org/money/2009/12/financial-2010-new-years-resolutions-surveys-save-money-spend-less-stick-to-budget-fidelity-investme.html [12/31/09]

The DCA Way

Dollar cost averaging offers you a way to invest consistently and a chance to exploit some great buys.

 

Are you investing inconsistently … or not at all? Inconsistent investment can sabotage your retirement savings efforts. There’s a way to avoid that problem: a strategy called Dollar Cost Averaging.

By investing equal dollar amounts on a regular monthly basis, you can plan to build wealth in a way you can afford today.

DCA to the rescue. Many people think they can’t afford to invest – their budgets won’t allow them to do so. DCA makes it easier. Arranging a monthly salary deferral of even $100 into your 401(k), for example, can help you plan to build wealth in a tax-advantaged way.

Remember, you won’t retire on the dollars you put aside today for retirement; you’ll retire on the assets accumulated from those early dollars as a result of investment and compounding. Most retirement accounts feature tax-deferred contributions and tax-deferred growth – why should you wait to take consistent advantage of that?

Look at it this way: you can't make retroactive contributions to a 401(k), so each dollar you didn’t contribute last year is an opportunity you've lost forever. Not to mention the opportunity for tax-deferred growth of those assets.

That’s one compelling reason to adopt the DCA approach.

Additionally, DCA ensures a constant flow of new money into the retirement account. That factor alone may help you exploit current market conditions.

The DCA strategy is designed to lower cost per share. When you practice Dollar Cost Averaging, you buy more shares when prices are low and fewer shares when prices are high. So with time, you end up with a lower overall cost for shares purchased.

In last year’s market downturn, there were some great buys – quality companies whose share prices had fallen to amazing lows. Through DCA, investors had a way to exploit this buying opportunity and pick up more shares. For example, on February 20, 2009, you could have picked up 107 shares of General Electric for $1,000. A year earlier, the same $1K would have bought you 29 shares.¹

In the downturn, the DCA strategy by no means guaranteed a great return in the future – but it did offer investors a chance to position their assets for the market rebound. And boy, has the market rebounded!

Speaking of market downturns and rebounds, Ibbotson Associates did some research and found that a hypothetical investor who would have invested $100 a month in Wall Street for 30 years starting in September 1929 would have seen that total investment of $36,000 grow into a $411,000 nest egg by September 1959.² Yes, the crash of 1929 was an extraordinary circumstance – but didn’t the Great Recession feel pretty extraordinary to you? This is a good argument for DCA for the long-run stock market investor.

The DCA strategy makes sense for many. Right now, many Americans would be hard-pressed to come up with a lump sum of say, $4,000 or $10,000 to invest. DCA allows people to contribute equivalent amounts toward retirement savings a little at a time.

The really great thing about it is how “automatic” it all is. By arranging, say, regular salary deferrals into a employer-sponsored retirement plan or regular monthly contributions to an IRA, you can go out and live your life and simply get that quarterly statement showing your ongoing contributions to the account. It is “off your plate” but never neglected.

Are you saving for the future using a Dollar Cost Averaging method? Talk to a financial advisor today and see how convenient it can be for you.

Citations.

¹ portfolio.com/views/blogs/market-movers/2009/02/20/why-dollar-cost-averaging-makes-sense/ [2/20/09]

² online.wsj.com/article/SB123696727736421823.html [3/16/09]